Summary
held a hearing on Apr 9, 2025 at 2:00 PM in Longworth House Office Building, Room 1300. 10 witnesses appeared.
Record
The meeting has its video, its transcript, witnesses and documents on the record.
Video
The proceedings, as the committee streamed them.
Transcript
The transcript runs to 13,199 lines and 786,260 characters, as the Government Publishing Office printed it.
1[House Hearing, 119 Congress]2[From the U.S. Government Publishing Office]34 AMERICAN INNOVATION AND THE FUTURE OF5 DIGITAL ASSETS67=======================================================================89 HEARINGS1011 BEFORE THE1213 SUBCOMMITTEE ON COMMODITY MARKETS, DIGITAL14 ASSETS, AND RURAL DEVELOPMENT1516 AND THE1718 COMMITTEE ON AGRICULTURE19 HOUSE OF REPRESENTATIVES2021 ONE HUNDRED NINETEENTH CONGRESS2223 FIRST SESSION24 __________2526 APRIL 9, 2025; JUNE 4, 202527 __________2829 Serial No. 119-53031 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]3233 Printed for the use of the Committee on Agriculture34 agriculture.house.gov3536 ______3738 U.S. GOVERNMENT PUBLISHING OFFICE394063-755 PDF WASHINGTON : 20264142 COMMITTEE ON AGRICULTURE4344 GLENN THOMPSON, Pennsylvania, Chairman4546FRANK D. LUCAS, Oklahoma ANGIE CRAIG, Minnesota, Ranking47AUSTIN SCOTT, Georgia, Vice Minority Member48Chairman DAVID SCOTT, Georgia49ERIC A. ``RICK'' CRAWFORD, Arkansas JIM COSTA, California50SCOTT DesJARLAIS, Tennessee JAMES P. McGOVERN, Massachusetts51DOUG LaMALFA, California ALMA S. ADAMS, North Carolina52DAVID ROUZER, North Carolina JAHANA HAYES, Connecticut53TRENT KELLY, Mississippi SHONTEL M. BROWN, Ohio, Vice54DON BACON, Nebraska Ranking Minority Member55MIKE BOST, Illinois SHARICE DAVIDS, Kansas56DUSTY JOHNSON, South Dakota ANDREA SALINAS, Oregon57JAMES R. BAIRD, Indiana DONALD G. DAVIS, North Carolina58TRACEY MANN, Kansas JILL N. TOKUDA, Hawaii59RANDY FEENSTRA, Iowa NIKKI BUDZINSKI, Illinois60MARY E. MILLER, Illinois ERIC SORENSEN, Illinois61BARRY MOORE, Alabama GABE VASQUEZ, New Mexico62KAT CAMMACK, Florida JONATHAN L. JACKSON, Illinois63BRAD FINSTAD, Minnesota SHRI THANEDAR, Michigan64JOHN W. ROSE, Tennessee ADAM GRAY, California65RONNY JACKSON, Texas KRISTEN McDONALD RIVET, Michigan66MONICA De La CRUZ, Texas SHOMARI FIGURES, Alabama67ZACHARY NUNN, Iowa EUGENE SIMON VINDMAN, Virginia68DERRICK VAN ORDEN, Wisconsin JOSH RILEY, New York69DAN NEWHOUSE, Washington JOHN W. MANNION, New York70TONY WIED, Wisconsin APRIL McCLAIN DELANEY, Maryland71ROBERT P. BRESNAHAN, Jr., CHELLIE PINGREE, Maine72Pennsylvania SALUD O. CARBAJAL, California73MARK B. MESSMER, Indiana74MARK HARRIS, North Carolina75DAVID J. TAYLOR, Ohio7677 ______7879 Parish Braden, Staff Director80 Brian Sowyrda, Minority Staff Director8182 ______8384 Subcommittee on Commodity Markets, Digital Assets, and Rural85 Development8687 DUSTY JOHNSON, South Dakota, Chairman8889JOHN W. ROSE, Tennessee, Vice Chair DONALD G. DAVIS, North Carolina,90FRANK D. LUCAS, Oklahoma Ranking Minority Member91AUSTIN SCOTT, Georgia DAVID SCOTT, Georgia92DAVID ROUZER, North Carolina NIKKI BUDZINSKI, Illinois93TRACEY MANN, Kansas JONATHAN L. JACKSON, Illinois94KAT CAMMACK, Florida SHRI THANEDAR, Michigan95BRAD FINSTAD, Minnesota ADAM GRAY, California96ZACHARY NUNN, Iowa KRISTEN McDONALD RIVET, Michigan97ROBERT P. BRESNAHAN, Jr., SHOMARI FIGURES, Alabama98Pennsylvania EUGENE SIMON VINDMAN, Virginia,99MARK B. MESSMER, Indiana Vice Ranking Minority Member100DAVID J. TAYLOR, Ohio JOHN W. MANNION, New York101 APRIL McCLAIN DELANEY, Maryland102103 (ii)104105 C O N T E N T S106107 ----------108 Page109110 Wednesday, April 9, 2025111112Craig, Hon. Angie, a Representative in Congress from Minnesota,113 opening statement.............................................. 7114Davis, Hon. Donald G., a Representative in Congress from North115 Carolina, opening statement.................................... 3116 Prepared statement........................................... 4117Johnson, Hon. Dusty, a Representative in Congress from South118 Dakota, opening statement...................................... 1119 Prepared statement........................................... 2120Thompson, Hon. Glenn, a Representative in Congress from121 Pennsylvania, opening statement................................ 5122 Prepared statement........................................... 6123124 Witnesses125126Hughes, J.D., William ``Bill'' C., Senior Counsel and Director of127 Global Regulatory Matters, Consensys Software Inc., Arlington,128 VA............................................................. 8129 Prepared statement........................................... 9130Tague, Mark, Co-Founder and Chief Revenue Officer, CattleProof131 Verified Inc., Cheyenne, WY.................................... 11132 Prepared statement........................................... 13133Horton, Mike A., Project Creator, GEODNET Foundation, Los Altos134 Hills, CA...................................................... 23135 Prepared statement........................................... 25136Brummer, Ph.D., J.D., Chris, Chief Executive Officer, Bluprynt;137 Agnes Williams Sesquicentennial Professor of Financial138 Technology, Georgetown University Law Center; Faculty Director,139 Institute of International Economic Law, Washington, D.C....... 30140 Prepared statement........................................... 31141Garrison, J.D., Coy, Partner, Steptoe LLP, Arlington, VA......... 35142 Prepared statement........................................... 37143144 Wednesday, June 4, 2025145146Craig, Hon. Angie, a Representative in Congress from Minnesota,147 opening statement.............................................. 61148 Prepared statement........................................... 62149Thompson, Hon. Glenn, a Representative in Congress from150 Pennsylvania, opening statement................................ 59151 Prepared statement........................................... 60152 Submitted transcript......................................... 129153154 Witnesses155156Ching, Ph.D., Avery, Chief Executive Officer and Co-Founder,157 Aptos Labs, Palo Alto, CA...................................... 63158 Prepared statement........................................... 65159Piwowar, Ph.D., Hon. Michael, Executive Vice President, Finance160 Pillar, Milken Institute; President, Economic Mobility161 Alliance, Milken Institute; former Commissioner and Acting162 Chairman, U.S. Securities and Exchange Commission, Fairfax, VA. 66163 Prepared statement........................................... 67164Miller, J.D., Ryne, Partner, Lowenstein Sandler LLP; Chair,165 Lowenstein Crypto; Co-Chair, Commodities, Futures, Derivatives166 Group, New York, NY............................................ 74167 Prepared statement........................................... 75168Pizzola, J.D., Chelsea, Partner, Willkie Farr & Gallagher LLP,169 Charlotte, NC.................................................. 80170 Prepared statement........................................... 81171172 AMERICAN INNOVATION AND THE FUTURE OF173 DIGITAL ASSETS174175 (ON-CHAIN TOOLS FOR AN OFF-CHAIN WORLD)176177 ----------178179 WEDNESDAY, APRIL 9, 2025180181 House of Representatives,182 Subcommittee on Commodity Markets, Digital Assets, and183 Rural Development,184 Committee on Agriculture,185 Washington, D.C.186 The Subcommittee met, pursuant to call, at 2:00 p.m., in187Room 1300 of the Longworth House Office Building, Hon. Dusty188Johnson [Chairman of the Subcommittee] presiding.189 Members present: Representatives Johnson, Rose, Lucas,190Austin Scott of Georgia, Mann, Nunn, Messmer, Taylor, Thompson191(ex officio), Davis, Budzinski, Jackson, Thanedar, McDonald192Rivet, Figures, Vindman, McClain Delaney, and Craig (ex193officio).194 Staff present: Paul Balzano, Wick Dudley, Timothy195Fitzgerald, Kyle Upton, John Konya, Britton Burdick, Joshua196Lobert, Clark Ogilvie, Ashley Smith, and Jackson Blodgett.197198 OPENING STATEMENT OF HON. DUSTY JOHNSON, A REPRESENTATIVE IN199 CONGRESS FROM SOUTH DAKOTA200201 The Chairman. The Committee will come to order. Welcome,202and thanks for joining this hearing. It is entitled, American203Innovation and the Future of Digital Assets: On-Chain Tools for204an Off-Chain World. After brief opening remarks, Members will205receive testimony from our excellent witnesses today, and then206the hearing will be open to questions. In consultation with the207Ranking Member, and pursuant to Rule XI(e), I want to make208Members of the Subcommittee aware that other Members of the209full Committee may join us today.210 I am pretty excited. This is our first hearing of this211Subcommittee on Commodity Markets, Digital Assets, and Rural212Development, and I am particularly excited about the gentleman213sitting to my right. Don Davis is a great human being, a great214Member of Congress. We worked together on this digital assets215stuff in the last Congress. I enjoyed working with Yadira, and216I am going to enjoy working with Don as well.217 Mr. Davis isn't the only one in a new role. Half of this218Subcommittee are new Members to the Subcommittee. So we are219going to be doing a lot of learning together, and I am sure I220speak for Don as well in that we are excited to have a new crop221of people, excited to make sure that these commodity markets222and rural development and crypto issues work well. And, of223course, a portion of our work, an important portion, is digital224assets, and that is what today's hearing is on. But it is225certainly not the only thing we deal with in this Committee. Of226course, rural development, rural energy, Commodity Futures227Trading Commission, legislation to reauthorize the CFTC, this228is all going to be a part of the work that we are going to do229together.230 In the digital assets space, the way it was last Congress,231that the full Committee did an extraordinary job, working in a232bipartisan way, and with the folks at Financial Services, to233craft and then pass the bipartisan comprehensive market234structures bill, the Financial Innovation and Technology for235the 21st Century Act, FIT21 (H.R. 4763, 118th Congress). It236passed the House floor by 279 to 136. I think Don has those237numbers tattooed on his upper arm. He will show you if you ask,238pretty please, nicely.239 And we are going to pick up right where we left off.240Earlier today, Chairman Steil's Digital Assets Subcommittee on241the Financial Services side held their first hearing on market242structure. That was not a coincidence. Just like last Congress,243everything we do, we are going to be doing in tandem and244working together. We are united and committed to advancing245comprehensive, bipartisan market structure legislation, and246getting it to the President's desk. Our legislation will bring247legal certainty to issuers and to users of digital assets.248There will be clear customer protections to buyers of digital249assets. And it is going to foster an environment of investment250and innovation, and that is going to benefit the whole country.251 Today, we are going to hear from entrepreneurs who are252using blockchain and digital assets to solve real-world253problems. Again, we get back to the title of this hearing, On-254Chain Tools for an Off-Chain World. Some of these concepts,255some of these solutions are really fun. And then that way it is256not about crypto, it is about cattle guys, trying to figure out257how to make it easier and more profitable for ranchers to258market their cattle. It is about a gifted engineer trying to259make a less expensive, more robust, more precise GPS system for260precision agriculture and other location-based systems. It is261about a law professor who is building automated systems to help262developers comply with legal disclosures in a way that263consumers can actually understand.264 Our work on market structure legislation is ultimately265about how to ensure that those ranchers, those engineers, those266professors, and many, many others, can use digital tools to267bring their ideas to life, and to power the American Dream.268 We have a terrific panel of witnesses to help us understand269that work, and the legal landmines which can disturb and slow270innovation. I am looking forward to today's hearing and our271work over the new few months. And, of course, ultimately,272punching FIT21 across into the end zone and onto the273President's desk.274 [The prepared statement of Mr. Johnson follows:]275276Prepared Statement of Hon. Dusty Johnson, a Representative in Congress277 from South Dakota278 Good afternoon. Welcome to our first meeting of the Subcommittee on279Commodity Markets, Digital Assets, and Rural Development for the 119th280Congress.281 I want to congratulate Don Davis from North Carolina as our new282Ranking Member. I know I'll enjoy working with you as I enjoyed working283with your predecessor, Yadira Caraveo.284 Mr. Davis isn't the only one in a new role--almost half our285Subcommittee is new compared to last Congress. I think I can speak for286the Ranking Member and say that we are thrilled to have you on this287Committee.288 A portion of our work is digital assets, which we will focus on289today. In the coming months, we will focus on the Committee's rural290development and rural energy priorities, oversight of the Commodity291Futures Trading Commission, and legislation to reauthorize the CFTC.292 Last Congress, this Committee did extraordinary work with our293colleagues on the Financial Services Committee to craft and pass a294bipartisan, comprehensive digital asset market structure bill--the295Financial Innovation and Technology for the 21st Century Act. FIT21296passed the House with great bipartisan support by a 279-136 vote.297 We are picking up right where we left off last Congress. Earlier298today, Chairman Steil's Digital Asset Subcommittee of the Financial299Services Committee held their first hearing on market structure. This300was not a coincidence--we'll be working side by side on legislation301again this Congress.302 We are united and committed to advancing comprehensive, bipartisan303market structure legislation to the President's desk. Our legislation304will bring legal certainty to issuers and users of digital assets,305clear customer protections to buyers of digital assets, and new306innovations to all Americans.307 Today, we are going to hear from entrepreneurs who are using308blockchains and digital assets to solve real-world problems.309 This conversation isn't really about crypto, but it's about a few310cattle guys trying to figure out how to make it easier and more311profitable for ranchers to market their cattle.312 It's about a gifted engineer trying to make a less expensive, more313robust, and more precise GPS network for precision agriculture and314other location-based systems.315 It's about a law professor who is building automated systems to316help developers comply with legal disclosure requirements in a way that317consumers can actually understand.318 It's about new ways to solve old problems, and these new ways use319public blockchains.320 Our work on market structure legislation is ultimately about how to321ensure that ranchers, engineers, college professors, and others can use322digital tools to bring their ideas to life and unleash their American323Dream.324 We have a terrific panel of witnesses to help us understand the325work to develop new projects and the legal landmines which can disturb326that effort and slow innovation.327 I am looking forward to today's hearing, our work over the next few328months, and ultimately, putting a bill on President Trump's desk.329 With that, I will recognize my friend, the new Ranking Member of330the Committee, Don Davis.331332 The Chairman. With that, I want to welcome the333distinguished--and recognize the distinguished Ranking Member,334the gentleman from North Carolina, Mr. Davis, for any opening335remarks he would like to give.336337OPENING STATEMENT OF HON. DONALD G. DAVIS, A REPRESENTATIVE IN338 CONGRESS FROM NORTH CAROLINA339340 Mr. Davis. Well, thank you so much, Mr. Chairman, and I341look forward to continued service with you on this Committee.342Thank you so much for not only your service to our country, but343in particular for the work that we have done, and I believe344what we will continue to do, on this Committee. And to all of345the Members, and to our witnesses, thank you for being with us346today.347 I would like to--in particular--to highlight and just thank348our Ranking Member as well as our Chairman for their leadership349and giving us guidance for the work before us in the 119th350Congress.351 Just this past month I had the privilege of participating352in the Digital Chambers' chambers of the DC Blockchain Summit.353We came together to reinforce what I think is a simple but354powerful idea, and that is digital asset policy remains vital355for American innovation.356 My priorities in particular as we move forward over the357119th for our Subcommittee: market structure, one, getting358digital market structure legislation across the finish line to359provide our markets with certainty, the certainty that is360necessary so that we can continue to operate to ensure that the361United States remains a leader. The future is counting on us,362and I truly believe that, and we must rise for this occasion363that is before us now. Number two, CFTC. Next, we must364reauthorize the CFTC with increased work for the CFTC coming on365the future market structure and other related legislation, we366need to ensure the CFTC is reauthorized and that they are367provided with adequate ability and staffing to carry out its368job. And third, which is shifting gears a little bit for me,369but I think I speak volumes for rural America, which I370understand in the First Congressional District of North371Carolina, we rely tremendously on Rural Development. Broadband372deployment, community facility support, and all the USDA rural373development programs. These are essential for our rural374communities. These priorities come with the need for a375commitment to move forward on this Subcommittee, a commitment376for holding hearings, roundtables, events, whatever it takes,377we are committed, Mr. Chairman, and to those who are here.378 As the House Financial Services Committee advances379legislation, it is vital that our Subcommittee keeps pace. Our380jurisdiction--commodity markets, digital assets, and rural381development--places us at an intersection of innovation and382making a difference in the lives of many people across this383nation, and I do not take that lightly. Any legislative384framework we move forward must account not only for market385structure and investor protection, but also for innovation386happening far from the trading floors, innovation that can387empower rural America, improve public services, and unlock388economic opportunity where it is needed most.389 I look forward to working with you, Mr. Chairman. And thank390you so much for the witnesses that are here again today.391 [The prepared statement of Mr. Davis follows:]392393 Prepared Statement of Hon. Donald G. Davis, a Representative in394 Congress from North Carolina395 Good afternoon. I thank our Subcommittee Chairman, Dusty Johnson,396and our witnesses for your service and commitment to such an important397topic.398 Just this past month, I had the privilege of participating in The399Digital Chamber's DC Blockchain Summit. We came together to reinforce a400simple but powerful idea: digital asset policy remains vital for401American innovation.402 My priorities for the Subcommittee are:403 Getting digital market structure legislation across the finish line404to provide our markets with the certainty they need to continue to405operate and to ensure they remain in the U.S. and not abroad. The406future is counting on us and we must rise for the occasion.407 Next, we must reauthorize the CFTC. With increased work for the408CFTC coming under future market structure and other related409legislation, we need to ensure the CFTC is reauthorized and provided410with the adequate ability and staffing to carry out its job.411 Finally, North Carolina's First Congressional District and rural412America rely on Rural Development. Broadband deployment, community413facilities support, and all of the USDA RD programs that support our414rural communities.415 These priorities come with the need for the Subcommittee to hold416hearings, roundtables, and events focused on the Subcommittee's work.417 As the House Financial Services Committee advances legislation,418it's vital that our Subcommittee keeps pace. Our jurisdiction--419commodity markets, digital assets, and rural development--places us at420the intersection of innovation and making a difference in the lives of421many across the nation.422 Any legislative framework we move forward must account not only for423market structure and investor protection but also for innovation424happening far from the trading floors, innovation that can empower425rural America, improve public services, and unlock economic opportunity426where it's needed most.427 I look forward to working with Chairman Johnson to schedule these428events and to move forward with good legislation that unlocks American429ingenuity.430 Now to shift to the focus of the hearing today. Blockchain431technologies uses for non-crypto applications.432 So often, when we hear about blockchain, it's focused on433cryptocurrencies and digital finance. Many don't understand that434blockchain technology can be used across industries for countless435reasons.436 Today's hearing provides us with an opportunity to educate the437Members of the Subcommittee so that we can educate our constituents and438better connect the technology to how it impacts their daily lives.439 The potential of this technology in improving processes for440industries across the U.S. is limitless. That is why we need to be441better messengers and communicators around this complicated technology.442I know the first time I heard about it from my son, it took me a while443to grasp it.444 For the House Agriculture Committee, the usage of this technology445increases across the country, and as the technology continues to446improve, all districts across the country will benefit. Whether it be447small businesses, farmers, rural communities, or under-invested448communities like the ones I represent in eastern North Carolina.449 I look forward to hearing from the witnesses about the various ways450that they are using blockchain technology. I think it will serve as an451opportunity to learn how we can help assist our home communities in452accessing and using the technology to allow them to thrive.453454 The Chairman. Before we recognize the Chairman and the455Ranking Member for their opening comments, after consultation456with Ranking Member Craig and Ranking Member Davis, I would ask457for a UC to limit the questioning time for Members to 4458minutes, and I will tell you why we want to do that. Votes are459going to get called, and rather than just shut down people at460the end of the dais, we thought if we all took a little bit461less, we could share more bountifully with all. And so I would462ask for a UC on that. Is there any objection? Hearing no463objection, Members will be given 4 minutes of questioning time.464And listen, if there are issues we still have to resolve and465votes haven't been called yet, we will do another round. Right?466It is not about shutting anybody down.467 And then for our witnesses, Mr. Davis and I will kind of468run this thing together. So if he recognizes you, don't think469he is going rogue, we just kind of like to tag team this a470little bit.471 And so with that, I would recognize the Chairman of the472full Committee, Mr. Thompson, for whatever remarks he would473make.474475 OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN476 CONGRESS FROM PENNSYLVANIA477478 Mr. Thompson. Well, thank you, Mr. Chairman. I am going to479congratulate you, Mr. Chairman, on your reappointment as480Chairman of the Subcommittee. You were a key part of our481success on digital assets last year, and I am so pleased that482you have agreed to take on this role again. And, Ranking Member483Davis, congratulations on your appointment as Ranking Member. I484know how excited you are to take on this role. I know that the485two of you are going to do a great job leading the Committee's486work on digital assets, rural development, and derivatives. I487also want to welcome all the Members of the Subcommittee here488today. And again, for the 119th Congress there was a great489demand to serve on this Subcommittee, in no small part because490of the opportunity to work on the digital asset issues.491 I am so excited for the work of the Subcommittee to492continue. I want to thank you all for your willingness to serve493on it. There is great potential for digital assets to provide494significant value for the American public and American495agriculture, not just in monetary terms, but as tools to solve496real world problems as we will hear about today. But as we will497also hear about today, digital asset developers, users, and498institutions still need clear, thoughtful rules of the road to499create these solutions. Congress wants to act so that we do not500lose out on this American innovation. And I want to underscore501what Chairman Johnson said, we are once again working hand in502glove with the House Financial Services Committee to craft503legislation that would do just that. This is perhaps unusual504for Congress, but it is the right thing to do to make good505public policy.506 I want to thank House Financial Services Chairman French507Hill and their Digital Assets Subcommittee Chairman Bryan Steil508for their partnership. Chairman Steil held a great Subcommittee509hearing on digital assets earlier today.510 No one can solve this issue alone. It takes cooperation of511committees and regulators to build a workable framework to512oversee digital assets. The result of this approach last513Congress was our digital asset market structure bill, FIT21,514passing the House with a strong bipartisan vote.515 Finally, I also want to thank our witnesses for coming516today from different parts of the country to share their517expertise with us, and I look forward to your testimony and518discussion that follows.519 Thank you, Mr. Chairman, Mr. Ranking Member, and I yield520back.521 [The prepared statement of Mr. Thompson follows:]522523Prepared Statement of Hon. Glenn Thompson, a Representative in Congress524 from Pennsylvania525 Thank you, Mr. Chairman.526 I want to congratulate you on your reappointment as Chairman of the527Subcommittee. You were a key part of our success on digital assets last528year, and I am so pleased you've agreed to take on this role again.529 And Ranking Member Davis, congratulations on your appointment as530Ranking Member. I know how excited you are to take on this role.531 I know that the two of you are going to do a great job leading the532Committee's work on digital assets, rural development, and derivatives.533 I also want to welcome all of the Members of the Subcommittee here534today.535 Again for the 119th Congress, there was a great demand to serve on536this Subcommittee, in no small part because of the opportunity to work537on digital asset issues.538 I am excited for the work of the Subcommittee to continue. I want539to thank you all for your willingness to serve on it.540 There is great potential for digital assets to provide significant541value for the American public and American agriculture.542 Not just in monetary terms, but as tools to solve real world543problems, as we'll hear about today.544 But, as we'll also hear about today, digital asset developers,545users, and institutions still need clear, thoughtful rules of the road546to create these solutions.547 Congress must act so we do not lose out on this American548innovation.549 I want to underscore what Chairman Johnson said. We are once again550working hand-in-glove with the House Financial Services Committee to551craft legislation that will do just that.552 This is perhaps unusual for Congress, but it's the right thing to553do to make good public policy.554 I thank House Financial Services Chairman French Hill and their555Digital Assets Subcommittee Chairman Bryan Steil for their partnership.556 Chairman Steil held a great Subcommittee hearing on digital assets557earlier today.558 No one can solve this issue alone. It takes the cooperation of559committees and regulators to build a workable framework to oversee560digital assets.561 The result of this approach last Congress was our digital asset562market structure bill, FIT21, passing the House with a strong563bipartisan vote.564 Finally, I also want to thank our witnesses for coming today from565different parts of the country to share their expertise with us.566 I look forward to your testimony and the discussion that follows.567 I yield back.568569 The Chairman. The gentlewoman from Minnesota, Ms. Craig, is570recognized.571572 OPENING STATEMENT OF HON. ANGIE CRAIG, A REPRESENTATIVE IN573 CONGRESS FROM MINNESOTA574575 Ms. Craig. Thank you so much, Mr. Chairman. I want to thank576the Subcommittee for holding this hearing. The two of you are577already demonstrating an amazing ability to work on a578bipartisan basis, so thank you for that, particularly in this579Congress.580 There is a wide range of views in Washington, of course,581surrounding cryptocurrencies, and while these new financial582products have their supporters and detractors, I think there is583one thing everyone can agree on; we need to establish a clear584and comprehensive regulatory structure to govern crypto. Today585though, this Subcommittee is reviewing a different question,586which I appreciate, by looking beyond crypto at the potential587other uses of the underlying technology that makes crypto588possible, blockchain technology.589 Blockchain technology is not crypto, but basically is the590operating system upon which it is built. And like other591operating systems we are more familiar with on our phones or592computers, people can build applications on the blockchain that593serve real-world, non-crypto purposes.594 Today we will be hearing from some of our witnesses who595will talk about those non-crypto use cases of distributive596ledger technology, like blockchain, and it is important that we597learn about these uses.598 As Congress works to develop legislation to establish a599regulatory structure for the financial products that use600blockchain technology, we do not want to inadvertently stifle601innovation of non-financial uses of the technology. At a time602when it seems that many of the bills that Congress votes on603seem designed to foster partisan conflict, I am hopeful that604the Committee's and Subcommittee's potential work in this space605can lead to legislation that can win broad, bipartisan support.606If we are successful in that effort, it will not be because of607the meme coins issued by the President and his family, or the608cryptocurrency companies they buy. Those efforts actually609undermine the credibility of the entire industry. Instead, our610success will be built on the stories we hear today; stories of611ordinary Americans trying to do what Americans do best;612innovate.613 I look forward to hearing our witnesses today. And I thank614the Chairman and Ranking Member of this Subcommittee, as well615as Chairman Thompson, for bringing all of us together.616 And with that, I yield back.617 The Chairman. If there are any other Members with opening618statements, of course, they can submit those for the record.619 And with that, we will recognize our witnesses. Our first620witness is Mr. Bill Hughes, Senior Counsel and Director of621Global Regulatory Matters, with Consensys Software, Inc.622 Mr. Davis. And our next witness is Mr. Mark Tague, the Co-623Founder and Chief Revenue Officer of CattleProof Verified, LLC.624And our third witness today is Mr. Mike Horton, the Project625Creator at GEODNET Foundation.626 The Chairman. Next witness is Dr. Chris Brummer, who is the627Sesquicentennial Professor of Financial Technology at628Georgetown. He is also the Chief Executive Officer at Bluprynt.629 Mr. Davis. And our fifth and final witness today is Mr. Coy630Garrison, who is a Partner at Steptoe LLP.631 The Chairman. Although we are cutting ourselves a little632short, we are not cutting your testimony time short, of course.633And so, Mr. Hughes, you are recognized for 5 minutes.634635 STATEMENT OF WILLIAM ``BILL'' C. HUGHES, J.D., SENIOR COUNSEL636 AND DIRECTOR OF GLOBAL REGULATORY637 MATTERS, CONSENSYS SOFTWARE INC., ARLINGTON, VA638639 Mr. Hughes. Thank you, Mr. Chairman, Chairman Johnson,640Ranking Member Davis, and the distinguished Members of the641Subcommittee. I thank you for this invitation to testify about642how blockchain is a special technology that allows us to643innovate in all aspects of the American economy, including the644agriculture sector.645 I work as a senior legal counsel at Consensys Software, a646software developer that is headquartered in Forth Worth, Texas.647Our business is helping to build the next version of the648internet, often called Web3, using primarily the Ethereum649blockchain. Ethereum is the first and most established650programmable blockchain. So just like Bitcoin, it allows you to651safeguard your own assets without a bank or custodian, and to652send funds without a payment intermediary. But unlike Bitcoin,653it additionally supports software programs, often called smart654contracts, that greatly expand what the network can do.655 New computer networks like Ethereum have enticed meaningful656computer engineering talent to migrate to the blockchain space657to build the apps that will impact our future. What we see with658Ethereum is the building of a new world computer where anyone659can build software programs that replace service providers, and660where everyday people can enjoy better access to important661services.662 Consensys has been closely tied to Ethereum since 2016. Our663flagship offering is the MetaMask Wallet, which you can find in664basically every app store. It is the most popular self-custody665wallet software in digital assets, with over 100 million users666worldwide. MetaMask is a browser interface, essentially. It667allows you to read the blockchain, to execute transactions on668your own behalf, and to safeguard your digital assets. Those669assets include digital dollars. Native digital assets like670Bitcoin and Ether and NFTs that could represent art or671essentially any ownership of a real-world asset.672 A wallet like MetaMask is the link that brings the digital673assets to today's internet, so it is a critical piece of674tooling. Blockchain unlocks a software application frontier675that can meaningfully impact the real world in ways that the676current internet simply cannot. Much attention is paid to the677financial applications of decentralized finance and to payment678stablecoins, and rightly so. They are indeed powerful new679innovations that will mature as the technology evolves, and the680economic and investment activity in traditional finance slowly681moves to blockchain. But blockchain applications are much more682diverse than finance, and I think we have recognized this today683so far. Developers are creating apps with commercial and social684applications.685 Blockchains and blockchain apps, if we take a step back,686are all grounded on basic economic incentives. On most687blockchains there is a native digital asset, which is the688foundation of that incentive structure. For example, on the689Ethereum network, Ether is the native digital asset. It is how690users pay for moving value, or accessing software applications691on the network. Ether is how the people who maintain the692network infrastructure voluntarily are paid for their work. You693can think of it this way, if the Ethereum blockchain was an694engine, Ether is the gasoline on which it runs.695 There are thousands of developers using these blockchains696to build services to solve real-world problems. I am very697interested to hear more about two such projects which are going698to be testifying here today. They are just two examples of what699is possible if the market is provided the freedom and clarity700to innovate. We are at a watershed moment today with an701opportunity to move on from the past several years of outdated702thinking. While the rest of the world has updated policies to703embrace innovation, the U.S., unfortunately, has lagged behind,704threatening its leadership role on this issue, but I think it705is a new day and America is back open for blockchain businesses706of all stripes. And you see that out in the market, people are707coming back, new companies are coming into the space,708especially from overseas. Durable clarity on the law is what we709need today to ensure that we can capture the opportunities710presented by blockchain technology. What we can build is only711limited by our imagination and the law.712 So I am pleased to be with you today to explore these713topics, and we at Consensys applaud this Committee, and this714Subcommittee in particular, for taking an important leadership715role on these issues. Thank you.716 [The prepared statement of Mr. Hughes follows:]717718Prepared Statement of William ``Bill'' C. Hughes, J.D., Senior Counsel719 and Director of Global Regulatory Matters, Consensys Software Inc.,720 Arlington, VA721 Chairman Johnson, Ranking Member Davis, and distinguished Members722of the Subcommittee, I thank you for the invitation to testify about723how blockchain is a special technology that allows us to innovate in724all aspects of the American economy, including the agriculture sector.725Regulation of the blockchain space is an important debate for our726elected representatives to have, especially this year as industry-727defining legislation is brought to the fore. Permission-less blockchain728networks are new technologies that have real value and present exciting729new opportunities that will impact our real-world lives.730 I work as a senior legal counsel at Consensys Software Inc., a731software developer that is headquartered in Fort Worth, Texas and732employs over 300 persons across the U.S. and another 300 around the733world. Our business is helping to build the next version of the734internet, often called Web3, using the Ethereum blockchain. Ethereum is735the first and most established programmable blockchain. Just like736Bitcoin, it allows you to safeguard your own assets without a bank or737other custodian and to send funds without a payment intermediary. But738unlike Bitcoin, it additionally supports software programs that greatly739expand what the network can do. Anyone in the world with the requisite740computer skills can publish a software program on Ethereum for anyone741else in the world to access. Anyone can also participate in maintaining742the network itself and processing new transactions.743 New computer networks like Ethereum have enticed meaningful744computer engineering talent to migrate to the blockchain space to build745the apps that will impact our future. What we see with Ethereum is the746building of a new world computer for which anyone can build software747programs that replace service providers, and everyday people can enjoy748better access to important services. And this world computer has749special characteristics: a Big Tech company cannot pick winners and750losers; there are no software black boxes; and the data is resilient751and incorruptible. It gives us the chance to move past this era of tech752oligopoly where we can trust systems again.753 Consensys has been closely tied to Ethereum since 2016. Both those754who build on blockchain and those who use blockchain day to day are the755main audience for our flagship offering, the MetaMask wallet, which you756can find in every app store. It is the most popular self-custody wallet757software in digital assets with over 100 million users. MetaMask is a758browser interface that allows you to read the blockchain and to execute759transactions on your own behalf. Wallets ensure Web3 user security760because they are the technology safeguarding a user's digital761assets.\1\ Those digital assets can represent almost any kind of asset:762digital dollars, native digital assets like Bitcoin or Ether, or NFTs763that represent art or ownership of real-world assets.764---------------------------------------------------------------------------765 \1\ To learn more about self-custody digital wallets, please visit766MetaMask Learn found at https://learn.metamask.io/ (last visited April7677, 2025).768---------------------------------------------------------------------------769 A wallet like MetaMask is the link that brings digital assets to770today's internet, so it is a critical piece of tooling. And as wallet771technology matures, it will make Web3 accessible, intuitive, and useful772for everyone, giving rise to a swath of new applications that can be773brought to market directly and that users can connect with directly,774cutting out Big Tech gatekeepers.775 When you use a wallet to access on-chain software, programs which776are frequently referred to as ``smart contracts'', you unlock a777software application frontier that can meaningfully impact the real778world in ways that the current internet with today's apps simply779cannot. Much attention is paid to the financial applications in780decentralized finance (``DeFi'') or to payment stablecoins. And rightly781so--they are indeed powerful new innovations that will mature as more782economic and investment activity move online.\2\783---------------------------------------------------------------------------784 \2\ Indeed, Ethereum has more DeFi activity and stablecoin volume785than any other chain.786---------------------------------------------------------------------------787 But blockchain applications are much more diverse than finance.788Developers are creating apps with commercial and social789applications.\3\ Other applications focus on building out physical790networks by incentivizing people to build and maintain network791infrastructure. Yet others are delving into the world of artificial792intelligence, both by changing how AI models work and by improving how793we use them. Some projects aim at solving tricky problems while794preserving privacy, including how we can fight deep fakes so we can795begin to trust information we get over the internet.796---------------------------------------------------------------------------797 \3\ Consensys highlighted some of these app developers in our798``Web3 Builders'' series, which may be found at https://consensys.io/799blog/builder-stories-back-represent-web3-innovation-matters-most (last800accessed April 7, 2025) and https://consensys.io/blog/the-essence-of-801web3-is-its-people-meet-the-builder-stories (last accessed April 7,8022025).803---------------------------------------------------------------------------804 The foundation for these apps and the blockchains upon which we805build them are basic economic incentives. Open computer networks allow806anyone to join and anyone participate in them, but they do not work807without incentives that drive participants to play by the system's808rules. Starting with Bitcoin, blockchains are built so that people are809heavily incentivized to play by the rules. Regulation should embrace810that. Maintaining the conditions for those incentives to work their811economic magic should be the goal of any regulation of the space.812 On most blockchains, including the Bitcoin blockchain, Ethereum,813and many others, there is a native digital asset which is the814foundation of that incentive structure. For example, on the Ethereum815network, Ether is the native digital asset, and it is how Ethereum816users pay for moving value or accessing software applications on the817network. Ether is paid to the people who maintain the infrastructure of818the network and confirm the transactions. Ether has value because it is819the only way to access the Ethereum network and the applications that820people have built on it.821 In this way, Ether is akin to gasoline, while the blockchain itself822is akin to an engine. Without Ether, blockchain transactions would not823process, and without the blockchain, there would be no need for Ether.824Together, they allow millions of Americans and other people around the825world to coordinate productively to operate the first truly global826computer platform.827 We should embrace the fact that blockchains like Ethereum828incentivize participants to play by the rules by offering a financial829reward in the form of a token. Those tokens exist only on the830blockchain ledger, and serve an important function without which the831blockchain would not work.832 There are thousands of developers using these blockchain-based833tools to build services to solve real-world problems. A network like834Ethereum is the foundation of their applications. Two such projects are835here to testify about their own work. But, they are just two examples836in an almost limitless universe. Just like we could not imagine the837services that people would develop in the early days of the internet,838we can only speculate today about what people will develop in the839future with blockchains and digital assets, if provided the freedom to840do so.841 We are at a watershed moment today with the opportunity to move on842from the past several years of outdated thinking. While the rest of the843world has updated policies to embrace innovation, the U.S. has lagged844behind, threatening its leadership role on this issue.845 But it is a new day, and America is back open for blockchain846businesses of all stripes. Those in this space are heartened by847bipartisan interest in the technology and the growing familiarity among848the ranks of Congress. Durable clarity on the law is what we need today849to ensure we can capture the opportunities presented by blockchain850technology. What we can build is limited only by our imagination and851the law. I am pleased to be with you today to explore these topics, and852we at Consensys applaud this Committee for taking an important853leadership role on these issues.854855 Mr. Davis. At this time we will recognize Mr. Mark Tague856for up to 5 minutes.857858 STATEMENT OF MARK TAGUE, CO-FOUNDER AND CHIEF859 REVENUE OFFICER, CattleProof VERIFIED INC.,860 CHEYENNE, WY861862 Mr. Tague. Chairman Johnson, Ranking Member Davis,863distinguished Members of the Subcommittee, thank you for the864opportunity to speak with you today.865 My name is Mark Tague and I come to you not just as a tech866founder, but as a fourth-generation cattleman. My family has867stewarded the same land in Oklahoma for over a century; land868that was originally allotted to my Chickasha great-grandmother869by the Dawes Act of 1887 (Pub. L. 49-43, An Act to provide for870the allotment of lands in severalty to Indians on the various871reservations, and to extend the protection of the laws of the872United States and the Territories over the Indians, and for873other purposes.), following the Indian Removal Act of 1830874(Pub. L. 21-148, An Act to provide for an exchange of lands875with the Indians residing in any of the states or territories,876and for their removal west of the river Mississippi.). Our877ranch is proudly recognized by the State of Oklahoma as a878centennial ranch, honoring 100 years of continuous family879ownership.880 I am also the Co-Founder and Chief Revenue Officer of881CattleProof Verified, a Wyoming-domiciled and USDA certified882process verified program provider, operating at the883intersection of agricultural provenance, blockchain884infrastructure, and rural economic development. Our mission is885to bring integrity, transparency, and innovation to one of the886most critical and most overlooked sectors of the American887economy, the livestock and commodity markets.888 At the core of our solution is something deceptively889simple; it is verifiable data. In an age where trust drives890markets, American agriculture is still being held back by891fragmented systems, paper trails, and lack of transparency.892That is not just inefficient, it is expensive, and it is unfair893to both producers and consumers.894 CattleProof is building on-chain tools for off-chain895assets; namely, real-world commodities, like cattle feed and896pasture, that need provenance, auditability, and programmable897trust. But let me be clear, we are not asking ranchers to898become technology experts or replace markets. We are building899tools that work in the background, quietly adding security,900efficiency, and access.901 Here is how it works. One, verification at the source.902Ranchers enter data, upload verified documents--breed903registration, vaccination records, feed logs, location data,904into our system. That information is cryptographically signed905and anchored on chain, creating a USDA-certified digital906identity for each animal.907 Two, proof of provenance. Once these credentials are in908place, downstream partners; blenders, packers, insurers,909regulators, even retailers, can verify claims instantly without910relying on a centralized authority.911 Three, tokenization of livestock and inputs. Representing912ranch assets as tokens on a blockchain enables fractional913ownership, collateralization and real-time liquidity, opening914the door for real financial inclusion. For instance, a young915rancher could tokenize part of a verified herd to raise working916capital through decentralized lending pools.917 Four, settlement and reporting. Using blockchain ensures918audit trails and automated compliance with evolving and919domestic and export regulations, something that is increasingly920important in global trade.921 And five, stablecoin payments. CattleProof intends to922integrate on-chain payments for cattle and other assets using923the anticipated Wyoming Stable Token. WYST can enable users to924transmit dollar-denominated transactions of any value, anywhere925in the world, nearly instantly with significantly reduced fees926compared to traditional ACH or wires. This reduces counterparty927risk and the concept of float from transactions.928 Let me emphasize, this is not hypothetical, this is live.929Our ranchers are already using CattleProof today. For example,930the Choctaw Nation ranches, a sovereign Tribe in Oklahoma, are931using CattleProof to create public trust and transparency in932their progressive animal handling and land stewardship933practices via USDA process verified programs.934 But if we want rural America to be part of the digital935economy, truly part of it, we need regulatory clarity and936digital infrastructure to match. Here is why this matters.937Rural America is often left behind when it comes to fintech938innovation. Blockchain gives us the rare opportunity to reverse939that. Digital assets need real-world use cases. Agriculture is940the perfect test-bed, combining blockchain technology with941inputs from RFID tags and other data captured can create942verifiable records of an asset's lifecycle. Commodities943represent trillions in value. If we bring these assets on chain944with transparency and trust, the U.S. can lead the next era of945programmable real-world markets.946 To help us get there, we need your help to make digital947asset market structure right. New digital asset tools depend on948low cost, fast, and transparent settlement, a clear legal949framework for stablecoins like the STABLE Act of 2025 (H.R.9502392, Stablecoin Transparency and Accountability for a Better951Ledger Economy Act of 2025) passed by the Financial Services952Committee last week, especially those backed by U.S. dollars or953U.S. Treasuries that will empower real communities to access954compliant, next generation financial products.955 While legislation must be bipartisan and well informed,956time is of the essence. Uncharacteristically, foreign957jurisdictions are ahead of America in deploying regulatory958frameworks to accommodate the rapid proliferation of digital959assets.960 In closing, with the right tools and the right policies, we961can ensure that America doesn't just keep up, but leads the962world in unlocking the value of real-world assets on-chain.963 I thank you again for your time, and I look forward to your964questions.965 [The prepared statement of Mr. Tague follows:]966967Prepared Statement of Mark Tague, Co-Founder and Chief Revenue Officer,968 CattleProof Verified Inc., Cheyenne, WY969I. Executive Summary970 The traditional cattle transaction system, largely unchanged for971the past 150 years, faces significant challenges today that hinder972efficiency, transparency, and trust within the industry. Ranchers973contend with a lack of comprehensive data regarding their livestock,974leading to difficulties in verifying quality and origin. Slow payment975processes can create cash flow issues and uncertainty for producers.976Furthermore, the industry grapples with persistent problems such as977fraud, impacting both buyers and sellers. These archaic processes978contribute to inefficiencies and prevent ranchers from fully realizing979the full value of their cattle. The absence of an easily accessible980reliable record-keeping system impedes traceability and the ability to981provide consumers with verifiable information about the beef they982purchase.983 Blockchain technology offers a transformative solution to the long-984standing issues plaguing the cattle industry. At its core, blockchain985is a secure, immutable, and distributed ledger that records986transactions and data across a network of computers. This decentralized987nature enhances transparency and makes it extremely difficult to tamper988with recorded information. In the context of cattle transactions,989blockchain enables the creation of unique digital identities for990individual animals, allowing for the recording and tracking of crucial991data points such as origin, health records, and ownership throughout992their lifespan. This comprehensive data trail can follow the animal993through the entire supply chain, from ranch to consumer, providing an994unprecedented level of transparency and accountability. The ability to995tokenize these digital animal identities and their associated data also996paves the way for more efficient and secure online marketplaces for997buying and selling cattle.998 The adoption of blockchain technology presents numerous benefits999for ranchers of all sizes. Enhanced transparency and verifiable data1000can enable ranchers participating in USDA Process Verified programs to1001receive premium prices for their certified cattle. Blockchain1002facilitates faster settlement of transactions, improving cash flow and1003reducing financial uncertainty. The digitization of animal records1004streamlines administrative processes, reducing paperwork and improving1005overall efficiency on the ranch. For smaller ranchers, blockchain can1006provide access to broader markets and potentially level the playing1007field by offering a secure and verifiable way to showcase the quality1008of their cattle, regardless of scale. The increased trust fostered by1009blockchain could also lead to stronger relationships with buyers and1010greater access to capital through more transparent and secure1011transaction histories. By addressing inefficiencies and providing a1012platform for verifiable quality, blockchain empowers ranchers to focus1013on their core business of raising cattle while capturing more of the1014value they create.1015 For the American beef-buying population, blockchain technology in1016the cattle industry translates to safer and more trustworthy food1017products. The enhanced traceability provided by blockchain allows1018consumers to gain insights into the origin and history of the beef they1019purchase, fostering greater confidence in its quality and safety. This1020transparency addresses the growing consumer demand for more information1021about their food sources and production practices. In the event of1022foodborne illness outbreaks, blockchain can facilitate faster and more1023precise recalls, minimizing harm to public health. The ability to1024verify claims related to animal welfare and sustainable farming1025practices through blockchain can also empower consumers to make more1026informed purchasing decisions that align with their values. Ultimately,1027blockchain contributes to a more reliable and accountable beef supply1028chain, ensuring that American consumers have access to high-quality,1029safe, and transparently sourced beef.1030 In sum, the integration of blockchain technology into the cattle1031industry holds significant and mutual advantages for both producers and1032consumers. By addressing the longstanding challenges of inefficient and1033opaque traditional transaction methods, blockchain offers a pathway1034towards a more transparent, efficient, and trustworthy beef supply1035chain. Ranchers, regardless of their size, stand to benefit from1036premium pricing, faster payments, reduced administrative burdens, and1037potentially broader market access. Simultaneously, the American beef-1038buying population will gain greater confidence in the safety and origin1039of their food through enhanced traceability and verifiable information.1040The adoption of blockchain represents a crucial step in modernizing the1041cattle industry, bridging the gap between innovative technology and the1042practical needs of ranching, ultimately fostering a more sustainable1043and resilient future for beef production and consumption in the United1044States and globally.1045II. Introduction: The Current State of Cattle Transactions1046A. Historical Overview of Cattle Transactions and Their Lack of1047 Significant Change1048 For over 150 years, the way cattle have been bought and sold has1049remained fundamentally unchanged. This lack of significant evolution in1050cattle transactions stands in stark contrast to advancements seen1051across numerous other industries. The core processes involved in1052transferring ownership, providing assurances of quality and origin, and1053facilitating payment have largely persisted without the benefits of1054modern technology.1055 Some of the very issues that plagued cattle transactions a century1056and a half ago continue to be prevalent today. Fraud, for instance,1057remains a significant concern within the industry. The absence of1058readily available, reliable data and transparent processes creates1059opportunities for misrepresentation and disputes regarding the1060characteristics and history of individual animals.1061 Furthermore, traditional cattle transactions suffer from1062inefficiencies that hinder ranchers and other stakeholders in the1063supply chain. Slow payments are a common frustration, creating cash1064flow challenges for producers. The lack of verifiable data on1065individual animals, including their health records, breeding history,1066and other relevant information, limits the ability of buyers to make1067informed decisions and for sellers to capture the full value of their1068high-quality cattle.1069 While demand for cattle remains strong, ranchers are increasingly1070challenged by issues of efficiency. The antiquated nature of1071transaction processes contributes to these challenges, acting as a1072bottleneck that prevents the industry from fully capitalizing on its1073potential. The need for technological solutions to bridge this gap and1074bring cattle transactions into the 21st century has become increasingly1075apparent. The introduction of blockchain and peer-to-peer transaction1076platforms will address these long-standing problems by providing1077solutions for verification, secure data storage and sharing, and1078streamlined transactions, which were simply not available in the1079historical context of cattle commerce.1080B. Problems with Current Cattle Transactions10811. Lack of Data and Traceability1082 Current cattle transactions are hampered by a significant lack of1083readily available and reliable data. This absence of information makes1084it difficult to track individual animals and their history throughout1085the supply chain. Ranchers lack the tools to easily record and share1086crucial details about their cattle, such as health records and breeding1087history. This limits transparency and makes it challenging for buyers1088to make informed decisions about the animals they are purchasing. The1089inability to trace an animal's history also impacts food safety and1090compliance efforts. Without a system for individual animal1091identification and data sharing, the industry operates with a1092significant information deficit, hindering efficiency and trust.10932. Rigid and Limited Distribution Channels1094 The traditional methods of buying and selling cattle often involve1095rigid and limited distribution channels that have not evolved1096significantly in over a century. The current environment lacks diverse1097and accessible avenues for ranchers to connect with potential buyers.1098The fact that technology is needed to ``bridge the gap'' indicates that1099the existing channels may not be efficient in reaching a wider range of1100buyers or in adapting to modern market demands. This limitation can1101prevent ranchers from accessing optimal prices and can slow down the1102overall movement of cattle through the supply chain.11033. Slow Payment Processes1104 Slow payment processes represent a persistent problem in1105traditional cattle transactions. This inefficiency creates cash flow1106challenges for ranchers and can impact their ability to reinvest in1107their operations. By bringing transactions onto a blockchain, the aim1108is to achieve faster settlement. The current reliance on outdated1109methods means that ranchers often have to wait for extended periods to1110receive payment after a sale, creating unnecessary financial strain.1111Modernizing these processes is crucial for improving the financial1112well-being of producers and streamlining the overall transaction cycle.11134. Lack of Reliable Proof of Ownership and History1114 A significant challenge in current cattle transactions is the lack1115of reliable proof of ownership and the difficulty in tracing an1116animal's history. Current methods of tracking ownership and history are1117inadequate and potentially unreliable. The blockchain's immutable and1118transparent nature offers a solution by providing a secure and1119verifiable record of an animal's journey and ownership changes1120throughout its life. Restoring trust in the provenance of cattle1121requires a more robust and tamper-proof system for documenting1122ownership and historical data.11235. Susceptibility to Fraud1124 The cattle transaction industry remains frustratingly susceptible1125to fraud. The lack of transparent data and verifiable records creates1126opportunities for fraudulent activities. Current, largely unchanged1127transaction methods lack the necessary safeguards to effectively1128prevent fraud. Implementing technologies that provide immutable records1129and verifiable information is crucial for mitigating the risk of1130misrepresentation and ensuring fair dealings within the cattle market.11316. Inefficiencies Impacting Rancher Profitability1132 Ranchers today are facing challenges not primarily due to a lack of1133demand, but because of inefficiencies in the transaction processes.1134These inefficiencies negatively impact their profitability and make it1135harder for them to ``keep ranching''. Antiquated transaction methods1136contribute to these inefficiencies, preventing ranchers from fully1137capturing the value of their cattle and adding unnecessary costs or1138delays to the process.1139C. The Need for Modernization and Technological Solutions in the Cattle1140 Industry1141 The cattle industry stands at a critical juncture, facing the1142imperative of modernization to overcome long-standing inefficiencies1143and embrace the potential of technological solutions. For over a1144century and a half, the fundamental processes of cattle transactions1145have remained largely unchanged, creating a growing disconnect with the1146advancements seen in other sectors. This lack of evolution has left the1147industry grappling with problems that not only hinder productivity but1148also limit the profitability and sustainability of ranching operations.1149The time has come for technology to bridge this gap and bring cattle1150commerce into the 21st century.1151III. CattleProof: A Blockchain Solution Purpose-Built for the Cattle1152 Industry1153A. CattleProof's Mission To Digitize Cattle Transactions1154 CattleProof's central mission is to digitize cattle transactions,1155bringing a centuries-old industry into the 21st century by leveraging1156cutting-edge technology to solve its fundamental problems. We are1157overhauling outdated processes that are hindering efficiency,1158transparency, and profitability within the cattle industry. Our core1159objective is to unlock value by addressing the critical shortcomings of1160the current system and empowering ranchers to thrive in a modern1161marketplace.1162 The foundation of CattleProof's mission lies in the digitization of1163agricultural assets through a blockchain-based platform. This involves1164creating individual animal IDs that are securely stored and shared on a1165blockchain. This unique identification forms the basis for recording1166and tracking comprehensive animal data throughout the supply chain. By1167moving away from traditional, often paper-based or fragmented1168recordkeeping, we eliminate the problem of ``no data'' that plagues the1169industry. This digital record-keeping enables traceability, allowing1170for a clear understanding of an animal's history, health, and origin.1171 Furthermore, CattleProof seeks to revolutionize the transactional1172aspect of the cattle industry. Our platform facilitates buying and1173selling animals directly on the blockchain, with the animal's data1174seamlessly following it through each transaction in the supply chain.1175This approach directly addresses the issue of slow payments by1176promising faster settlement through the efficiency of blockchain1177technology. By streamlining the payment process, CattleProof improves1178cash flow for ranchers and reduce the financial burdens associated with1179traditional transaction delays.1180 A key component of CattleProof's mission is to enhance trust and1181security within the industry. The current system suffers from a lack of1182reliable proof of ownership and history, contributing to the persistent1183problem of fraud. By utilizing a secure blockchain to store individual1184animal IDs and transaction records, CattleProof provides restored trust1185and a verifiable history for each animal. This immutability and1186transparency inherent in blockchain technology offer a significant1187advantage over traditional methods, creating a more secure and reliable1188environment for all stakeholders.1189 Ultimately, our mission is driven by an understanding that ranchers1190aren't struggling for demand--they're struggling with efficiency. Our1191platform is designed to bridge the gap between the cattle industry and1192modern technology, providing tools that enhance operational efficiency1193and future-proof compliance. In essence, CattleProof's mission is to1194empower ranchers to keep ranching by providing them with the1195technological solutions needed to operate more efficiently, securely,1196and profitably in the 21st century.1197B. Key Features of the CattleProof Platform11981. Verification: USDA Process Verified Program Service Provider1199 A core feature of the CattleProof platform is its role as a USDA1200Process Verified Program Service Provider. We offer a trusted and1201recognized mechanism for verifying cattle, a process that can yield1202significant benefits for ranchers. Ranchers who utilize USDA Process1203Verified programs can receive up to a 150% premium on their cattle,1204highlighting the economic advantage of this verification. By offering1205this service, CattleProof directly addresses the industry's need for1206proof and enables ranchers to differentiate their high-quality1207livestock in the marketplace. This feature contributes to restored1208trust within cattle transactions by providing buyers with assurance1209regarding the origin and quality of the animals. CattleProof's1210verification service leverages established USDA standards, integrating1211them into a modern digital platform to enhance transparency and value1212for producers of certified cattle. This ensures that data regarding the1213cattle's adherence to specific USDA process-verified attributes is1214securely recorded and readily accessible to authorized parties1215throughout the supply chain.12162. Blockchain Technology: Individual Animal IDs Creation, Secure1217 Storage, and Sharing on a Blockchain1218 The CattleProof platform is built upon blockchain technology, a1219foundational element that underpins its ability to digitize and track1220cattle. This technology enables the creation of individual animal IDs,1221which are securely stored on a distributed and immutable ledger. Each1222animal's unique ID serves as the anchor for a comprehensive record of1223its life and transactions. The blockchain's inherent security ensures1224the integrity and tamper-proof nature of this data, addressing the1225problem of no data and the risk of fraud prevalent in traditional1226systems. Furthermore, the blockchain facilitates the secure sharing of1227this animal data with relevant stakeholders across the supply chain.1228This enhanced data transparency and traceability are crucial for1229building trust, improving supply chain efficiency, and potentially1230future-proofing compliance requirements. By leveraging blockchain,1231CattleProof provides a robust and transparent infrastructure for1232managing and exchanging critical information about individual cattle.12333. Tokenization: Digitizing Physical Assets and Providing 24/7/3651234 Transactability1235 CattleProof embraces the concept of tokenization by digitizing1236physical assets--the cattle themselves--through the creation of1237individual animal IDs on the blockchain. This digital representation1238transforms cattle into assets that can be transacted more efficiently.1239The use of blockchain technology paves the way for 24/7/3651240transactability, moving beyond the limitations of traditional auction1241schedules and physical marketplaces. Ranchers gain the flexibility to1242buy and sell their cattle at any time, potentially expanding their1243market reach and accelerating transaction cycles. This continuous1244availability for transactions contributes to bringing cattle1245transactions into the 21st century, offering a significant improvement1246over the historically slow and restricted nature of cattle commerce.1247Tokenization on the blockchain allows for a more dynamic and accessible1248market where physical cattle are represented by secure digital records,1249enabling continuous trading opportunities.12504. Marketplace: Platform for Buying and Selling and Financing Cattle on1251 the Blockchain1252 CattleProof provides a dedicated marketplace built on the1253blockchain, specifically designed for buying and selling animals. This1254platform aims to create more marketplaces for ranchers, expanding their1255access to a wider network of potential buyers and sellers beyond1256geographical limitations. By digitizing the transaction process,1257CattleProof streamlines the exchange of ownership and facilitates1258faster settlement, addressing key inefficiencies in the traditional1259cattle market. This blockchain-based marketplace fosters a more1260transparent and efficient environment for cattle commerce, allowing1261ranchers to directly participate in a modern, digital ecosystem and1262potentially access new avenues for capital and market opportunities.1263C. Data Tracking Real-Time Throughout the Supply Chain1264 Real-time data tracking throughout the supply chain is a crucial1265element in modernizing the cattle industry, and it forms a cornerstone1266of CattleProof's mission to digitize cattle transactions and unlock1267value. The current state of cattle transactions suffers from a1268significant lack of readily available and reliable data, hindering1269efficiency and contributing to problems like fraud and the inability to1270capture the full potential value of cattle. CattleProof's platform1271directly addresses this by implementing a system for individual animal1272IDs created and securely stored on a blockchain. This foundational step1273enables the continuous and real-time tracking of vital information as1274an animal moves through each stage of the supply chain, from ranch to1275consumer.1276 The creation of a unique digital identity for each animal allows1277for the recording of a comprehensive dataset, including origin, health1278records, vaccination history, feeding information, and ownership1279transfers. Because this data is immutably recorded on the blockchain,1280it provides an auditable and trustworthy history for each animal. This1281real-time tracking offers stakeholders an unprecedented level of1282visibility into the supply chain. Ranchers can monitor the health and1283well-being of their animals more effectively. Feedlots can optimize1284feeding practices based on the documented history. Processors can1285access critical information relevant to food safety and quality. And1286ultimately, consumers can have greater confidence in the provenance of1287the beef they purchase.1288 Furthermore, our role as a USDA Process Verified Program Service1289Provider enhances the value of this real-time data tracking. By1290integrating USDA verification processes into the platform, CattleProof1291ensures that data related to specific quality attributes is captured1292and linked to the animal's digital ID. This verifiable data can then be1293shared in real-time with buyers, allowing ranchers to demonstrate the1294value of their USDA Process Verified Cattle. The ability to access this1295verified information instantly streamlines transactions and builds1296trust between buyers and sellers.1297 The benefits of real-time data tracking extend beyond individual1298animal management and transactions. At a broader level, it enhances the1299overall efficiency of the cattle supply chain. Knowing the precise1300location and status of animals in real-time can optimize logistics,1301reduce transportation delays, and minimize waste. This improved1302efficiency directly addresses the fact that ranchers aren't struggling1303for demand--they're struggling with efficiency.1304 By providing the technological tools for real-time data management,1305CattleProof aims to bridge the gap and empower ranchers to operate more1306effectively and profitably. The transparency afforded by this system1307also contributes to a more secure marketplace, mitigating the risks1308associated with inaccurate or fraudulent information. CattleProof's1309commitment to real-time data tracking throughout the supply chain1310represents a significant step towards a more efficient, transparent,1311and trustworthy cattle industry.1312D. How CattleProof Aims To Bring Cattle Transactions Into the 21st1313 Century1314 CattleProof directly addresses the long-standing inefficiencies of1315the cattle transaction process. The platform aims to revolutionize this1316sector by bringing cattle transactions into the 21st century through1317the strategic integration of cutting-edge technologies and a focus on1318data, trust, and efficiency. Traditionally plagued by no data, slow1319payments, and no proof, the cattle market is ripe for modernization,1320and CattleProof offers a comprehensive solution to these archaic1321problems.1322 At its core, CattleProof utilizes blockchain technology to create a1323secure and transparent environment for cattle transactions. This1324involves the creation of individual animal IDs that are stored on an1325immutable ledger, ensuring the integrity and traceability of each1326animal's history. This digital foundation moves the industry away from1327reliance on outdated paper-based records, providing a single source of1328truth for critical animal data. This lays the groundwork for greater1329trust and efficiency throughout the supply chain.1330 Furthermore, CattleProof acts as a USDA Process Verified Program1331Service Provider, integrating a trusted verification mechanism directly1332into the platform. By providing this verification service, CattleProof1333injects much-needed proof into the transaction process, fostering1334greater confidence among buyers and contributing to restored trust in1335the market.1336 The concept of tokenization is central to CattleProof's1337modernization efforts. By digitizing physical assets--the cattle--1338through their unique blockchain IDs, the platform enables 24/7/3651339transactability. This eliminates the constraints of traditional auction1340schedules and physical marketplaces, offering ranchers greater1341flexibility and access to a wider pool of buyers. This continuous1342availability for transactions represents a significant leap forward1343from the historically slow and geographically limited nature of cattle1344commerce.1345 CattleProof aims to create more marketplaces for ranchers,1346expanding their reach and streamlining the transaction process. The use1347of blockchain technology facilitates faster settlement of payments,1348addressing another critical pain point in the traditional system. By1349addressing fundamental issues like lack of data, slow payments, and the1350risk of fraud, and by leveraging modern technologies like blockchain,1351verification services, tokenization, and a dedicated marketplace,1352CattleProof is poised to bring cattle transactions into the 21st1353century.1354IV. Benefits for Ranchers of All Sizes1355 CattleProof offers a suite of benefits designed to modernize1356ranching operations and enhance profitability for producers of all1357sizes. By digitizing cattle transactions and unlocking value, the1358platform addresses critical pain points that have persisted in the1359industry for over a century. Ranchers stand to gain significantly1360through enhanced efficiency and reduced costs. The implementation of a1361blockchain-based system with individual animal IDs facilitates1362streamlined data management and record-keeping, moving away from1363cumbersome traditional methods. This digital approach has the potential1364for a reduced administrative burden associated with tracking animal1365history, health records, and ownership transfers, freeing up ranchers1366to focus on core ranching activities. Furthermore, the faster1367settlement of transactions facilitated by the blockchain marketplace1368can improve cash flow and reduce the financial uncertainties associated1369with traditional payment systems.1370 Increased trust and transparency are central to the CattleProof1371value proposition. By creating immutable and verifiable records on the1372blockchain, the platform contributes to restored trust within the1373cattle market. Buyers can have greater confidence in the provenance and1374quality of the cattle they are purchasing, leading to more secure and1375reliable transactions. CattleProof provides ranchers with access to1376premium markets and increased profitability. As a USDA Process Verified1377Program Service Provider, the platform enables ranchers to easily1378participate in value-added programs and receive up to 150% premium on1379USDA Process Verified Cattle. The easier verification for premium1380certifications through blockchain records streamlines the audit process1381and reduces the complexities associated with proving specific animal1382attributes. Additionally, the CattleProof marketplace provides access1383to more marketplaces beyond traditional auction houses, potentially1384widening the pool of buyers and creating more competitive pricing.1385 Finally, CattleProof facilitates improved data management and1386decision-making. The platform's focus on individual animal data1387tracking allows ranchers to compile comprehensive records on health,1388breeding, and other vital metrics. This detailed information has the1389potential for better insights into herd management and performance,1390enabling data-driven decisions that can optimize ranching practices and1391improve overall productivity. Moreover, the readily available and1392verifiable data on the blockchain contributes to future-proofed1393compliance by simplifying the process of meeting regulatory1394requirements related to animal health, traceability, and other industry1395standards.1396 CattleProof is designed to offer significant advantages to both1397small and large ranching operations, addressing the unique challenges1398and opportunities associated with different scales of production. Small1399ranchers can gain access to wider markets and potentially higher prices1400through verification and the marketplace. Traditionally, smaller1401ranches might be limited by geographical constraints and access to a1402smaller pool of buyers. CattleProof's digital marketplace breaks down1403these barriers, allowing small producers to showcase their cattle to a1404national or even international audience. The ability to obtain USDA1405Process Verification and have those credentials immutably recorded on1406the blockchain provides small ranchers with a credible and cost-1407effective way to differentiate their cattle and tap into premium1408markets. This levels the playing field, allowing smaller operations to1409compete more effectively on quality and verified attributes,1410potentially leading to increased profitability and sustainability.1411 Furthermore, the streamlined data management offered by CattleProof1412can be particularly beneficial for small ranchers who may have limited1413administrative resources. The platform simplifies record-keeping,1414freeing up valuable time that can be better spent on animal husbandry1415and other core activities. The increased transparency and trust1416facilitated by the blockchain can also help small ranchers build1417stronger relationships with buyers, as their animal data is readily1418available and verifiable.1419 Large ranchers, on the other hand, can realize significant benefits1420from the increased efficiency, streamlined data management, and1421enhanced traceability at scale offered by CattleProof. Managing large1422herds involves complex logistical challenges and extensive data1423tracking. The platform's ability to assign individual digital IDs and1424track animal movements and health records in real-time provides a1425powerful tool for optimizing operations across a large number of1426animals. This can lead to reduced labor costs associated with manual1427record-keeping and improved decision-making regarding herd health,1428feeding strategies, and market timing.1429 The enhanced traceability provided by CattleProof is also crucial1430for large-scale operations in ensuring food safety and meeting consumer1431demands for transparency. The immutable record of each animal's journey1432through the supply chain provides a high level of accountability and1433facilitates quick response in the event of any issues. Moreover, large1434ranchers can leverage the USDA Process Verification capabilities at1435scale, efficiently documenting and verifying the attributes of a1436significant number of cattle to access premium markets and maximize1437returns. The platform's ability to integrate with existing ranch1438management systems (although not explicitly detailed, this would be a1439logical feature for scalability) would further enhance its value for1440large operations, making it a powerful tool for modernizing and1441optimizing large-scale cattle production.1442V. Benefits for the American Beef-Buying Population1443A. Increased Food Safety1444 CattleProof's implementation of blockchain technology enhances the1445traceability of cattle through the entire supply chain. The creation of1446individual animal IDs stored on a secure and immutable ledger allows1447for a comprehensive record of each animal's journey, from birth to1448processing. This enhanced traceability offers significant benefits for1449food safety. In the event of a foodborne illness outbreak, the ability1450to quickly and accurately trace the affected product back to its origin1451is crucial. CattleProof's system provides a robust mechanism for1452tracking animal health and origins, potentially reducing the risk and1453spread of foodborne illnesses. This detailed tracking can help identify1454the source of contamination more efficiently, allowing for quicker and1455more targeted recalls, thereby minimizing the impact on public health.1456 Furthermore, the platform's integration with USDA Process Verified1457Programs adds another layer of assurance for consumers. This1458verification process involves adherence to specific standards and1459practices, and CattleProof's blockchain provides a transparent and1460auditable record of this verification. This can increase consumer1461confidence in the safety of beef products, as they have greater1462certainty that the cattle were raised and handled according to verified1463protocols. The immutable nature of the blockchain ensures that these1464records cannot be tampered with, providing a higher level of trust1465compared to traditional, potentially less secure record-keeping1466methods.1467 By digitizing animal data, including health records, CattleProof1468can also contribute to proactive food safety measures. Ranchers and1469other stakeholders in the supply chain can have better access to1470information about animal health, potentially identifying and addressing1471health issues earlier, before they can impact the food supply. This1472proactive approach, facilitated by improved data management, can1473further bolster the safety of beef products for consumers. Ultimately,1474CattleProof's focus on traceability and verified data through1475blockchain technology aims to provide American consumers with safer and1476more trustworthy beef options, leading to increased confidence in the1477food they purchase.1478B. Greater Transparency and Information1479 CattleProof holds the potential to bring greater transparency and1480information to the often complex and opaque beef supply chain. The use1481of blockchain technology allows consumers to access information about1482the origin and history of the beef they purchase, going beyond basic1483labeling requirements. For example, consumers might one day be able to1484scan a QR code on a beef product to view verified claims about the1485animal's origin, how it was raised, and any relevant certifications.1486 Blockchain's immutability plays a crucial role in helping to expand1487and maintain heightened trust in the beef supply chain. The inability1488to alter records once they are on the blockchain provides a high degree1489of confidence in the accuracy and integrity of the information. This is1490particularly important in an industry where consumers may have concerns1491about the authenticity of claims and the potential for misinformation.1492By providing a tamper-proof record of key information, CattleProof can1493empower consumers to make more informed purchasing decisions based on1494verified data.1495 This increased transparency can also extend to practices related to1496animal welfare and sustainability, as verified claims related to these1497aspects can be securely recorded on the blockchain. Consumers who1498prioritize these values can then seek out and support beef products1499with verifiable proof of adherence to such practices. Our underlying1500technology could be adapted in the future to accommodate other types of1501verified claims, further enhancing transparency for consumers. By1502providing a more transparent and informative beef supply chain,1503CattleProof can empower American consumers and foster greater trust in1504the products they buy.1505C. Support for Ranchers and Sustainable Practices1506 By facilitating premium pricing for USDA Process Verified Cattle,1507CattleProof can create a market-driven incentive for ranchers to adopt1508sustainable and higher-quality practices. Ranchers who choose to1509participate in these verified programs and meet the required standards1510can earn up a premium for their cattle. This economic advantage1511encourages more ranchers to invest in practices that go above and1512beyond standard production methods, potentially leading to improvements1513in animal welfare, environmental stewardship, and the overall quality1514of beef.1515 American consumers can indirectly support ranchers who prioritize1516quality and verification by purchasing beef that originates from cattle1517tracked and verified through the CattleProof platform. As more ranchers1518adopt verified practices to access premium markets, the availability of1519beef produced under these standards is likely to increase, providing1520consumers with more options that align with their values. This creates1521a positive feedback loop where consumer demand for higher-quality and1522sustainably produced beef drives greater adoption of such practices1523within the ranching community.1524 While CattleProof's primary focus is on improving the efficiency1525and transparency of cattle transactions, its ability to facilitate1526value-added programs has a direct impact on supporting ranchers who are1527committed to quality and potentially sustainable practices. By enabling1528these ranchers to capture the economic benefits of their efforts, the1529platform contributes to a more resilient and potentially more1530sustainable beef industry. Consumers who value these attributes in1531their food choices can feel confident that by supporting beef from1532verified sources, they are also supporting the ranchers who are1533investing in these practices. Ultimately, CattleProof's mechanism for1534premium pricing based on verification can help align consumer1535preferences with ranching practices that prioritize quality and1536sustainability.1537VI. Blockchain as a Key Technology Solution in Agriculture1538A. Existing Barriers for Ranchers1539 The adoption of new technologies, including blockchain, in the1540agricultural sector, particularly for ranchers, faces several existing1541barriers. The challenges faced by rural communities in accessing1542resources and technical assistance are well known. These challenges1543directly translate to potential hurdles in technology adoption for1544ranchers. The lack of human and financial capacity in many rural areas1545can impede the understanding, implementation, and maintenance of1546complex systems like blockchain. Furthermore, the digital divide in1547rural America, where internet access and digital literacy may be1548limited, presents a significant obstacle to the widespread use of1549blockchain-based platforms. Without reliable connectivity and the1550necessary skills, ranchers may find it difficult to engage with and1551benefit from such technologies.1552 The cost of implementing and maintaining blockchain solutions can1553also be a significant barrier for ranchers, especially smaller1554operations. The initial investment in hardware, software, and training1555to participate in new technology may be prohibitive for some. Simply1556applying existing regulations to new technologies can be inadequate and1557inappropriate. Current financial support mechanisms or regulatory1558frameworks may not adequately address the specific costs associated1559with blockchain adoption in agriculture. Overcoming these barriers1560often requires targeted support, including financial assistance,1561technical training tailored to the agricultural context, and1562infrastructure development to improve rural connectivity.1563B. Data Privacy and Security Concerns on the Blockchain1564 While blockchain is often lauded for its security features, data1565privacy and security concerns within the agricultural context warrant1566careful consideration. The immutable nature of blockchain, a key1567feature for traceability and trust, also means that once data is1568recorded, it cannot be easily altered or removed. This raises questions1569about the types of data being stored on agricultural blockchains and1570who has access to it. For instance, individual animal IDs and their1571associated data could contain sensitive information about a rancher's1572operations, animal health, and business practices. Concerns may arise1573regarding the potential for unauthorized access or misuse of this data,1574even if the blockchain itself is secure against tampering.1575 Blockchain has great potential to provide secure and transparent1576data management. In the agricultural sector, ranchers need assurance1577that their data is protected and that they have control over who can1578view and utilize it. This necessitates careful design of blockchain-1579based systems with robust access controls and potentially privacy-1580enhancing techniques. In agricultural blockchain, clarity is needed1581regarding data ownership, privacy regulations, and the responsibilities1582of different stakeholders in managing data on the ledger. Addressing1583these concerns through transparent data governance frameworks and the1584implementation of appropriate security measures is crucial for1585fostering trust and encouraging adoption of blockchain in agriculture.1586C. Interoperability with Existing Ranching and Supply Chain Systems1587 For blockchain to be effectively integrated into the agricultural1588sector, it must be interoperable with the diverse array of existing1589ranching and supply chain systems. Ranchers and other stakeholders1590currently utilize various software, databases, and record-keeping1591methods. The ability of a new blockchain-based platform to seamlessly1592interact and exchange data with these legacy systems is critical for1593minimizing disruption and maximizing efficiency. Without1594interoperability, ranchers may face the burden of maintaining parallel1595systems or manually transferring data, which can negate the benefits of1596blockchain technology.1597 Web3 aims for decentralized networks offering increased security,1598privacy, and transparency. In this context, interoperability becomes1599even more crucial to avoid the creation of new data silos within the1600decentralized landscape. As this Subcommittee explores the regulatory1601gaps in digital assets, you should also consider the technical1602requirements for interoperability in agricultural applications of1603blockchain to ensure that these solutions can integrate smoothly into1604existing workflows and infrastructure.1605D. Scalability of the Blockchain Solution1606 The scalability of blockchain solutions is a critical factor for1607their successful implementation across the vast and varied agricultural1608sector. Agriculture involves a massive volume of transactions and data1609points, from individual animal tracking to supply chain logistics. A1610blockchain platform intended for widespread use must be capable of1611handling this scale efficiently without compromising speed, cost-1612effectiveness, or security.1613 The technical infrastructure required for handling large volumes of1614transactions in the agricultural sector is necessarily substantial. The1615chosen consensus mechanism, network architecture, and data storage1616solutions will significantly impact the scalability of the blockchain.1617Ensuring that agricultural blockchain platforms can accommodate the1618demands of the industry, including peak seasons and the increasing use1619of IoT devices for data collection, is essential for their long-term1620viability and impact.1621E. Regulatory Landscape for Blockchain in Agriculture1622 The regulatory landscape for blockchain in agriculture is currently1623evolving and often mirrors the broader uncertainty surrounding digital1624assets. There is still a significant debate regarding the1625classification of digital assets as securities or commodities, and a1626lack of comprehensive Federal regulation for the spot market. This1627regulatory ambiguity extends to the application of blockchain1628technology in agriculture, particularly when involving digital tokens1629or cryptocurrencies related to agricultural products or processes.1630 For agricultural blockchain platforms that facilitate the trading1631of digital representations of agricultural commodities or involve1632financial transactions, clarity on whether these activities fall under1633the jurisdiction of the CFTC or the SEC is crucial. As Congress1634considers legislation in this area, understanding the specific needs1635and potential of blockchain in agriculture is essential to create a1636regulatory environment that fosters innovation while ensuring consumer1637protection and market integrity.1638VII. Conclusion: The Future of Cattle Transactions with Blockchain1639A. Benefits for Ranchers and the American Beef-Buying Population1640 The integration of blockchain technology into cattle transactions1641holds significant promise for both ranchers and the American beef-1642buying population. For ranchers, blockchain offers the potential to1643address long-standing inefficiencies in the industry. The current1644system is characterized by a lack of data, slow payments, and1645insufficient proof of origin and quality, issues that have persisted1646for 150 years. Blockchain aims to rectify these problems by providing1647individual animal IDs stored on a secure, shareable ledger, enabling1648verification and traceability throughout the supply chain. This1649enhanced transparency can lead to restored trust among stakeholders.1650Economic incentives, coupled with faster settlement of transactions1651facilitated by blockchain, directly benefit ranchers' bottom lines and1652efficiency. Improving access to capital and fostering rural economic1653development is crucial. Blockchain can contribute to this by creating1654more transparent and potentially more accessible marketplaces for1655cattle transactions.1656 For the American beef-buying population, blockchain offers the1657prospect of safer food through enhanced traceability. The ability to1658track an animal's history and data from birth to processing can provide1659consumers with greater confidence in the origin and quality of the beef1660they purchase. This aligns with the growing consumer demand for1661transparency and information about their food sources. The digitizing1662of physical assets ultimately aims to bring cattle transactions into1663the 21st century, benefiting all participants in the supply chain, from1664the rancher to the consumer. By addressing issues like fraud and1665enabling future-proofed compliance, blockchain contributes to a more1666reliable and trustworthy beef market, ultimately serving the interests1667and well-being of the American public.1668B. The Transformative Potential of Blockchain Technology in the Cattle1669 Industry1670 Blockchain technology possesses transformative potential for the1671cattle industry by revolutionizing how transactions are conducted, data1672is managed, and value is unlocked. The traditional cattle transaction1673process suffers from inefficiencies and a lack of transparency.1674Blockchain offers a paradigm shift by providing a secure, immutable,1675and distributed ledger for recording critical information about1676individual animals. This includes not only their origin and ownership1677but also health records, feeding practices, and other relevant data1678points that can follow them through the supply chain. This1679individualized data tracking contrasts sharply with the current1680aggregated and often opaque systems.1681 The ability to tokenize individual animals and their associated1682data, as envisioned by CattleProof, opens up new possibilities for1683creating more efficient and transparent marketplaces. Buying and1684selling cattle on a blockchain platform can streamline the process,1685potentially reducing transaction times and costs. Moreover, the1686enhanced traceability enabled by blockchain can improve supply chain1687management, reduce the risk of disease outbreaks, and provide consumers1688with verifiable information about the beef they are purchasing.1689Blockchain technology offers increased security, privacy, and1690transparency, solving many issues of the Web 2.0 era. Applying these1691principles to the cattle industry can foster greater trust and1692efficiency across the entire value chain, ultimately leading to a more1693resilient and sustainable beef production system. The transformative1694potential lies in its ability to digitize a traditionally physical1695asset and unlock its inherent data value.1696C. CattleProof's Role in Bridging the Gap Between Innovative1697 Technologyand Ranching Efficiency1698 CattleProof is positioned to play a crucial role in bridging the1699gap between innovative blockchain technology and the need for enhanced1700efficiency in the ranching sector. Our core offering centers around1701digitizing cattle transactions and leveraging blockchain to unlock1702value for ranchers. By providing a USDA Process Verified Program1703Service Provider for verification, CattleProof directly addresses the1704opportunity for ranchers to earn premium prices for their certified1705cattle. The creation of individual animal IDs on a secure blockchain is1706fundamental to their approach, enabling the collection, storage, and1707sharing of vital animal data. This data can then follow the animal1708throughout the supply chain, providing transparency and traceability.1709 CattleProof's focus on verification, blockchain integration, and1710facilitating transactions on the blockchain directly tackles the1711problems of no data, slow payments, and a lack of proof that plague the1712traditional system. Our business model, centered on digitizing physical1713assets, aligns with the broader trend of bringing traditional1714industries into the digital age. By offering a platform that caters1715specifically to the needs of ranchers, CattleProof can help overcome1716the barriers to technology adoption discussed earlier, such as the lack1717of technical expertise and the perceived cost of implementation.1718Ultimately, we empower ranchers to keep ranching by providing them with1719tools to improve their efficiency, access new markets, and capture1720greater value for their product.1721D. The Importance of Supporting Innovation in Agriculture in the U.S.1722 and Globally1723 Supporting innovation in agriculture, including the adoption of1724technologies like blockchain, is of paramount importance for the U.S.1725and global food security and economic prosperity. Ranchers are1726struggling with efficiency, not demand. Technology offers a crucial1727pathway to bridge this gap and ensure the sustainability of1728agricultural production. Supporting agricultural innovation, such as1729blockchain-based solutions, aligns with this goal by potentially1730creating new economic opportunities for ranchers and rural communities.1731 Furthermore, other jurisdictions are actively creating regulatory1732certainty for digital assets and blockchain technology. The U.S. risks1733falling behind if it does not foster an environment that encourages and1734supports innovation in this space. The transformative potential of1735blockchain extends beyond cattle transactions to areas like supply1736chain traceability and sustainability. Supporting its adoption in1737agriculture can lead to more efficient resource management, reduced1738waste, and a more transparent and resilient food system. Without a1739sound regulatory framework tailored to the technology, the U.S. may not1740see the full benefits and could lose its leadership position in1741blockchain development. Therefore, proactive support for agricultural1742innovation, including blockchain, is essential to maintain the1743competitiveness of the U.S. agricultural sector and contribute to1744global food system resilience.1745E. The Long-Term Impact of Blockchain on the Future of Beef Production1746 and Consumption1747 In the long-term, blockchain technology has the potential to1748fundamentally reshape the future of beef production and consumption. By1749providing a secure and transparent record of each animal's life and1750journey through the supply chain, blockchain can foster greater trust1751and accountability among all stakeholders, from ranchers to consumers.1752This enhanced transparency can lead to a more efficient and responsive1753supply chain, potentially reducing costs and improving the quality and1754safety of beef products. The ability for consumers to access detailed1755information about the origin and characteristics of their beef could1756also lead to more informed purchasing decisions and a closer connection1757between producers and consumers.1758 CattleProof's efforts to digitize cattle and leverage blockchain1759represent a significant step in this direction. As the technology1760matures and adoption broadens, we can envision a future where premium1761U.S. beef, verified through blockchain, becomes the global standard,1762rewarding American ranchers for sustainable and high-quality practices.1763The interoperability of blockchain platforms with other agricultural1764supply chain systems will be crucial for realizing the full potential1765of this technology. While regulatory clarity for blockchain and digital1766assets is essential for fostering innovation and ensuring consumer1767protection, the long-term impact on the beef industry promises a more1768transparent, efficient, and trustworthy ecosystem that benefits both1769producers and consumers.1770 Ultimately, blockchain can contribute to a more sustainable and1771resilient future for beef production and consumption in the U.S. and1772globally.17731774 The Chairman. Mr. Horton, you are up. Let's go.17751776 STATEMENT OF MIKE A. HORTON, PROJECT CREATOR, GEODNET1777 FOUNDATION, LOS ALTOS HILLS, CA17781779 Mr. Horton. All right. Good afternoon, Chairman Johnson,1780Ranking Member Davis, and Members of the Subcommittee. It is a1781pleasure to be here to tell you a bit about the GEODNET1782Foundation, and the great technology the GEODNET community has1783developed to help American farmers.1784 By way of background, I am from Austin, Texas, and I1785received a Bachelor's and Master's in electrical engineering1786from UC Berkeley in 1996. Prior to initiating the GEODNET1787project, I co-founded two successful startups in the field of1788navigation.1789 Today, precision agriculture is a well-proven technology1790that provides substantial economic benefit to the American1791farmer through efficient crop applications, which is also good1792for the environment. Precision agriculture depends on precision1793GPS, and I am going to describe how blockchain has enabled1794GEODNET to improve their reliability and reduce the cost of1795precision GPS for the American farmer.1796 The global positioning system, or GPS, is known by most1797people as the way to find directions when driving. Typical GPS1798accuracy is measured in feet, not inches. Standard GPS is1799useful for finding a grocery store, but it is not capable of1800identifying where a specific plant is planted, or to help steer1801a tractor without running over the plants themselves. To1802enhance GPS accuracy, precise positioning, or precision GPS1803techniques, are able to improve GPS location accuracy from1804several feet to sub-inch accuracy. The most precise method of1805precise positioning is RTK, or real-time kinematics. Precise1806positioning techniques like RTK require either a direct or1807indirect connection to one or more GPS reference stations. This1808is what a GPS reference station looks like. For this technology1809to work at scale and across the country, a network of these GPS1810antenna is necessary.1811 As I attempted to launch GEODNET, it quickly became1812apparent that it would cost billions of dollars to place1813antenna around the country; capital that we did not have.1814Through my research, I discovered that blockchain can solve1815this problem. Utilizing blockchain technologies, the GEODNET1816network has grown quickly, and it is now the largest precise1817positioning RTK network in the world, with more than 15,0001818registered stations. In any given week, more than 10,0001819professionals use the network, accessing 6 to 7,000 GEODNET1820stations daily.1821 This type of application of blockchain now has a name. It1822is called DePIN, or Decentralized Physical Infrastructure1823Networks. GEODNET is one of the leading DePIN networks, but1824there are many, many more DePIN networks being built globally,1825including DePIN networks for broadband internet, mobile1826internet, decentralized energy, and more. GEODNET is extremely1827useful because it offers reliable, high-accuracy positioning1828needed to conduct precision agricultural farm practices, as1829well as the precision required by many robotics and drone1830systems.1831 In agriculture, GEODNET is beloved for its low cost,1832accessibility to small and big farm operators alike, and its1833compatibility with both new and old equipment. The USDA's Dale1834Bumper Small Farm Research Center has been an active GEODNET1835node operator for over a year, and USDA research staff has1836validated quality and accuracy on both new and old machines. To1837the end farmer who requires the precise position signal,1838GEODNET subscriptions offer savings from 33 percent to 901839percent per annum, compared to centralized corporate1840competitors. And the southern states where small farms are1841diverse in size and scope, GEODNET provides small farmers an1842ROI to use precision ag, while higher-cost centralized1843solutions are out of reach or simply don't provide RTK coverage1844in the area. In the Midwest, GEODNET's unprecedented station1845density in places like Sioux Falls, South Dakota, provides the1846best immunity to solar weather, which in 2024 knocked more1847expensive services offline during the critical planting season,1848causing significant economic damage. On the West Coast, fully1849robotic farm practices are becoming popular, and GEODNET is the1850solution of choice for two of the leading autonomous farm1851equipment companies. The GEOD blockchain token is the key1852mechanism which allows the network to operate and grow1853successfully, without capital investment required from a1854centralized entity, corporate or government. For this1855innovative digital infrastructure to function, GEODNET depends1856on reliable blockchain networks.1857 Because of blockchain technology and networks, GEODNET has1858been able to grow quickly. GEODNET encourages the Subcommittee1859to consider ways to enhance clarity on digital asset regulation1860so that high utility applications of blockchain can thrive in1861the United States.1862 Thank you, and I look forward to answering your questions.1863 [The prepared statement of Mr. Horton follows:]18641865 Prepared Statement of Mike A. Horton, Project Creator, GEODNET1866 Foundation, Los Altos Hills, CA1867 Good afternoon, Chairman Johnson, Ranking Member Davis, and Members1868of the Subcommittee. It is a pleasure to be here to tell you a bit1869about the GEODNET Foundation and the great technology the GEODNET1870community has developed to help American farmers. By way of background,1871I am from Austin, TX and I received a Bachelors and Masters in1872Electrical Engineering from UC Berkeley. Prior to initiating the1873GEODNET project, I co-founded two successful startups in the field of1874navigation. I am a co-author on over 20 U.S. patents related to1875navigation technology.1876 My first company, Crossbow Technology, started after leaving UC1877Berkeley, was a pioneer in the field of sensors, and the first to1878receive FAA approval for a new gyroscope sensor technology that1879improved the safety of civilian aircraft. I sold this business to Moog1880Aerospace in 2011. In 2018 I co-founded a new sensor company, Anello1881Photonics, which is a pioneer in the use of Silicon Photonics for1882navigation.1883 The Global Positioning System or GPS is known by most people as the1884way to find directions when driving today. GPS works using satellites.1885 Typical standard GPS accuracy is measured in feet not inches.1886Standard GPS is useful for finding a grocery store on a street full of1887shops, but GPS is not, by itself, capable of identifying where a1888specific plant is planted or help steer a tractor without running over1889the plants themselves. Image 1 shows how monitoring individual plant1890seedlings requires inch level absolute accuracy.1891Image 1: 1" Accuracy to Locate Individual Plant Seedlings18921893[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]18941895 To enhance GPS accuracy, Precise Positioning techniques are able to1896improve GPS location accuracy from several feet to sub-inch accuracy.1897With Precise Positioning, you can locate an individual plant in a1898field, you can accurately measure the width of a door frame on a1899construction site, and you can navigate a robot through a dense field1900reliably. Precise positioning techniques require either a direct or1901indirect connection to one or more nearby GPS reference stations. A GPS1902reference station is a fixed GPS antennae mounted on a roof and1903connected to the internet. Image 2 illustrates what a GPS antennae1904installation looks like. For this technology to work at scale and1905across the country, a network of these GPS antennae is necessary. As I1906attempted to launch GEODNET it quickly became apparent that it would1907cost billions of dollars to place antennae around the country, capital1908that we did not have.1909Image 2: Typical GEODNET Antennae Installation19101911[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]19121913 Without going into great detail given limited time today, through1914my research I discovered that blockchain can solve this problem. I1915initially presented this idea of using blockchain as a foundational1916technology to build a large global network of these reference stations1917at the Institute of Navigation's--Global Navigation Satellite Systems1918Plus Conference in Saint Louis 2021.\1\ The presentation, authored by1919me and several industry colleagues, was awarded Best Presentation at1920the Conference, and the GEODNET whitepaper was subsequently published1921as a peer reviewed article in the Journal of Navigation.\2\1922---------------------------------------------------------------------------1923 \1\ Early Concept Presentation at ION GNSS+ 2021, St Louis https://1924www.ion.org/publications/abstract.cfm?articleID=17882.1925 \2\ Peer-reviewed GEODNET White Paper, published in Journal of1926Navigation https://navi.ion.org/content/70/4/navi.605.1927---------------------------------------------------------------------------1928 Utilizing Blockchain technologies, the GEODNET network has grown1929quickly and is now the largest precise positioning network in the world1930with more than 15,000 registered stations [Image 3]. In any given week,1931more than 10,000 professionals use the network accessing 6000 to 70001932GEODNET stations daily.\3\ GEODNET's expansive coverage includes all1933major cities in the United States and Europe, as well as ever-expanding1934coverage in rural areas.1935---------------------------------------------------------------------------1936 \3\ GEODNET Station Map https://console.geodnet.com/map.1937---------------------------------------------------------------------------1938Image 3: The GEODNET Station Network as of Friday April 4, 202519391940[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]19411942 GEODNET is extremely useful because it offers the reliable high-1943accuracy positioning needed to conduct precision agriculture farm1944practices as well as the precision required by many robotics and drone1945systems.1946 In agriculture, GEODNET is beloved for its low-cost, accessibility1947to small and big farm operators alike, and its compatibility with both1948new and old equipment.1949 The USDA's Dale Bumper Small Farm Research center has been an1950active GEODNET node operator for over a year, and research staff has1951validated quality and accuracy on both new and old machines. The USDA1952has also conducted numerous studies on the benefits of Precision1953Agriculture. As an example, Image 4 shows a USDA study demonstrating1954the efficiency benefits of automated tractor guidance utilizing precise1955positioning.1956Image 4: USDA Study on Efficiency Gains from Accurate Tractor Guidance19571958[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]19591960 20-30% efficiency using tractor guidance.19611962 To the end-farmer who requires the precise position signal, GEODNET1963subscriptions offer savings from 33% to 90% per annum as compared to1964centralized corporate competitors. Lower-cost allows more farmers to1965utilize precision agriculture practices resulting in reduced input1966costs, higher-yields, and reduced environmental waste. The relative1967adoption of precision agriculture practices is shown in Image 5 in a1968slide generated by the USDA.1969Image 5: Relative Adoption of Precision Ag by Farm Type and Application19701971[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]19721973 In the southern states, where farms are diverse in size and scope,1974GEODNET provides small farmers with a return on investment (ROI) to use1975precision agriculture while higher-cost centralized solutions are out1976of reach, and creates significant savings for larger operations that1977are currently required to pay exorbitant per-unit subscription fees.1978 In the Midwest, GEODNET's unprecedented station density in places1979like Sioux Falls South Dakota, provides the best immunity to Solar1980Weather which in 2024 knocked more expensive precise positioning1981services offline during the critical planting season causing1982significant economic damage.\4\1983---------------------------------------------------------------------------1984 \4\ Article on 2024 Solar Storm Impact to Farmers https://1985www.farmprogress.com/planting/this-spring-s-solar-storm-could-cost-1986american-farms-500-million.1987---------------------------------------------------------------------------1988 On the West Coast, fully robotic farm practices are becoming1989popular and GEODNET is the solution of choice for two of the leading1990autonomous farming equipment companies.1991 The GEOD blockchain token is the key mechanism which allows the1992network to operate and grow successfully without capital infrastructure1993investment required from a centralized entity--corporate or government.1994 Customer usage of GEODNET precise positioning services requires the1995consumption or so called ``burning'' of GEOD tokens. On the other side,1996those GEODNET users who chose to purchase and operate a GEODNET1997compatible reference station, receive GEOD tokens in exchange for1998providing a high-quality location and stable internet for the station.1999This process is called token ``emission'' or ``minting.'' Blockchain2000transactions emitting and burning these GEOD tokens permit both2001autonomous and decentralized network operation.*2002---------------------------------------------------------------------------2003 * Editor's note: there is no footnote reference ``5'' in the2004submitted statement. However, this paragraph appears to meet the2005criteria of footnote 5. Therefore, footnote 5 follows:2006 \5\ GEODNET Dune Dashboard which tracks on-chain network activity2007including usage revenue https://dune.com/geodnet_console/geod-console.2008---------------------------------------------------------------------------2009 For this innovative digital infrastructure to function, GEODNET2010requires reliable blockchain technology. GEODNET itself does not run a2011blockchain, but it is an active user of blockchain networks. The GEOD2012Token is live on Solana and IoTeX Layer 1 chains, and the Polygon Layer20132 chain. The Smart Contract addresses are found below.2014 GEODNET has leveraged many technologies from the blockchain2015ecosystem including the creation of its native GEOD utility tokens used2016to consume GEODNET precise location services, specialized GEODNET2017location Non-Fungible Tokens used to facilitate a geographically well-2018structured and efficient network,\6\ as well as Decentralized2019Governance,\7\ Decentralized Finance,\8\ and Staking.\9\2020---------------------------------------------------------------------------2021 \6\ GEODNET Location NFT awarded to first station to establish2022reliable coverage in a new region https://opensea.io/collection/2023geodnet-location-nft.2024 \7\ GEODNET Governance Website https://vote.geodnet.com/.2025 \8\ Example DeFi Swap Link for GEOD to USDC https://raydium.io/2026swap/?inputMint=2027EPjFWdd5AufqSSqeM2qN1xzybapC8G4wEGGkZwyTDt1v&outputMint=7JA5eZdCzztSfQbJ2028vS8a2029VVxMFfd81Rs9VvwnocV1mKHu.2030 \9\ GEODNET Staking portal utilized to create incentivized regions2031requiring additional GEODNET station coverage in a decentralized way2032https://console.geodnet.com/stake.2033---------------------------------------------------------------------------2034 Image 6 provides an overall summary of the GEOD utility token.2035Image 6: GEOD Utility Token Summary20362037[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]20382039 Because of blockchain technology, GEODNET has been able to grow2040quickly and scale the reach of the network across the country,2041including in typically underserved rural communities. This success is2042attributable to the fact that we were able to incentivize unrelated2043third parties to build out the network using the GEOD token, a digital2044asset. While we have been successful, it is imperative that future2045innovators have absolute clarity around how digital assets are to be2046regulated. A lack of clarity stifles innovation and discourages2047investment in the US. We commend this Committee's pioneering work in2048promoting legislation like FIT21 which seeks to provide clarity for2049companies like mine hoping to build innovative projects utilizing2050blockchain technology. Absent regulatory clarity that legislation will2051provide, it will be difficult for America to lead in this space.2052GEODNET encourages the committee to continue its work to enhance2053clarity on digital asset regulation so that high-utility applications2054of blockchain can thrive in the United States. Thank you.2055GEOD Smart Contract Addresses2056 Solana: https://explorer.solana.com/address/20577JA5eZdCzztSfQbJvS8aVVxMFfd812058Rs9VvwnocV1mKHu.2059 Polygon: https://polygonscan.com/address/20600xac0f66379a6d7801d7726d5a9433520616a172549adb.2062 IoTeX: https://iotexscan.io/token/20630x8e33229206f726993e4a7bf7da2347f3743bf8b4.20642065 Mr. Davis. Thank you. Dr. Brummer.20662067 STATEMENT OF CHRIS BRUMMER, Ph.D., J.D., CHIEF2068 EXECUTIVE OFFICER, BLUPRYNT; AGNES WILLIAMS2069 SESQUICENTENNIAL PROFESSOR OF FINANCIAL2070TECHNOLOGY, GEORGETOWN UNIVERSITY LAW CENTER; FACULTY DIRECTOR,2071 INSTITUTE OF INTERNATIONAL2072 ECONOMIC LAW, WASHINGTON, D.C.20732074 Dr. Brummer. Chairman Johnson, Ranking Member Davis, and2075Members of the Committee, I have always loved this Committee,2076not just because I am from the great State of Arkansas, and was2077pleased to hear about the--there, but because of the bipartisan2078nature of this Committee. It is a real pleasure.2079 I am a Professor over at Georgetown where I teach courses2080on financial regulation, crypto assets and the law, securities2081law, and international financial regulation, among other2082subjects. I am also a founder of--and CEO of--Bluprynt, a2083startup that leverages AI and blockchain technology to reinvent2084and enable regulatory market and consumer disclosures, and2085communications for companies and governments around the world.2086 As both an academic and as an entrepreneur, I have come to2087appreciate that building a novel business, especially one2088rooted in emerging technologies, requires more than innovation2089for innovation's sake. It demands a merger of manufacturing and2090disclosure. Entrepreneurs today must not only develop2091compelling products and services, but also must communicate2092clearly and accessibly about the complex infrastructures2093powering them. In essence, creation and explanation now go hand2094in hand.2095 Now, Bluprynt was born of this idea that making things and2096disclosing things need not be separate endeavors. They are two2097sides of the same coin. And today, a little more than a year2098later, Bluprynt is on track to count as customers issuers,2099central banks, and blockchain builders, again, from around the2100world.2101 When I started my career as a securities law professor, the2102logic of disclosure was built on and premised on the prevailing2103regulatory technology of the time; pieces of paper, and the2104U.S. mailing system. Fast forward, and new channels have arisen2105for communications; hyperlinks to Webpages and even social2106media tweets have been recognized as a means through which2107builders can fulfil and create regulatory expectations. But2108when it comes to the latter, perhaps no other technology is2109more interesting and creates more potential than blockchains.2110They are programmable, immutable, and transparent. The perfect2111compliance technology.2112 Startups, of course, have to be snipers, even when they see2113big objectives and opportunities, and identify friction points2114and build from there. So for Bluprynt, our first product,2115thinking through disclosures and compliance, and it will be the2116one that I will focus on today, was Europe, and focusing on2117Europe's new regulations, MiCA, which took a step forward of2118doing that which the SEC at that point could not, which was2119tailoring a disclosure regime for crypto assets based upon the2120production of something that they call white papers, sort of2121like S1s, of a sense, for issuers of crypto assets.2122 But there were still plenty of questions even within MiCA.2123The legislation was filled with undefined terms left open to2124interpretation, such as the basics, conflict of interest, what2125exactly are certain kinds of digital asset features, and2126compliance really wasn't cheap. Hiring lawyers to draft a white2127paper even in the EU can cost tens of thousands of Euros, and2128can take weeks to complete.2129 So my team of lawyers and engineers, and lawyer engineers,2130yes, they exist, created a solution enabling companies to2131effectively turbotax white papers based on a range of consumer2132data and inputs. Part of the process involves collaborating2133with L1s, L2s, in this particular instance the European2134community, national central banks, and more, and navigating2135Europe's first MiCA pilot here from the United States. And we2136worked on bespoke legal wrappers for new data sources and2137providers. But we didn't stop there. Recognizing the2138programmable nature of blockchains, we also built tools for2139developers enabling them to embed regulatory metadata on-chain.2140And we started with various L1s, first starting with MiCA-2141related metadata, and now we have started to do the same here2142in the United States.2143 Now, Bluprynt's first-use cases were born in financial2144services, but we are thinking big about the digital economy as2145a disclosure economy, whatever its guise. So we are not just2146building a business, but we are building systems applicable2147beyond financial markets.2148 So here, for the cases of today, we have seen interesting2149questions about cattle, but what happens, of course, when you2150are thinking about cattle that aren't just tagged, but are also2151bought and sold. And here for Bluprynt, we think about2152infrastructure to put in place to make that happen. When2153farmers and ranchers want to hedge against different kinds of2154fluctuations, how can you do that--embed that process--on-2155chain. Similarly, Bluprynt thinks about companies like GEODNET,2156explain and publish who is validating the data, and how can2157entrepreneurs build efficiently on that data.2158 Effectively, building high-quality digital infrastructure2159isn't easy. We do need your help. We need clear rules of the2160road so that people can know how to build compliance2161technologies, and the rulebook itself needs updating. As I have2162said before, even if technology moves and the rules remain the2163same, something can go wrong, especially if weaknesses arise,2164creating risk or creating challenges for innovators who can't2165build, or both.2166 I look forward to having a further conversation with all of2167you today, and thank you for the invitation.2168 [The prepared statement of Dr. Brummer follows:]21692170 Prepared Statement of Chris Brummer, Ph.D., J.D., Chief Executive2171 Officer, Bluprynt; Agnes Williams Sesquicentennial Professor of2172 Financial2173 Technology, Georgetown University Law Center; Faculty Director,2174 Institute of International Economic Law, Washington, D.C.2175A Bluprynt for Upgrading On- and Off-Chain Transparency2176 Chairman Johnson, Ranking Member Davis, and Members of the2177Committee:21782179 Thank you for inviting me to testify at this hearing. My name is2180Chris Brummer. I am the Agnes Williams Sesquicentennial Professor of2181Financial Technology at Georgetown University Law Center, where I teach2182courses on financial regulation, cryptoassets and the law, and2183international financial regulation, among other subjects. I am also the2184founder and CEO of Bluprynt, a startup that leverages AI and blockchain2185technology to reinvent and enable regulatory, market, and consumer2186disclosures and communications for companies around the world.2187 As both an academic and entrepreneur, I've come to appreciate that2188building a novel business--especially one rooted in emerging2189technologies--requires more than innovation for innovation's sake. It2190demands a merger of manufacturing and disclosure. Entrepreneurs today2191must not only develop compelling products and services, but also2192communicate clearly and accessibly about the complex infrastructures2193powering them. In essence, creation and explanation now go hand in2194hand.2195 Bluprynt was born of this idea--that making things and disclosing2196things need not be separate endeavors; they are two sides of the same2197(digital) coin. While novel in application, it's a timeless proposition2198that has, we believe, come of age. And today, a little more than a year2199after founding the company, Bluprynt is on track to count as customers2200issuers, central banks, and blockchain builders from around the world.2201Why Regulators (and Consumers and Investors) Should Love Blockchains2202 Our company is founded on the belief that blockchains--as2203distributed, verifiable databases--offer new tools for enabling new2204categories of transparency fit for purpose in a digital marketplace.2205I'd like to share with you a bit about our journey, and what this2206intuition means even beyond financial markets, but I do think given the2207purview of this Committee, some initial remarks about financial markets2208are a logical place to start.2209 When I started my career as a securities law professor, the logic2210of disclosure, and disclosure obligations, was built and premised on2211the prevailing regulatory technology of the time--pieces of paper, and2212the U.S. mail system.\1\2213---------------------------------------------------------------------------2214 \1\ For a sample of my work thinking about what technology means2215for disclosure see, Chris Brummer, Disclosure, Dapps and DeFi, Stanford2216Journal of Blockchain Law & Policy, Jun. 29, 2022, https://stanford-2217jblp.pubpub.org/pub/disclosure-dapps-defi/release/1; Chris Brummer, A2218Developer Theory of Disclosure, SSRN Electronic Journal (2025). See2219also my edited book,*2220 * Editor's note: the above footnote cuts off. It has been2221reproduced herein as submitted.2222---------------------------------------------------------------------------2223 Fast forward, and new channels have arisen for communications;2224hyperlinks to webpages and even social media tweets have been2225recognized as the means through which builders can fulfill and create2226regulatory expectations. But when it comes to the latter, perhaps no2227other technology is more interesting, or creates more potential, than2228blockchains.2229 I've always taught my students that rules are only as effective as2230the world they operate in. And as the world goes digital, pieces of2231paper are not exactly fit for purpose. On the other hand, when you look2232at them objectively, blockchains have features that make them, or at2233least should make them, very attractive to regulators. The national2234security community was perhaps the first on the beat here. They2235recognized that blockchains provide tamper proof information about how2236transactions are consummated and how and where money is directed. And2237as tools for builders, they can be programmed with controls and smart2238contract configurations that require verification before assets can be2239held or transferred--ensuring that participants meet baseline2240regulatory standards. Smart contracts can enforce additional compliance2241rules--such as transaction limits, geographic restrictions, or2242blacklisting of sanctioned addresses--before allowing asset transfers.2243 But as I've told market participants and regulators, it's really2244the tip of the iceberg. Blockchains have a lot to offer companies and2245their stakeholders from the standpoint of both capital formation and2246consumer and investor protection, even at the protocol level.\2\2247Because smart contracts are deployed on blockchains, and not on a2248specific server, their code, execution logs and function are2249distributed, fully transparent, and irreversible. Public blockchains by2250definition house information and data available to anyone, enabling2251third parties to verify and evaluate how underlying systems operate,2252and how participants behave.\3\ When harnessed effectively, this kind2253of radical transparency can help investors, consumers and even third2254party developers better understand the risks and advantages of the2255technology they are engaging with.\4\ Indeed, virtually anyone can view2256and audit the code powering a protocol or smart contract, and begin to2257evaluate its robustness against varying cybersecurity threats including2258market attacks, front running and reentrancy, and whether it is secure2259for handling and transacting large sums of crypto assets.2260---------------------------------------------------------------------------2261 \2\ The Stellar blockchain, for example, which has integrated2262Bluprynt technology, natively incorporates investor protection2263mechanisms at the protocol level, notably through its Asset Clawback2264feature. Introduced with Protocol 17 in June 2021, this feature allows2265asset issuers to revoke tokens under specific conditions, facilitating2266compliance with regulatory requirements and enhancing investor2267safeguards.2268 \3\ See Lily Francus, Block by Block: Assessing Risk in2269Decentralized Finance, Moody's Analytics: Credit Where Due Blog Series2270(Jan. 2022), https://www.moodysanalytics.com/articles/2021/2271block_by_block_assessing_risk_in_decentralized_finance.2272 \4\ See Chris Brummer, A Developer Theory of Disclosure (noting2273that thinking about disclosure from the standpoint of the ``reasonable2274developer'' not only improves upon standards exclusively fixated on the2275``reasonable investor,'' but it also recognizes other long-term2276stakeholders of value).2277---------------------------------------------------------------------------2278 In short, digitalization--currently taking shape in the form of2279tokenization and on-chain finance--enables and creates the conditions2280whereby transparency, accountability, and integrity are not merely2281regulatory add-ons, but can be leveraged as essential, built-in2282components of the marketplace. While regulatory uncertainty has limited2283the exploration of such use cases, mission driven reforms could unlock2284``transformative cost-saving and operational efficiency benefits . . .2285and innovation-led growth, broader market access . . . when operating2286at scale.'' \5\2287---------------------------------------------------------------------------2288 \5\ Global Financial Markets Association, Impact of Distributed2289Ledger Technology in Global Capital Markets (May 2023), https://2290www.gfma.org/wp-content/uploads/2023/05/impact-of-dlt-on-global-2291capital-markets-full-report.pdf.2292---------------------------------------------------------------------------2293The Bluprynt Journey2294 I founded Bluprynt after more than half a decade of research2295focused on what kind of information investors or holders of crypto2296assets need before making investment decisions. Crypto markets had2297problems with fraud, poorly understood technology, and misleading2298claims. And yet there was enormous potential in the technology.2299Figuring out how to direct capital to its best uses in the ecosystem2300seemed like a no-brainer. So during this period, I led a global survey2301in collaboration with Broadridge, asking investors what they considered2302crucial to know before holding a crypto asset.\6\ This survey was part2303of a broader series of studies examining the current disclosure2304requirements for regulated assets and comparing them with the2305technological opportunities and risks that on-chain finance presents.2306In a nutshell, my conclusions from these various projects were rather2307simple:2308---------------------------------------------------------------------------2309 \6\ Broadridge Financial Solutions, Crypto Asset Disclosure Study:2310Insights on Holders and How They Analyze Their Holdings (2023), https:/2311/www.broadridge.com/_assets/pdf/broadridge-crypto-asset-disclosure-2312study-report.pdf.23132314 The existing backdrop on rules relating to disclosure were2315---------------------------------------------------------------------------2316 outdated;23172318 The very definition of ``disclosure'' needed an upgrade; and23192320 The existing disclosure system had evolved into one where2321 information was meant to be filed, but not read--and useful for2322 investment banking lawyers and litigators, but not end-users.23232324 In the course of my research, I asked the SEC on many occasions to2325rethink and modernize its approach, like many of you today. And I hoped2326and waited for the CFTC to be empowered legislatively to do what it2327does best--to innovate. But the SEC's leadership had no interest, and2328the CFTC was left wanting for basic powers over spot markets to be able2329to deliver on its end.2330 So I did what entrepreneurs have done for over 2 centuries in this2331country. I started up a company to solve the problem myself.2332 Startups have to be snipers and identify friction points and build2333from there. So our first product--and the only one I will talk about2334today because we have a lot coming out soon--was found in Europe.2335Europe's new regulations, MiCA, took the step of doing what the SEC at2336that point would not, and tailoring a disclosure regime for crypto2337assets based upon the production of ``white papers'' by issuers of2338crypto assets.\7\ Still, there were plenty of questions. The2339legislation is littered with undefined terms left open to2340interpretation (some as basic as ``conflict of interest'') And the2341compliance isn't cheap; hiring lawyers to draft a white paper, even in2342the EU, can cost tens of thousands of euros, and take weeks to2343complete.2344---------------------------------------------------------------------------2345 \7\ Regulation (EU) 2023/1114 of the European Parliament and of the2346Council of 31 May 2023 on Markets in Crypto-assets, and amending2347Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives23482013/36/EU and (EU) 2019/1937, 2023 O.J. (L 150) 40, art. 6-8.2349---------------------------------------------------------------------------2350 So my team of lawyers, engineers and lawyer-engineers (yes they2351exist) created a solution enabling companies to effectively turbotax2352white papers based on a range of customer data and inputs. Part of the2353process involved collaborating with L1s, L2s, the European Community,2354national central banks and more, navigating the first MiCA pilot. We2355then worked on bespoke legal wrappers for new data sources and2356providers. And we put together a unique solution that was not only fit2357for the market, but also delivered software solutions for the European2358regulators to consider and build upon.2359 But we didn't stop there. Recognizing the programmable nature of2360blockchains, we also built tools for developers--enabling them to embed2361metadata on-chain. We started with Avalanche, one of the fastest layer2362one blockchains, to introduce regulatory metadata and compliance on-2363chain.\8\ We then shifted our sights back to the United States, working2364with Aptos, a leading blockchain specializing in enterprise solutions,2365to enable doing the same with our first Reg D document, a compliance2366feature for issuers of real world assets.\9\ And we have more2367announcements to come.2368---------------------------------------------------------------------------2369 \8\ Bluprynt Partners with Avalanche Foundation to Revolutionize2370MiCA White Paper Requirement Through On-Chain Regulatory Metadata2371Integration, https://www.cfodive.com/press-release/20250117-bluprynt-2372partners-with-avalanche-foundation-to-revolutionize-mica-white-pap.2373 \9\ Bluprynt Partners with Aptos Foundation to Bring U.S.2374Securities Law Documents On-Chain and Advance Tokenized Real-World2375Asset Solutions, https://www.bluprynt.com/post/bluprynt-partners-with-2376aptos-foundation.2377---------------------------------------------------------------------------2378 We're only a little more than a year old, but we already have our2379first cohorts of customers based in the United States and Europe. We're2380integrating into networks and block explorers. And we're being2381approached by regulators, officials at central banks and others.2382Enabling Real World Use Cases2383 Beyond just positive use cases, this panel has a particular2384interest in real world ones. Not gimmicks. But the kind that enable2385building businesses. And here I think it's worth highlighting what it2386means, in my opinion, to be a modern disclosure company.2387 Bluprynt's use cases were born in financial markets, but we're2388thinking big about the digital economy as the disclosure economy,2389whatever it's guise. So we're not just building a business, we're2390building systems applicable beyond financial markets. So just for the2391purpose of this testimony, I'll reference today this Committee's other2392wonderful witnesses as to what a company like ours means.2393 As we see today, Cattle[P]roof tracks real-world data about2394cattle--who owns them, their health, and where they've been--using2395blockchain to make that data trustworthy. But in the real world, cattle2396aren't just tagged, they're bought and sold. And given fluctuations in2397the global economy, commerce needs tools to hedge and protect farmers2398and ranchers. And here we can help; if someone wants to turn cattle2399into a financial product, like a futures contract (an agreement to buy2400or sell cattle at a future date), regulators need more than just proof2401of ownership or health. They need clear, legally structured information2402about how the contract works.2403 Bluprynt has the infrastructure in place to help make that happen2404on and off chain. So while Cattle[P]roof proves the cattle are real, we2405help those same end-users grow their businesses.2406 Similarly, Bluprynt can help companies like [GEODNET] explain and2407publish who is validating the data, what the system rules are, and how2408changes happen--in a way that regulators, customers, and users can2409understand and trust. [GEODNET] can stay focused on building the2410world's best geospatial network. Bluprynt can help make sure it's2411understood, trusted, and compliant--so it can work with governments,2412big companies, or financial markets that require clear, reliable2413information about how the network operates.2414Looking Forward2415 Building high quality digital infrastructure is not easy. The2416technology is there. But it is as much a regulatory build as it is a2417technological one. And this means that in order for us to work2418optimally to embed and promote transparency we need help from Congress2419in two critical ways.2420 First, we need clear rules. People building products don't know2421where the underlying tokens fit in the regulatory dashboard, if at all.2422And even if they do, there's no clear way to identify compliance in2423ways native to their businesses.2424 Second, the rulebook itself needs updating. As I have said before,2425if technology moves, and the rules remain the same, something is going2426to go wrong. Either weaknesses arise, creating risks, or innovators2427can't build. Or both.2428 I think we will get there. I was pleased to see my friend Brian2429Quintenz nominated as CFTC Chair, and the CFTC has been lucky to have2430over its tenure a succession of leaders, including Chairs Tim Massad,2431Chris Giancarlo, and Rostin Behnam, deeply interested in technology and2432how to leverage it for our markets.2433 But make no mistake, merging technologies present a unique2434opportunity to rethink our policy frameworks--not through the lens of2435scarcity and protectionism, but instead, to coin a popular phrase, to2436pursue outcomes of ``abundance'' and openness.2437 This means focusing on capacity-building rather than mere2438constraint-setting. Instead of defaulting to enforcing old rules2439designed for markets of the past out of a false sense of security, we2440should focus on enabling modern rules that work--and vigorously2441ensuring compliance with them. Rules that expand opportunities for2442builders while advancing our core regulatory goals and protections. The2443best policy outcomes will require regular review and vigilance designed2444to rethink outdated rules and update them for new risks, technologies,2445and markets.2446 Failing to act comes at a cost--and not just for frontier-pushing2447startups. It punishes the companies trying to do things right, like2448ours, by making it harder to deliver better, more trustworthy2449information to the market. Just as technical debt builds up when2450engineers delay essential fixes, regulatory debt accumulates when2451policymakers sidestep the hard conversations. Over time, that inaction2452weighs down the system. Risks multiply. Innovation slows. And when the2453inevitable reckoning comes, the cleanup is far more disruptive than2454thoughtful, incremental reform would have been.2455 We've seen that debt balloon in recent years--especially in crypto,2456where sometimes the absence of a single new rule or proposal has left2457an entire sector navigating in the dark. That silence hasn't yielded2458certainty or stronger protections. It's created a vacuum.2459 And the reality is that innovation doesn't wait. Whether it's on-2460chain--where protocols are automating trust and transforming markets--2461or off-chain, where infrastructure is being rebuilt from the ground up,2462builders are moving forward. The question is whether our regulatory2463frameworks will move with them.2464 Because in the end, it's not innovation that creates risk--it's the2465refusal to meet it with clarity, creativity, and courage.2466 I look forward to this Congress helping to close the gap before the2467future gets too far ahead.24682469 The Chairman. We need clear rules of road, yes, indeed. Dr.2470Brummer, well said.2471 Mr. Garrison, it is your 5 minutes.24722473 STATEMENT OF COY GARRISON, J.D., PARTNER, STEPTOE LLP,2474 ARLINGTON, VA24752476 Mr. Garrison. Thank you, Chairman Johnson, Ranking Member2477Davis, and Members of the Subcommittee for inviting this2478securities lawyer and grandson of a dairy farmer to testify2479here today. My name is Coy Garrison, I am a partner in2480Steptoe's blockchain and cryptocurrency practice, where I2481advise clients on securities and derivatives of all matters.2482Prior to Steptoe, I was an attorney at the SEC for nearly 92483years, where I had the honor of serving as counsel to current2484Commissioner Hester Peirce. I am testifying today on my own2485behalf, and not on behalf of the firm or any client of the2486firm.2487 My message is rather straightforward; it is that passing2488digital asset market structure legislation is essential to2489promoting American innovation in blockchain technology. The2490promising cases presented to you here today, along with all2491projects built on blockchain technology, rely on digital assets2492being easily transferable. People that hold digital assets,2493people that want to participate in the protocols, and people2494that want to express a view on the price of a digital asset,2495all meet on spot market exchanges. Robust digital asset2496markets, therefore, serve a vital function facilitating price2497discovery for digital assets.2498 However, there are two main problems with the status quo.2499First, exchanges lack any Federal regulatory oversight to2500promote market integrity, to monitor against fraud and2501manipulation, or to impose requirements to safeguard customer2502assets. While there are a number of responsible platforms, the2503lack of a Federal regulator leaves open the door to another2504FTX-like failure.2505 Second, entrepreneurs face an unnecessary stumbling block2506of regulatory uncertainty in the U.S. Specifically, the SEC2507under Gary Gensler initiated litigation against a number of2508digital asset trading platforms, alleging that such entities2509were operating as unregistered securities exchanges, broker2510dealers, and clearing agencies. While the SEC asserted2511jurisdiction through enforcement actions, the agency declined2512to provide a pathway to registration. Perhaps most troubling,2513the SEC failed to articulate a cogent and consistent analysis2514for the fundamental legal issue at hand; being how secondary2515trading of digital assets involved the sale of investment2516contracts or securities. Faced with such legal uncertainty,2517entrepreneurs looking to build a decentralized network in the2518U.S. often choose not only to build and launch offshore, but to2519exclude or limit the participation of U.S. persons. This2520outcome hurts U.S. competitiveness, and it encourages2521entrepreneurs and capital to flow to other jurisdictions.2522Fortunately, new leadership at the SEC and CFTC are already2523beginning to reverse the failed crypto policies of the last 42524years. For example, the SEC Crypto Taskforce, led by2525Commissioner Pierce, has issued clear statements scoping2526outside of the securities law certain transactions, and is2527actively soliciting public input. There are limitations,2528however, to what the SEC and CFTC can achieve, absent direction2529from Congress. One significant regulatory gap is that neither2530agency has clear statutory authority to regulate spot market2531trading of digital assets.2532 Congress and this Administration, therefore, have a2533tremendous opportunity to work together to bring sensible2534regulation to the digital asset industry by enacting market2535structure legislation.2536 Last week, Chairman Thompson published six principles for2537this market structure legislation, which I believe provide2538sensible guideposts upon which a framework can be built. I2539respectfully offer a few observations for this Subcommittee in2540assessing these principles.2541 Principle number one is that legislation must promote2542innovation. If a digital asset itself is labeled a security2543under the legislation, then each transaction in that digital2544asset, even outside of a digital asset exchange, would be2545subject to the securities laws. This would severely restrict2546the ability for that digital asset to be used as intended on2547its network. That could drive the development of the network2548and capital flows offshore. The legislation should focus on2549regulatory the spot market trading of digital assets, not2550regulating their intended use within the relevant network.2551 For principle number two, that legislation must provide2552clarity for the classification of assets, in developing any2553test to divide jurisdiction between the CFTC and SEC, I propose2554that the Subcommittee weigh the following factors. First,2555whether the test will upend current practice and bifurcate spot2556digital asset markets, and if so, whether there is a compelling2557customer protection or market integrity justification for doing2558so. Second, whether the benefits of simplicity and2559administration of the test for both regulators and industry2560participants should be prioritized. Third, whether there are2561difficulties of coordinating between the SEC and CFTC in2562creating and maintaining separate rulebooks. And fourth,2563whether any agency has the capability to fully perform all2564market oversight functions on their own.2565 In conclusion, the timing is right for Congress and this2566Administration to work together to implement a much-needed2567regulatory framework.2568 Thank you for your leadership on this important topic, and2569I look forward to your questions.2570 [The prepared statement of Mr. Garrison follows:]25712572 Prepared Statement of Coy Garrison, J.D., Partner, Steptoe LLP,2573 Arlington, VA2574 Thank you, Chairman Johnson, Ranking Member Davis, and Members of2575the Subcommittee for inviting me to testify today on American2576innovation and the future of digital asset regulation.2577 My name is Coy Garrison. I am a partner in the Washington, D.C.,2578office of Steptoe LLP. For nearly 3 years my practice has focused on2579advising clients how to navigate challenging legal and regulatory2580issues related to blockchain technology. Prior to private practice, I2581was an attorney for the U.S. Securities and Exchange Commission2582(``SEC'' or the ``Commission''), including serving as counsel to2583Commissioner Hester M. Peirce from 2019-2022 and in multiple roles with2584the Division of Corporation Finance from 2013-2019. My testimony today2585is informed by both my private and public sector experience, but I2586appear before you on my own behalf and not on behalf of Steptoe LLP or2587any client of the firm.2588 My message to you today is straightforward: passing digital asset2589market structure legislation is essential to promote American2590innovation in blockchain technology. The status quo is unacceptable:2591there is no Federal market regulator overseeing centralized spot market2592exchanges and there is a lack of regulatory clarity that only Congress2593can fully address. Fortunately, the 119th Congress and the Trump2594Administration have a unique opportunity to work together to establish2595sensible regulation and encourage innovation in the U.S. I provide some2596thoughts below to aid in this Subcommittee's consideration of the six2597principles for market structure legislation recently published by2598Chairman Thompson.\1\2599---------------------------------------------------------------------------2600 \1\ Chairman G.T. Thompson & Chairman French Hill, A Blueprint for2601Digital Assets in America (Apr. 4, 2025), https://2602agriculture.house.gov/news/documentsingle.aspx?DocumentID=7875.2603---------------------------------------------------------------------------26041. Robust Digital Asset Markets Are Vital to Blockchain Technology2605 Innovation, But Lack a Federal Market Regulator2606 Blockchain technology plays an important role in society today and2607holds significant promise in a world of growing distrust in2608institutions. In 2008, the Bitcoin whitepaper seeded the idea that a2609peer-to-peer electronic payment system could be based on cryptographic2610proof instead of a trusted third party.\2\ Bitcoin soon thereafter2611became the world's first permission-less, decentralized, peer-to-peer2612payments technology, and served as catalyst for others to build upon2613the concept. Since then, developers have built blockchains and2614blockchain-based software seeking to provide decentralized networks for2615everything from payments, lending, and trading, to livestock2616verification, agricultural equipment financing, and mapping tools, to2617file storage, social media, and artificial intelligence model2618development.2619---------------------------------------------------------------------------2620 \2\ Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash2621System (Oct. 31, 2008), https://bitcoin.org/bitcoin.pdf.2622---------------------------------------------------------------------------2623 Decentralized networks and applications built upon them need an2624incentive structure to drive participation in the security and2625operation of the network. Digital assets native to these networks are2626therefore distributed either programmatically or by a centralized2627entity in a number of ways, including through capital raising2628transactions, airdrops, rewards linked to a consensus mechanism, and2629developer grants, to name a few. Digital asset spot markets exist to2630facilitate the trading of digital assets by holders, persons wanting to2631participate in or use the network, and persons desiring to express a2632view on the price of the digital asset. Centralized spot market2633exchanges therefore serve a vital function of facilitating price2634discovery for digital assets.2635 However, these exchanges lack any Federal regulatory oversight to2636promote market integrity, monitor against fraud and manipulation, or2637impose requirements to safeguard customer assets. While there are a2638number of responsible trading platforms, the lack of a Federal2639regulator leaves open the door to another FTX-like failure in the2640future. Moreover, Federal oversight of these exchanges will likely2641encourage more participation in these markets from entities hesitant to2642jump in absent such regulation, and in turn, encourage more innovation2643in the blockchain industry.26442. The Lack of Regulatory Clarity Persists and Can Only Be Solved by2645 Congress2646 Entrepreneurs looking to build decentralized networks in the U.S.2647often choose not only to build and launch offshore, but to exclude or2648limit the participation of U.S. persons. Typically they do so because2649of uncertainty as to whether the securities laws apply, and if they did2650apply, there is no clear pathway to compliance. Such an outcome hurts2651U.S. competitiveness and lets entrepreneurs and capital flow to2652jurisdictions willing to provide regulatory certainty for the industry.2653 A closer look at the securities law analysis reveals how difficult2654it is for the SEC to bring clarity on whether it has authority to2655regulate digital asset spot market transactions, absent direction from2656Congress. The legal analysis of whether any particular digital asset is2657sold pursuant to an ``investment contract,'' and therefore subject to2658the securities laws, requires a facts-and-circumstances consideration2659of the economic realities of the transaction. That analysis is guided2660by case law, anchored by the Supreme Court's Howey test of whether2661there is a ``contract, transaction, or scheme whereby a person invests2662his money in a common enterprise and is led to expect profits solely2663from the efforts of the promoter or a third party.'' \3\2664---------------------------------------------------------------------------2665 \3\ SEC v. W.J. Howey Co., 328 U.S. 293 (1946).2666---------------------------------------------------------------------------2667 The SEC under Gary Gensler adopted a broad and shifting2668interpretation suggesting that a digital asset embodies an ``investment2669contract'' in secondary market transactions and went so far as to coin2670the term ``crypto asset security'' in court filings alleging that major2671centralized spot market exchanges were operating as unregistered2672securities exchanges, broker-dealers, and clearing agencies. Multiple2673district courts reprimanded the agency for its legal imprecision, with2674one court describing the label ``unclear at best and confusing at2675worst,'' \4\ and another court explaining how the approach is2676inconsistent with the statute and Howey:2677---------------------------------------------------------------------------2678 \4\ SEC v. Payward Inc., et al., No. 23 Civ. 06003 (WHO), ECF No.267990 (N.D. Cal. Aug. 23, 2024) at 19.26802681 Insisting that an asset that was the subject of an alleged2682 investment contract is itself a ``security'' as it moves2683 forward in commerce and is bought and sold by private2684 individuals on any number of exchanges, and is used in any2685 number of ways over an indefinite period of time, marks a2686 departure from the Howey framework that leaves the Court, the2687 industry, and future buyers and sellers with no clear2688 differentiating principle between tokens in the marketplace2689 that are securities and tokens that aren't. It is not a2690 principle the Court feels comfortable endorsing or applying2691 based on the allegations in the complaint, particularly since2692 the only term among the approximately twenty options included2693 in the statutory definition of ``security'' that is being2694 relied upon in this case is ``investment contract.'' \5\2695---------------------------------------------------------------------------2696 \5\ SEC v. Binance Holdings Ltd, et al., No. 23 Civ. 1599, ECF No.2697248 (D.D.C. June 28, 2024 at 42-43.26982699 SEC Acting Chairman Mark Uyeda and Commissioner Peirce have rightly2700begun to reverse course, dismissing many of the cases against the2701centralized spot market exchanges. Accordingly, Federal appellate2702courts will not have the opportunity to weigh in with their views on2703the scope of Howey as applied to digital assets for the foreseeable2704future.2705 The SEC Crypto Task Force, led by Commissioner Peirce, is engaged2706in a commendable and fruitful effort to right the ship at the SEC and2707provide regulatory clarity. In recent weeks, the Task Force issued2708clear statements scoping outside the securities laws certain2709transactions in stablecoins, proof of work mining, and memecoins.\6\2710The Task Force also hosted a roundtable last month focused on defining2711security status for digital assets.\7\2712---------------------------------------------------------------------------2713 \6\ See SEC Staff Statement on Meme Coins (Feb. 27, 2025), https://2714www.sec.gov/newsroom/speeches-statements/staff-statement-meme-coins;2715SEC Staff Statement on Certain Proof-of-Work Mining Activities (Mar.271620, 2025), https://www.sec.gov/newsroom/speeches-statements/statement-2717certain-proof-work-mining-activities-032025; SEC Staff Statement on2718Stablecoins (Apr. 4, 2025), https://www.sec.gov/newsroom/speeches-2719statements/statementstablecoins-040425.2720 \7\ SEC Roundtable, How We Got Here and How We Get out--Defining2721Security Status (Mar. 21, 2025), https://www.sec.gov/newsroom/meetings-2722events/how-we-got-here-how-we-get-out-defining-security-status.2723---------------------------------------------------------------------------2724 U.S. Commodity Futures Trading Commission (``CFTC'') Acting2725Chairman Caroline Pham is similarly pushing forward for regulatory2726clarity on digital assets. The CFTC recently held its first Crypto CEO2727Forum, withdrew staff guidance on clearing of digital assets so as to2728not apply unequal treatment on digital asset derivatives, and is2729exploring a potential digital assets markets pilot program for2730tokenized non-cash collateral.\8\2731---------------------------------------------------------------------------2732 \8\ CFTC Announces Crypto CEO Forum to Launch Digital Asset Markets2733Pilot (Feb. 7, 2025), https://www.cftc.gov/PressRoom/PressReleases/27349049-25; CFTC Staff Withdraws Advisory on Review of Risks Related to2735Clearing Digital Assets (Mar. 28, 2025), https://www.cftc.gov/2736PressRoom/PressReleases/9060-25.2737---------------------------------------------------------------------------2738 There are limitations to what the SEC and CFTC can achieve absent2739direction from Congress, however. One significant regulatory gap is2740that neither the SEC or CFTC have clear statutory authority to regulate2741spot market trading of digital assets. The CFTC does not have2742regulatory oversight authority over spot trading of commodities. While2743the SEC has clear authority to regulate the primary issuance of a2744digital asset sold pursuant to an investment contract, there is2745significant doubt that the secondary trading of digital assets2746constitute investment contract transactions within the SEC's2747jurisdiction.27483. Considerations for Market Structure Legislation2749 Last week, House Committee on Agriculture Chairman G.T. Thompson2750and House Committee on Financial Services Chairman French Hill2751published six principles for market structure legislation. I2752respectfully offer high-level considerations for this Subcommittee in2753assessing each principle.27542755 a. Legislation must promote innovation. We seek to protect2756 opportunities for innovators to create and utilize digital2757 assets, while ensuring users can lawfully transact with one2758 another.27592760 If a digital asset native to a decentralized network were to be2761labeled as a security under the terms of the legislation, then each2762transaction in that digital asset, even outside of a centralized spot2763market exchange, would be subject to the securities laws. This would2764severely restrict the ability for that digital asset to be used as2765intended on the network and could drive the development of that network2766offshore. Legislation should focus on regulating the spot market2767trading of digital assets, not their use as intended within the2768relevant network.27692770 b. Legislation must provide clarity for the classification of2771 assets. Users of digital assets should clearly understand2772 the nature of their holdings, including whether they2773 qualify as securities or non-securities.27742775 This is the most challenging aspect of market structure given the2776complexities of the Howey analysis. Any test used to divide2777jurisdiction between the CFTC and SEC based on the classification of2778the digital asset should consider the following factors:27792780 The extent to which the test will upend current practice and2781 bifurcate spot digital asset markets;27822783 Whether there is a compelling customer protection or market2784 integrity reason for bifurcating spot digital asset markets;27852786 The benefits of simplicity in administration of the test for2787 regulators and industry participants;27882789 The difficulties of coordination between the SEC and CFTC in2790 creating and maintaining separate rules, and the resulting2791 burdens on registered entities; and27922793 The capabilities of either agency to equally perform all2794 market oversight functions.27952796 The SEC Crypto Task Force will be a valuable resource to Congress2797in articulating the SEC's current views on how it intends to evaluate2798digital asset spot market trading, and whether there are specific types2799of assets or transactions with which they believe the SEC has2800jurisdiction over. Ultimately, however, it is for Congress to decide2801where to draw the line between the two agencies.28022803 c. Legislation must codify a framework for the issuance of new2804 digital assets. The framework should permit issuers to2805 raise capital through the sale of new digital assets under2806 the jurisdiction of the SEC. It should protect retail2807 investors and require developers to disclose relevant2808 information to help users understand the unique2809 characteristics of digital asset networks.28102811 This approach would be consistent with the well-established2812position that token offerings conducted to raise capital for a project2813involves the sale of investment contracts and are subject to the2814securities laws. Many token issuers avoid selling to U.S. investors2815because the existing registration and exempt offering framework is a2816poor fit for the realities of the projects they are building.2817 Bold reforms to the existing disclosure requirements and2818restrictions on secondary trading under the Regulation A and Regulation2819Crowdfunding exemptions should be considered for token offerings sold2820pursuant to investment contracts. For example, audited financial2821statement requirements appropriately form the cornerstone of the SEC's2822disclosure system for public companies. However, for many development2823teams looking to build a decentralized network, the financial2824information that is relevant to a token holder is likely not the2825financials of the development team, but rather the wallet address(es)2826of the project's treasury and transparency into how and why tokens move2827from that address. A streamlined exemption that leverages the benefits2828of blockchain for transparency and contains disclosure requirements2829that are carefully crafted for token holder protection would be an2830ideal outcome.28312832 d. Legislation must establish the regulation of spot market2833 exchanges and intermediaries. Centralized, custodial2834 exchanges and intermediaries facilitating transactions with2835 non-security digital assets should adhere to similar2836 requirements as other financial firms.28372838 Imposing the same type of regulation on digital asset2839intermediaries as CFTC-registered or SEC-registered firms is a2840reasonable approach for regulation. Some modifications to existing CFTC2841or SEC rules may be appropriate to allow spot market exchanges and2842intermediaries, and their customers, to benefit from disintermediated2843trading and real-time settlement of digital assets.28442845 e. Legislation must establish best practices for the protection of2846 customer assets. Entities registered with the SEC or CFTC2847 should be required to segregate customer funds and hold2848 them with qualified custodians. Customer funds should also2849 be protected during bankruptcy.28502851 Protection of customer assets is a core function for any2852centralized, custodial spot market exchange and should be prioritized2853in legislation. Preserving flexibility in the type of Federal or state2854regulator that may have oversight over the qualified custodian will be2855an important factor.28562857 f. The legislation must protect innovative decentralized projects2858 and activities. Congress should ensure that decentralized2859 protocols, which pose different risks and benefits, are not2860 subject to regulations designed for centralized, custodial2861 firms. In safeguarding decentralized activities, Congress2862 must also protect an individual's right to self-custody2863 their digital assets.28642865 DeFi is a growing, but nascent industry that raises different2866issues from centralized spot market trading. Truly decentralized2867protocols typically allow disintermediated, peer-to-peer transactions2868and do not exercise control over transactions or a user's assets. They2869therefore don't pose the same risks that centralized spot market2870trading does to market participants. Of course, centralized entities2871that masquerade as decentralized protocols should be regulated in a2872manner that addresses the risk of their actual activities, not of the2873label they use to market themselves. Limiting the legislation to the2874issue at hand: centralized spot market trading of digital assets, is a2875prudent course of action.28764. Conclusion2877 Despite the welcome change in regulatory approach by the SEC and2878CFTC under the Trump Administration, Congressional action is needed to2879implement oversight of spot market digital asset trading because there2880are limits to the regulators' existing authorities. In addition to2881bringing regulatory clarity and customer protection benefits to the2882marketplace, market structure legislation is likely to encourage2883American innovation in blockchain technology. Thank you for your2884leadership on this important topic and I look forward to your2885questions.28862887 The Chairman. Excellent job, panelists. That is exactly2888what we needed.2889 As a reminder perhaps those who arrived after gavel, by UC2890we have reduced time for our questioning for 4 minutes apiece,2891so that we don't injure the people at the end of the dais when2892votes are called.2893 In the spirit of bipartisanship, Ranking Member Davis will2894play traffic cop for a bit until the burden irritates him, in2895which case he will revert it back to me. So with that, Ranking2896Member.2897 Mr. Davis [presiding.] All right. At this time we recognize2898the gentleman from Tennessee, Mr. Rose.2899 Mr. Rose. Thank you, Chairman Johnson and Ranking Member2900Davis, for holding this hearing. I am honored to have been2901appointed to serve as Vice Chair of the Subcommittee on2902Commodity Markets, Digital Assets, and Rural Development for2903the 119th Congress, and I look forward to working with the2904Chairman and Ranking Member to advance U.S. commodity markets2905and digital assets, while also delivering success for rural2906America.2907 Let me get right to my questions. Mr. Hughes, as2908agriculture enters this era of digital assets, how can we2909better integrate innovative technologies like MetaMask into2910more production agriculture transactions and increase the usage2911of these tools?2912 Mr. Hughes. Well, I think we need to start thinking about2913how these assets can migrate online. I think you heard a little2914testimony earlier about the benefits of putting things like2915cattle, at least an instantiation of cattle, and all the2916information that pertains to a particular head of cattle on-2917chain so you can know the data, and that asset is there to be2918traded in a very streamline manner. Once you do that, an2919interface like MetaMask allows you to control those assets,2920give permission to who can see the data, and what types of2921transactions you are willing to go into. It is about getting2922the real world on-chain, but that requires a regulatory2923framework that allows companies and industries to explore this2924space. And so that is what we hope happens this year.2925 Mr. Rose. Sure. Well, thank you, and I share your view of2926what we need to do next.2927 Mr. Tague, in your written testimony you mentioned that2928blockchain technologies can increase security and transparency,2929and lead to stronger relationships between buyers and sellers.2930With that in mind, please elaborate on how these technologies2931can strengthen market access for producers, and enhance the2932possibility of producers receiving higher prices.2933 Mr. Tague. Absolutely. Thank you for your question. As Mr.2934Hughes said, the blockchain network is central to what we are2935creating. The idea behind our product is trust and2936transparency. Right? We are trying to create trust and2937transparency up and down the chain, no pun intended, so to2938speak, from the producer all the way to the consumer.2939 One of the ways we do this is we use USDA process verified2940programs. We started with those programs because to date, those2941are the best ways to identify individual head of cattle. And by2942putting that data on an immutable ledger; that is, you can2943trust that ledger from start to finish, it can't be changed, or2944it can be changed but the recordation of that change will2945occur, so it provides transparency from the birth of that2946animal to the harvest of that animal.2947 Mr. Rose. Thank you. And, Mr. Tague, can you further2948explain how integrating blockchain technologies into the beef2949industry can minimize the issues we see with payment methods2950and delays?2951 Mr. Tague. Absolutely. Cattle transactions really haven't2952changed in about 150 years. Essentially, today, if we take our2953cattle to market, we sell them at a sale barn, the sale barn2954gets paid their amount, the sale barn takes the check, they2955hold the check, then the check goes to the bank and the bank2956holds the check, and et cetera. So from the day you deliver2957your cattle to the day you get paid for your cattle, there is a2958delay there of days or even weeks. Using blockchain technology2959and smart contracts there, we can absolutely make that almost2960instantaneous, but also ensure that lienholders and other2961people that are in that transaction also get instantly paid,2962with full compliance.2963 Mr. Rose. Thank you. And I will end here. Dr. Brummer, it2964is always nice to have a fellow with connections to Vanderbilt2965Law School. I am an alum, and good to have you with us today.2966 Tell me in just 10 seconds here, how do we speed up the2967adoption period, from early adopters to late adopters?2968 Dr. Brummer. I think certainly having a UX (user2969experience) that enables people to engage the technology from2970its benefits, and not just from a sort of crypto native2971interface, makes it a lot easier for more people to engage with2972the technology, and for people to have a sense of trust in the2973technology, obviously, will do a lot towards mainstreaming that2974technology.2975 Mr. Rose. Thank you, Mr. Chairman for your--Ranking Member,2976for your indulgence. I yield back.2977 Mr. Davis. Yes. The gentleman's time has expired.2978 At this time, we are going to recognize the amazing2979Representative from Illinois, Ms. Budzinski.2980 Ms. Budzinski. Thank you, Ranking Member, and thank you to2981our Subcommittee Chairman Johnson, for having this hearing2982today. And I appreciate all of the panelists here for your2983testimony.2984 I want to reiterate my thanks to Chairman Johnson for his2985bipartisan work to get FIT21 across the finish line here in the2986House last Congress. I was really proud to work alongside him2987to pass a few of my consumer protection priorities that ended2988up being included in that final bill, which I thought was2989really important.2990 I have said this before, it is really whether you like it2991or not, whether we are ready for it or not, blockchain2992technology is here and it is here to stay. So I believe it is2993in our best interest to utilize this technology for positive2994purposes, and I know some of which as panelists you have shared2995some of those positive outcomes with us in your testimony.2996 I want to share with you one of those applications going on2997in my district. The University of Illinois Urbana-Champaign is2998in my district. I am a proud alum. They are doing some really2999great work at the U of I, Gies College of Business, which is3000home to a lot of blockchain firsts. In 2022, Gies started the3001first blockchain ever to be created by a business school. We3002call it iBlock. iBlock is a platform that allows Gies faculty3003and students to create accounts and view transactions in a3004classroom setting. It is also used to teach students how to3005build customized blockchain environments for their own use in3006the classroom. Their ultimate goal with iBlock is to expand our3007knowledge of blockchain technology, and what they call a3008scalpable production--scalable, I am sorry, scalable production3009system. They also work jointly with the College of Engineering3010and the College of Law to expand technology and usability, and3011to navigate the regulatory environment. Additionally, in 2023,3012Protocol Labs gave the first ever crypto-funded donation to3013Gies, a donation to be used to research blockchain questions3014and solutions. And this is not to mention the many other gifts3015that have been given to Gies over the years to research uses3016for blockchain technology.3017 So in the time that I have, I just have one quick question3018for Dr. Brummer. Given your position as an entrepreneur using3019blockchain, but also as an academic, I imagine you have a3020unique take on these applications. Can you speak to the role3021that higher education, particularly through research, play in3022expanding the uses of blockchain?3023 Dr. Brummer. Thank you so much. I have colleagues and3024friends at Urbana-Champaign, not just in the Law School. Great,3025great university.3026 Yes, I think universities have a unique gift of both3027students who are much more likely to be involved in the3028technology, and they are also learning. So they are not3029necessarily stuck, and a little bit more open-minded to at3030least explore. And I think universities have a unique position3031because we ask questions, and the best of us don't have3032answers. So when you can approach a new, novel technology with3033fewer priors, but also with an education and skill, you are3034much more likely to be able to kick the tires on that3035technology in a very straightforward way, and I think that is3036what I see in a lot of my students. I ask my students all the3037time, like how many of you have interfaced as law school3038students with blockchain technology. The hands will go up, and3039then I will ask more conventional stuff, and they will ask me3040what that is, and I feel old.3041 Ms. Budzinski. That makes a lot of sense.3042 Dr. Brummer. Yes.3043 Ms. Budzinski. Thank you very much.3044 Dr. Brummer. Thank you.3045 Ms. Budzinski. And I will yield back.3046 Mr. Davis. The gentlelady yields.3047 At this time we will recognize the gentleman from Oklahoma,3048Mr. Lucas.3049 Mr. Lucas. Thank you.3050 Many legislative proposals for a digital asset regulatory3051framework grant the CFTC authority to oversee spot market3052authority for decentralized changes.3053 Mr. Garrison, what are your views on how to address the3054spot market gap? Why is it so important to pay attention to3055this issue in our discussions around digital asset market3056structure?3057 Mr. Garrison. Thank you. So I think the importance comes3058from the fact that there is no Federal market regulator3059overseeing the spot digital assets right now. So that means all3060participants are subject to the whims of the trading platforms3061and what protections they put in place on their own. Right? So3062things like preserving market integrity, seeking to prevent3063fraud and manipulation, front running, these types of concerns,3064the safeguarding of customer assets. There is no Federal3065standard that is being imposed upon them right now, and I think3066that would rightly be a focus for Congress as it considers3067market structure legislation.3068 Mr. Lucas. The United States is unique in that our markets3069are overseen by two different regulators; the SEC and the CFTC.3070And this can present challenges, particularly for hedging3071strategies that involve products in both jurisdictions. For3072example, investors might hedge Treasury holdings in the SEC3073jurisdiction, of course, with Treasury futures in the CFTC3074jurisdiction. This situation will also come up in digital asset3075markets.3076 Continuing again with you, Mr. Garrison, how should the3077Committee be thinking about this as we look at market structure3078legislation? Should we allow for digital asset products that3079are naturally hedged and offset to be marginalized together in3080the same portfolio?3081 Mr. Garrison. So I think the focus and the cleanest3082approach is to continue to keep clear lines between the CFTC3083that analyzes the risk hedging functions, and the SEC, and to3084also finding the right spot of, does the CFTC and SEC share3085jurisdiction over the spot markets, or do you just assign to3086one or the other. Now, there's obviously a lot of pros and cons3087with either approach, but at the end of the day the SEC and3088CFTC have a long tradition of working together. There certainly3089are challenges that can come along with that, but as we saw in30902020 when the SEC and CFTC had an open Commission meeting3091together and voted on various rules in connection with each3092other, as long as the leadership of those agencies are working3093hand in glove, then they can achieve regulatory harmonization.3094 Mr. Lucas. A theme that I continue to hear in my3095discussions with industry experts is the need for regulatory3096clarity in the digital asset market, to encourage innovation3097and stay competitive globally. That is why my bill, the3098Securing Innovation and Financial Regulation Act (H.R. 9633,3099118th Congress), codifies LabCFTC and the SEC's strategic hub3100for innovation and financial technology. Both of these offices3101would make the Commissions more accessible to market3102participants, and foster fintech innovation.3103 Mr. Tague, your product currently helping ranchers in my3104home State of Oklahoma is quite the technological achievement.3105What would it mean for ag producers to have regulatory3106certainty and assistance like that that would be provided3107through my bill?3108 Mr. Tague. Thank you, Congressman Lucas. Yes, it would be3109essential. One of the things that we need as entrepreneurs is3110that regulatory certainty for investment. Most investors are3111not going to invest a large sum of money into a product that3112there is not regulatory certainty on. But it also means that3113with that investment, we can provide these type of tools to3114ranchers and farmers too to make sure that they get all the3115benefits of this technology.3116 Mr. Lucas. Thank you.3117 And I yield back, Ranking Member.3118 Mr. Davis. Thank you so much.3119 At this time, Mr. Figures from the great State of Alabama,31204 minutes.3121 Mr. Figures. Thank you. And thank you for hosting this3122hearing, Mr. Chairman and Mr. Ranking Member.3123 I represent a very rural district geographically. About 803124percent of my district is relatively rural, some of the most3125rural parts of the State of Alabama, where getting online is a3126challenge. And when we talk about blockchain technology, when3127we talk about being able to leverage the assets and the3128benefits of this technology, that is something that concerns me3129with making sure that our rural communities don't get left3130behind. I am supportive of the benefits of the technology, and3131supportive of innovating in ways that will further positive3132life outcomes and business outcomes, and just overall3133experience for our rural communities.3134 So can you guys talk to me a little bit about what we can3135do to ensure that our rural communities are not left out in3136this wave of innovation? And if we can start with you Dr.3137Tague--or Mr. Tague, I am sorry.3138 Mr. Tague. Certainly. Yes, I believe that investment in3139rural broadband structure, particularly in the rural areas, is3140vitally important, especially for what I do. Without that, I am3141kind of a nonstarter. Right? But I do also believe that3142blockchain technology is bringing a lot of things to bear that3143will make that investment in rural broadband technology much3144more attractive, because we are actually bringing real-world3145use cases that need a lot of piping, so to speak, to come back3146to the market. So I think it all--a rising tide lifts all3147boats, is essentially what I am saying.3148 Mr. Figures. Anybody else want to take a stab at it?3149 Mr. Horton. Congressman, yes, these technologies that use3150blockchain called DePIN, or Decentralized Physical3151Infrastructure Networks, are particularly good at bringing3152technology to more rural communities.3153 Our first customer in the agricultural space, Deep Sand,3154was stymied by the fact that there was no precise positioning3155network in his southwest corner of Oklahoma that he could3156access, and that is what got him started in looking into us. It3157wasn't interest in crypto or Web3, or anything, it was a3158practical need to be able to build infrastructure and provide3159infrastructure to his customers, which are farmers.3160 Mr. Figures. All right, thank you. And I know from a3161securities standpoint, from a cybersecurity standpoint, like3162one of the attractive elements to blockchain technology that3163some people are familiar with are the benefits in being able to3164secure it.3165 Can you talk a little bit about the steps that you guys3166take, and how you guys prioritize that cybersecurity to make3167sure that we can deploy this technology in rural areas, these3168are rural farmers, that even if they can take advantage of the3169technology, if something goes wrong, if somebody is attempting3170to manipulate anything, talk about how you guys prioritize3171securing this technology, and how we make sure that farmers in3172Eufaula, Alabama, can feel secure in the investment that they3173are making in these sorts of technologies.3174 Mr. Horton. In our case, Congressman, the hardware itself3175has a cryptographic chip in there that is certified by the3176foundation, and that is what allows us to support a3177decentralized deployment of these stations, is that there is3178actually a device in there that is programmed to sign the data,3179and ensure that data is authentic and originated from a real3180GEODNET station. We also leverage the infrastructure and space.3181The different satellite constellations have different data that3182comes down, and our devices get to see--because we have a3183global footprint, we see that data first, and we can use that3184as kind of a code to make sure that people aren't faking the3185data.3186 Mr. Figures. All right, and the last thing I will just add,3187just more so of a statement, is you guys are great at breaking3188this down, and as we say in Alabama, putting the hay down where3189the goats can get it. And I think that is necessary in general3190from a messaging standpoint for more Americans to feel3191comfortable in this technology, is hearing these real-world,3192practical explanations at a very base level understanding. So I3193appreciate what you guys are doing, and thank you.3194 I yield back.3195 Mr. Davis. The gentleman's time has expired.3196 At this time we recognize the gentleman, Tracey Mann, from3197Kansas.3198 Mr. Mann. All right, thank you. And thank you both for3199hosting this hearing. Thank you all for being here.3200 This Committee and Congress, frankly, has really grasped3201with, what does it look like to regulate the cryptocurrencies,3202and there's differing degrees of opinion on that, but I feel3203very strongly, and this panel really exemplifies the fact that3204we have to make sure whatever we do there doesn't hinder new3205technologies from being built on the blockchain. And I think3206just shining a light on what you all are doing is remarkable3207the technologies that you are building, and how it really helps3208our ag producers every day, is amazing.3209 I represent the First District of Kansas, which is the3210western \2/3\ of the state. For the most part, we have seen3211production in my district, and around most of the country,3212dramatically increase regularly and pretty constantly over the3213last 150 years. We are now in this season, as we all know,3214where, specifically for our commodity producers, we have very3215input costs and relatively low commodity prices, which has--3216puts a big squeeze on our--some of our best ag producers are3217eating into working capital, and it is a very dire situation on3218the family farm. But appreciate you all being there. I3219appreciate the new technologies that are helping address these3220concerns.3221 My first question for you would be for Mr. Horton. As I3222mentioned, it is becoming evermore expensive to farm, margins3223continue to shrink, and I--that a little bit, but how does your3224technology or your service help farmers achieve the benefits in3225a way that can help both small, medium, and large producers3226become more efficient?3227 Mr. Horton. Good question, Congressman. Yes, as one of our3228customers always tells me in the ag business, farming is hard3229enough. And the way precise positioning helps farmers is that3230when you farm a field, if you drive the tractor manually you3231will have anywhere from 10 to 20 percent of overlap; like you3232basically drive over the same area multiple times. By having3233centimeter-accurate GPS, you are able to let the machine steer3234itself, and it avoids that overlap. And that translates3235directly into reduced input costs such as fuel and chemicals3236when you are spraying, and that really drops to the bottom3237line.3238 Now, traditionally, centralized solutions to this problem3239have either lacked coverage in certain areas, or they have been3240pretty darn expensive. And that has provided a hard time for3241smaller operators to get an ROI with the technology. Through3242this kind of community-based approach that is how this3243blockchain-based GEODNET network works, we have been able to3244bring that cost substantially down and introduced the precision3245agriculture technology to a lot of new farmers.3246 Mr. Mann. Tremendous. And then how does that work? So does3247their combine or tractor or sprayer have to be equipped with3248certain, obviously, software and hardware to be able to utilize3249the technology?3250 Mr. Horton. Yes, sir. So there are two solutions. One3251solution is to use the technology that is already on the3252equipment, and most modern equipment--or I would say--should3253say all modern equipment being built today by folks like John3254Deere, Case, and AGCO does come equipped ready to connect to a3255network like GEODNET. And then there are solutions for3256retrofitting machines. So you can put on a retrofit kit that3257will actually sort of put a motor on the steering wheel, which3258will let it to automatically steer. And those are also3259extremely popular, and lets you utilize older assets and bring3260value out of them.3261 Mr. Mann. Great. Well, thank you for having this hearing.3262As an aside, I will never forget, 20 years ago I was in the3263real estate business, when I called my dad and he--I knew he3264was planting, right, and I said, ``Hey, Dad, what are you3265doing?'', and he said, ``Well, I am sitting on the side of the3266field.'' And I said, ``Why is that?'' And he said, ``Well, my3267satellite is down.''3268 Mr. Horton. Yes, sir.3269 Mr. Mann. And I remember that moment knowing things are3270never going to be same because he no longer spent the $30,0003271to put markers on the side of the planter, because you don't3272need them, but if your satellite--if the technology doesn't3273work, you are entirely shut down. But I commend you, and all of3274you all, for what you are doing and how it is helping producers3275in the field.3276 And thanks for having this hearing. I will yield back.3277 Mr. Davis. The gentleman yields back.3278 At this time we will recognize our, actual, Vice Ranking3279Member, and that is Mr. Vindman from Virginia.3280 Mr. Vindman. Thank you, Mr. Chairman. Thank you, Ranking3281Members--thank you, Ranking Member. I am proud and honored to3282serve as the Vice Ranking Member for the Subcommittee on3283Commodity Markets, Digital Assets, and Rural Development. And I3284have had a career that involved emerging technology and policy3285at the highest levels. My work at the White House National3286Security Council illustrated to me how important it is to get3287the balance right on emerging technology. And so, for instance,3288when we are looking to balance protecting consumers versus not3289stifling technology, it is obviously very critical for emerging3290technology to get that balance right.3291 Dr. Brummer, can you please share your perspective on3292FIT21, which passed from the Committee last year, what it did3293well, and the areas where it could be improved?3294 Dr. Brummer. Absolutely, Congressman. It is a big question.3295I think that FIT21 did a number of things that were excellent,3296particularly given the context in which the bill was put3297together. I mean it does something that you have heard from all3298of us here today, that it helps to define clear roles for the3299CFTC and the SEC, it helps to modernize your digital asset3300trading platforms, it starts to put us on the journey of3301registration requirements for digital commodity exchanges. I3302think those are real accomplishments, and they cannot be3303overlooked.3304 I think that when you create rules, particularly for3305emerging technologies, a couple of things you want to probably3306keep in mind. FIT21 was probably written where it had certain3307kinds of node and validation architectures in mind that were3308more 2020, and I think however you decide to sort of think3309through your regulatory perimeter, it has to be sort of future-3310proofed and flexible enough to engage with however technology3311ends up evolving.3312 I think the--there are certain kinds of things you3313certainly always want to see. You want to ask yourself about3314the segregation of customer assets, you want to ask yourself3315and ensure that in bankruptcy there is some kind of defined3316status for customer funds with exchanges. But really, I am here3317to talk about, obviously, disclosure. I think from the3318disclosure standpoint, there was a lot of good work done to3319kind of identify for the SEC certain kinds of disclosures that3320you would need. I think the SEC is going to have its job in3321perhaps even elaborating on that list, bringing in things like3322tokenomics, which I think is really important if you are going3323to be an investor. Was actually quite delighted to see my3324friend, Brian Quintenz, over at the CFTC, and I know he will3325have his own hands full. I think the disclosure issues and what3326needs to be disclosed, even in--with decentralized assets, is3327an interesting question, but it is not something that the CFTC3328has not tackled before. I mean it kind of inheres to the nature3329of commodities. So I think I would like to see a little bit3330more about that.3331 Mr. Vindman. Okay, thank you.3332 And then I have a question for you, Mr. Horton. I think3333about things as a retired 25 year veteran of the Army in a3334national security context. And you talked about GPS in your3335testimony. Can you elaborate on some of the potential national3336security benefits to blockchain technology?3337 Mr. Horton. Yes, sir. I think having a decentralized3338network of these nodes provides a very good way to detect3339things like jamming and spoofing, and localize those things.3340The GPS signal that comes to us from 12,000 miles away from3341space is very weak when it gets here to the planet. And so3342having these nodes out there that are very sensitive receivers,3343that is able to help us identify those types of things. We are3344also working with some of the new low-orbit satellites that are3345being launched, to provide ground infrastructure for those, and3346doing that in a decentralized way, will provide over time3347additional benefits to the sort of reliability and resilience3348of our positioning networks.3349 Mr. Vindman. Thank you. I would like to ask the same thing3350from everybody, but I will wait until next time. Thank you.3351 Mr. Davis. Time has expired.3352 At this time we are recognizing our Subcommittee Chair, Mr.3353Johnson from South Dakota.3354 The Chairman [presiding.] Thank you, Mr. Ranking Member.3355 I am struck by how thoughtful all of the testimony is, and3356how much agreement there is. And to just kind of underline3357that, I am going to ask three yes-or-no questions. I am not3358attempting to trap anybody. If--after we are done with my three3359yes-or-no questions, if you want to clarify your answer, I will3360give you time, I promise. All right, and so I am just going to3361ask each question and just roll down from you, Mr. Hughes, down3362to Mr. Garrison, and we will just see if we have any agreement3363on these things.3364 So first off, over the next few years, gentlemen, will3365blockchain technology enable fantastic new capabilities in3366hundreds of industries?3367 Mr. Hughes. Yes.3368 Mr. Tague. Yes.3369 Mr. Horton. Yes.3370 Dr. Brummer. Yes.3371 Mr. Garrison. Yes.3372 The Chairman. Would it be good for our country if we are3373the home for that innovation?3374 Mr. Hughes. Yes.3375 Mr. Tague. Yes.3376 Mr. Horton. Yes.3377 Dr. Brummer. Yes.3378 Mr. Garrison. Yes.3379 The Chairman. Is a lack of a clear regulatory regime around3380digital assets and blockchain, does that risk reducing3381innovation and investment in this country?3382 Mr. Hughes. Yes.3383 Mr. Tague. Yes.3384 Mr. Horton. Yes.3385 Dr. Brummer. Yes.3386 Mr. Garrison. Yes.3387 The Chairman. Oh, you guys are so good. Some of my3388colleagues on both sides of the aisle will sometimes wonder if3389any of this is real, and I get it. When we imagine going to pay3390for bubblegum with Bitcoin at the point of sale, that maybe3391doesn't seem like a huge step up from the way we can pay with3392our phones today. But what you gentlemen have been talking3393about today is real life. This is about marketing capital. This3394is about precision agriculture. This is, in fact, real. And3395what we know is that if we don't get a regulatory structure in3396place, that our country risks falling behind.3397 And so, Mr. Tague, you talked about this transparency and3398some of this power that comes on the cattle side, but we could3399get some of that from other solutions. Couldn't there be some3400centralized solutions, like an eBay or an Amazon that would3401give some of this transparency? Why blockchain?3402 Mr. Tague. So we specifically chose blockchain versus a3403central eBay, PayPal type of model because even then, you are3404still having to trust a central authority or a central person3405to trust that data, and there is potential for bias there.3406Blockchain is a distributed letter, there--ledger, there is no3407bias. So we specifically chose that for the trust factor over3408creating just a central eBay, PayPal type.3409 The Chairman. And that is--those capabilities, number one,3410they are exquisite today, but also it is hard to imagine what3411innovators like you and others will be able to do over the3412course of the next few years. Is that right?3413 Mr. Tague. Oh, that is correct. The technology just is ever3414expanding, and as I have--was having discussions with other3415panel members, you can literally go into the ether, no pun3416intended, when you are talking about blockchain technology and3417what it can do.3418 The Chairman. So, Mr. Horton, you explained in your3419testimony GEODNET has its own token, but it doesn't have its3420own blockchain. So help us understand, what is the GEODNET3421protocol, what is GEOD, how does that interact with Solana,3422give us some sense to how they fit together.3423 Mr. Horton. Yes, so you can think about the layer one3424blockchain as kind of this distributed operating system that3425projects like GEODNET build on top of. And GEODNET is an3426application that really connects providers of this RTK data to3427users of this RTK data, and the token is able to help those3428buyers and sellers transact and record that data in a3429consistent, transparent way. That also provides an ability for3430you to reward the stations that are providing good coverage and3431good performant data, and incentivize that coverage to grow.3432 The Chairman. Yes. Very well said. With that I would yield3433back, and recognize a gentlewoman whose efforts in the last3434Congress strengthened the final FIT21 product, the Ranking3435Member of the full Committee, Ms. Craig.3436 Ms. Craig. Thank you so much, Mr. Chairman.3437 This question is to Dr. Brummer. We all know that one of3438the key components to customer protection is disclosure, but3439historically, while acknowledging the need for disclosure3440regulations for customers, many in the financial sector3441complain continuously about the cost of current and new3442customer disclosure requirements.3443 From your testimony, it sounds like blockchain can offer a3444solution that could help the financial sector meet many of its3445current or potentially new customer disclosure obligations at3446much, much lower cost. Do I have that right, number one,3447because if we can enhance customer disclosures at an affordable3448price, that enhances customer protection too. Am I correct?3449 Dr. Brummer. Absolutely. One of the--and this is building3450on another sort of statement that we have all heard,3451blockchains are pretty neat. They allow data to be composable,3452programmable, it is transparent, and that programmability3453enables all kinds of functionality. And there are certain kinds3454of questions, I deal with central banks and regulators, and L1s3455and L2s all around the world. And when we look at different3456regulatory regimes, there is a neat aspect and functionality in3457blockchains that can enable disclosure solutions at a much3458lower cost, faster execution, and really can, frankly, even3459give lawyers a run for their money in terms of the compliance3460services that you can now put on-chain.3461 Ms. Craig. Thank you so much.3462 I actually have a question for the whole panel, and please3463keep your answers a little short here. Are any of you familiar3464with the approach that foreign governments have taken with3465regulating this technology, and if so, any lessons learned, dos3466or don'ts, that we can take away from their examples?3467 Mr. Hughes. I think--yes, I am familiar. I think a lesson3468that they have--that can be taken away is focus on centralized3469intermediaries first, because that is where the majority of the3470economic mass is currently. They have not had--and the second3471lesson is they have not had a heavy hand on regulating the3472technology itself, because that allows innovation and the real-3473world applications, which I think you see as examples at this3474table.3475 Mr. Tague. I--that is definitely not my area of expertise,3476but I do think that, as I stated in my testimony that, that our3477regulation, time is of the essence, because I do believe that3478there are other jurisdictions way ahead of us.3479 Ms. Craig. Thank you.3480 Mr. Horton. Yes. I am not a lawyer, I am an engineer, but3481the same basic answer as Mark. We found that other3482jurisdictions have clear guidelines for what is a digital3483commodity, what is a utility token, and that is helpful, and3484that is why you find the vast, vast majority of projects that3485do have a token have their foundation based offshore.3486 Ms. Craig. Thank you. I am not a lawyer either.3487 Dr. Brummer. Unfortunately, I am. I deal with lots of3488international folks as well. I think that where most regulators3489sort of get caught up from time to time is that we are taking3490terms of art and we are trying to translate them into a legal3491regime. And I think one of the interesting tasks that all of3492you will have is coming up with something that is elastic3493enough for the future, but concrete enough for people to work3494with and to build on top of. And sometimes internationally,3495regulators and policymakers kind of stumble a little bit on3496that.3497 Ms. Craig. Thank you.3498 Mr. Garrison. And one last quick observation is, those3499regulators of jurisdictions that have allowed for3500experimentation through some type of sandbox I think have shown3501a great ability to allow industry to try new things, while also3502preserving consumer customer protections.3503 Ms. Craig. Thank you, Mr. Garrison. That is fantastic. That3504is a lot of info. in a very short amount of time.3505 So with that, Mr. Chairman, I yield back.3506 The Chairman. Mr. Nunn, you are recognized.3507 Mr. Nunn. Well, thank you, Mr. Chairman. And I would like3508to align myself with a lot of what Representative Craig just3509highlighted here.3510 Look, I am from Iowa. We know the CFTC, we know corn and3511pork bellies are commodities, and we know that my bankers on3512Main Street, Des Moines, have stocks and bonds, and those are3513securities. It is a pretty straightforward gig. But serving on3514both Agriculture and Financial Services, we recognize that when3515we enter the digital asset space, it is a lot more confusing,3516not only for the innovator, but certainly for the end-user. As3517we look forward in this, I guess I am challenged by the3518regulatory uncertainty that seems to have occupied this space.3519We will take Ethereum, for example. Look, first, Mr. Chairman,3520it was treated in 2018 as a security, and the SEC officials3521said that it was not. And certainly, as securities have3522changed, then the CFTC then agreed. But then we went to the3523Biden Administration, and under the Biden Administration the3524SEC labeled it as a security, and the CFTC called it a3525commodity. Now we have a conflict. Going forward, I have asked3526both the former chair of the SEC and the CFTC right here in3527this room, the Chairman will recall, to help provide some3528clarity for this issue. And guess what, we walked away more3529confused than where we began. That is not good for American3530investment, that is not great for American innovation, and most3531importantly, this allows our competitors in this space to be3532highly successful when they have some framework and the United3533States is looking at over-regulating something that it clearly3534can't even figure out on its own.3535 So with that, Mr. Hughes, you have worked not only in the3536digital asset space, you are a software guy, do you think3537candidly this type of whiplash is hurting American innovators?3538 Mr. Hughes. It absolutely is. Our products are used by3539software developers, and over the last several years really the3540work has migrated overseas. I think you are starting to see3541that change now. But when we are talking about a chilling3542element, we are not only talking about apps like MetaMask and3543other apps, you are talking about the chains themselves. Being3544an open-source software computer networking .deb one day, going3545about building a new world computer, and then all of a sudden3546you are served with an SEC subpoena out of the blue, that3547doesn't make for a conducive working environment trying to3548evolve the next era of innovation.3549 These people want to work in the United States.3550 Mr. Nunn. Right.3551 Mr. Hughes. They want to work with U.S. companies, they3552want to found U.S. companies, they want to--their--this is3553where the talent is, this is where the capital is. If we just3554get a coherent regulatory structure that people can actually3555comply with, rather than it being impossible to comply with, we3556are going to see a lot of doors open, and that is going to be a3557very good thing for this industry, but the country as well.3558 Mr. Nunn. So I can think of no better way to spend an3559afternoon than having a government official call you in, we are3560from the government, we are here to help you, but I have heard3561real horror stories from folks who have gone in to try and be3562helpful from the private-sector, only to be lambasted by the3563SEC, and then to be fined for the very information they shared3564with the SEC trying to get clarity, to the tune of lawsuits and3565millions of dollars being spent in this.3566 Briefly, can you share your thoughts on, between the SEC3567and the CFTC, did anybody offer a roadmap here that we should3568start replicating and given to law here in Congress?3569 Mr. Hughes. I--well, unfortunately, no. We were very much3570encouraging both agencies to engage with Congress to come up3571with a coherent regulatory regime. I think the CFTC did a much3572more admirable job with that.3573 Mr. Nunn. I would agree with you on that.3574 Mr. Hughes. But what we are seeing now is full engagement.3575I think what the SEC is doing now is--should be applauded. I3576think their taskforce is the right way to go about doing it.3577There is a kind of a cart-and-a-horse problem, because we need3578a new legislative regime, and then the SEC has to fill in the3579gaps, as well as the CFTC. But they are doing a great job3580trying to narrow the gap, but really, they are putting a ball3581upon a tee for Congress to kick the field goal, and that is3582what we need to happen.3583 Mr. Nunn. My time has expired. I yield back to the chair,3584only to say that made in America starts with keeping our3585innovators right here in the country to begin with. Thank you,3586Mr. Chairman.3587 The Chairman. Although she is a freshman, she is certainly3588no stranger to this chamber and how it runs. With that, we3589would recognize the gentlewoman from Maryland, Mrs. McClain3590Delaney.3591 Mrs. McClain Delaney. Thank you. And thank you to our3592Chairman and Ranking Member for organizing this and, of course,3593to our incredible panelists.3594 I do want to lift up--I believe we need a much-needed3595bipartisan regulatory framework for clarity, to ensure that3596there is transparency, trust, prevention, fraud manipulation,3597and the promotion of innovation and U.S. competitiveness. Very3598key. And I would like to, for the interest of time, for--direct3599questions to Dr. Brummer and Mr. Garrison. And I am a Hoya3600lawyer as well. So, Go Georgetown. But I am also an Idaho3601potato farmer's daughter, and represent the Sixth District of3602western Maryland, and so I am going to be talking about3603applying blockchain technology to agricultural supply chains,3604and in particular some of our dairy farmers.3605 A secure food supply chain plays an essential role, as we3606know, in ensuring customer trust and protecting health, and3607blockchain technology is definitely a solution to these3608challenges. But the untraceability and--of solutions, our3609farmers and ranchers and businesses want verifiable3610information, and this technology could really be at the core of3611the next revolution.3612 Mr. Tague, your testimony had highlighted the potential3613benefits in recordkeeping and traceability, but Maryland3614farmers have really started to have an interest in blockchain3615technology for traceability. Can you tell me how, like, my3616farmers there and across the country, we can really adopt but3617also build trust in this technology to modernize their3618operations and improve efficiency, and is there any other3619challenges you haven't mentioned which exist to get this3620technology widely deployed?3621 Mr. Tague. Excellent question. So, generally, in the ag3622space we are generally price takers, we are not price makers,3623and verifiable data is something that can help us receive a3624premium for our product. For example, cattle are a great3625example. If you put cattle on a commodity market you can't tell3626one from the other, but if you have verifiable data you can3627tell that story of that individual through that, and then get3628paid a premium through that. Obviously, through USDA process3629verified programs, they have great premiums that they can offer3630through those.3631 Even in the farming community, for example, also if you can3632verify that a specific crop came from a specific region, and3633you have that verifiable data that shows that you have a3634premium product versus another one, that is a great way for3635farmers and ranchers to receive premiums for products.3636 A lot of the challenges that we have that I would say,3637specifically in the ag spaces, blockchain technology and3638crypto, especially to ag producers, can be a little bit scary.3639We have a lot of education to do. That is what--as I mentioned3640in my opening testimony that I really feel like we want to be3641in the background, we don't want to be up at the front, we want3642to be helping these markets operate more efficiently so we can3643help those price takers get a premium versus being in a3644commodity.3645 Mrs. McClain Delaney. Sounds good.3646 And then this is to all--any of you who want to quickly3647talk about this. I spent--many rural areas don't have the3648required infrastructure, as we discussed, and most of my life--3649much of my life I spent working to bridge the digital divide,3650particularly in rural America. To any of the witnesses, as we3651roll out rural broadband, are there platforms designed for3652farmers to use in low bandwidth environments, or do any of your3653platforms offer offline capabilities, for like the 20 percent3654of farmers in my district that lack high-speed broadband?3655 Mr. Tague. We do offer offline capabilities that will catch3656the data and re-upload as you get access.3657 Mr. Horton. Our network does rely on having good internet3658connectivity, but I think that these decentralized protocols3659called DePIN networks, these Decentralized Physical3660Infrastructure Networks, really offer an attractive way to3661extend coverage out to rural areas very cost effectively.3662 Mrs. McClain Delaney. Thank you.3663 I yield back.3664 The Chairman. Mr. Jackson, you are recognized. And again, a3665Member who spent a lot of time on the bill last year, and made3666it better with his efforts, you are recognized.3667 Mr. Jackson. Thank you, Chairman Johnson. Thank you,3668Ranking Member Davis.3669 To Dr. Brummer, a question for you on key elements that you3670would like to see that should be required in this legislation3671regarding digital assets, and what protections would you3672recommend, how best can we help the industry?3673 Dr. Brummer. I said this earlier, I think that FIT21 was3674pretty remarkable in terms of how much ground it was able to3675cover. When I look at it from a 10,000 level, there are core3676kinds of protections if you want to mainstream the technology3677and if you want to think about segregating customer assets, I3678think that is an important thing to think about. You want to3679create a mode of regulatory clarity, identifying both the SEC3680and CFTC oversight that is workable and doable, both in theory3681and in practice, and engaging with both the academics, but also3682the industry folks on that, I am sure you have been very3683engaged in.3684 From the disclosure standpoint, I would suggest that when3685it comes to the commodities and digital commodities that you3686recognize really the longstanding tradition that the CFTC has3687of creating disclosures in its own way. I think a lot of people3688have said that the CFTC has no experience when it comes to3689disclosures and creating information. Actually, it actually has3690a very longstanding history of being able to do so. It just3691does it in a way that is different from the SEC. And to think3692through, well, what does that look like for the digital3693commodity space, I think is something that either legislatively3694or through the rulemaking process is something that eventually3695people are going to have to grapple with.3696 Mr. Jackson. Thank you so much.3697 And the second question would be open to anyone on the3698panel regarding the digital ledger platform. Do you see an3699advantage or disadvantage in a public versus a private? Which3700do you prefer?3701 Mr. Hughes. I think that time has started to demonstrate3702that open permission-less ledgers are--the economics around3703them are a lot more attractive than private ledgers, and that3704is simply because a private ledger you have to--instead of just3705running a single server, you have to run lots of servers. Wall3706Street has examined private blockchains as a platform to3707improve their own internal services, but also to offer new3708offerings to customers.3709 Those efforts have largely wound down. If you are on an3710open permission-less ledger, like Ethereum, what you are3711basically doing is you are plugging into a system which already3712works, so your infrastructure costs are very low, and the3713security and the open architecture is really advantageous for3714you. So I think open permission-less ledgers are things that we3715should be supporting in any future legislation.3716 Mr. Jackson. All right, thank you very much.3717 And I would like to thank Chairman Thompson for coming back3718to hear my questions. I yield back my time, Mr. Johnson, Mr.3719Davis.3720 Mr. Thompson. Thank you, Jonathan.3721 The Chairman. With that, the legend of Howard,3722Pennsylvania, Mr. Thompson, you are recognized.3723 Mr. Thompson. Yes. Well, my apologies for--I feel like I am3724speed dating this afternoon. A Chairman's work never ends. So--3725but I am so grateful to all the witnesses that are here, and to3726our leadership that we have with the Subcommittee. This is a3727very exciting time. We don't really know everything that is--3728what is over the horizon here, but you have shared some insight3729into that.3730 So I will be quick with my 4 minutes, which I am blowing3731through already. Mr. Tague, you are a fourth-generation3732cattleman, and we want to make sure the next four generations3733of your family can carry on the tremendous legacy of your3734ranch. But those in the sector are constantly met with new3735challenges. You said: ``American agriculture is being held back3736by fragmented systems, paper trails, and a lack of3737transparency.'' How do you see blockchain and digital asset3738tools being part of the solution to this problem, and ensuring3739that we see the next four generations of American farmers,3740ranchers, and producers, and do you see these tools encouraging3741younger generations to get into that sector to continue the3742hard work that you and so many others do?3743 Mr. Tague. Thank you for the question, Chairman Thompson.3744And, I absolutely believe that solutions like ours are key to3745attracting younger folks into the industry. As most of you3746know, the--kids--there is an app for that, right? They expect3747that in today's world. And if you think about it from, for3748example, I have or my nephews, if they develop a specific type3749of grass-fed beef cattle that can top the market, and they need3750to be able to transfer that data to the public to create that3751trust and transparency to get that premium, we offer that3752solution to do that.3753 In today's market, as I had mentioned earlier, we haven't3754changed in 150 years. We have been doing it the same way for a3755long, long time. And it has just become inefficient, and it3756really breaks down trust because when you have a paper trail,3757or if you are relying on paper versus an immutable ledger,3758papers get lost, for example. Right? We have that nightmare3759tale of losing your cabin records in the washing machine3760because you forgot to take your cabin book out. Right?3761 So yes, no, I believe it is absolutely essential for--to3762continue.3763 Mr. Thompson. Very good. Well, thank you.3764 Mr. Horton, not only is GEODNET a solution to farmers and3765others who rely on precision mapping data, but blockchain was3766the solution to creating GEODNET. You said ``It would have cost3767billions of dollars to place antennae around the country.''3768Would this project for precision mapping be possible without3769blockchain technology? And please speak to blockchain's unique3770ability to be part of the solution to this problem.3771 Mr. Horton. Yes. I think there is very strong evidence that3772it is not possible, and that the--people have been trying to3773build this kind of network for 20 years, and both centralized3774companies as well as governments have spent a lot of money3775trying to put up stations and create a network, and it just3776hasn't happened. And GEODNET in 2 years has been able to build3777the world's largest network by--in terms of stations by more3778than a factor of 2. And I think at the root of that is the3779underlying blockchain, and the incentive that you can provide3780by having a token.3781 We presented the idea first at the Institute of3782Navigation's GNSS+ conference. And it is a very conservative3783community. We thought the idea of introducing using blockchain3784to solve this problem of the reference station network would be3785controversial, we didn't know if people would like it, and in3786turn it won the best presentation award, and immediately3787attracted folks from the industry to help us participate and3788create this network.3789 Mr. Thompson. Well, very good. I thank all of you. We thank3790you for telling that story, for all of you sharing the story3791about exciting prospects for the future.3792 And with that, Mr. Chairman, my time has expired.3793 Mr. Davis [presiding.] All right, thank you so much, Mr.3794Chairman. We appreciate it.3795 The capability of blockchain technology feels limitless,3796not only in the crypto-related world, but across all3797industries, as we have been hearing so much of today.3798 North Carolina's First Congressional District is extremely3799rural; 22 counties. Matter of fact, I was informed that every3800single county by our state's definition, all 22 are defined as3801rural. As we have heard time and time again in different3802hearings held by the Agriculture Committee, rural communities3803sometimes can feel left out of the process, not quite fully3804understand how they integrate. I hear back home all the time,3805especially when we are talking to farmers, small-town mayors,3806people back home that are just trying to make it.3807 So my question, and I am going to try and go at this a3808different way, from Dr. Brunner--Brummer, is, if you can make3809that pitch, we are back in rural North Carolina, rural America,3810what would be the pitch for why blockchain, various3811applications?3812 Dr. Brummer. It makes dealing with the government and3813others a lot easier. We have already heard about paper and how3814paper can--isn't always the best technology, especially if you3815are in rural areas. I grew up in an area, and I tell my friends3816here, it is like I actually had to hop down a dirt road to get3817to my mailbox, and then people then ask me what is a mailbox3818here in D.C. sometimes.3819 And I understand that challenge. But one of the things--we3820already talked about compliance with the rules, but I have3821always thought about how can you make communication3822understandable, no matter who you are. Disclosure is not just3823for--in a legal sense, but in terms of businesses and3824communications. I think it helps with adoptability,3825adaptability, for people to use the technology.3826 You are talking about farmers who are themselves becoming3827proactive participants in transparency, and making that3828information available to people who buy their products. What we3829do at Bluprynt is we just take that data, and then we put legal3830wrappers around it and we automate it so they don't have to3831think about it. But ultimately, you are talking--and you would3832go to those towns and those mayors and say how can we make sure3833that we connect you better to the overall digital economy. And3834the way in which we can do this is in a way where you don't3835have to necessarily even know that you are operating on3836something called a blockchain, but we are going to show you and3837give you certain kinds of tools so that you don't have to pay3838as much, and that you can move and do things a lot faster and3839at scale.3840 Mr. Davis. Mr. Tague, I heard you talking earlier, I mean3841we are talking about the farmers, agriculture, and I get the3842question--I hear people ask me all the time what are they doing3843up there. So my question is, you can continue along this3844thought line--this line of questions, but you mentioned earlier3845education. What do you believe is the best strategy and3846approach that we can take to educate Members of Congress,3847educate the constituency, broadly speaking, because, guess3848what, Members are often driven by the constituents. I would3849love to hear.3850 Mr. Tague. Yes, sir. Excellent question. Education is going3851to be key in this issue because, well, one of the great things3852about the technology is if we can speed up payments and reduce3853cost, right, that is a game changer for a lot of folks in rural3854areas. Right? But, being able to break down the technology or3855break down the concepts to the simplest levels we can possibly3856make them. For example, our solution where you take a cow, and3857you put a tag in its ear and you identify that cow, and that3858cow--as it travels through the chain you can follow it through3859its lifecycle. People understand that. That is a very easy way3860to give you the concept of a blockchain of why that--you can3861trust that data, because it is an immutable--it is a digital3862notary, essentially, is what it is.3863 So I believe that breaking it down to the simplest concepts3864we can possibly can is going to be key to educating most folks.3865 Mr. Davis. Thank you to all the witnesses.3866 And, Mr. Chair, we yield back.3867 The Chairman [presiding.] Mr. Davis, what an experience in3868a town and a time so often fascinated by food fights, there3869were no insults today, no indictments, no political speeches.3870Instead, it was just good, thoughtful people examining an issue3871of critical importance. People asking questions to learn,3872rather than to demonize. And I just--what a great opportunity.3873The panelists were excellent. I think our Members were3874excellent. We are filling out this record as we work together3875to build an even better market structures bill that is going to3876become the law of the land.3877 And with that, sir, if you have any closing remarks, we are3878happy to hear them.3879 Mr. Davis. Mr. Chairman, those are great words to end on.3880 The Chairman. Under the rules of--by the way, thank you for3881the UC. There were three Members who got to ask questions3882because of our flexibility, that wouldn't have otherwise gotten3883to ask them before votes, which have been called. So again, a3884good opportunity working together.3885 Under the Rules of the Committee, the record of today's3886hearing will remain open for 10 calendar days to receive3887additional material and supplementary written responses from3888the witnesses to any questions posed by the Member.3889 And with that, this hearing is adjourned.3890 [Whereupon, at 3:38 p.m., the Subcommittee was adjourned.]38913892 AMERICAN INNOVATION AND THE FUTURE OF DIGITAL ASSETS38933894 (FROM BLUEPRINT TO A FUNCTIONAL FRAMEWORK)38953896 ----------38973898 WEDNESDAY, JUNE 4, 202538993900 House of Representatives,3901 Committee on Agriculture,3902 Washington, D.C.3903 The Committee met, pursuant to call, at 10:00 a.m., in Room39041300, Longworth House Office Building, Hon. Glenn Thompson3905[Chairman of the Committee] presiding.3906 Members present: Representatives Thompson, Lucas, Austin3907Scott of Georgia, Crawford, LaMalfa, Rouzer, Kelly, Bacon,3908Bost, Johnson, Baird, Mann, Feenstra, Miller of Illinois,3909Moore, Cammack, Finstad, Rose, Jackson of Texas, De La Cruz,3910Nunn, Van Orden, Newhouse, Wied, Bresnahan, Messmer, Harris,3911Taylor, Craig, David Scott of Georgia, Costa, McGovern, Adams,3912Brown, Davids of Kansas, Salinas, Davis of North Carolina,3913Tokuda, Budzinski, Sorensen, Vasquez, Jackson of Illinois,3914Thanedar, McDonald Rivet, Figures, Vindman, Riley, Mannion,3915McClain Delaney, and Carbajal.3916 Staff present: Paul Balzano, Josh Beale, John Busovsky,3917Austin DeBerry, Wick Dudley, Luke Franklin, Sofia Jones, Kyle3918Upton, John Konya, Suzie Cavalier, Kate Fink, Joshua Lobert,3919Clark Ogilvie, Emily Pliscott, and Jackson Blodgett.39203921 OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN3922 CONGRESS FROM PENNSYLVANIA39233924 The Chairman. The Committee will come to order.3925 We welcome and thank you for joining today's hearing3926entitled, American Innovation and the Future of Digital Assets:3927From Blueprint to a Functional Framework. After brief opening3928remarks, Members will receive testimony from our witnesses3929today, and then the hearing will be open to questions. I will3930proceed with my opening statement.3931 Good morning, everyone, and welcome again to our full3932Committee hearing on the future of digital assets. Thank you to3933our esteemed panel of witnesses for making the time to be with3934us here today. This is an important and rare opportunity to3935discuss this Committee's work to create lasting change and3936cement America as the global leader in innovation.3937 For almost a decade, Congress has debated the treatment of3938digital assets through hearings, bills, and meetings. The House3939Committee on Agriculture has played a critical role in this3940work. Since our first hearing in 2018, our guiding principles3941have not changed: foster American innovation and bring needed3942customer protections to digital asset-related activities and3943intermediaries, but we are not working alone. I want to thank3944Financial Services Chairman Hill for his leadership and the3945entire Financial Services Committee for their work with our3946Committee. We have engaged in a remarkable partnership to3947examine these issues and propose solutions on a cross-committee3948bipartisan basis.3949 Chairman Dusty Johnson has been a tremendous leader in this3950effort, and I want to thank him for everything he has done. In3951April, Chairman Johnson and Ranking Member Davis held a hearing3952that examined the promise digital assets hold for everyday3953Americans, but they also learned that the promise of digital3954assets depends on getting the right market structure3955legislation across the finish line. Last month, Chairman3956Johnson and Subcommittee Chairman Bryan Steil of Financial3957Services held a joint roundtable to examine digital assets with3958both of our committees working together. That roundtable made3959it clear that current Federal laws and regulations do not3960provide adequate rules of the road for those who want to engage3961with these emerging technologies. That is why last week, ten3962bipartisan Members of the House Agriculture and Financial3963Services Committees introduced H.R. 3633, Digital Asset Market3964Clarity Act of 2025, or CLARITY Act of 2025. The CLARITY Act of39652025 is a product of years of vigorous debate, stakeholder3966feedback, and technical assistance.3967 I want to thank Chairman Hill for leading our effort and3968Ranking Member Craig and Ranking Member Davis for joining3969Chairman Johnson, me, and other colleagues on both sides of the3970aisle in introducing the CLARITY Act. I am pleased to see the3971Committee's longstanding tradition of leading together in a3972bipartisan manner continue. It is incumbent on us to embrace3973this opportunity and finally bring certainty to the users and3974developers of this technology. The United States is the beating3975heart of global finance and innovation. Let me thank the Trump3976Administration for elevating this issue and recognizing the3977urgency of action in the digital asset space, and the agencies3978who offered technical assistance.3979 Years ago, other nations put pen to paper and created and3980enacted frameworks seeking to establish themselves as hubs for3981the development of the digital asset ecosystem. It is time that3982we do our work here in the United States, too, and implement a3983framework for trusted, reliable, and useful markets for digital3984assets. I look forward to the work ahead in getting the CLARITY3985Act signed into law. Again, thanks to each of our witnesses for3986their willingness to participate in today's hearing, and I look3987forward to our discussion.3988 [The prepared statement of Mr. Thompson follows:]39893990Prepared Statement of Hon. Glenn Thompson, a Representative in Congress3991 from Pennsylvania3992 Good morning, and welcome to our full Committee hearing on the3993future of digital assets. Thank you to our esteemed panel of witnesses3994for making the time to be with us today. This is an important and rare3995opportunity to discuss this Committee's work to create lasting change3996and cement America as the global leader in innovation.3997 For almost a decade, Congress has debated the treatment of digital3998assets through hearings, bills, and meetings. The House Committee on3999Agriculture has played a critical role in this work.4000 Since our first hearing in 2018, our guiding principles have not4001changed: foster American innovation and bring needed customer4002protections to digital asset-related activities and intermediaries. But4003we are not working alone.4004 I want to thank Financial Services Chairman Hill for his leadership4005and the entire Financial Services Committee for their work with our4006Committee. We've engaged in a remarkable partnership to examine these4007issues and proposed solutions on a cross-committee, bipartisan basis.4008 Chairman Dusty Johnson has been a tremendous leader in this effort.4009I want to thank him for everything he has done. In April, Chairman4010Johnson and Ranking Member Davis held a hearing that examined the4011promise digital assets hold for everyday Americans.4012 But they also learned that the promise of digital assets depends on4013getting the right market structure legislation across the finish line.4014Last month, Chairman Johnson and Subcommittee Chairman Brian Steil of4015Financial Services held a joint roundtable to examine digital assets4016with both of our committees working together. That roundtable made it4017clear that current Federal laws and regulations do not provide adequate4018rules of the road for those who want to engage with these emerging4019technologies.4020 That is why last week ten bipartisan Members of the House4021Agriculture and Financial Services Committees introduced the Digital4022Asset Market Clarity Act, or CLARITY Act. The CLARITY Act is a product4023of years of vigorous debate, stakeholder feedback, and technical4024assistance.4025 I want to thank Chairman Hill for leading our effort and Ranking4026Member Craig, and Ranking Member Davis, for joining Chairman Johnson,4027me, and other colleagues on both sides of the aisle in introducing the4028CLARITY Act. I am pleased to see the Committee's longstanding tradition4029of leading together in a bipartisan manner continue.4030 It is incumbent on us to embrace this opportunity and finally bring4031certainty to the users and developers of this technology. The United4032States is the beating heart of global finance and innovation.4033 Let me thank the Trump Administration for elevating this issue and4034recognizing the urgency of action in the digital asset space, and the4035agencies who offered technical assistance.4036 Years ago, other nations put pen to paper and created and enacted4037frameworks, seeking to establish themselves as hubs for the development4038of the digital asset ecosystem.4039 It is time that we do our work here in the United States too, and4040implement a framework for trusted, reliable, and useful markets for4041digital assets.4042 I look forward to the work ahead in getting the CLARITY Act signed4043into law. Again, thank you to each of our witnesses for their4044willingness to participate in today's hearing. I look forward to our4045discussion.40464047 The Chairman. And with that, I would now like to welcome4048the distinguished Ranking Member, the gentlewoman from4049Minnesota, Ms. Craig, for any opening remarks you would like to4050give.40514052 OPENING STATEMENT OF HON. ANGIE CRAIG, A REPRESENTATIVE IN4053 CONGRESS FROM MINNESOTA40544055 Ms. Craig. Well, thank you so much, Mr. Chairman. I want to4056first thank the witnesses for coming to Capitol Hill to share4057your perspectives with us here this morning. The CLARITY Act is4058not a perfect bill, and there are improvements that I hope4059still can be made. However, I was pleased to join with the4060Chairman and others on this Committee to put forth the4061legislation because, at the end of the day, we need to bring4062consumer protection and a market structure to digital assets in4063our financial system.4064 Digital assets, including cryptocurrencies, are no longer a4065novel financial product. They have become and will continue to4066be integrated with and, in some instances, completely change4067our financial architecture. I believe it is critical that4068Congress establish clear protections for consumers and retail4069investors, as well as rules of the road for businesses dealing4070in digital assets. There are common-sense regulations that the4071industry currently lacks, like requiring the sequestration of4072consumer funds for broker exchanges, ensuring consumer deposits4073are not misused, and that retail investors are not left holding4074the bag when bad actors commit fraud. I hope that these are all4075things that this body can agree on. If Congress does its job4076well with this legislation, we will hear more stories of4077innovation and success, legitimate enterprises will innovate4078and thrive, and consumers will be able to engage with their4079services and products without undue financial risk. This4080technology in these markets is growing rapidly, and Americans4081are engaging at a rapid pace. We have a responsibility to be4082part of the solution and to protect them.4083 But I do want to add that we cannot ignore the fact that4084the President of the United States is making this debate a lot4085more difficult. Under current law, Members of Congress, judges4086and their respective staffs, and other Federal employees may4087not use nonpublic information to trade in markets overseen by4088the CFTC or share nonpublic information with others so they can4089trade. This bill rightly adds digital commodities to those4090prohibitions, yet these limits, which apply to us, do not apply4091to the President, and when we have a President hawking meme4092coins and his family, that is a very difficult situation for4093this body.4094 Our work here is critical to getting this right for retail4095investors, and I am glad we are here today. I again want to4096thank the Chairman for holding this hearing and for working4097with us over the course of the last week to help improve the4098CLARITY Act. I hope we can build upon this success as the bill4099moves through the legislative process. Thank you again to our4100witnesses, and I yield back.4101 [The prepared statement of Ms. Craig follows:]41024103 Prepared Statement of Hon. Angie Craig, a Representative in Congress4104 from Minnesota4105 I want to thank the witnesses for coming to Capitol Hill to share4106their perspectives with us.4107 The CLARITY Act is not a perfect bill. And there are improvements4108that I hope can still be made. However, I was pleased to join with the4109Chairman and others on this Committee to put forth the legislation4110because, at the end of the day, we need to bring consumer protection4111and a market structure to digital assets in our financial system.4112 Digital assets, including cryptocurrencies, are no longer a novel4113financial product. They have become and will continue to be integrated4114with and, in some instances, completely change our financial4115architecture. I believe it is critical that Congress establish clear4116protections for consumers and retail investors as well as rules of the4117road for businesses dealing in digital assets.4118 There are common sense regulations that the industry currently4119lacks, like requiring the sequestration of consumer funds for broker4120exchanges. Ensuring consumer deposits are not misused, and that retail4121investors are not left holding the bag when bad actors commit fraud. I4122hope these are all things we can agree on.4123 If Congress does its job well with this legislation, we will hear4124more stories of innovation and success. Legitimate enterprises will4125innovate and thrive, and consumers will be able to engage with their4126services and products without undue financial risk.4127 This technology and these markets are growing rapidly, and4128Americans are engaging at a rapid pace. We have a responsibility to be4129part of the solution and to protect them.4130 But I do want to add that we cannot ignore the fact that the4131President of the United States is making this debate more difficult.4132 Under current law, Members of Congress, judges, their respective4133staffs and other Federal employees may not use non-public information4134to trade in markets overseen by the CFTC or share non-public4135information with others so they can trade. This bill rightly adds4136digital commodities to those prohibitions.4137 Yet, these limits, which apply to us, do not apply to the4138President.4139 Our work here is critical to getting this right for retail4140investors. And I'm glad we are here today.4141 I want to again thank the Chairman for holding this hearing and for4142working with us to help improve the CLARITY Act. I hope we can build4143upon this success as the bill moves through the legislative process.4144 Thank you again to our witnesses, and I yield back.41454146 The Chairman. I thank the gentlelady. The chair requests4147that other Members submit their opening statements for the4148record so the witnesses may begin their testimony to ensure4149that there is adequate and ample time for questions.4150 Our first witness today is Dr. Avery Ching, the CEO and Co-4151Founder of Aptos Labs. Our next witness is the Honorable4152Michael Piwowar, who is currently the Executive Vice President4153of the Milken Institute. He is also a former Commissioner and4154was the acting Chairman of the Securities and Exchange4155Commission. Our third witness today is Ms. Chelsea Pizzola, a4156partner at Willkie Farr & Gallagher LLP, and our fourth and4157final witness today is Mr. Ryne Miller, a partner at Lowenstein4158Sadler LLP. He also chairs the Commodities, Future, and4159Derivatives Group, and is the co-chair of the Lowenstein4160Crypto.4161 Thank you all for joining us today, and we now look forward4162to your testimony. You will each have 5 minutes. The timer in4163front of you will count down to zero, at which point your time4164has expired. Dr. Ching, please begin when you are ready.41654166 STATEMENT OF AVERY CHING, Ph.D., CHIEF EXECUTIVE OFFICER AND4167 CO-FOUNDER, APTOS LABS, PALO ALTO, CA41684169 Dr. Ching. Chairman Thompson, Ranking Member Craig, Members4170of the Committee, thank you for the opportunity to testify4171today. My name is Avery Ching, and I am the CEO and Co-Founder4172of Aptos Labs, the team behind the Aptos blockchain. I hold a4173Ph.D. in supercomputing, and I have spent my career scaling4174technology at Yahoo, Facebook, and now Aptos. In 2021, I co-4175founded Aptos Labs to advance the next era of the internet,4176starting with a global scale and highly-secure blockchain4177capable of transforming payments, commerce, digital identity,4178and beyond. Aptos Labs was established and is headquartered in4179the U.S. We are proud to contribute to American innovation and4180job creation. Aptos is a high-performance, permission-less,4181proof-of-stake, Layer 1 blockchain designed to support4182internet-scale applications and their billions of users. Like4183the internet, it is open infrastructure that enables anyone to4184build applications on top of it. Unlike centralized systems,4185Aptos is maintained by a distributed network of participants,4186validators, developers and users.4187 Digital assets or tokens are essential for these4188decentralized systems to function. They provide incentive,4189security, and governance mechanisms that keep the network4190running. For example, APT is the native token of Aptos and is4191essential to the network's operation and to access the network.4192It plays three key roles. First, the token is used to secure4193the network. In order to record transactions on the blockchain,4194validators are selected based on the amount of APT tokens they4195stake or lock up as collateral. This mechanism uses APT to4196secure the network by preventing attacks from malicious actors.4197The token is also used to programmatically reward validators4198for truthfully recording transactions, commonly known as4199staking. Second, APT holders can propose and vote on protocol4200operates, ensuring decentralized decision-making. Third, APT is4201used to pay transaction fees. These fees, averaging fractions4202of a cent, are required for submitting active activities to the4203blockchain. Even though they are small, these fees serve as a4204protective measure against spam and denial-of-service attacks,4205ensuring the network remains secure and efficient.4206 Security, decentralization, and utility are what make4207blockchains like Aptos capable of supporting real-world4208applications at scale. Today these applications are no longer4209theoretical. More than 1,000 developers are building on Aptos,4210and hundreds of live projects are delivering value across4211industries like finance, commerce, entertainment, and4212infrastructure. Some of the world's largest financial4213institutions, including BlackRock, Franklin Templeton, and4214Apollo, have launched regulated tokenized money markets and4215other funds on Aptos. Doing so increases transparency, enables4216real-time peer-to-peer transfers, and boosts operational4217efficiency. The PACT protocol is a blockchain-based platform4218for licensed lenders in emerging markets. The platform allows4219these lenders to originate and service loans on the blockchain,4220offering transparency and efficiency to lenders and borrowers4221alike. Over $1 billion in loans have been issued through PACT,4222helping small businesses access faster capital, enabling them4223to buy equipment, open shops, or invest in clean energy.4224 Aptos also powers new forms of engagement in entertainment4225and commerce. Projects use Aptos to issue tokenized tickets,4226cutting out intermediaries, reducing costs, and offering4227collectible digital ticket stubs that drive loyalty and fan4228engagement. Aptos has a multiyear collaboration with4229NBCUniversal to reimagine the fan experience through4230blockchain-enabled, real-world experiences, loyalty programs,4231and interactive games. Brands like Jelly Bean use Aptos to link4232physical products with blockchain-verified records, enabling4233immersive customer experiences and greater consumer trust4234through traceable authenticated products and supply chain data.4235 The use cases we see on Aptos today are only the first step4236of a sweeping transformation. Just as the internet rewired4237everyday life, decentralized networks will form the core4238infrastructure of the coming digital economy, delivering4239systems that are transparent, interoperable, and designed for4240innovation, and will define how we engage with the world around4241us. Tokens serve a vital role in every application built on a4242blockchain. For blockchain innovation to grow responsibly in4243the U.S., developers need clear regulatory guidance around4244token issuance and distributions. We are ready to help realize4245that mission, and we are grateful for this Committee's4246leadership in making it possible.4247 Market structure legislation and well defined, consistent4248rules around token issuance and distribution will ensure that4249networks like Aptos can function as designed, U.S. builders can4250innovate while staying compliant and competitive, and4251regulators can enforce meaningful consumer protections. The4252infrastructure is ready. Regulatory clarity will ensure U.S.4253leadership in the next era of the internet. We stand ready to4254work with the Committee in this regard, and I am grateful for4255the Committee's leadership. I look forward to answering your4256questions.4257 [The prepared statement of Dr. Ching follows:]42584259 Prepared Statement of Avery Ching, Ph.D., Chief Executive Officer and4260 Co-Founder, Aptos Labs, Palo Alto, CA4261 Chairman Thompson, Ranking Member Craig, distinguished Members of4262the Committee:42634264 Thank you for the opportunity to appear before you today. My name4265is Avery Ching and I am the CEO and co-founder of Aptos Labs, the core4266development team that helped launch the Aptos blockchain. I hold a4267Ph.D. in high-performance computing and distributed systems and have4268spent my career scaling emerging technologies at large internet4269platforms like Yahoo, Facebook, and now Aptos.4270 In 2021, I co-founded Aptos Labs to advance the next era of the4271internet-starting with a global-scale, highly secure blockchain,4272capable of transforming payments, commerce, digital identity, and more.4273Aptos Labs was established and is headquartered in the U.S. and we're4274proud to contribute to American innovation and job creation.4275About Aptos4276 Aptos is a high-performance, permission-less, proof-of-stake Layer42771 blockchain designed to support internet-scale applications and their4278billions of users. Layer 1 blockchains like Aptos are the base-layer4279infrastructure for all blockchain-based applications, and at their4280core, are decentralized networks. Like the internet, they allow anyone4281to build applications on top of them. Layer 1 blockchains are distinct4282from other networks in that they are decentralized, meaning there is no4283single entity recording transactions.4284 Blockchains and the decentralized applications built on top of them4285have digital assets or tokens associated with them. These tokens are4286necessary utilities for decentralized systems to operate.4287Token Utility on Aptos4288 APT is the native token of the Aptos network and is essential to4289operate and access the blockchain, serving three core functions. First,4290the token is used to secure the network. Aptos uses a proof-of-stake4291consensus mechanism, meaning that in order to record transactions on4292the blockchain, validators are selected based on the amount of APT4293tokens they ``stake'' or lock up as collateral. This mechanism uses APT4294to help secure the network by preventing attacks by malicious actors.4295It also allows small token holders to play a role in securing the4296network. The token is also used by the network to programmatically4297reward validators for truthfully recording transactions. Second, APT is4298central to the blockchain's governance and upgradeability. Token4299holders can propose and vote on improvements or changes to the4300blockchain itself. Third, APT is used to pay transaction fees. These4301fees, averaging fractions of a cent on Aptos, are required for4302submitting activity to the blockchain. Even though they are small,4303these fees serve as a protective measure against spam and denial-of-4304service attacks, ensuring the network remains secure and efficient.4305Notable Use Cases on Aptos4306 Security, decentralization, and utility make blockchains like Aptos4307capable of supporting real-world applications at scale. Today, those4308applications are no longer theoretical. More than a thousand developers4309are building on Aptos and there are hundreds of projects currently4310delivering value across industries like finance, commerce, and4311entertainment.4312 Some of the world's largest regulated financial institutions,4313including BlackRock, Franklin Templeton, and Apollo have launched4314tokenized money-market and other types of regulated funds on Aptos.4315Deploying these funds onto Aptos increases transparency, enables real-4316time peer-to-peer transfers, and improves operational efficiency for4317issuers.4318 The PACT protocol is a blockchain-based platform for licensed4319lenders. The platform allows these lenders to originate and service4320loans on the blockchain, offering transparency and efficiency to4321lenders and borrowers alike. Over $1 billion in on-chain assets have4322been issued through PACT, with a major focus on emerging markets. Small4323business owners can access capital in days, not weeks--enabling them to4324buy equipment, open shops, or invest in clean energy.4325 The Aptos blockchain is also being leveraged to create new types of4326interactive and programmable experiences across entertainment, gaming,4327and commerce. Several projects on Aptos are using the blockchain to4328sell tokenized event tickets, removing costly ticketing intermediaries,4329lowering prices for fans, and giving them digital collectibles that4330commemorate their experiences. These digital ticket stubs can also be4331used for loyalty programs and deeper engagement between artists and4332their audiences. Aptos Labs recently announced a multi-year4333collaboration with NBCUniversal to reimagine fan engagement through4334blockchain-enabled real-world experiences, loyalty programs, rewards,4335and interactive games. This collaboration has the potential to4336transform how fans connect with their favorite content, using the Aptos4337network to power immersive programs and experiences that go far beyond4338traditional engagement.4339 Aptos also powers new ways for brands to connect physical products4340with blockchain-based digital records. JellyBean uses the Aptos4341blockchain to help brands provide more immersive experiences for fans,4342comply more easily with regulatory requirements, and increase consumer4343confidence by embedding physical objects with an immutable record of4344manufacturing details, supply chain information, and other4345authenticated product data.4346 The use cases we see on Aptos today are only the first step in a4347sweeping transformation. Just as the internet rewired everyday life,4348decentralized networks will form the core infrastructure of the coming4349digital economy-delivering systems that are transparent, interoperable,4350designed for innovation, and will redefine how we engage with the world4351around us.4352Potential Impact of Market Structure Legislation4353 Tokens serve a vital role in every application built on a4354blockchain. For blockchain innovation to expand responsibly in the4355U.S., developers need clear regulatory guidance around token issuance4356and distributions. We're ready to help realize that mission, and we're4357grateful for the Committee's leadership in making it possible.4358 Market structure legislation and well-defined, consistent rules4359around token issuance and distribution will ensure that networks like4360Aptos can function as designed, U.S. builders can innovate while4361staying compliant and competitive, and regulators can enforce4362meaningful consumer protections.4363 The infrastructure is ready. Regulatory clarity will ensure U.S.4364leadership in the next era of the internet. We stand ready to work with4365the Committee in this regard.4366 I look forward to answering your questions.43674368 The Chairman. Thank you, sir. Dr. Piwowar, please begin4369when you are ready.43704371 STATEMENT OF HON. MICHAEL PIWOWAR, Ph.D., EXECUTIVE VICE4372 PRESIDENT, FINANCE PILLAR, MILKEN INSTITUTE; PRESIDENT,4373 ECONOMIC MOBILITY ALLIANCE, MILKEN4374 INSTITUTE; FORMER COMMISSIONER AND ACTING4375 CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION, FAIRFAX, VA43764377 Dr. Piwowar. Good morning, Chairman Thompson, Ranking4378Member Craig, and Members of the Committee. Thank you for4379inviting me to testify today. My name is Mike Piwowar, and I am4380the Executive Vice President of the Milken Institute's Finance4381Pillar and the President of our newly-announced Economic4382Mobility Alliance. The Milken Institute is committed to4383supporting legislation that will establish a workable framework4384to bring clarity to the digital asset market. My colleagues and4385I believe the CLARITY Act crafts a framework that addresses4386regulatory gaps, jurisdictional boundaries, and pathways for4387responsible innovation. It reinforces the U.S. financial4388system's growth, competitiveness, and resilience. As you4389consider next steps in the legislative process, we look forward4390to continuing to work on this bipartisan issue with this4391Committee and the House Financial Services Committee.4392 Prior to joining the Institute, I served as Commissioner4393and acting Chairman of the Securities and Exchange Commission.4394In those roles, I saw firsthand how the U.S. capital markets4395are the envy of the world. They are the world's deepest, most4396liquid, and most transparent. They are the most efficient at4397allocating capital from investors seeking lifetime financial4398security to job-creating entrepreneurs, like Avery. I saw how4399the historical success of our capital markets has led to jobs,4400economic growth and competitiveness, and increased standard of4401living for everyday Americans. And I saw how much of that4402success can be attributed to the SEC's long history of focusing4403on its threefold mission: protecting investors; maintaining4404fair, orderly and efficient markets; and promoting capital4405formation. During my tenure, I have worked to incorporate4406dozens of rulemakings required by the Dodd-Frank Act (Pub. L.4407111-203, Dodd-Frank Wall Street Reform and Consumer Protection4408Act) and the JOBS Act (Pub. L. 112-106, Jumpstart Our Business4409Startups Act) into that mission. As we look to future4410innovations in capital-raising activities in digital asset4411markets, the critical role played by the SEC will become even4412more important for the United States to maintain our economic4413competitiveness.4414 My written testimony focuses on the critical role that the4415SEC plays in regulating our capital markets and how that4416expertise can be applied to digital asset markets. I provide4417examples of how the SEC is already applying their existing4418authorities to do so. I also discuss how key provisions of the4419CLARITY Act grant new authorities to the SEC that aligns its4420mission with the functional application to the digital asset4421markets. Finally, I offer a few recommendations as you consider4422next steps in the legislative process.4423 Chairman Thompson, Ranking Member Craig, and Members of the4424Committee, thank you for your leadership in finding bipartisan4425and cross-committee solutions and for building bicameral4426consensus to create a clear and workable regulatory framework4427for digital assets in the United States. And thank you for the4428opportunity to testify on the critical role that the SEC,4429working with the CFTC, will provide in promulgating,4430administering, and enforcing regulations that align with its4431mission and promote innovation. I am happy to answer any4432questions you may have.4433 [The prepared statement of Dr. Piwowar follows:]44344435 Prepared Statement of Hon. Michael Piwowar, Ph.D., Executive Vice4436 President, Finance Pillar, Milken Institute; President, Economic4437 Mobility Alliance, Milken Institute; Former Commissioner and Acting4438 Chairman, U.S. Securities and Exchange Commission, Fairfax, VA4439 Good morning. Thank you, Chairman Thompson, Ranking Member Craig,4440and Members of the Committee, for inviting me to testify today.4441 My name is Mike Piwowar, and I am the Executive Vice President of4442the Milken Institute's Finance Pillar and President of our newly4443announced Economic Mobility Alliance.\1\ The Milken Institute is4444committed to supporting legislation that will build a workable4445regulatory framework to bring clarity and confidence to the digital4446assets market. The Digital Asset Market Clarity Act of 2025 (``CLARITY4447Act'') crafts a framework that addresses market structure gaps,4448jurisdictional boundaries, and pathways for responsible innovation,4449thereby reinforcing the U.S. financial system's growth,4450competitiveness, and resilience. As you consider next steps in the4451legislative process, we look forward to continuing to work on this4452bipartisan issue with this Committee and the U.S. House Committee on4453Financial Services.4454---------------------------------------------------------------------------4455 \1\ The Milken Institute is a nonprofit, nonpartisan think tank4456that promotes evidence-based research that serves as a platform for4457policymakers, industry practitioners, and community members to come4458together in catalyzing practical solutions to challenges we face both4459here in the U.S. and globally. The Milken Institute's Finance Pillar4460conducts research and constructs programs designed to facilitate the4461smooth and efficient operation of financial markets--to help ensure4462that they are fair and available to those who need them when they need4463them. The Milken Institute's Economic Ability Alliance aims to foster4464greater collaboration and maximize our impact, increasing economic4465mobility for individuals of all backgrounds throughout every stage of4466their financial lives.4467---------------------------------------------------------------------------4468 Today, my testimony will focus on the critical role that the U.S.4469Securities and Exchange Commission (``SEC'') plays in the regulation of4470our capital markets and how that expertise can be applied to digital4471asset markets. I have had the pleasure of serving as a visiting4472academic scholar, senior financial economist, commissioner, and acting4473Chairman of the SEC. I am testifying today on my own behalf.4474 * * * * *4475 The U.S. capital markets are the envy of the world. Well-regulated4476competition among stock exchanges, alternative trading systems, and4477market makers has led to the best market quality environment for4478publicly traded securities in history. Transaction costs are low,4479market depth is high, and execution speeds are fast. Well-regulated4480competition among investment professionals--broker-dealers and4481investment advisers--has led to the highest standards for investor4482protections and the lowest costs for trading, diversification, advice,4483and professional management in history. Companies that issue securities4484benefit from the liquidity provided by the U.S. public capital markets4485at a low cost of capital.4486 The SEC's role in fostering the historical success of our capital4487markets and the resulting positive effects on jobs, economic growth,4488and the lives of everyday Americans cannot be overstated. As we look to4489future innovations and capital-raising activities in digital asset4490markets, the critical role played by the SEC will become even more4491important for the United States to maintain its economic4492competitiveness.4493 I commend all the Members of this Committee, working with the U.S.4494House Committee on Financial Services, as you continue to find4495bipartisan solutions and build bicameral consensus with the Senate to4496create a clear and workable regulatory framework for digital assets.4497 The remainder of my testimony is organized into three sections:44984499 I. The SEC's Mission45004501 II. Applying the SEC's Mission to Digital Asset Markets45024503 III. Key Provisions of the CLARITY Act and Additional4504 Recommendations4505I. The SEC's Mission4506 The SEC's threefold mission is to protect investors; maintain fair,4507orderly, and efficient markets; and promote capital formation. In4508accordance with the explicit authorities granted by Congress, the SEC4509accomplishes its mission by promulgating regulations under the Federal4510securities laws, monitoring compliance with the laws and regulations,4511and enforcing securities law and regulation violations.4512Protecting Investors4513 The Federal securities laws and regulations administered by the SEC4514contain several provisions to protect investors. Statutory and4515regulatory language, by their nature, are highly legalistic, but they4516basically boil down to this simple phrase, ``Don't lie, don't cheat,4517don't steal.''4518Don't Lie4519 The backbone of the SEC's investor protection mandate is4520disclosure. The SEC requires public companies and key market4521participants such as brokers, dealers, investment advisers, and4522investment companies to disclose meaningful, accurate, and timely4523information to the public. Access to this information provides4524investors with a common pool of basic facts that allows them to4525determine whether to buy, sell, or hold securities and how to vote4526their shares.4527 Unlike merit-based regimes where regulators have the power to deem4528securities offerings ``too risky'' or ``unsuitable'' to be approved,4529our disclosure system comports well with American traditions of self-4530reliance, pioneering spirit, and rugged individualism. As former4531Supreme Court Justice Louis Brandeis famously wrote, ``sunlight is said4532to be the best of disinfectants; electric light the most efficient4533policeman.'' \2\ By arming investors with information, they can4534evaluate and make informed investment decisions that support more4535accurate securities valuations and a more efficient allocation of4536capital.4537---------------------------------------------------------------------------4538 \2\ Louis D. Brandeis, ``What Publicity Can Do,'' Harper's Weekly,4539Dec. 20, 1913, reprinted in Louis D. Brandeis, Other People's Money and4540How the Bankers Use It, (Frederick A. Stokes Co., 1914).4541---------------------------------------------------------------------------4542Don't Cheat4543 The SEC requires market participants to deal fairly with their4544customers. For example, brokers must comply with a best-interest4545standard when they provide recommendations to Main Street investors.4546This standard requires brokers to act in the best interest of their4547customers and not place their own interests ahead of the customer's.4548 Similarly, investment advisers owe a fiduciary duty to their4549customers when providing investment advice. This duty is comprised of4550both a duty of care and a duty of loyalty. The duty of care requires an4551investment adviser to provide investment advice in the best interest of4552its client, based on the client's objectives, and to provide advice and4553monitoring over the course of the relationship. The duty of loyalty4554requires an investment adviser to disclose or address all conflicts of4555interest between the adviser and its client.4556 When executing customer orders to buy or sell securities, the SEC4557allows brokers to choose which trading venue to direct the orders. The4558broker may direct the order to the exchange where the stock is listed,4559a different exchange, an alternative trading system, or a market maker.4560 The SEC also allows brokers to enter into payment for order flow4561arrangements. Market makers may pay brokers for routing orders to them4562so long as they fulfill their best execution obligations. A broker must4563consider multiple factors when seeking the best execution of customers'4564orders, including the opportunity to get a better price than what is4565currently quoted (price improvement), the speed of execution, and the4566likelihood that the trade will be executed.\3\4567---------------------------------------------------------------------------4568 \3\ See Fast Answers--Best Execution, (May 9, 2011), available at4569https://www.sec.gov/fast-answers/answersbestexhtm.html.4570---------------------------------------------------------------------------4571 Payment for order flow arrangements could represent a conflict of4572interest between their broker and their customer. Brokers may choose to4573route customer orders to the market maker that offers the highest4574payment to the broker rather than to the trading venue that offers the4575best execution for the customer. However, the SEC's best execution4576requirements mitigate this conflict of interest.4577Don't Steal4578 The SEC protects customers' property (securities and cash) held at4579broker-dealers from being misappropriated (i.e., stolen) through a4580rigorous financial responsibility framework. Two SEC rules form the4581foundation of this framework. The SEC's customer protection rule (Rule458215c3-3) is designed to ensure that customer property in the custody of4583broker-dealers is adequately safeguarded and not used by the broker-4584dealer in their business. The SEC's uniform net capital rule (Rule458515c3-1) requires all broker-dealers to always have sufficient liquid4586resources on hand to satisfy customer and creditor claims promptly in4587the event the firm fails.4588Maintaining Fair, Orderly, and Efficient Markets4589 The SEC's regulatory framework for the U.S. equity markets is4590complicated. It reflects a complex system of legal and regulatory4591decisions made over decades, and the markets have evolved within this4592framework into a highly interconnected system.4593 I like to say that the underlying U.S. equity market structure4594represents the gears that turn the clock of the capital markets.\4\4595From the moment we get up in the morning until the moment we turn out4596the lights at night, we rely on clocks to order our days. Yet most4597people will never open a clock to inspect the gears that make it work,4598much less comprehend the operation of the complex and interrelated4599system sitting behind it. In the same way, most Main Street investors4600and business owners who rely on the capital markets will never dig into4601the details of market structure. They may never understand the way that4602SEC regulations on things like tick sizes, the order protection rule,4603or maker-taker pricing function. But they rely on them every day to4604raise capital, invest in securities, and save for retirement.4605---------------------------------------------------------------------------4606 \4\ See Remarks at FINRA and Columbia University Market Structure4607Conference, Speech by Commissioner Michael S. Piwowar (Oct. 26, 2017),4608available at https://www.sec.gov/newsroom/speeches-statements/speech-4609piwowar-2017-10-26.4610---------------------------------------------------------------------------4611 Thus, the details of market structure matter, not just because4612industry participants, regulators, and academics like to debate them,4613but because they ensure the fair and orderly operation of our complex4614financial markets. Ultimately, the efficiency of these markets is what4615allows our capital markets to drive the economy in ways that benefit4616all Americans. The SEC recognizes that the appropriate market structure4617for equity markets is not the same as it is for the markets of other4618securities they oversee, such as corporate bonds, municipal bonds, and4619security-based swaps.4620 The SEC also recognizes that changes to existing market structure4621policy always involve tradeoffs. When the SEC operates at its best, it4622makes use of two tools to evaluate whether, and if so, how to make4623changes as the markets evolve.4624 The first is economic analysis. The lens of economic analysis is4625well-suited for evaluating tradeoffs. In 2012, the Commission4626recognized the importance of going beyond statutory obligations and4627mere quantitative exercises to incorporate comprehensive economic4628analysis in the rulemaking process by adopting ``Current Guidance on4629Economic Analysis in SEC Rulemaking'' (``Current Guidance'').\5\4630---------------------------------------------------------------------------4631 \5\ Current Guidance on Economic Analysis in SEC Rulemaking, (Mar.463216, 2012), available at http://www.sec.gov/divisions/riskfin/4633rsfi_guidance_econ_analy_secrulemaking.pdf.4634---------------------------------------------------------------------------4635 The second is retrospective reviews of existing rules. The only4636constant in financial markets is change. Markets and technologies are4637continually evolving. The SEC recognizes that if we want our capital4638markets to remain the envy of the world, our regulatory framework needs4639to evolve with them. Retrospective reviews of market structure and4640rules by the SEC ensure that they are not outdated, obsolete, or overly4641burdensome.4642Promoting Capital Formation4643 The oft-forgotten third part of the SEC's mission is to promote4644capital formation. The Securities Act of 1933, the Securities Exchange4645Act of 1934, and the Investment Company Act of 1940 require the SEC to4646``consider, in addition to the protection of investors, whether the4647action will promote efficiency, competition, and capital formation''4648when it is engaged in rulemaking.\6\4649---------------------------------------------------------------------------4650 \6\ See, e.g., 15 U.S.C. 77b(b); 15 U.S.C. 78c(f); 15 U.S.C. 465180a-3(c)(1)(B) (emphasis added).4652---------------------------------------------------------------------------4653 Just as the disclosure of meaningful, accurate, and timely4654information to the public protects investors, it also improves capital4655formation. False and misleading information not only can cost4656investors' money ex post, but it also impedes capital formation by4657discouraging investment ex ante. It contributes to increased volatility4658in the markets and leads to the inefficient distribution of capital.4659 However, the SEC must guard against requiring too much information4660that is burdensome for public companies to provide. Thankfully, the4661Supreme Court has provided guidance on the legal standard of4662materiality. Former Supreme Court Justice Thurgood Marshall, writing4663for a unanimous Supreme Court in the seminal case of TSC Industries v.4664Northway, stated, ``[t]he question of materiality, it is universally4665agreed, is an objective one, involving the significance of an omitted4666or misrepresented fact to a reasonable investor.'' \7\ Justice Marshall4667expressed his concern that an unnecessarily low standard of materiality4668and the resulting fear of exposure to substantial liability might cause4669issuers to ``simply bury the shareholders in an avalanche of trivial4670information--a result that is hardly conducive to informed decision4671making.'' \8\4672---------------------------------------------------------------------------4673 \7\ 426 U.S. 438, 445 (1976).4674 \8\ Ibid, at 448-49.4675---------------------------------------------------------------------------4676II. Applying the SEC's Mission to Digital Asset Markets4677 The SEC's traditional mission of protecting investors, maintaining4678fair, orderly, and efficient markets, and promoting capital formation4679for the capital markets is easily applied to digital asset markets. The4680CLARITY Act provides the foundational authority for a regulatory4681framework that aligns the mission with the functional application to4682these markets.4683Protecting Investors4684 Digital asset investors should have the same investor protections4685as securities investors. For too long, U.S. investors in digital assets4686have not had adequate protections under the Federal securities laws.4687The SEC's investor protection framework of ``Don't lie, don't cheat,4688don't steal'' fits perfectly with digital asset markets.4689 The SEC's disclosure regime can be effectively tailored to digital4690assets, as it already has been tailored for a diverse range of4691securities offerings that have evolved over time, such as public4692companies, open-end mutual funds, closed-end funds, money market funds,4693exchange traded funds, business development companies, security-based4694swaps, etc. I am pleased to see the CLARITY Act directs the SEC to4695provide disclosure of specific information unique to digital assets.4696 The SEC's fair dealing requirements should be applied to digital4697asset markets, where appropriate. Brokers and investment advisers4698should be subject to the same best interest standards and fiduciary4699duties when providing recommendations or advice or facilitating4700customer orders for digital assets as they do for securities. In other4701words, digital asset investors working with intermediaries expect to4702have the same protections.4703 The SEC's rigorous financial responsibility framework should be4704applied and adapted to protect customers' digital assets held at4705broker-dealers. The SEC's customer protection rule and uniform net4706capital rule can easily be amended to safeguard digital assets held in4707custody and protect customer claims in the event of the firm's failure.4708Maintaining Fair, Orderly, and Efficient Markets4709 The appropriate regulatory framework for digital asset market4710structure will require the SEC to use economic analysis to determine4711the costs and benefits of various alternatives. The SEC's experience4712overseeing markets for a diverse set of securities--equities, corporate4713bonds, municipal bonds, and security-based swaps--will serve it well as4714it establishes a regulatory framework for the trading of digital4715assets.4716 As the digital asset markets evolve, the SEC must keep pace with4717changes in market conditions and technologies and conduct retrospective4718reviews of existing rules to determine any necessary changes in4719regulatory policy.4720 The CLARITY Act restricts insider sales of digital assets following4721a primary offering to protect retail investors, in a manner similar to4722the SEC's insider lockup periods following an initial public offering4723(IPO). A lockup period helps stabilize the market price following a4724public offering by preventing a flood of additional sales in the early4725days of trading.4726Promoting Capital Formation4727 The SEC's experience striking the right balance of disclosures for4728investors, giving them just what they need--not too much, not too4729little--to make informed investment decisions to buy, sell, or hold4730securities, is exactly what is needed in the digital asset markets. A4731similar consideration for striking the right balance for issuers of4732securities--not too burdensome, not too sparse--is also what is needed4733for capital-raising issuers of digital assets that fall under the SEC's4734jurisdiction.4735 The CLARITY Act establishes a critical role for the SEC to provide4736transparency for new digital commodity issuances. Like primary4737offerings of public companies, the SEC will ensure that investors have4738helpful information about primary offerings of digital assets to make4739informed decisions. The CLARITY Act also recognizes that meaningful4740information about the digital commodity issuer changes over the4741maturation of the blockchain system. It provides for a ratcheting down4742of disclosure requirements as the digital commodity issuer is no longer4743in control of the blockchain system and eventually no longer a4744meaningful part of the development process.4745Recent SEC Actions Involving Digital Assets4746 The day after being designated as Acting Chairman of the SEC on4747January 20, 2025, Commissioner Mark Uyeda created the SEC's Crypto Task4748Force, dedicated to developing a comprehensive and clear regulatory4749framework for crypto assets, and designated Commissioner Hester Peirce4750to lead it.\9\ The Task Force has been busy over the past 4 months.4751Here are a few examples of their public-facing activities:4752---------------------------------------------------------------------------4753 \9\ See https://www.sec.gov/newsroom/press-releases/2025-30.47544755 Hosting four public roundtables on the topics of defining4756 security status, tailoring SEC regulation for crypto trading,4757 key considerations for crypto custody, and the intersection of4758 traditional finance (``TradFi'') and decentralized finance4759 (``DeFi'').\10\ The Task Force will hold their fifth public4760 roundtable next week on the topic of DeFi and the American4761 Spirit.4762---------------------------------------------------------------------------4763 \10\ See https://www.sec.gov/about/crypto-task-force/crypto-task-4764force-roundtables.47654766 Inviting public comment on 48 detailed questions to help the4767 Task Force work through several crypto regulatory questions on4768 topics such as security status, public offerings, safe harbors4769 from registration, trading, custody, crypto lending, crypto4770 exchange-traded products (ETPs), tokenized securities, and4771 cross-border challenges.\11\4772---------------------------------------------------------------------------4773 \11\ See https://www.sec.gov/newsroom/speeches-statements/peirce-4774statement-rfi-022125.47754776 Meeting with more than 100 organizations and firms involved4777 with digital assets.\12\4778---------------------------------------------------------------------------4779 \12\ See https://www.sec.gov/about/crypto-task-force/crypto-task-4780force-meetings.47814782 The SEC's Crypto Task Force has also been coordinating with other4783SEC Divisions and Offices, resulting in several notable public4784---------------------------------------------------------------------------4785releases, including:47864787 Acting Chairman Mark Uyeda announced the creation of a new4788 Cyber and Emerging Technologies Unit, consisting of 30 fraud4789 specialists and attorneys, to focus on combating cyber- and4790 crypto-related misconduct and to protect retail investors from4791 bad actors.\13\4792---------------------------------------------------------------------------4793 \13\ See https://www.sec.gov/newsroom/press-releases/2025-42.47944795 The Office of Investor Education and Advocacy has published4796 several online resources for retail investors considering4797 investments involving crypto assets.\14\4798---------------------------------------------------------------------------4799 \14\ See https://www.investor.gov/additional-resources/spotlight/4800crypto-assets.48014802 The Division of Corporation Finance issued staff statements4803 on Meme Coins, Proof-of-Work Mining Activities, Stablecoins,4804 Offerings and Registrations of Securities in the Crypto Asset4805 Markets, and Proof-of-State Protocol Staking Activities.\15\4806---------------------------------------------------------------------------4807 \15\ See https://www.sec.gov/newsroom/speeches-statements/staff-4808statement-meme-coins, https://www.sec.gov/newsroom/speeches-statements/4809statement-certain-proof-work-mining-activities-032025, https://4810www.sec.gov/newsroom/speeches-statements/statement-stablecoins-040425,4811https://www.sec.gov/newsroom/speeches-statements/cf-crypto-securities-4812041025, https://www.sec.gov/newsroom/speeches-statements/statement-4813certain-protocol-staking-activities-052925.48144815 The Division of Trading and Markets issued a list of4816 frequently asked questions (FAQs) relating to crypto asset4817 activities and distributed ledger technology.\16\4818---------------------------------------------------------------------------4819 \16\ See https://www.sec.gov/rules-regulations/staff-guidance/4820trading-markets-frequently-asked-questions/frequently-asked-questions-4821relating-crypto-asset-activities-distributed-ledger-technology.48224823 The Office of the Chief Accountant rescinded Staff4824 Accounting Bulletin 121 (``SAB 121'').\17\4825---------------------------------------------------------------------------4826 \17\ See https://www.sec.gov/rules-regulations/staff-guidance/4827staff-accounting-bulletins/staff-accounting-bulletin-122.4828---------------------------------------------------------------------------4829III. Key Provisions of the CLARITY Act and Additional Recommendations4830 The recently introduced CLARITY Act represents a comprehensive,4831clear, and commonsense approach to establish a regulatory framework for4832digital assets in the United States. I commend the Members of this4833Committee and your staff for your diligent work and your engagement4834with the public.\18\4835---------------------------------------------------------------------------4836 \18\ I want to specifically thank you for your responsiveness to4837the comment letter that my colleagues Nicole Valentine and Max4838DeGregorio and I submitted on the Discussion Draft. See https://4839milkeninstitute.org/content-hub/government-affairs/comment-letters/48402025-digital-assets-market-structure-discussion-draft.4841---------------------------------------------------------------------------4842 The CLARITY Act contains several provisions that authorize the SEC4843to do its part in establishing the U.S. digital asset markets as the4844best in the world. These include the following:48454846 Providing clear guidelines to digital commodity issuers and4847 the SEC on which activities fall under SEC jurisdiction.48484849 Requiring the SEC (and CFTC) to coordinate with foreign4850 regulators to promote consistent international standards for4851 digital asset market regulations and permitting them to enter4852 into information-sharing arrangements to protect investors.48534854 Prohibiting certain sales by project insiders that would4855 harm retail investors.48564857 Providing the SEC with anti-fraud enforcement authority over4858 SEC-registered entities involving transactions with stablecoins4859 and digital commodities.48604861 Providing the SEC with anti-fraud and anti-manipulation4862 enforcement authorities over exempted decentralized finance4863 activities.48644865 Modernizing books and records requirements for broker-4866 dealers and exchanges by allowing them to use blockchain4867 technology.48684869 Providing additional flexibility for the SEC to use its4870 exemptive authority.48714872 Adding ``innovation'' to the SEC's mission and establishing4873 offices of innovation within each division of the SEC.48744875 Requiring the SEC, CFTC, and GAO to conduct studies on4876 decentralized finance, nonfungible tokens (NFTs), market4877 infrastructure improvements needed to facilitate the4878 development of tokenized securities and derivatives, and4879 improving financial literacy for digital asset investors.48804881 As this Committee, working with the U.S. House Committee on4882Financial Services, considers next steps in the legislative process, I4883would like to offer a few recommendations to consider.4884Continue to Rely on SEC and CFTC Member and Staff Expertise4885 The CLARITY Act is appropriately detailed and technical. It is4886clear to me that you have incorporated feedback from the highly capable4887Members and staff experts at the SEC and CFTC. As you consider next4888steps in the legislative process, I urge you to continue to rely on4889their expertise.4890 The SEC's Crypto Task Force is an all-star team of incredibly smart4891people, some of whom I know personally and others by reputation.\19\4892They are increasing their already high level of expertise on digital4893asset markets by engaging with members of the public through meetings,4894information requests, and roundtable discussions.\20\4895---------------------------------------------------------------------------4896 \19\ While I am not as familiar with many of the CFTC staff working4897on these issues, I have always been impressed with their expertise on4898issues under their jurisdiction.4899 \20\ See https://www.sec.gov/about/crypto-task-force.4900---------------------------------------------------------------------------4901 The Crypto Task Force is led by Commissioner Hester Peirce. I can4902think of no better person to lead this august group. A few years ago,4903Commissioner Peirce was nicknamed ``Crypto Mom'' by the crypto4904community due to her dedication to providing clarity on the application4905of the Federal securities laws to digital asset markets and for4906adopting practical and workable policies to protect investors and4907foster innovation.4908 I will offer one cautionary example of what happens when SEC staff4909expertise is not incorporated into highly technical legislation that4910grants authorities and requires rulemakings under their jurisdiction.4911Title VII of the 2010 Dodd-Frank Act created a new regulatory framework4912for over-the-counter derivatives and divided jurisdiction between the4913CFTC (for ``swaps'') and the SEC (for ``security-based swaps'').\21\4914The legislative language, which was written with substantial input from4915then-CFTC Chairman Gary Gensler, did not incorporate any feedback from4916the SEC. As a result, SEC rulemakings were unnecessarily delayed for4917years, and limited SEC resources were diverted from their core mission4918to fix problems that could have easily been avoided.4919---------------------------------------------------------------------------4920 \21\ Dodd-Frank Wall Street Reform and Consumer Protection Act,4921Pub. L. No. 111-203 (2010).4922---------------------------------------------------------------------------4923Maximize Self-Effectuating Statutes and Minimize Joint Rulemaking4924 As a former Senate staffer who worked on legislative text and a4925former regulator who had to implement complex legislation, I think4926there is both a ``science'' and an ``art'' to drafting legislation. The4927science involves getting the technical definitions and legal language4928correct, addressing conforming amendments to existing legislation, etc.4929The art of legislation involves identifying alternative language that4930makes implementation more efficient and effective.4931 The use of self-effectuating statutes that do not require any4932rulemaking is a great tool. Wherever possible, I urge the Committee to4933consider using self-effectuating statutory language. For example, if4934the Committee decides that the SEC should use its exemptive authority4935on a particular issue, one way to draft the language is to say, ``The4936SEC shall exempt XYZ . . .'' But that would require the SEC to act--4937i.e., issue a rule, regulation, or order--and use scarce resources that4938could be better deployed elsewhere. A better way to draft the language4939would be to say, ``XYZ is exempt . . .'' The language would be4940effective upon enactment, and the SEC would not need to do any4941additional work.4942 Title I of the Jumpstart Our Business Startups Act (``JOBS Act'')4943of 2012 provides an excellent example of self-effectuating4944language.\22\ Title I created a new ``emerging growth company''4945(``EGC'') designation for smaller companies going public and provided4946them with temporary scaled disclosures (a regulatory ``on-ramp'') and4947other benefits. It directly amended the Securities Act of 1933 and the4948Securities Exchange Act of 1934 and did not require any SEC rulemaking.4949Academic research finds that Title I immediately increased IPO4950volumes.\23\4951---------------------------------------------------------------------------4952 \22\ Jumpstart Our Business Startups Act, Pub. L. No. 112-1064953(2012).4954 \23\ See, e.g., The JOBS Act and IPO Volume: Evidence that4955Disclosure Costs Affect the IPO Decision, Michael Dambra, Laura Field,4956and Matthew Gustafson, Journal of Financial Economics, Vol. 116, No. 14957(2015).4958---------------------------------------------------------------------------4959Provide New Statutory Clarity on Investment Contracts4960 The CLARITY Act creates a new definition of ``investment contract4961assets'' to exclude digital commodities sold pursuant to an investment4962contract from being considered investment contracts themselves. I4963believe this is a clever way to provide much-needed clarity in the4964context of digital commodities.4965 The bill carefully excludes only specific types of investment4966contracts from the definition of ``digital commodity,'' recognizing4967that the definition of ``investment contract'' in the Securities Act of49681933 and the Securities Exchange Act of 1934 is very broad.\24\ I4969suggest this Committee work with the U.S. House Committee on Financial4970Services to go one step further and narrow the statutory definition of4971``investment contract'' itself.4972---------------------------------------------------------------------------4973 \24\ See 15 U.S.C. 77b-77c.4974---------------------------------------------------------------------------4975 When the SEC has been faced with the determination of whether an4976investment contract exists under certain facts and circumstances, it4977has had to rely on prior Court cases. The most well-known example is4978the ``Howey Test'' from the 1946 Supreme Court case SEC v. W.J. Howey4979Co.\25\ The Supreme Court's opinion states that the Howey Test embodies4980a ``flexible rather than a static principle.'' \26\ While a flexible4981approach has the benefit of being adaptable to new situations, decades4982of regulatory experience and several subsequent court cases show that4983it would be helpful if Congress could narrow the statutory definition4984of investment contract.4985---------------------------------------------------------------------------4986 \25\ 328 U.S. 293, 301 (1946).4987 \26\ 328 U.S. at 299 (emphasis added).4988---------------------------------------------------------------------------4989 * * * * *4990 Thank you for moving forward on the critical issue of providing a4991clear and workable regulatory framework for digital asset markets in4992the United States. And thank you for the opportunity to testify on the4993critical role that the SEC, working with the CFTC, will provide in4994promulgating, administering, and enforcing regulations that protect4995investors, establish and maintain market integrity, and foster4996responsible innovation. I am happy to answer any questions you may4997have.49984999 The Chairman. Dr. Piwowar, thank you so much. Mr. Miller,5000please begin when you are ready.50015002 STATEMENT OF RYNE MILLER, J.D., PARTNER, LOWENSTEIN SANDLER5003LLP; CHAIR, LOWENSTEIN CRYPTO; CO-CHAIR, COMMODITIES, FUTURES,5004 DERIVATIVES GROUP, NEW YORK, NY50055006 Mr. Miller. Thank you. Chairman Thompson, Ranking Member5007Craig, and Members of the Committee, it is a privilege and5008honor to have been invited to appear at this hearing. Thank5009you. My name is Ryne Miller, and while I grew up in Oklahoma, I5010have been a financial markets lawyer in New York City for the5011past 15 years. I am here to offer my voice, my support on a5012single message: the time to act on digital asset market5013structure legislation is now. I do think that the time has5014come, and we cannot afford further delay. My perspective on5015this comes from my experience in the financial markets, and I5016want to share some of that with the Committee.5017 I have spent my career at the intersection of market5018regulation, innovation, and risk. I was fortunate to have5019worked at the CFTC during the Dodd-Frank rule-writing years,5020which is familiar to many on this Committee, and since then, I5021have advised financial institutions, exchanges, and crypto5022firms on financial market regulation. As many of you might5023know, I also lived through the collapse of the FTX Global5024Cryptocurrency Exchange. I was the FTX U.S. General Counsel for5025a little more than 1 year.5026 I want to start with a few observations about my FTX5027experience. The failure of FTX is often talked about as a run5028on the bank or a liquidity crisis, and this Committee knows5029well that is not what happened. FTX was not a bank. It was a5030cryptocurrency exchange charged with protecting customer5031assets. The FTX failure was the result of a concealed fraud5032performed by the most senior members of the FTX founding team.5033As my written statement reflects in greater detail, I first5034learned in early November 2022 that approximately $8 billion in5035customer assets on the FTX global platform were simply gone. A5036small group of insiders at the global FTX entity had5037misappropriated billions of dollars in customer funds for5038personal use. That is not okay, and part of the goal of the5039legislation we are considering now is to address this issue.5040After learning of the revelation and the customer asset5041shortfall, I and a few others worked around the clock for 45042days to stop the ongoing fraud, to mitigate the bleeding, to5043preserve critical records, and ultimately prepare for5044insolvency filings.5045 The critical point of this story is this: had proper5046Federal market structure regulation been in place, the kind5047contemplated in the bill before you, offshore companies would5048have come to the United States and centered their businesses5049here. FTX's story could have ended very differently. Customer5050asset segregation, regular examination, governance requirements5051and auditing would have been in place, and they would have5052provided guardrails to prevent the fraud. And that is why I am5053here today, not just to tell the FTX story and to recount the5054past, but to support your work to shape the future. Again, I do5055not think we can afford more delay.5056 The Committee's draft legislation, the CLARITY Act, is5057thoughtful, it is balanced, it is functional, and, importantly,5058it is ready. It creates a path for registration, it draws a5059sensible line between the SEC and the CFTC, and it prompts5060coordination where appropriate. It protects investors while5061enabling responsible innovation, and it gives regulators--and5062this is important--the tools they need to move from enforcement5063to proactive supervision and regulation. Critically, it also5064ends the state-by-state regulatory patchwork that is pushing5065innovators offshore. A Federal framework will restore5066confidence and competitiveness in the U.S. digital asset5067markets. Regulation enables innovation, and when market5068structure works, it creates the foundation of trust that has5069allowed the frequent statement to be made about America having5070the most deep, liquid, and resilient capital markets in the5071world. Crypto is capital, and if we want the digital asset5072markets to grow here, adopting legislation is a must-do.5073 Thank you again for the opportunity to appear today. I5074appreciate the work this Committee has done, and I stand ready5075to answer any questions.5076 [The prepared statement of Mr. Miller follows:]50775078 Prepared Statement of Ryne Miller, J.D., Partner, Lowenstein Sandler5079 LLP; Chair, Lowenstein Crypto; Co-Chair, Commodities, Futures,5080 Derivatives Group, New York, NY5081 Chairman Thompson, Ranking Member Craig, and Members of the5082Committee:50835084 Thank you for the opportunity to testify today. It is a privilege5085to appear before you to discuss the future of digital assets in the5086United States. Adopting Federal market structure legislation for5087digital assets is critical to enabling responsible innovation and5088economic growth in the United States, and I commend this Committee for5089its leadership and continued diligence in addressing one of the most5090consequential markets policy questions of our time--how to regulate a5091newly emerged asset class that is poised to revolutionize the5092operations and functions of financial markets, globally. I look forward5093to using my voice, developed over a career as a financial markets and5094exchange professional, to support the swift adoption of Federal market5095structure legislation for digital asset markets.5096 I have seen the damage and fallout that can occur when market5097structure regulation is non-existent or incomplete, and in contrast, I5098have also seen how innovation and markets can flourish when regulators5099have a clear legislative mandate to implement a properly calibrated and5100principles-based markets regulatory program.5101 The perspective I seek to offer the Committee is shaped by a career5102of direct experience at the intersection of technology, regulation, and5103market infrastructure. Many on the Committee know that I previously5104served as General Counsel of FTX US, the U.S. based digital asset and5105derivatives exchange that was an affiliated entity of the global FTX5106group. I was in this role for the U.S. business for just over a year,5107an intense time period that included a hyper growth phase, a shocking5108discovery of fraud perpetrated by the FTX international founders, and5109the much discussed fallout and subsequent insolvency filing of the5110global FTX group. Both before and after that experience, I have been a5111long-time commodities and derivatives partner at leading law firms5112advising clients on financial markets regulation. Early in my career, I5113had the privilege of serving at the U.S. Commodity Futures Trading5114Commission in Washington D.C. throughout the pivotal Dodd-Frank rule5115writing years, first as a staff attorney in the CFTC's Division of5116Market Oversight and then as counsel to the then CFTC Chairman.\1\ My5117testimony today draws on all of these experiences, and the views I5118express are my own.5119---------------------------------------------------------------------------5120 \1\ I want to take this moment to also specifically thank a few of5121my CFTC mentors, each of whom expended material effort to introduce me5122to and educate me early in my career under the U.S. commodities and5123derivatives laws. To name a few CFTC alumni, each dedicated public5124servants: David Van Wagner, Don Heitman, Susan Nathan, and Ken Raisler.5125---------------------------------------------------------------------------5126The FTX Story--What Happened5127 Let me first share my perspective on the FTX story. I will be5128brief, clear, and direct, but I do believe it is important for me to5129address this topic, for this Committee, in the context of this hearing.5130 Due to a series of fraudulent schemes and actions undertaken by the5131FTX international founding team, through which they improperly accessed5132and used customer assets (a series of misconduct which was concealed5133from and first learned about by myself and other key employees during5134the week starting November 7, 2022), the global FTX group filed for5135bankruptcy on Friday, November 11, 2022. Assets then on hand were5136insufficient, by an amount of approximately $8 billion, to meet the5137withdrawal requests of customers who wanted their assets back. The5138shortfall, and the fraud behind it, was a shocking revelation to me, to5139customers and investors, to employees, and to regulators.5140 To add some color from my lived experience--on Monday evening5141November 7, 2022, I received a phone call from Sam Bankman-Fried's5142father, Professor Joseph Bankman (a close and frequent advisor of the5143company), and I also received a series of subsequent messages over the5144course of that evening from Sam himself. Through those communications,5145I was informed that the FTX international business was meaningfully5146short of customer assets. Professor Bankman and Sam were reaching out5147to me given my U.S. market presence and background. I was ostensibly5148being invited into an emergency fundraising effort to identify backers5149to ``fill the hole''--a fundraising effort that ultimately became5150hopeless given that the underlying shortfall was affiliated with the5151clear wrongdoing of the founding team, as I would soon learn.5152 By the next morning, after a never-ending night during which more5153detailed information became available and I was briefed further into5154the situation by other members of the global FTX business, the facts5155surrounding the wrongdoing behind the shortfall and its approximately5156$8 billion size started becoming clearer. And so, for the 4 sleepless5157days and nights that followed, I, along with several other devoted and5158talented remaining FTX employees, did exactly what you would expect5159trained professionals to do in the face of discovering an unraveling5160and quickly worsening crisis. The remaining engaged core worked to5161implement a ``crisis management 101'' playbook, working to swiftly5162prepare for entering into insolvency proceedings and to prompt a series5163of actions to end the active fraud and pave the way for the5164preservation of critical records and the eventual recovery of the5165billions of dollars in value now being returned to customers.5166 What I have said is what happened, and I am deeply proud of the5167rapid thinking work done by a dedicated group of then-remaining5168employees to institute basic risk management practices, in the face of5169a crisis, that stopped the bleeding and paved the way for a path to5170what now appears to be a meaningful recovery (``meaningful''5171particularly when compared to the perceived possibility of a $05172recovery outcome that presented itself during that week in November51732022).5174 In some commentary that followed the insolvency filings, there was5175a tendency to describe the FTX international fallout as a ``run on the5176bank'' or a ``temporal liquidity crisis.'' Unfortunately, and this5177cannot be overstated, FTX was NOT a bank, and FTX had no legal or5178operational basis that justified the occurrence of a customer asset5179driven liquidity crisis. The crisis occurred because customer assets5180were stolen by the founding team and used for personal trading,5181expenditures, and investments. As a consequence, customer assets were5182unavailable to satisfy customer withdrawal requests. It was not a run5183on the bank, and it was not a liquidity crisis. The assets were gone,5184and it was insolvency due to clear and deceptive wrongdoing perpetrated5185by a small group of actors.5186 The courts have now done their job to consider and determine the5187consequences of the illegal conduct that led to this outcome, and the5188bankruptcy process has done its job to pick up the pieces and bring5189back for the benefit of customers the value that could be identified,5190preserved, and reclaimed. Regardless of the final economic outcome,5191this fraud was an egregious breach of trust, a significant moral lapse,5192and it came at the expense of massive amounts of pain and stress for5193the customers of FTX, amongst many others.5194 And so now we come back to the role of this Committee, ``what could5195have been done'', and ``what can be done to avoid a next time.'' And I5196look very much forward to having that discussion today.5197Moving Forward; Time to Act5198 Had the regulatory structure provided for in the bill currently5199being considered by this Committee and ultimately Congress applied to5200FTX, the story I just told would almost certainly have a much different5201ending. Examinations, governance requirements, audits, reporting,5202recordkeeping, and customer asset segregation requirements directly5203address the shortfalls that have allowed various digital asset industry5204failures and thefts to occur. And yet we are now at least a decade into5205the meaningful emergence of trading activity around the new global5206asset class of digital assets, and still the U.S. has made essentially5207no black-ink progress in bringing real protections to digital asset5208markets under an appropriately calibrated Federal market structure5209regime. To be clear, regulators have not been idle. There is an5210abundance of thoughtful and diligent writings from regulators that5211evaluate these markets, and Congress has now considered a multitude of5212draft texts for new laws to apply to these markets. Now we have reached5213the time to act, and I again commend this Committee in its efforts to5214see the swift adoption of this legislation.5215 The remainder of this written statement further underscores the5216important value that legislation and regulation brings to digital asset5217markets, and it continues to encourage the adoption of digital asset5218market structure legislation as soon as is practicable.\2\5219---------------------------------------------------------------------------5220 \2\ There are of course important existing tools that both the CFTC5221and SEC can and perhaps should begin to use to address market structure5222regulation for digital asset markets. The tools that could be wielded5223by an innovative and focused regulator include exemptive authorities,5224guidance, and inter-agency cooperation, amongst others. In fact, in the5225absence of legislation these tools will become increasingly important5226and necessary to use. However, only legislation can bring about the5227clear and unambiguous mandate of authority that is needed to achieve5228consistent and durable progress.5229---------------------------------------------------------------------------5230Market Regulation as the Foundation of Trust5231 When market structure regulation works, investors transact5232confidently with the knowledge that pricing is fair and transparent and5233that trading venues and intermediaries are subject to compliance5234obligations, examinations, and clear standards to ensure asset security5235and market integrity. But when market structure regulation fails (or5236worse, never arrives), markets lose confidence and customers,5237investors, and other constituents lose much more.5238 In crypto, we have now lived through at least a few cycles of the5239emergence and hope of real technological innovation followed by the5240intense collapse of several poorly governed entities. I believe it is5241essential for lawmakers and regulators to end the unsustainable silence5242of the legislative pen on these matters and to act quickly to pass5243market structure legislation. If my testimony holds value today, it5244will be because it is heard as a forceful call for prompt action. As a5245reminder, market structure legislation is the requisite first step,5246before the accompanying regulations and agency guidance that follows5247can begin as its own body of important and critical work. On the5248legislative side, I am confident in suggesting to this Committee that5249the Digital Asset Market Clarity (CLARITY) Act is good to go; it is5250ready. A decade of legislative inaction in pursuit of perfection has5251already wrought its damage. We have the present opportunity to take the5252bold step of adopting legislative text, starting the timeline for the5253next phase of work for our regulatory agencies to interpret and apply5254these new laws, learning from markets and market participants as they5255go. The alternative, which is to continue watching and waiting and5256engaging in unending and valueless re-writing exercises, will only5257further embolden the riskiest and least honest acting founders to5258continue targeting and attracting U.S. users looking to access these5259globally emergent financial markets.5260 In my experience, the CFTC's principles-based approach to market5261oversight, which is designed for derivatives markets but readily5262transferable to spot markets, has proven resilient in enabling5263innovation while protecting market integrity, and I again commend this5264Committee for seeking to allocate to the CFTC a primary and principal5265role in digital asset regulation. In parallel, the SEC is deeply5266experienced in customer protection, capital formation, and disclosure5267based regulatory programs, and in cooperation with the CFTC, I believe5268they offer an equally important body of experience and judgement to5269bring to bear in regulating these markets. Where digital asset5270exchanges and intermediaries operate under U.S. regulatory regimes,5271their conduct and risk management efforts are shaped by an interlocking5272framework: customer asset segregation, audits and examinations,5273conflicts governance, capital and liquidity requirements, disclosure,5274and surveillance of market abuse.5275 These obligations are not academic. They are operational,5276continual, and essential. Customer protection begins with fund5277segregation and extends to ongoing solvency, liquidity monitoring, and5278governance of risk exposures. A platform cannot credibly hold customer5279assets or facilitate orderly trading without building around these5280foundations.5281 Moreover, these frameworks are not standalone checklists. They5282function as interconnected systems of internal controls, external5283validation, and regulatory supervision that jointly reduce the risk of5284catastrophic failure. In that sense, regulation is not a constraint on5285innovation. It is what makes responsible innovation possible and5286sustainable.5287Regulated Exchanges are Better Exchanges5288 Running a crypto exchange in the United States is hard, and it5289should be. Exchanges handle customer funds, supervise risk engines,5290respond to market volatility, monitor for potential fraud, and manage5291cross-border cybersecurity threats. All of this while under the5292scrutiny of auditors, regulators, and the public.5293 Regulatory expectations shape daily operations: onboarding5294procedures, surveillance protocols, compliance operations, capital5295adequacy planning, governance of hot and cold wallets, operational risk5296reviews, independent audits. The process is demanding, continuous, and5297at times inflexible, but it is necessary.5298 When done properly, regulation acts as a guard rail and guide. It5299forces the kind of institutional maturity that market forces alone may5300not demand, especially in high-growth environments. It also creates an5301ecosystem where trustworthy players can distinguish themselves.5302Why This Bill Matters5303 The draft legislation under discussion offers a thoughtful and5304coherent framework for digital asset markets. It recognizes that5305digital assets are not monolithic, and it seeks to allocate regulatory5306jurisdiction between the CFTC and SEC in a manner that reflects how5307these markets actually operate.5308 Importantly, it would:53095310 Establish baseline registration and compliance requirements5311 for digital asset trading platforms,53125313 Create clarity for the classification of digital assets,53145315 Preserve investor protection while accommodating5316 technological differences, and53175318 Empower the CFTC to oversee spot digital commodities markets5319 and, in certain instances, oversee multi-asset class markets in5320 coordination with the SEC.53215322 For the first time, market participants would have a pathway to5323registration that fits the structure of digital asset trading. This is5324critical because forcing crypto markets into legacy frameworks built5325for other asset classes risks both over-regulation and under-5326enforcement.5327 This bill instead takes a functional approach. It preserves core5328principles, including customer protection, fair dealing, and5329transparency, while tailoring implementation to the nature of5330decentralized technology and blockchain-based assets. That balance is5331hard to strike, and the drafters deserve credit for engaging directly5332with market realities.5333 Adopting this bill will answer many of the foundational questions5334that have thus far remained unaddressed. It will allow regulators to5335move from enforcement-first policymaking to proactive rulemaking. It5336will give responsible actors a path forward. And it will create the5337legal infrastructure to support U.S. leadership in tokenized markets.5338Endorsing Coordination Between the CFTC and SEC5339 The line between commodities and transactions that implicate the5340securities laws in crypto markets is not always bright. But regulatory5341coordination should not require metaphysical certainty. Market5342participants need workable rules. Investors need protection. And the5343public needs confidence that regulators are rowing in the same5344direction.5345 This bill contemplates joint rulemaking, coordinated oversight, and5346clear lines of accountability. That is not only a legal necessity, but5347also a practical one. Neither agency can oversee the entirety of this5348space alone. But together, they can offer a credible framework that5349addresses market risks while enabling innovation.5350 Importantly however, coordination does not mean duplication. It5351means defining roles based on asset function and market behavior. I5352want to encourage each of the CFTC and the SEC to actively coordinate5353to ensure that markets are regulated in a clear, predictable and not5354unnecessarily redundant way. This bill recognizes that complexity and5355gives agencies the tools to manage it. As longtime industry observers,5356we can all acknowledge the friction that can occur when directing two5357Federal agencies to ``coordinate and harmonize'' when done without5358including reasonably observable boundaries and instructions for that5359coordination. I encourage the Committee to finalize a bill that5360provides this clear instruction to the agencies and that includes5361meaningful oversight mechanisms to permit the Committee to monitor5362(and, if needed, prompt) that regulatory coordination throughout the5363implementation process.5364Federal Preemption and the Need for National Consistency5365 In the absence of Federal action, states have filled the vacuum for5366digital asset markets. The result is a fragmented patchwork of5367licensing regimes that are difficult to navigate and nearly impossible5368to harmonize. The status quo favors incumbents, punishes compliance,5369and undermines U.S. competitiveness.5370 The burden of navigating dozens of separate licensing frameworks,5371with overlapping and occasionally contradictory requirements, falls5372heaviest on early-stage projects and smaller intermediaries. These are5373precisely the actors we should be encouraging to build domestically and5374not driving offshore.5375 A Federal framework, especially one that preempts duplicative state5376regulation, would level the playing field and bring clarity to5377innovators and investors alike. It would allow regulators to5378concentrate expertise and resources where they are most needed. And it5379would send a signal that the United States intends to lead in the next5380generation of financial infrastructure.5381Why Digital Assets Matter5382 For all the noise and speculation, I want to conclude my written5383statement by affirmatively acknowledging that there is real substance5384in this space. I am a markets lawyer and professional, and I know that5385markets exist when there is a market. Digital assets represent5386trillions of dollars in real value, hundreds of billions of dollars in5387monthly transaction volumes (between spot and derivative markets), and5388millions of users. Studies have demonstrated that approximately 555389million U.S. persons hold cryptocurrencies. Developers are building5390decentralized financial systems with the potential to expand access to5391capital, reduce transaction costs, and create programmable financial5392products. Enterprises are exploring tokenized treasuries, real-time5393settlement systems, and on-chain asset management. These are not5394hypothetical ideas; each statement reflects live market experiments,5395and they are happening now.5396 And they are happening globally. Other jurisdictions (e.g.,5397Singapore, Dubai, Abu Dhabi, the UK, the EU) are implementing5398comprehensive digital asset frameworks. The U.S. cannot afford to5399remain on the sidelines. Leadership in financial infrastructure has5400long been a pillar of American economic strength. This is the next5401front.5402 But innovation alone is not enough. It must be channeled through a5403framework that promotes fairness, transparency, and market integrity.5404That is what this legislation begins to do.5405Conclusion: A Clear Call to Action5406 I appreciate the work that this Committee has done to complete the5407difficult task of translating complex market dynamics into a functional5408regulatory framework, learning from the lessons of this market's5409history and failings and also carrying over the best of our collective5410experiences in regulating existing markets. This was not easy work, but5411it was essential. In digital assets, as in every market, regulation5412matters. The next step is Federal market structure legislation, and I5413again suggest that it is ready to be adopted, now.5414 Thank you for the opportunity to testify. I look forward to your5415questions.54165417 The Chairman. Well, thank you, Mr. Miller. Ms. Pizzola,5418please proceed when you are ready.54195420 STATEMENT OF CHELSEA PIZZOLA, J.D., PARTNER, WILLKIE FARR &5421 GALLAGHER LLP, CHARLOTTE, NC54225423 Ms. Pizzola. Thank you, Mr. Chairman. Chairman Thompson,5424Ranking Member Craig, Members of the Committee, it is an honor5425to testify before you today. Thank you for the opportunity to5426discuss the current draft of the CLARITY Act of 2025.5427 I previously served as the CFTC's Deputy Chief of Staff and5428Counsel to former Chairman Heath Tarbert. I have also served as5429head regulatory counsel to Cumberland DRW, a large participant5430in digital asset, spot, and derivatives markets. Currently, as5431a partner at the law firm, Willkie Farr & Gallagher, I advise5432clients on CFTC and SEC regulatory matters, including matters5433involving digital assets. In these roles, I have seen firsthand5434the confusion, misallocation of resources, and barriers to5435innovation and competition caused by the lack of jurisdictional5436clarity regarding digital assets in the United States.5437Legislation is needed to remove permanently any jurisdictional5438ambiguity. As Mr. Miller said, the CLARITY Act's allocation of5439jurisdiction between the SEC and the CFTC along the line5440between primary and secondary markets is appropriately tailored5441to each agency's specialized expertise, experience, and5442statutory remit.5443 The SEC is well suited to regulate primary market5444transactions in digital assets, which are often viewed as5445similar to capital raises involving traditional securities that5446have long been under the SEC's remit. Equally, the CFTC is the5447natural regulator for secondary market digital asset5448transactions, which are widely viewed, including by multiple5449Federal courts, as transactions in commodities. Although the5450CFTC currently does not have plenary regulatory authority over5451spot commodity markets, it has antifraud and anti-manipulation5452authority, and the Commission intently monitors and surveils5453spot commodity markets, given the close relationship between5454derivatives contracts and their underlying commodities. In5455short, the CFTC has spent the past 50 years dedicated to5456understanding and improving commodities markets and markets for5457commercial risk transfer, including in the exercise of its5458exclusive regulatory authority over options on futures and5459swaps referencing commodities.5460 The CFTC has also had an extensive history of engagement5461with digital asset markets through the authorities that I have5462just described. Since 2015, it has aggressively and5463successfully pursued fraud and manipulation in spot and5464derivatives markets, as well as failure-to-register cases5465involving digital asset derivatives. It worked closely with5466exchanges and their clearinghouses to prepare for the first5467Bitcoin futures listings in 2017, and it did the same with5468Ether futures listings in 2019. Today these markets are deep,5469liquid, and transparent, and are well policed by the CFTC for5470fraud, manipulation, and trade practice violations. This record5471on digital assets is consistent with the CFTC's 50 year tenure5472as a preeminent markets regulator. Today, a total of5473approximately 40 million futures contracts are traded on5474average each day on CME Group and ICE derivatives exchanges5475alone, and in the OTC derivatives market, total U.S.-reported5476notional traded in interest rate swaps alone was approximately5477$112.7 trillion during the third quarter of 2024.5478 CFTC-regulated markets and market utilities have steadily5479performed their risk transfer and shock absorption functions5480through periods of extreme volatility, such as negative oil5481pricing and other shocks, at the onset of the COVID-195482pandemic. Finally, the CFTC is also well suited for its5483responsibilities under the CLARITY Act by virtue of its5484statutory core principles-based regulatory framework for5485exchanges and its self-certification process for new product5486listings, which were specifically designed to promote5487responsible innovation and fair competition. The statutory core5488principles are outcomes-based requirements, and exchanges are5489given reasonable discretion in determining how to comply. This5490has prevented the kind of rigid one-size-fits-all regulatory5491environment that previously stifled innovation and competition5492in CFTC-regulated markets prior to the Commodity Futures5493Modernization Act of 2000 (Pub. L. 106-554, Making consolidated5494appropriations for the fiscal year ending September 30, 2001,5495and for other purposes, Appendix E--H.R. 5660).5496 The self-certification listing process has supported5497innovation and competition in CFTC-regulated markets, reducing5498the time to market for new products from years to days. These5499flexible, adaptable regulatory approaches are particularly well5500suited for the novel and constantly-evolving nature of digital5501asset markets. The CLARITY Act appropriately includes these5502features in its regulatory regime for digital commodity5503exchanges, and there is no better agency to implement such a5504regulatory framework in furtherance of responsible innovation5505than the one that has done so for the last 25 years, allowing5506for the markets under its jurisdiction to become the largest5507and the most vibrant and robust of their kind in the world.5508 Finally, just returning to allocation of regulatory5509authority between the CFTC and the SEC, de minimis registration5510exemptions in areas of overlapping jurisdiction and interagency5511coordination and deference are valuable tools to reduce5512regulatory burden and promote regulatory efficiency. But beyond5513these limited exemptions and targeted deference, holistic CFTC5514oversight of the secondary digital commodity markets is5515necessary to avoid fragmentation in market regulation,5516monitoring, and surveillance. Yet ultimately, exactly how the5517line is drawn between CFTC and SEC jurisdiction is less5518important than ensuring that a clear, durable line is drawn5519through lasting legislation. We should not allow inaction to5520perpetuate an environment of regulatory uncertainty. Digital5521asset entrepreneurs and the American people deserve better.5522Thank you.5523 [The prepared statement of Ms. Pizzola follows:]55245525 Prepared Statement of Chelsea Pizzola, J.D., Partner, Willkie Farr &5526 Gallagher LLP, Charlotte, NC5527 Chairman Thompson, Ranking Member Craig, Members of the Committee:55285529 It is an honor to testify before you today. Thank you for the5530opportunity to discuss the current draft of the CLARITY Act of 2025 and5531the U.S. Commodity Futures Trading Commission's (``CFTC'') role in5532digital asset regulation.5533 I have previously had the privilege of serving as the CFTC's Deputy5534Chief of Staff and Counsel to former CFTC Chairman Heath Tarbert, as5535well as head regulatory counsel to Cumberland DRW, a large participant5536in digital asset spot and derivatives markets. Currently, as a partner5537at the law firm Willkie Farr & Gallagher, I advise clients on CFTC and5538U.S. Securities and Exchange Commission (``SEC'') regulatory matters,5539including matters involving digital assets.\1\5540---------------------------------------------------------------------------5541 \1\ I appear before you today in my personal capacity; the views I5542express here are my own. Thanks are due to Hon. J. Christopher5543Giancarlo and Matthew Goldberg of Willkie Farr & Gallagher for their5544contributions to this statement.5545---------------------------------------------------------------------------5546 In these roles, I have seen firsthand the confusion, misallocation5547of resources, and barriers to innovation and competition caused by the5548lack of jurisdictional clarity with respect to digital assets. Markets5549work best when there are clear rules of the road. In the United States5550today, digital asset market participants cannot even be certain which5551road they are on at any given time. In the race for global5552competitiveness in the digital asset space, we have regrettably lost5553years to regulatory uncertainty and at times outright hostility toward5554digital assets. This environment has largely driven digital asset5555projects and markets offshore and impeded participation by regulated5556institutions.5557 A clear demarcation of the boundaries of the SEC's jurisdiction5558over digital asset transactions, and workable rules for transactions5559within those boundaries, are critical to getting the United States back5560on track as a leader in the digital assets arena. Under new agency5561leadership, the SEC's recently formed Crypto Task Force is making5562admirable strides in this direction,\2\ and I understand that5563Commission-level action is in progress.\3\5564---------------------------------------------------------------------------5565 \2\ See, e.g., Hon. Hester M. Peirce, Commissioner, SEC, New5566Paradigm: Remarks at SEC Speaks (May 19, 2025), available at https://5567www.sec.gov/newsroom/speeches-statements/peirce-remarks-sec-speaks-5568051925-new-paradigm-remarks-sec-speaks.5569 \3\ See Hon. Paul S. Atkins, Chairman, SEC, Keynote Address at the5570Crypto Task Force Roundtable on Tokenization (May 12, 2025), available5571at https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-5572crypto-roundtable-tokenization-051225.5573---------------------------------------------------------------------------5574 But more is needed. Any SEC action acknowledging the limitations of5575its jurisdiction can be reversed under a future Administration. The5576previous SEC Chair claimed jurisdiction over all transactions in5577``[e]verything other than Bitcoin'' \4\ and pursued an aggressive5578enforcement and regulatory campaign to make good on that claim. A5579future Chair could do the same. Legislation must remove any5580jurisdictional ambiguity to ensure this cannot happen again.5581---------------------------------------------------------------------------5582 \4\ Ankush Khardori, Can Gary Gensler Survive Crypto Winter?:5583D.C.'s top financial cop on Bankman-Fried blowback, N.Y. Mag. (Feb. 23,55842023), https://nymag.com/intelligencer/2023/02/gary-gensler-on-meeting-5585with-sbf-and-his-crypto-crackdown.html.5586---------------------------------------------------------------------------5587 In this statement, I will (1) summarize relevant aspects of the5588draft legislation at a high level; (2) explain why I support the bill's5589allocation of regulatory responsibility between the CFTC and the SEC;5590and (3) highlight the importance of such a clear legislative division5591of authority between the agencies and robust coordination in any5592inevitable areas of overlapping authority.55931. Primary- and Secondary-Market Jurisdiction5594 The bill divides jurisdiction between the SEC and the CFTC along5595the line between primary and secondary markets. It implies that the5596offer or sale of a ``digital commodity'' by the issuer may constitute5597the offer or sale of an investment contract subject to the securities5598registration requirements under Section 5 of the Securities Act of55991933, and it creates a conditional registration exemption under new5600Section 4(a)(8) for such offers and sales. It cuts off the ``investment5601contract'' chain there, however, by providing that (1) a digital5602commodity transferred pursuant to an investment contract is not itself5603an investment contract, and (2) offers and sales of a digital commodity5604by a person other than the issuer (or an agent or underwriter thereof)5605likewise are not offers or sales of investment contracts.5606 Thus, generally, primary-market sales of a digital commodity could5607fall under the securities laws, while secondary-market sales would not.5608A trading facility for spot digital commodity transactions would be5609required to register with the CFTC as a digital commodity exchange5610(``DCE'') and subject to enumerated core principles and listing5611standards. Under Section 202 of the bill, an intermediary in an issuer5612offer or sale conducted in reliance on Section 4(a)(8) must register5613with the SEC as a broker-dealer, whereas a broker or dealer engaged in5614secondary-market digital commodity transactions and certain related5615activities must register with the CFTC as a digital commodity broker5616(``DCB'') or digital commodity dealer (``DCD'' and, together with DCEs5617and DCBs, ``Digital Commodity Entities''), respectively.5618 This jurisdictional division of digital asset transactions provides5619much-needed regulatory stability and certainty. Provision (1) above5620codifies existing case law distinguishing digital assets themselves5621from the manner in which they are offered and sold,\5\ while provision5622(2) resolves vexing conflicts in case law related to secondary-market5623transactions \6\ in a manner consistent with the best reading \7\ of5624the term ``investment contract'' as interpreted under SEC v. W.J. Howey5625Co.\8\ and its progeny.5626---------------------------------------------------------------------------5627 \5\ Every court to consider the issue has ruled that natively5628digital assets are not in and of themselves ``investment contracts''5629and that the relevant inquiry is whether the facts and circumstances of5630a particular digital asset transaction satisfy the ``investment5631contract'' definition. See, e.g., SEC v. Binance Holdings, 1:23-cv-563201599, Doc. 248, at *19-21 (June 28, 2024) (collecting cases).5633 \6\ See, e.g., SEC v. Coinbase Inc., Case 1:23-cv-04738 (KPF), Doc.5634175 (S.D.N.Y. Jan. 7, 2025) (order granting motion to certify ruling5635for interlocutory appeal). This order acknowledges a split in authority5636between judicial districts, and even between judges of the same5637district, on the question of whether secondary-market transactions in5638digital assets can constitute the offer or sale of ``investment5639contracts.''5640 \7\ See, e.g., SEC v. Ripple Labs, 682 F. Supp. 3d. 308, 3285641(S.D.N.Y. 2023); Binance, 1:23-cv-01599, Doc. 248, at *37-43; see also5642Letter from Cumberland DRW LLC to SEC Crypto Task Force (Mar. 16, 2025)5643(explaining why secondary-market transactions generally do not satisfy5644the ``common enterprise'' and ``reasonable expectation of profits from5645the efforts of others'' prongs of the Howey test). While SEC v.5646Terraform Labs declined to distinguish primary from secondary markets5647and held that the SEC had plausibly alleged horizontal commonality,5648there the court was required to credit the SEC's allegations that the5649defendant, who was the token's issuer, pooled the proceeds from token5650sales and represented that such proceeds would be used to benefit all5651purchasers. See 684 F. Supp. 3d 170, 195-96 (S.D.N.Y. 2023). The court5652in SEC v. Coinbase followed Terraform in ruling on a motion for5653judgment on the pleadings. SEC v. Coinbase, Case 1:23-cv-04738 (KPF),5654Doc. 105 (S.D.N.Y. Mar. 27, 2024).5655 \8\ 328 U.S. 293 (1946).5656---------------------------------------------------------------------------5657 Of equal importance, the role the bill allocates to each agency5658generally is appropriately tailored to that agency's specialized5659expertise, experience, and statutory remit.5660 Initial sales of digital assets by an identifiable issuer are often5661viewed as similar to ``capital raises'' involving issuance of5662traditional debt and equity securities, in that the proceeds of the5663sale are expected to go to the issuer or a related promoter to finance5664its development of an enterprise. The SEC has been administering a5665fulsome disclosure regime for capital-raising issuances, to the benefit5666of American investors, since its creation in 1934. Though there are5667inherent differences between traditional securities offerings and most5668initial sales of natively digital assets, the SEC nevertheless is well-5669suited for the role the bill assigns to it in regulating what are5670essentially capital-forming issuer sales.5671 Equally, the CFTC is the natural regulator for exchanges, brokers,5672and dealers executing digital asset transactions not involving the5673issuer. Interpreting current law, multiple--albeit not all--Federal5674court rulings on the issue have held that such transactions are not5675offers or sales of investment contracts.\9\ Rather, these are5676transactions in commodities. The CFTC is best-suited, by dint of5677expertise, experience, and historical statutory framework, to regulate5678digital commodity markets.\10\5679---------------------------------------------------------------------------5680 \9\ See generally note 7, supra. In Ripple, the transactions held5681not to involve investment contracts did involve the issuer; however,5682this was not known to the purchasers because the transactions occurred5683on a blind bid-ask basis.5684 \10\ As a technical matter, a security likely would fall within the5685broad definition of a ``commodity'' under Section 1a(9) of the5686Commodity Exchange Act (``CEA''), 7 U.S.C. 1a(9). However, securities5687generally are not treated like other commodities under the CEA; Section56882 of the CEA, 7 U.S.C. 2, preserves the SEC's jurisdiction over5689securities.5690---------------------------------------------------------------------------5691 Though the CFTC currently does not have plenary regulatory5692authority over spot commodity markets, it has anti-fraud and anti-5693manipulation authority over such markets. And the Commission,5694particularly through its Divisions of Market Oversight and Enforcement,5695intently monitors and surveils these markets given the close5696relationship between derivatives contracts and the underlying5697commodities they reference. The CFTC also has regulatory authority over5698retail foreign exchange dealers \11\ and vigorously polices statutory5699restrictions on certain leveraged retail off-exchange commodity5700transactions.\12\ Moreover, the agency has exclusive regulatory5701authority over futures, options on futures, and swaps referencing5702commodities. In summary, the CFTC has spent the past 50 years dedicated5703to understanding and improving commodities markets and markets for5704commercial risk transfer.5705---------------------------------------------------------------------------5706 \11\ See 7 U.S.C. 2(c)(2)(C)(ii)(III); 17 CFR Part 5.5707 \12\ See 7 U.S.C. 2(c)(2)(C), 2(c)(2)(D) (requiring transactions in5708foreign exchange and other commodities with counterparties that are not5709eligible contract participants to be executed on a designated contract5710market, among other things, unless there is ``actual delivery'' of the5711commodity within 2 days (for foreign exchange) or 28 days (for other5712commodities)); see also, e.g., CFTC, Addendum to FY 2024 Enforcement5713Results (Dec. 2024), https://www.cftc.gov/media/11596/5714DOE_ResultsFY24_AddendumA120424/download (noting CFTC enforcement5715actions pursuing leveraged retail off-exchange commodity transactions).5716---------------------------------------------------------------------------5717 The CFTC has an extensive history of engagement with digital asset5718markets via the above-described authorities. After thorough analysis,5719it determined Bitcoin to be a non-security commodity in 2015 \13\ and5720did the same with respect to Ether in 2019.\14\ It has enhanced5721integrity in these markets by aggressively and successfully pursuing5722fraud and manipulation in spot and derivatives instruments--and5723multiple failure-to-register cases involving digital asset5724derivatives--since that time.\15\ It worked closely with designated5725contract markets (``DCM'') and their clearinghouses (derivatives5726clearing organizations, or ``DCO'') ahead of the first Bitcoin futures5727listings in 2017 to ensure appropriate risk management, contract5728resistance to manipulation, and adherence to other DCM core5729principles,\16\ and did the same with Ether futures listings in 2019.5730Today, these markets are deep, liquid, and transparent, and are well-5731policed by the CFTC for fraud, manipulation, and trade practice5732violations. As former CFTC General Counsel Dan Davis recently noted in5733a statement before this Committee, Bitcoin, Ether, and other digital5734assets underlying products trading on CFTC-regulated markets currently5735represent 83% of total digital asset market capitalization.\17\5736---------------------------------------------------------------------------5737 \13\ See In re Coinflip, Inc., 29 Comm. Fut. L. Rep. (CCH)5738 33,5385739(Sept. 17, 2015).5740 \14\ See, e.g., Hon. Heath P. Tarbert, Chairman, CFTC, Yahoo!5741Finance All Markets Summit (Oct. 10, 2019), https://www.cftc.gov/5742PressRoom/PressReleases/8051-19.5743 \15\ See, e.g., CFTC v. Samuel Bankman-Fried, Case No. 1:22-cv-574410503-PKC (S.D.N.Y. Aug. 7, 2024); CFTC v. Changpeng Zhao (Binance5745Holdings), Case No. 1:23-cv-01887 (N.D. Ill. Dec. 14, 2023); see also5746In re Coinbase, Comm. Fut. L. Rep. (CCH)5747 34,925 (Mar. 19, 2021).5748 \16\ See, e.g., Remarks of Hon. J. Christopher Giancarlo, Chairman,5749CFTC, to the ABA Derivatives and Futures Section Conference, Naples,5750Florida (Jan. 19, 2018).5751 \17\ See American Innovation and the Future of Digital Assets: A5752Blueprint for the 21st Century: Hearing Before the Subcomm. on5753Commodity Mkts., Dig. Assets, and Rural Dev. of the H. Comm. on Agric.5754and the Subcomm. on Dig. Assets, Fin. Tech., and Artificial5755Intelligence of the H. Comm. on Fin. Servs., 119th Cong. 4 (2025)5756(statement of Dan Davis, Partner, Katten Muchin Rosenman LLP),5757available at https://agriculture.house.gov/uploadedfiles/hhrg-119-ba21-5758wstate-davisd-20250506.pdf.5759---------------------------------------------------------------------------5760 The cumulative effect of this extensive engagement with digital5761asset products and markets recently led the CFTC's Divisions of Market5762Oversight and Clearing and Risk to withdraw a 2018 staff advisory5763providing ``enhanced'' guidance on listing of digital asset5764derivatives, explaining that the advisory is no longer necessary given5765CFTC staff experience gained in this area since that time.\18\5766---------------------------------------------------------------------------5767 \18\ CFTC Staff Letter No. 25-07 (Mar. 27, 2025), available at5768https://www.cftc.gov/PressRoom/PressReleases/9059-25. This letter also5769cites digital asset market growth and maturation over the years in5770support of withdrawal of the prior advisory.5771---------------------------------------------------------------------------5772 The CFTC's oversight of digital asset markets is not only long-5773running, but also battle-tested: in the 2022 failure of digital asset5774exchange operator FTX, while other FTX trading platforms revealed a5775total $8.9 billion shortfall in customer funds and went into5776bankruptcy, FTX's CFTC-regulated DCM, swap execution facility5777(``SEF''), and DCO survived without any loss of customer assets and5778remain in operation today under new ownership.5779 This record on digital assets is consistent with the CFTC's 50 year5780tenure as a preeminent markets regulator. Due to its sound regulatory5781framework, not a single CFTC-regulated exchange failed during the 20085782financial crisis. On average during Q1 2025, a total of approximately578340 million futures contracts were traded each day on CME Group and5784Intercontinental Exchange (``ICE'') derivatives exchanges alone.\19\5785The CFTC-supervised DCOs for these exchanges are designated by the5786Financial Stability Oversight Council as systemically important5787financial market utilities under Title VIII of the Dodd-Frank Act.\20\5788Neither these DCOs nor any other under CFTC supervision has ever5789defaulted or even resorted to use of its mutualized guaranty fund5790resources.\21\ And in the OTC derivatives market, total U.S. reported5791notional traded in interest-rate swaps alone was approximately $112.75792trillion during Q3 2024.\22\ These CFTC-regulated markets and market5793utilities have functioned well and steadily performed their risk-5794transfer and shock-absorption roles through periods of extreme5795volatility, such as during instances of negative oil pricing and other5796shocks at the onset of the COVID-19 pandemic.\23\5797---------------------------------------------------------------------------5798 \19\ CME Group International Average Daily Volume Hits Record 8.85799Million Contracts in Q1 2025, Up 19% Year over Year, CME Group (Apr. 9,58002025), https://www.cmegroup.com/media-room/press-releases/2025/4/09/5801cme_group_internationalaveragedailyvolumehitsrecord88million5802cont.html; Historical Daily Volume, ICE, https://ir.theice.com/5803investor-resources/supplemental-information/default.aspx (last accessed5804May 27, 2025). Note that ICE figures include foreign boards of trade5805registered with the CFTC in addition to DCM ICE Futures US.5806 \20\ See Designated Financial Market Utilities (Jan. 29, 2015),5807Board of Governors of the Fed. Reserve, https://www.federalreserve.gov/5808paymentsystems/designated_fmu_about.htm.5809 \21\ See Giancarlo, note 29, infra, at 5-6.5810 \22\ International Swaps and Derivatives Association, Interest Rate5811Derivatives Trading Activity Reported in EU, UK, and US Markets: Third5812Quarter of 2024 and Year-to-September 30, 2024 (2024), available at5813https://www.isda.org/a/lqbgE/Interest-Rate-Derivatives-Trading-5814Activity-Reported-in-EU-UK-and-US-Markets-Third-Quarter-of-2024-Year-5815to-September-30-2024.pdf. Note that these figures include only5816interest-rate swaps reported to the Depository Trust & Clearing5817Corporation swap data repository. Not all swap transactions are subject5818to reporting; for example, CFTC staff has granted no-action relief from5819swap data repository reporting requirements for inter-affiliate swaps.5820 \23\ See Hon. Heath P. Tarbert, Volatility Ain't What it Used to5821Be, Wall St. J. (Mar. 23, 2020), https://www.wsj.com/articles/5822volatility-aint-what-it-used-to-be-11585004897.5823---------------------------------------------------------------------------5824 Finally, in addition to the above-described experience and5825expertise, the CFTC's statutory framework and mission further bolster5826the case for the CFTC as the appropriate regulator for Digital5827Commodity Entities. Among the key purposes of the CEA are to promote5828``responsible innovation and fair competition.'' Since they were added5829to the statute by the Commodity Futures Modernization Act of 20005830(``CFMA''),\24\ the CFTC has regulated with these purposes as guiding5831lights--including in its approach to digital assets.5832---------------------------------------------------------------------------5833 \24\ Public Law 106-554, 114 Stat. 2763 (2000). Since before the5834CFMA was enacted, Section 4(c) of the CEA has authorized the CFTC to5835issue exemptions from statutory requirements ``in order to promote5836responsible economic or financial innovation and fair competition.'' 75837U.S.C. 6c(a).5838---------------------------------------------------------------------------5839 The CFMA furthered these twin purposes by, inter alia, (1)5840replacing prescriptive requirements with flexible core principles for5841registered entities (e.g., DCMs, DCOs, and now SEFs following enactment5842of the Dodd-Frank Act of 2010) and (2) allowing registered entities to5843list new products for trading without affirmative CFTC approval by5844certifying to the CFTC that the listing complies with the CEA and CFTC5845regulations. These reforms were intended, inter alia, to ``remov[e]5846barriers to financial innovation that [we]re threatening America's5847global competitive position in financial markets.'' \25\5848---------------------------------------------------------------------------5849 \25\ Press Release, House Comm. on Agric., Congress Concludes5850Commodity Futures Modernization Act: House-Senate committee leaders5851craft consensus measure, (Dec. 15, 2000) (quoting House Agriculture5852Committee Chairman Larry Combest), https://agriculture.house.gov/news/5853documentsingle.aspx?DocumentID=2047; see also CFMA 2 (providing that5854``[t]h]e purposes of [the CFMA] . . . [include] to promote innovation5855for futures and derivatives . . .'').5856---------------------------------------------------------------------------5857 The statutory core principles established for registered entities5858are outcomes-based requirements, and a registered entity has reasonable5859discretion in determining how to comply.\26\ Importantly, ``flexible''5860regulation does not mean ``lax'' or ``light-touch'' regulation. The5861CFTC is authorized to issue (and has issued) interpretations describing5862acceptable practices for compliance with the core principles, which it5863may designate as the exclusive means of compliance.\27\ And the CFTC5864has brought enforcement actions against registered entities for failure5865to comply with applicable core principles and implementing5866regulations.\28\ But the CFTC's post-CFMA history of outcomes-based5867regulation has allowed registered entities to establish compliance5868methods appropriate for their respective businesses, preventing a5869recurrence of the kind of rigid, one-size-fits-all regulatory5870environment that stifled innovation and competition in CFTC-regulated5871markets prior to the CFMA.\29\5872---------------------------------------------------------------------------5873 \26\ See, e.g., 7 U.S.C. 7, 7a-2, 7b-3. The applicable core5874principles differ across the different types of registered entities.5875 \27\ 7 U.S.C. 7a-2(a).5876 \28\ See, e.g., In re Options Clearing Corporation, Comm. Fut. L.5877Rep. (CCH)5878 35,225 (Feb. 16, 2023).5879 \29\ See The CFTC at 50: Examining the Past and Future of Commodity5880Markets: Hearing Before the H. Comm. on Agric., 119th Cong. (2025)5881(testimony of De'Ana H. Dow, Partner and General Counsel, Capitol5882Counsel LLC), available at https://agriculture.house.gov/uploadedfiles/5883testimony-package_dow_03.25.2025.pdf; see also The CFTC at 50:5884Examining the Past and Future of Commodity Markets: Hearing Before the5885H. Comm. on Agric., 119th Cong. (2025) (testimony of Hon. J.5886Christopher Giancarlo, Senior Counsel, Willkie Farr & Gallagher),5887available at https://docs.house.gov/meetings/AG/AG00/20250325/118038/5888HHRG-119-AG00-Wstate-Gian5889carloJ-20250325-U1.pdf.5890---------------------------------------------------------------------------5891 The self-certification listing process as implemented by the CFTC5892has likewise supported innovation and competition, allowing inventive5893new platform-traded products to flourish by reducing the time to market5894``from years to days.'' \30\5895---------------------------------------------------------------------------5896 \30\ Hearing on the Commodity Futures Modernization Act of 2000:5897Hearing Before the S. Committee on Banking, Housing and Urban Affairs,5898109th Cong. (2005) (testimony of Terrence A. Duffy, Chairman, Chicago5899Mercantile Exchange Holdings, Inc.), available at https://5900www.banking.senate.gov/imo/media/doc/duffy.pdf. The Commission may stay5901listing of a product during the pendency of Commission proceedings for5902filing a false certification of compliance with the CEA or during the5903pendency of a petition to alter or amend the contract terms and5904conditions under Section 8a(7) of the CEA, 7 U.S.C. 12a(7). 17 CFR590540.2(c).5906---------------------------------------------------------------------------5907 These changes to the CEA have supported the proliferation of a5908variety of new entrants operating trading platforms, including multiple5909CFTC-regulated platforms specializing in digital asset products today.5910 As in the period before enactment of the CFMA, an oppressive5911regulatory environment has again threatened America's global5912competitive position--this time in digital asset markets. The bill5913applies many of the same remedies that cured the problem in 2000,5914including a core principles framework for digital commodity exchanges5915and a self-certification listing process. This flexible, adaptable5916framework is particularly well-suited for the relatively novel and5917constantly evolving nature of digital asset markets. There is no better5918agency to implement such a regulatory framework in furtherance of5919responsible innovation than the one that has done so for the last5920twenty-five years, allowing the markets under its jurisdiction to5921become by far the largest, and the most vibrant and robust, of their5922kind in the world.59232. Digital Commodity Activity by SEC-Registered Entities5924 The bill seeks to strike an appropriate balance allowing for5925efficient, non-duplicative SEC supervision of its registrants engaged5926in digital commodity activity while preserving CFTC authority over5927digital commodity markets that are appropriately under its5928jurisdiction. Regulatory efficiency is a laudable objective. But a5929framework that retains holistic CFTC oversight over the secondary5930digital commodity markets is necessary to avoid fragmentation in market5931regulation, monitoring, and surveillance and to bring to bear the5932CFTC's unique expertise and perspective regarding these markets.5933 CFTC registration exemptions for SEC registrants engaged in de5934minimis levels of digital commodity activity may be appropriate5935measures for minimizing regulatory cost and burden and maximizing5936efficient use of regulatory resources. This construct has precedents in5937other areas of overlapping CFTC and SEC jurisdiction.\31\ But beyond5938such limited exemptions, the CFTC should have oversight over digital5939commodity markets as a whole. Carving up the market between two5940regulators could result in a situation in which neither regulator can5941see the forest for the trees and major market disruption, manipulation,5942fraud, or other issues arise without warning.5943---------------------------------------------------------------------------5944 \31\ See, e.g., 17 CFR 4.13(a)(3) (providing an exemption from5945commodity pool operator registration where, inter alia, a pool's5946positions in products under CFTC jurisdiction do not exceed established5947thresholds); 17 CFR 240.18a-10 (allowing a dually registered swap5948dealer and security-based swap dealer to comply with CFTC requirements5949in lieu of certain SEC requirements where, inter alia, the entity's5950security-based swap positions do not exceed established thresholds).5951---------------------------------------------------------------------------5952 Holding multiple registrations with different regulators for5953different activities is commonplace in U.S. financial markets today.5954For example, many entities are simultaneously registered with the CFTC5955as futures commission merchants (``FCM'') or swap dealers and with the5956SEC as broker-dealers or security-based swap dealers. Regulators do and5957should coordinate with and defer to one another where appropriate to5958minimize the cost and burden of such multiple registrations. Forms of5959``alternative compliance'' or similar deference are provided for in5960certain specific areas, such as in CFTC capital rules incorporating for5961dual registrants elements of SEC net capital rules.\32\ Similarly,5962portfolio margining is available in certain cases for related products5963under different agencies' jurisdiction--e.g., Treasuries under SEC5964jurisdiction and Treasury futures under CFTC jurisdiction--with5965expansion of such margining programs keenly awaited as the SEC's5966Treasury clearing mandate deadline approaches. A comparison of the5967vibrancy of broad-based security index futures markets (under sole CFTC5968jurisdiction) with the past malaise of single-stock and narrow-based5969security futures markets (under an onerous and complex joint regulatory5970regime) should serve as a reminder of the importance of these types of5971measures to minimize regulatory burden in areas of jurisdictional5972overlap.\33\5973---------------------------------------------------------------------------5974 \32\ See, e.g., 17 CFR 23.101(a)(1)(ii); see generally 17 CFR 1.17.5975 \33\ Indeed, the SEC seemingly recognized the latter structure's5976negative implications for innovation and competition when it attempted5977to issue an exemption allowing futures contracts on the5978SPIKESTM index to be regulated as futures rather than5979security futures, with the stated goal of facilitating new entrants5980into the market for volatility products. SEC, Order Granting5981Conditional Exemptive Relief, Pursuant to Section 36 of the Securities5982Exchange Act of 1934 With Respect to Futures Contracts on the5983SPIKESTM Index, 85 Fed. Reg. 77297 (Dec. 1, 2020), vacated,5984CBOE Futures Exchanges, LLC v. SEC, No. 21-1038 (D.C. Cir. July 28,59852023) (vacating exemptive order under the Administrative Procedure Act5986due to order's inadequate explanation and consideration of the issues).5987---------------------------------------------------------------------------5988 But with these tools for regulatory efficiency in our toolkit, we5989should not hesitate to unify all U.S. digital commodity markets and5990market participants of material size under a single ruleset,5991administered by a single agency with the expertise and experience to5992ensure these markets are vibrant, innovative, and well-regulated.59933. Conclusion5994 Ultimately, exactly how the line is drawn between CFTC and SEC5995jurisdiction is less important than ensuring that a clear, durable line5996is drawn through lasting legislation. If we lose this historic5997opportunity to provide enduring regulatory clarity for digital asset5998markets and end-users, we cannot be sure that another will come. And5999the United States may slip further behind in the push for global6000digital asset markets competitiveness. We should not allow inaction to6001perpetuate an environment of regulatory uncertainty. Digital asset6002entrepreneurs and the American people deserve better.6003 Thank you, and I look forward to your questions.60046005 The Chairman. Thank you, Ms. Pizzola. At this time, Members6006will be recognized for questions in order of seniority,6007alternating between Majority and Minority Members, and in order6008of arrival for those who joined us after the hearing convened.6009You will be recognized for 5 minutes, each in order, to allow6010us to get to as many questions as possible, and I recognize6011myself for 5 minutes.6012 Ms. Pizzola, in your testimony, you mentioned there is no6013better agency to implement a bill like the CLARITY Act and6014further responsible innovation. Please explain why CFTC is best6015suited and how it is uniquely situated among Federal regulators6016on this front.6017 Ms. Pizzola. Thank you for the question, Mr. Chairman. I6018believe the CFTC is best suited to regulate secondary digital6019commodity markets in furtherance of responsible innovation6020because of its experience, its expertise, and its statutory6021remit. It currently monitors and surveils spot commodity6022markets closely, given the close relationship between6023derivatives contracts and their underlying commodities. It has6024engaged in that activity for 50 years, and its predecessor did6025so before the CFTC was established, and it spent the past 106026years engaging productively with digital asset spot and6027derivatives markets. We saw this through its efforts to promote6028integrity through its very vigorous enforcement program,6029rooting out fraud and manipulation, as I said, in both the spot6030and derivatives markets. We have also seen this in the CFTC's6031oversight of the launch of Bitcoin and Ether futures years ago6032now that have since become vibrant, well-policed markets.6033 As Mr. Miller mentioned, in the FTX bankruptcy, we saw that6034the CFTC-regulated entities within the FTX group were the only6035ones that were able to return all customer funds without any6036loss without having to go through the bankruptcy, and that,6037again, as Mr. Miller said, is because of the diligent oversight6038and examinations that CFTC staff had and engaged in regularly6039to prevent the sort of misappropriation of funds that happen6040with other entities within the group.6041 So essentially, I would just sum up and say that the CFTC6042has 25 years of experience in implementing the kind of6043flexible, core-principles-based framework and self-6044certification process that, here are key elements of the6045CLARITY Act's regulatory regime for exchanges. And they have6046proven over time to support responsible innovation through6047thousands of product listings, dozens of new market entrants,6048and I really just think this is the right structure for digital6049asset markets, and the CFTC is the right regulator to implement6050that structure given its experience.6051 The Chairman. Thank you, ma'am. Mr. Miller, thank you for6052sharing your story. In the FTX collapse, the only FTX entity in6053the United States with Federal regulatory oversight was the FTX6054U.S. derivatives, which is overseen by CFTC. Please describe6055for us how CFTC's oversight of FTX U.S. derivatives spared it6056from getting wrapped up in the activities of the FTX foreign6057entities.6058 Mr. Miller. Thank you, Mr. Chairman. Great question. FTX6059U.S. Derivatives was registered with the CFTC, both as a6060designated contract market and a derivatives clearing6061organization. The tools in place were very simple. Customer6062assets were held at a third-party custodian segregated from the6063Treasury and company assets of FTX U.S. Derivatives. Customer6064assets were in separate accounts. They were subject to rule and6065legal structures that protected them as such, and they were not6066able to be accessed either by FTX U.S. Derivatives or the6067broader enterprise. It is not more complicated than putting6068U.S. customer assets in a segregated place and protecting those6069with law.6070 The Chairman. Are you concerned something similar to the6071FTX debacle could occur in the United States if digital assets6072market structure legislation is not enacted by Congress, and6073how urgent is it that Congress act?6074 Mr. Miller. Another great question. I started my statement6075with urging prompt action, and I believe that sincerely because6076what we have now is a 50 state regulatory program that doesn't6077necessarily impose governance requirements, examinations,6078audits, and the types of standards we see at our Federal6079markets regulators. I think the states do a great job at making6080sure that their standards are followed and that their6081registration requirements are met. However, we have the 25 and608250 years of experience at our Federal markets regulators to6083bring to bear, and this statute allows that to happen.6084 The Chairman. So how would CLARITY prevent an event like6085that from happening?6086 Mr. Miller. So the CLARITY Act as drafted, the most6087important point is that it prompts registration. The6088registration brings in examinations, auditing, governance6089requirements, independent directors, and record keeping. That6090tool set allows both regulators and the governance body of any6091entity to ensure that what the entity says is happening is6092taking place. And so the registration provisions and the6093accompanying compliance programs in the Act do clearly what we6094are asking for in this space.6095 The Chairman. Thank you sir, and I yield back my time and6096recognize the gentlelady from Minnesota, the Ranking Member,6097Representative Craig, for 5 minutes.6098 Ms. Craig. Thank you so much, Mr. Chairman. I want to begin6099with a focus on consumer protection, and a key component of6100that in my mind is educating your customers. The better we can6101increase the financial literacy and risk for retail customers,6102the better prepared they will be to face those risks and the6103opportunities that these new markets present. In addition to6104establishing a regulatory framework for digital commodities6105that includes important basic protections for customers, like6106segregation of funds and disclosures, the CLARITY Act would6107also require the CFTC and the SEC to jointly study how to6108increase financial literacy of retail digital commodity holders6109and improve their coordination on customer education in this6110space.6111 For those of you on the panel who have experience working6112at the CFTC or the SEC, can you talk to us a little bit about6113the agencies' respective customer education programs, and do6114you have any suggestions on ways we can help improve customer6115education and outreach surrounding digital commodities?6116 Dr. Piwowar. I will go first.6117 Ms. Craig. Thank you.6118 Dr. Piwowar. So at the Securities and Exchange Commission,6119there is an office dedicated to this. It is called the Office6120of Investor Education and Advocacy, and they engage in a number6121of financial literacy- or financial education-type programs.6122They actually have their own website called Investor.gov,6123separate and apart from the SEC's website, and there are a6124number of different things that they do to try to educate6125folks. There is an entire page dedicated to digital assets and6126investing in those assets. Also, I mentioned in my opening6127testimony that the SEC is already using its existing authority6128in the digital asset space, and one way they are doing that is6129issuing staff statements to let people know various things. So6130for example, they have said meme coins are not securities and6131do not fall under the Federal securities laws, and so,6132therefore, you do not have the protection of the Federal6133securities laws from that, basically, a caveat emptor to6134letting them know those sorts of things. And they have issued a6135number of other statements on other things, proof of work6136staking, proof of other sorts of things that they have done,6137too, so they have a number of different mechanisms for doing6138that.6139 Ms. Craig. Thank you. It is a critical moment in time to6140make sure that investors know those are now protected. With6141respect to the CFTC, any comments there?6142 Ms. Pizzola. I can start, Ranking Member, and then my6143colleague, Mr. Miller, can jump in. Yes, the CFTC does have,6144like the SEC, as many here may know, a separate office of6145customer education and outreach, and it has been engaged in the6146past, I believe it is almost 10 years now, in educating6147customers regarding digital assets. It put out virtual currency6148primers explaining what is Bitcoin, what is Ether, what are6149virtual currencies, things of that nature, I believe almost 106150years ago now. And since then, it has sort of had regular6151engagement events, an annual sort of CFTC virtual currency or6152blockchain day. Sometimes that is part of a broader blockchain6153week that is held in Washington, D.C. with different6154universities. But I certainly, Ranking Member, agree that more6155could be done, particularly in the outreach arena, making sure6156that more customers are aware, more customers are sort of6157knowledgeable of the types of fraud and other abuses that can6158take place. There is always more to be done in that arena, but6159I do think the CFTC has engaged in robust efforts in that6160regard.6161 Ms. Craig. Let me just ask two more quick questions because6162I am running out of time here. Mr. Miller and Ms. Pizzola, let6163me just ask you, does the CFTC, in your view, have the current6164resources that would be necessary to regulate this space6165appropriately? Mr. Miller, yes or no, and maybe 10 seconds.6166 Mr. Miller. Yes, it is an agency where resources are6167critical, and I think it is important to focus on funding the6168agency at the level of resources it has requested.6169 Ms. Craig. Thank you. Ms. Pizzola.6170 Ms. Pizzola. I agree with that, yes, ma'am.6171 Ms. Craig. Great. Excellent. Let me just close with a final6172question to each of you. Obviously, there has been a lot of6173activity from the President and his family in this space. I6174told you what I thought about that, that he should also be6175added as well, as the Vice President, to those folks that are6176included in the legislation. Under current law, Members of6177Congress, judicial officers, legislative, judicial employees,6178et cetera, are all prohibited from using nonpublic information6179that they acquire because of their position to trade in those6180CFTC markets. Current law prohibits the same list from telling6181others, such as nonpublic information, for those trading on6182those markets. The CLARITY Act rightly adds digital commodities6183to these prohibitions. Do you believe these prohibitions should6184apply in the same way for the President? Mr. Miller?6185 Mr. Miller. So I think what the Act does is bring about6186transparency and disclosure requirements that apply to all6187participants in these markets, and I think that is appropriate.6188 Ms. Craig. Thank you. Ms. Pizzola.6189 Ms. Pizzola. I couldn't agree more. I think the disclosure6190requirements of the Act are appropriate, and it is appropriate6191that they are broadly applied.6192 Ms. Craig. I am going until Mr. Chairman cuts me off here.6193Any other? Yes? Should those prohibitions apply to the6194President and Vice President?6195 Dr. Piwowar. The meme coins are not under the jurisdiction6196of the SEC, so no comment.6197 Ms. Craig. Okay. Dr. Ching, just because you are here.6198 Dr. Ching. I agree with our colleagues that more disclosure6199and the rules formed by this Commission are going to really6200help with that in the future. Thank you.6201 Ms. Craig. Not quite the same as prohibition, but thank6202you, and I yield back.6203 The Chairman. The gentlelady's time has expired. I now6204recognize the gentleman from Oklahoma, Mr. Lucas, for 56205minutes.6206 Mr. Lucas. Thank you, Mr. Chairman. Dr. Piwowar, what are6207the challenges posed by the regulation by enforcement approach6208that the last Administration took? In other words, why does6209Congress need to provide a comprehensive regulatory framework6210for digital assets so the SEC is not depending on after-the-6211fact enforcement?6212 Dr. Piwowar. Yes, Congressman. I almost want to call you6213Mr. Chairman, but, Congressman, thank you for that question.6214The regulation by enforcement by the last Administration had a6215number of negative effects in the market. So as Mr. Miller6216testified, it forced a lot of folks to go offshore rather than6217having customer assets be protected within the regulatory6218framework. It was not only regulation by enforcement, but there6219was no actual regulation going on in there. There were actually6220firms that were going to the SEC begging them to regulate them.6221Please regulate us. We want to be regulated under the framework6222to protect the customer assets, as they were saying, and so6223there was a lot of innovation that went offshore, less6224protections for consumers.6225 And one that I think that is an underrated negative6226consequence was that it wasted SEC resources for 4 years. There6227were dozens of staff members pursuing cases that were not under6228its jurisdiction, they lost multiple times in court, and those6229were resources they could have used to provide clarity in the6230regulatory space. And now they are catching up, but that was 46231years wasted.6232 Mr. Lucas. Dr. Ching, as you and I discussed yesterday, the6233ag and energy industries are often leading the change when it6234comes to innovation and technology advancements. Can you talk6235about some of the challenges our rural producers face when6236regulations fail to keep up with the new technology?6237 Dr. Ching. There is a lot of innovation that can happen6238right now inside of rural America and agriculture. Some of the6239examples of that we have seen in the past are in this6240Committee's hearings of encounter tracking, data lineage, and6241more. Blockchain is one of those great equalizing technologies.6242As long as you have internet through a phone or other device,6243you can access the pure power of a decentralized network that6244is globally accessible. We are very excited about the work that6245this Committee is doing to help advance these technologies and6246make them more accessible to developers who can help build6247these technologies in agriculture and rural America.6248 Mr. Lucas. And Mr. Miller, by the way, thank you for6249maintaining that Oklahoma tone of voice and logic. Would you6250care to comment as well as a fellow Oklahoma State guy?6251 Mr. Miller. Thank you, Congressman. So access to new6252technology is often gated by the providers of the technology6253and the willingness of users to adopt it, and oftentimes that6254is gated by legal and regulatory certainty. And given that we6255have just gone through, as Commissioner Piwowar described, 46256years of enforcement on every corner of the cryptocurrency and6257blockchain space, there is no certainty to these rural users6258that they are allowed to engage with this technology. The6259CLARITY Act and the work of this Committee will bring that6260clarity and allow more access to take place.6261 Mr. Lucas. Ms. Pizzola, can you talk about the necessity of6262addressing the spot market gap? How does the CLARITY Act6263provide regulatory certainty for the spot market trading of6264digital commodities?6265 Ms. Pizzola. Thank you for the question, Congressman. Yes,6266I believe that the CLARITY Act does provide very beneficial6267clarity in the spot markets today. We do have, as Commissioner6268Piwowar said, essentially a sort of morass of confusion when it6269comes to whether particular transactions are under SEC's6270jurisdiction or are sort of spot commodity transactions that6271are not regulated other than under the CFTC's antifraud and6272anti-manipulation authority. We did see under the prior6273Administration, case after case, time wasted, resources6274misallocated, and just general confusion. And it really did6275deter market participants and entrepreneurs from participating6276in the space and drove well-meaning firms, both entrepreneurs6277and financial institutions, either offshore or just out of the6278digital asset markets altogether.6279 And I think the CLARITY Act really does provide a6280beneficial set of rules of the road that really draw a clear6281line between SEC and CFTC jurisdiction, and has this sort of6282registration, examination, auditing that Mr. Miller referenced,6283as well as customer funds segregation requirements, disclosure6284requirements, other important aspects of a regulatory framework6285that you would need in order to sort of have clear rules of the6286road and ensure that these markets can flourish.6287 Mr. Lucas. Thank you very much, and thank you, Mr.6288Chairman. I yield back to balance my time.6289 The Chairman. The gentleman yields back. I now recognize6290Ms. Brown from Ohio for 5 minutes.6291 Ms. Brown. Thank you, Chairman Thompson and Ranking Member6292Craig, for calling this hearing today, and thank you to our6293witnesses for being here. As the representative for Ohio's 11th6294Congressional District, I am proud to represent a region with a6295legacy of innovation rooted in service to working families.6296From Garrett Morgan revolutionizing traffic signals to Charles6297F. Brush perfecting electric lighting, my district has a6298history of leading innovative technology. That legacy lives on.6299Case Western Reserve University has been collaborating with6300Hyland and Dataswift to develop verified blockchain-anchored6301digital credentials. And just down the road, our world-class6302hospitals are leveraging artificial intelligence and advanced6303learning algorithms to protect patient privacy and improve6304care. This is what innovation looks like, but innovation6305without guardrails invites exploitation.6306 Digital assets aren't just about cryptocurrency or6307speculation. They are about the next generation of technology,6308finance, and market participation. From enabling faster6309payments to powering digital identity, the potential is6310enormous, but so are the risks. Today's regulatory framework is6311fragmented, outdated, and insufficient. Consumers don't know6312who is protecting them. Companies operate in a fog of6313uncertainty, and bad actors are exploiting the vacuum. The time6314to act on cryptocurrency and digital asset regulation is long6315overdue. The last few years revealed a systemic failure to6316protect retail investors from fraud, misconduct, and abuse, and6317accountability remains elusive, and the risk isn't behind us.6318It is still unfolding at the highest levels of government.6319 President Trump has reportedly profited from meme coins, a6320clear conflict of interest. It should concern every American6321that someone can spend $2 million to get a literal seat at the6322table with the President. Reports indicate that the President6323and his family have increased their net worth by nearly $36324billion, thanks to crypto investments, and 40 percent of the6325President's net worth is now tied to crypto. This isn't just6326about ethics, it is about oversight. We need clear, consistent,6327and forward-looking regulation not just to protect consumers,6328but to give businesses the certainty they need to innovate and6329grow responsibly.6330 Mr. Miller, you had a front row seat to the FTX collapse.6331In your view, are current regulatory frameworks capable of6332protecting retail investors from the kind of misconduct we saw6333there, and what critical protections were missing that allowed6334billions in customer assets to vanish?6335 Mr. Miller. Thank you for the question, Congresswoman. I6336think the tools that we want to bring to bear are capital6337requirements, customer asset segregation, examination, and6338audits, and those are the tools baked into the current draft of6339the CLARITY Act. When you bring that set of tools and6340regulatory programs into an entity that is holding customer6341assets, that gives regulators the ability to enforce what the6342law says.6343 Ms. Brown. Thank you. Dr. Piwowar, even if agencies, like6344the CFTC or SEC, have rulemaking authority, they may lack tools6345to ensure transparency and consumer redress. Should they, or6346possibly the CFPB or another regulator, be empowered to develop6347a national digital asset consumer protection standard, and if6348so, what should that include: disclosures, recourse mechanisms,6349or real-time fraud monitoring?6350 Dr. Piwowar. Yes, thank you for your question. I believe6351that the SEC and the CFTC have the tools and the necessary6352authorities, not only the existing ones, but the ones provided6353in the CLARITY Act. In particular, I note that the CLARITY Act6354exempts digital commodity issuers from traditional securities6355regulation. However, it applies a very tailored approach using6356the SEC's expertise. So the SEC provides disclosures not only6357for public companies, but also for investment companies like6358mutual funds, ETFs, closed-end funds. They have the expertise6359and the tools to apply those that fall under their jurisdiction6360and I have the confidence that the CFTC also has under theirs.6361 Ms. Brown. Thank you, and, Ms. Pizzola, if Congress fails6362to act, what do you believe the long-term consequences are for6363low-income and minority consumers who already face deceptive6364marketing and limited financial protections?6365 Ms. Pizzola. Thank you for the question, Congresswoman. I6366believe that financial institutions that may otherwise support6367financial inclusion for those types of Americans will continue6368to be deterred from participating in this space, and that,6369again, the types of financial inclusion mechanisms that digital6370assets can provide will continue to be sort of pushed offshore,6371as we have seen for the past several years, due to the6372regulatory fragmentation that you mentioned.6373 Ms. Brown. Thank you. Discussion like today's highlight why6374this Committee's work is so important. Through thoughtful6375dialogue, we can finally begin to bring digital assets out of6376the regulatory shadows by ensuring there are rules of the road6377that protect consumers, promote responsible innovation, and6378preserve U.S. competitiveness. I look forward to continuing6379this discussion with my colleagues, and with that, Mr.6380Chairman, I yield back. Thank you.6381 The Chairman. The gentlelady's time has expired. I now6382recognize Representative Bost for 5 minutes.6383 Mr. Bost. Thank you, Mr. Chairman. Mr. Miller, given your6384background and experience, is it important for market6385participants to proactively know which assets are subject to6386CFTC's oversight and which assets are subject to the SEC's6387oversight, and if so, why?6388 Mr. Miller. Thank you for the question. It is important to6389know who your regulator is and who your service provider's6390regulator is because we have longstanding laws that govern how6391those assets are protected and how those assets are treated,6392depending who the regulator is, in the case of insolvency or6393otherwise. And so it is critical that a customer can look at a6394business and understand who its regulator is.6395 Mr. Bost. So does it enhance customers' protection to6396provide clear lines so they know exactly where their guardrails6397are and who they are dealing with?6398 Mr. Miller. Absolutely.6399 Mr. Bost. Ms. Pizzola, you have worked at CFTC as well for6400and on behalf of several firms regulated by the CFTC. Can you6401talk about the agency's principal-based approaches and why that6402would serve as a good fit for digital assets?6403 Ms. Pizzola. Congressman, thank you for the question. The6404principles based approach that we have under the Commodity6405Exchange Act, it is really a flexible framework, it establishes6406outcomes-based requirements, and it gives exchanges and other6407registered entities reasonable discretion in determining how to6408comply. And it is expressly designed to promote responsible6409innovation, which we all want to see in the digital asset6410space. And ever since it was enacted 25 years ago, it has6411really allowed exchanges to tailor their compliance efforts to6412their unique business models, and I think that approach works6413very well in the digital asset space because of the constant6414innovation, the evolving nature of the space. I think we have6415seen that it has supported the proliferation of a variety of6416new entrants in the exchange operating space, including6417multiple CFTC-regulated platforms that specialize in digital6418asset products today, and so I think it is a great fit for the6419digital asset industry because of those features.6420 Mr. Bost. I just want to say that as we are moving forward6421with this, the first time I heard about any digital--obviously6422it was Bitcoin that everybody talked about6423 I was in church, and there was a guy who had a radio show6424program that broadcasted with 30 powerful watts, I am pretty6425sure, and it was amazing to me. He came up and he said you got6426to know about this, and honest to goodness, it has been trying6427to get educated. And so adding to where, early on, Ranking6428Member Craig went, educating people specifically on6429understanding Bitcoin, because you can get online and literally6430blow your head up trying to figure out what digital assets and6431how you work them. And the only thing I can compare it to is6432whenever we went to the paper dollar, and you no longer had6433gold and silver in your hand.6434 This is the same type situation, and trying to get a6435wraparound to protect people's, literally, assets that are6436floating out there and try to understand how to use them is6437challenging, but your help is tremendous. Thank you for your6438input and look forward to where we are going with this. Thank6439you, and I yield back.6440 The Chairman. The gentleman yields back. Now I am pleased6441to recognize gentlelady from Oregon, Ms. Salinas, for 56442minutes.6443 Ms. Salinas. Thank you, Chairman Thompson and Ranking6444Member Craig, and thank you to our witnesses for being with us6445today.6446 Throughout my public service, I have taken consumer and6447investor protection very seriously. Oregonians demand6448accountability for bad actors, and our state has a pretty proud6449history of standing up to companies that engage in practices6450that actually harm consumers. In fact, earlier this year,6451Oregon's Attorney General filed suit against Coinbase for6452selling unvetted, unregistered digital assets to Oregonians and6453Coinbase users across the country. Coinbase cost investors6454billions of dollars, and one of these specious cryptocurrencies6455at issue in the lawsuit dropped in value from $700 to $726456within 1 month of being launched for public trading on the6457platform, and today the coin is valued at around $5 per share.6458And this question is for the whole panel. How pervasive are6459these kinds of scam coins across large exchanges like Coinbase,6460Crypto.com, and Robinhood, and have these actors or our6461regulating agencies made any progress to rein in their6462proliferation?6463 Mr. Miller. Thanks for the question, Congresswoman. I think6464disclosure on the cryptocurrency service providers' websites6465about the products that are made available is critical. I think6466many of the companies you identify do that, and they do it very6467well, and I think the CLARITY Act will encourage more of that6468and will provide a Federal basis for those types of6469disclosures. I think the industry has done a good job in the6470United States of ensuring that customers are aware of what they6471are buying when they go on the websites and they are able to6472read the backgrounds of the projects behind the tokens. I think6473the current lawsuit by the State of Oregon is a bit of a replay6474of the SEC lawsuits that have either been withdrawn or defeated6475in the courts, and so I am hopeful that we don't see a6476continuation of the state of the SEC enforcement path over the6477last 4 years that diverted so many resources from progress.6478 Ms. Salinas. Thank you. Would anybody else like to comment?6479 Dr. Piwowar. Just to comment that I note in the CLARITY Act6480where it provides for disclosures on the projects up front, and6481then also, coupled with the prohibitions on certain sales by6482insiders, I think is a very good consumer protection. It is6483very consistent with what the SEC requires for initial public6484offerings where there is a lockup period, where insiders who6485have inside information on their companies are not allowed to6486sell into the market until a lockup period expires, and they6487have to disclose that. So I think providing the prohibitions6488along with the disclosures is very helpful.6489 Ms. Salinas. Thank you, and in the panel's view, how have6490these kinds of scam coins hurt the investors' perception of6491digital assets as legitimate investment vehicles?6492 Ms. Pizzola. I will start with that. Thank you,6493Congresswoman. I think it has deterred participation from6494financial institutions that otherwise would feel or may feel,6495particularly with increasing regulatory clarity through the6496types of SEC staff actions that Commissioner Piwowar mentioned.6497I think they may otherwise be interested in getting into the6498space, but are concerned about scams and frauds and exposing6499their customers to that kind of activity. And then I think in6500general, it just sort of deters market participation, has left6501sort of a vacuum of sort of the kind of professional and well-6502regulated space that we would want to see for crypto assets. I6503think with the kind of disclosure and customer protection,6504customer asset segregation requirements, registration,6505recordkeeping, reporting, things like that that we see under6506the draft CLARITY Act, I think that that would really6507professionalize the space and address many of the concerns that6508you have identified, Congresswoman.6509 Ms. Salinas. Thank you. So to the point of everything that6510we have talked about today with the disclosures, the segregated6511funds, transparency audits, last Congress, this Committee heard6512testimony from the CFTC Chairman, Russ Behnam, that indicated6513the agency would need an additional $120 million of additional6514investment over a 3 year period to meet the demands of the6515regulatory framework that was set out under the FIT21, and this6516framework does closely monitor what we are talking about today6517under the CLARITY Act. How can the CFTC and the SEC, for that6518matter, be expected to meet the expectations laid out in this6519legislation without being provided additional resources? And6520what would some of the harmful consequences of setting forth a6521more regulated market structure be that cannot be properly6522enforced?6523 Mr. Miller. I will make a short response. Thank you for the6524question. I think funding our market regulators has been a6525great return on investment for the American people, and it has6526been proven over the years, and so if we are going to add6527responsibilities, we have to add resources.6528 Ms. Salinas. Thank you.6529 Dr. Piwowar. From the SEC side, I note that the new6530Chairman, Paul Atkins, just testified recently to the6531Appropriations Committee on what he believed the level of6532resources are, so defer to him on that. I will say that the SEC6533is already, as I mentioned, redeploying assets from some of6534their enforcement staff that have been doing some of these6535cases that should have been focused on protecting consumers.6536Acting Chairman Uyeda started, I think it was called the Cyber6537and Emerging Threat Unit that specifically focuses on these6538types of things, so I think redeploying resources is one way6539that they can do that.6540 Ms. Salinas. Thank you for indulging me, Mr. Chairman. I6541yield back.6542 The Chairman. The gentlelady's time has expired. I now6543recognize the gentleman from the Buckeye State, Mr. Taylor, for65445 minutes.6545 Mr. Taylor. Thank you very much, Mr. Chairman and Ranking6546Member Craig, for holding this hearing, and thank you very much6547to the witnesses for their insight, time, and the sacrifices6548you made to be here. As representative of a large swath of6549Appalachian southern Ohio, one of my main priorities is to6550support policies that promote economic development and job6551creation. And while the digital assets industry is still in its6552early stages, many innovators are already using blockchain6553technology to improve the daily lives of Americans every day.6554Dr. Ching, can you describe the value of digital assets today6555and their potential value in the future for small businesses6556and main street Americans beyond trading them on an exchange?6557And what I am trying to get at is why should the people in6558southern Ohio, which is a very Appalachian district, care about6559what we are talking about today?6560 Dr. Ching. Thank you for your question, Congressman. We6561have heard today a little bit about how tokens can be used for6562different kinds of purposes. I would like to talk about the6563ones that I think that they are best used for. Tokens are an6564incredibly neutral way to interact on a blockchain. They6565provide governance features, staking features, which is6566security as well as opportunity to do payments, and represent6567digital identity and verification of the digital identity. In6568places in Ohio and across the world, we are starting to see new6569entrepreneurs and new ideas being picked up in these areas to6570support new applications. I think one actually we talked about6571in the past was actually working with Ohio State on some6572programs for digital assets for athletic programs and others6573and games.6574 I think that this innovation is very important to support6575Americans bringing those small businesses across all of6576America, as well as it is going to help the global economy to6577make these products accessible from a larger standpoint. So6578overall, we are very excited about this Committee's work to6579help provide much more clarity around token issuance and6580management to making these innovations possible.6581 Mr. Taylor. Thank you very much. We heard testimony earlier6582that the one basic requirement for participation in this6583technology is connection to the internet, correct?6584 [No response.]6585 Mr. Taylor. Okay. My district has an incredibly large part6586of it that has basically no access to the internet, and I am6587not the only person that has a district like that. So by show6588of hands, does anyone on the panel share my concern about the6589fairness of enacting a comprehensive cryptocurrency framework6590using the resources of all Americans before we make it6591accessible to all Americans? Is nobody else concerned about6592that?6593 [Hands raised.]6594 Mr. Taylor. We all are? Okay. Good. Good, good. Glad to6595hear that. Sorry. I didn't think it was coming to me this fast.6596Mr. Miller, in your testimony, you described how in the absence6597of Federal action, states have filled the vacuum for digital6598asset market regulation, and because we lack a Federal6599framework, innovators are forced to navigate a complex,6600inconsistent patchwork of licensing regimes. As a small6601business owner myself, I know the last thing entrepreneurs want6602to think about is regulations. Every minute you spend thinking6603about regulations is a minute that is not spent improving your6604business. I don't know any business owner that would want to6605spend more time thinking about regulations. So in the current6606regulatory environment, can you describe further the steps that6607a digital asset entrepreneur must take if they want to scale at6608the national level?6609 Mr. Miller. Thank you for the question, Congressman. It is6610a great question and one that we get often. There are at least661140, maybe 45 states that have clear licensing requirements for6612many types of digital asset businesses that involve6613transferring assets between customers. Certain states, it can6614be a multiyear process. The cost estimate, if someone wants a661550 state program, it can be in the millions of dollars. It is a6616burden that many have faced and decided to not start their6617business in the United States.6618 Mr. Taylor. Thank you very much. Just for clarification of6619my previous question, has there been an estimate of the cost6620that goes into the building the rulemaking framework? Is6621anybody familiar? I know that is going to be ultimately our6622job, but is anybody aware of what they estimate that cost to6623be?6624 Dr. Piwowar. I have not seen an overall cost, but both6625agencies are required by law when they engage in particular6626rulemakings to look at the cost and benefits of each of the6627particular regulations that they are putting in place, so they6628will be coming out on an individual basis.6629 Mr. Taylor. Sure. So the point of my earlier question, in6630case it wasn't clear, is the taxpayer money from everybody is6631going to be used for whatever the cost of these two agencies'6632big framework is going to be, but until we get everybody access6633to the internet, they won't be able to participate in it. Is6634that where we are?6635 Mr. Miller. I will engage this way. I think blockchain6636provides an opportunity for inclusion and access to financial6637services, and if that is the promise of it, then we need to6638distribute it and deliver it to those who need to access it.6639 Mr. Taylor. So you are in favor of making sure everyone has6640access to the internet before we worry about this framework?6641 Mr. Miller. I am exceptionally pro-internet, and I am also6642pro-blockchain legislation.6643 [Laughter.]6644 Mr. Taylor. Fair enough.6645 Dr. Piwowar. At the Milken Institute, we worked on a6646provision of the Bipartisan Infrastructure Bill (Pub. L. 117-664758, Infrastructure Investment and Jobs Act) that has $2 billion6648at Department of Commerce that rural communities can apply for6649to get broadband.6650 Mr. Taylor. Okay. Thank you all very much.6651 Dr. Piwowar. So I will be happy to put you in contact with6652them.6653 Mr. Taylor. I appreciate it. I yield back, Mr. Chairman.6654 The Chairman. The gentleman yields. I now recognize the6655gentleman from Alabama, Mr. Figures, for 5 minutes.6656 Mr. Figures. Thank you, Chairman Thompson and Ranking6657Member Craig, and I appreciate everyone's involvement in6658pulling this hearing together, and to the panel. I also want to6659start with a special thanks to all of the Committee staff and6660the Committee Members' staff because this is complex stuff.6661This is not simple. This is tough. It is tough to comprehend.6662It is tough to understand. It is tough to discuss in simple6663terms. It is tough. So I want to give a special shout-out and6664thanks to all staff on both sides of the aisle for really6665diving into this and becoming the experts that we need.6666 Congressman Taylor, I was with you back here. You couldn't6667see us, but we had our hands up, too. We agree with that issue.6668I represent a very rural part of Alabama for the most part. I6669have Mobile and Montgomery, but I am pretty sure those are6670probably the only two cities in my district that most of you6671guys have heard of. We have a very significant rural broadband6672access issue, and so I, too, am committed and want to work with6673you, Congressman Taylor, to make sure that, in the context of6674this being a future element, a significant and growing element6675of our economy, that we are not leaving rural America and rural6676Alabama in the dust simply because they don't have the ability6677to be able to plug into the future. That is a real thing. You6678can pull up to McDonald's in my district on any school day and6679see it full of cars with more cars than people are inside the6680restaurant because that is their only access to be able to get6681on the internet to do homework. And so that is a real concern,6682and, Congressman Taylor, I want to work with you on that going6683forward.6684 I spoke to the complexities of these issues, and literacy6685is enormously important here because we sit here and we look6686very smart and educated and informed in discussing this6687subject, but I can guarantee you there are probably less than668820 percent of Members of Congress who can have deeper than a6689surface-level conversation about this issue because it is6690tough. And we have the benefits of staff that can get us up to6691speed on it, but the average person doesn't. And so people in6692Alabama and Mississippi and Ohio, they don't have the luxury of6693having somebody to be able to explain to them what6694cryptocurrency is, and I believe that is what contributes to a6695lot of the fear and misunderstanding and misinformation that is6696out there about the industry. And so, I want to make sure that6697what we are doing here in regulating this is going to6698contribute to enhancing literacy across the spectrum of a6699future, quite possibly, cornerstone of the American economy.6700 And so, Dr. Ching, what does this bill do for that in terms6701of financial literacy, particularly to those highly vulnerable6702groups and populations and communities across the country?6703 Dr. Ching. Thank you for your question, Congressman, and I6704just want to address, as an industry, on the product side, we6705are working actually really hard to support new types of6706applications where the blockchain can be used without the6707internet. And so you can imagine a world where even without6708internet, using Bluetooth technology or other kind of like just6709person-to-person communication, you can transact in the same6710way and have those transactions then be finalized on a6711blockchain when they do connect with the internet at some point6712in time in the future. This regulation is very helpful to6713actually define, again, the token issuance rules and having6714this innovation come into America.6715 A lot of the products we worked with in the past, ourselves6716included, have had trouble understanding these rules and6717regulations and spend considerable resources to try to6718understand them, and, ultimately, delayed our token launches or6719forced us into launching with a lot of uncertainty in the past.6720Other projects don't even have the resources that we have, and6721they have had to struggle with even moving offshore or finding6722other methods of solving this challenge. This clarity will be6723very, very helpful in helping American innovation to happen in6724places in your district and other places in rural America, and6725I think with that ability and definition, it will bring back a6726lot of that entrepreneurial spirit to these areas and then6727drive technology in those areas as well.6728 Mr. Figures. Thank you for that. And I am personally a6729believer in innovation and the power of innovation, and believe6730that we need a framework that encourages said innovation and6731continues to put America in the driver's seat in this space.6732But the consumer protection angle of it is obviously something6733that a lot of people are concerned about and something that we6734have to be realistic about in addressing and make sure that the6735framework that we are adopting has sufficient protections and6736means to address scams. I know the industry does not like6737frauds, does not like scams, does not like people abusing it.6738That is not good for business. It is not good for the image of6739the industry. I know many players have called for regulation6740for a long time to root out that sort of malfeasance. And so, I6741guess I will channel this last question to you, Mr. Miller. In6742terms of consumer protection, does this bill do enough, and I6743will give you a softball: why is this bill the best way to go6744right now?6745 Mr. Miller. Thank you for the question. By certain6746measures, 55 million Americans own cryptocurrency, so this is a6747real question today. And what the bill does is require6748examinations, customer asset protection and disclosures, and an6749ongoing regulatory supervision by our markets regulators with6750the experience to do it. That is what the CLARITY Act does, and6751it is why I have been supportive.6752 Mr. Figures. Thank you. I yield back, Mr. Chairman.6753 The Chairman. I thank the gentlemen. I now recognize the6754gentleman from South Dakota, the Chairman of the Subcommittee6755of jurisdiction for CLARITY, Mr. Johnson, for 5 minutes.6756 Mr. Johnson. Thank you, Mr. Chairman, and thank you for6757your kind comments at the top of the hearing. Mr. Chairman, as6758you know, the age of digital asset opportunity and innovation6759is here. Blockchain technology is going to improve and empower6760every industry, and a lot sooner than most people realize. The6761only question that is really before us is where is that6762innovation going to happen? The only thing that is standing in6763the way of America being the home for that innovation and that6764investment is our regulatory uncertainty. Most everyone else6765has already figured this out, and so the CLARITY Act, which has6766been a great joint effort between myself, the Chairman, the6767Ranking Member, Don Davis, and our colleagues on Financial6768Services, is an attempt to banish that regulatory uncertainty,6769to unlock this innovation, unlock this investment, and make6770sure that those industries are empowered.6771 And so, Dr. Ching, you have spoken quite a little bit today6772already about how the CLARITY Act, our CLARITY Act, is the path6773toward unlocking that innovation. Am I being too hyperbolic in6774my statements?6775 Dr. Ching. Thank you for the question, Congressman. No, not6776at all. Thinking about our own journey, we started Aptos Labs6777in 2021, and it took us 10 months to get the launch in 2022. A6778lot of time and resources were spent trying to understand best6779practices in this space, and it was very hard. We ultimately6780end up launching with a lot of uncertainty and still have6781uncertainty still today. Others are not as fortunate in this6782space. They don't have the resources we have, and so for them,6783it has been a very difficult journey to understand what is6784permissible, what is not allowed. Are they following the best6785practices for their particular protocols and their particular6786products? It is very challenging for that to happen.6787 Today we have 118 employees in the U.S., and we are very6788much U.S.-based. We still see a lot of projects happening6789overseas. We would love to see a lot of projects happening back6790in the U.S., and we are here to support this Committee and this6791path forward with the CLARITY Act in making that happen.6792 Mr. Johnson. Ms. Pizzola, well, let me back up. There are6793some instances today when we have dual registration between the6794CFTC and the SEC, at least a couple instances of which I am6795aware. Are the agencies able to handle that? Stakeholders and6796market participants, does it work?6797 Ms. Pizzola. Yes, Congressman, it does work. Today there6798are numerous financial institutions that are dually registered6799with both agencies. You have dual FCMs and broker-dealers, swap6800dealers and security-based swap dealers, and I think the6801agencies, while they could certainly do more in the areas of6802harmonization and deference and coordination, I think there are6803today many mechanisms already in place to try to minimize the6804regulatory burden and cost that comes along with dual6805registration. For example, we have capital requirements that6806the CFTC has that incorporate by reference SEC requirements for6807dual registrants to sort of ease the burden of having to comply6808with both capital regimes. The SEC has a time limited no-action6809position for compliance with its security based-swap reporting6810requirements if an entity complies with CFTC's parallel6811requirements. There is portfolio margining that sort of eases6812the burden for entities that are engaged in offsetting6813positions and related products that are within each agency's6814respective jurisdiction, for example, Treasuries and Treasury6815futures.6816 And so there are a lot of tools in the toolkit to try to6817minimize regulatory burden that exists today, and I think the6818agencies certainly could apply similar approaches under a dual6819registration framework under the CLARITY Act.6820 Mr. Johnson. Thank you. Mr. Chairman, I would note that it6821seems like it is always easier to do nothing than to do6822something in Washington. It is really only a deadline that6823drives us to achieve something, and I would submit to my6824colleagues that we have a deadline before us. I believe that6825the next 18 months will see more innovation and more6826transformation in the blockchain and in the digital asset space6827than we have seen in the last 18 years. And every other6828developed country in the world has gotten this right. Now is6829our time. We have a deadline before us. If we want to protect6830consumers, if we want to unlock innovation, if we want to be6831the home of the kind of investment that will transform these6832industries, now is the time for us to get this right, and I am6833grateful for my colleagues on both sides of the aisle that have6834put serious effort into this work product. With that, I would6835yield back.6836 The Chairman. The gentleman yields back. I now recognize6837the icon of south Chicago, the gentleman from Illinois,6838Representative Jackson, for 5 minutes.6839 Mr. Jackson of Illinois. Thank you. Chairman Thompson, once6840again, thank you, and our Ranking Member, Ms. Angie Craig. This6841is such a fascinating topic, and my comments specifically will6842be going to you, Dr. Piwowar. You got a very fascinating and6843storied career. Particularly, I feel as if you have been here6844before, with your great work on the Dodd-Frank Act and other6845good things.6846 It seems to me that we are going through a bit of market6847hysteria. Our country says DEI is an inappropriate, illegal6848term. Only one person has said that. It is ill-defined and not6849defined at all. There are no DEI laws, so you can't break a law6850that is not a law. It is an aspiration, diversity: out of many,6851we are one. Equity, equal protection, inclusiveness. You want6852to bring more people in. How can we make sure that there is6853greater market participation, and how can we get to the depth6854and bring people in that are currently in the margins that6855would have a higher barrier to getting access to information to6856these resources, to be a market participant?6857 Dr. Piwowar. Yes. Thank you, Congressman, for that6858question, right. So at the Milken Institute, as you know, you6859are very familiar with the Institute--we spend a lot of time6860thinking about how do we improve access to capital for6861underserved populations, financial inclusion for underserved6862populations, and really to what end, and it is really about6863economic mobility. If we can provide financial inclusion for6864people who have not been included into the financial system,6865there is an opportunity for them to move up the economic6866ladder, so that is really what it is all about.6867 And so we do that in a number of ways, focusing on6868underserved entrepreneurs, underserved communities, like rural6869communities. We have worked with the Department of Commerce on6870helping to get access to Federal dollars from communities that6871had not been able to do that, and also the providers of the6872capital. We have an HBCU Fellows Program to put people on a6873pathway to careers in asset management and a lifetime financial6874security program looking exactly what you are looking at is,6875how do we get more investment opportunities for folks that6876maybe don't have $100,000 to invest, those small-dollar6877amounts? And that is where a well-regulated system that6878promotes competition is the best way to do that because then6879you get competitors competing for everybody. Whether it is6880offering access to the financial system in a brick-and-mortar6881situation or on the phone, or whatever it is, the more6882competition you get, and we have seen that--the costs have gone6883down and down and down over decades.6884 Mr. Jackson of Illinois. Thank you, Dr. Piwowar. Another6885question, probably more technical, but I wish I had you for a6886few hours to talk to you all by myself. But from the capital6887markets perspective, efficiency and liquidity are critical6888drivers of innovation and growth, and we accept that. How do6889you see the current regulatory environment impacting liquidity,6890specifically for the formation of the crypto markets? I am more6891concerned about how they reduce the bid-ask price, how they6892will be the next evolution of innovation in this market.6893 Dr. Piwowar. Yes. No, that is a wonderful question. I6894mentioned the threefold mandate, right, and the key here is, as6895you mentioned, liquidity, efficiency, and I would add price6896discovery. So if we can provide a proper framework where people6897feel protected, have the information to make informed decisions6898in terms of buying, selling, holding securities, right, that6899will create more efficient markets. You will have better price6900discovery, better liquidity for the investors, and more6901efficient allocation of resources in terms of capital formation6902for the entrepreneurs like Avery here, and we will get more6903innovation. So it is a virtuous circle.6904 Mr. Jackson of Illinois. And the last question I would ask6905because I am very much concerned about you have to grow the6906market, increase liquidity, all the other good drivers in6907there. But considering the historical access, that diversity6908initiative, equities initiative, these things have been6909innovative in bringing this multicultural society together. I6910bring that up because if we let the markets go their way with6911certain access to broadband and other things, it will become6912inefficient. I am trying to figure out how do we keep that as a6913mandate or as a goal, an aspiration, so that it enhances the6914market, it does not detract from the market. So most people6915say, oh, why are you saying diversity, equity, inclusion?6916Because I can, and I think it is very important, and it helps6917the capital markets. Can you respond to that, please?6918 Dr. Piwowar. Yes. So one thing that I mentioned when I was6919a Commissioner at the SEC is that we prohibit some investors6920from investing in certain investment opportunities. And the SEC6921has these rules called the accredited investor definition that6922says, look, some things are so complex, so risky that only6923sophisticated investors can invest in them, and how does the6924SEC define sophistication? If you are rich, if you have a high6925net worth, if you have a high net income, you can invest in6926stuff, so the rich get richer and the other folks get left6927behind. So this is one where we can really democratize6928opportunities for investment by looking at the accredited6929investor definition and make sure that it doesn't seep into the6930digital asset regulation as well.6931 Mr. Jackson of Illinois. Thank you so much, Mr. Chairman. I6932yield back, and thank you for the extra time.6933 The Chairman. The gentleman yields back. I am now pleased6934to recognize the gentleman from the duck and rice capital of6935the country, Mr. Crawford, for 5 minutes.6936 Mr. Crawford. I thought LaMalfa might jump in there on that6937one. He might have some issues with that.6938 Voice. [Inaudible.]6939 Mr. Crawford. Oh, yes. We will talk about that later. For6940the record, though, he got that right. To follow up, Mr.6941Miller, in your testimony you said, ``Running a crypto exchange6942in the U.S. is hard and should be.'' Do you believe the CLARITY6943Act would continue to make it hard to run a crypto exchange6944and, therefore, protect American consumers from something like6945what happened with FTX?6946 Mr. Miller. Thank you for the question, Congressman. By6947saying it is hard, I mean there are compliance programs that6948need to be in place, and you need the right level of expertise6949to get it correct, and you need the right level of supervision6950from a regulator to continually ensure that you are getting it6951correct. The CLARITY Act, by bringing registration to these6952businesses, introduces that structure.6953 Mr. Crawford. Dr. Ching, forgive me, but I am going to ask6954you to describe the value of digital assets. Assume you are6955talking to somebody that doesn't know what crypto is, like you6956met them in the elevator and they ask you what you are here to6957testify about today, and you say crypto, and they have no clue6958what that is. In an elevator speech, what is crypto?6959 Dr. Ching. Thank you for the question, Congressman. It is6960actually hard to tell in an elevator speech. I just want to6961acknowledge that up front. But the way we describe digital6962assets is just a kind of incredibly neutral infrastructure for6963executing functions that are very hard in the traditional6964world, like how do you do governance, how do you do staking,6965how do you support payments in a world that is global and with6966open, accessible, verifiable capabilities? There is no other6967possible technology that can support this kind of use case6968today. And so it is just really about a global utility, public6969utility, like the same way we think about electricity or water6970or roads in which any kind of application can be built on top6971of, really a new age of the internet, and tokens are really the6972lifeblood of that infrastructure.6973 Mr. Crawford. So if I heard you right, you are basically6974saying that crypto is an economic or a financial6975infrastructure.6976 Dr. Ching. Exactly. It is a way to transfer value between6977any two participants.6978 Mr. Crawford. You want to expand on that a little bit6979because I am giving you an extra floor on this elevator ride to6980give me a little bit more time to understand exactly what so6981that the layperson knows what we are dealing with.6982 Dr. Ching. Probably the simplest way to describe it, it is6983a utility token in which you can do payments, governance,6984staking, transact, and have identity, all in one, on an6985infrastructure that is trustless as well as globally6986accessible.6987 Mr. Crawford. So as a U.S. citizen who is fiercely6988concerned about privacy and stuff like that, how do I feel6989comfortable with those kinds of transactions? Talk about the6990privacy issues, how those are related to this, how you address6991those. Make me feel better about crypto.6992 Dr. Ching. That is an excellent question. Today, most6993blockchains support very transparent operations, which means6994that any transaction that occurs is going to be completely6995accessible to everyone to see. It is replayable, and that6996gives, also, a certain type of comfort to know that there is no6997way the system can undo or revert those transactions. At the6998same time, we are very used to having our privacy when we6999purchase a coffee or buy a sandwich. There is also additional7000blockchain functionality that is coming down the pipe, though,7001that will support that level of privacy and confidentiality,7002yet be regulatory compliant. That is things that Aptos Labs and7003other companies are exploring, already have prototypes for.7004 So I think there is a world where we have both the benefits7005of transparency where people can replay transactions, but also7006the benefits of privacy, where things remain confidential, can7007be confidential, but yet regulatory compliant.7008 Mr. Crawford. And then finally, what underlies a7009cryptocurrency? In other words, what gives it intrinsic value?7010Why is it any different than, I don't know, say, a Pokemon7011card?7012 Dr. Ching. In many ways, it might be thought of as a7013Pokemon card. I think it is a good characterization to it, but7014it really depends on the token and what the token is7015representing. As far as APT, which is our kind of native token7016to Aptos, it really is going to be a token that is supporting7017the transaction fees, prevents the down service attacks on the7018network. It supports the staking functionality, which is7019security in the network, making sure it can't be attacked by7020malicious actors. And then it supports the governance features,7021so whenever there is a protocol upgrade, people can vote on7022whether the upgrade wants to happen or not.7023 Mr. Crawford. Excellent. Thank you, Mr. Chairman. I will7024yield back.7025 The Chairman. The gentleman yields. I am now pleased to7026recognize Representative McClain Delaney for 5 minutes.7027 Mrs. McClain Delaney. Thank you, Chairman and Ranking7028Member, for having this hearing, and I was listening to you all7029in my office and found it very illuminating on multiple fronts,7030and thank each of you as witnesses here today.7031 As we all know and you discussed earlier, we are in a7032digital revolution where values extend beyond the physical7033crypto. NFTs and tokenizing real estate are already shaping our7034economy, expanding financial access, and improving efficiency7035in places like agriculture. And I represent the 6th District of7036Maryland, and Maryland, we are leading the way in financial7037innovation and digital asset management, and I am really7038excited about how digital assets can really be utilized by the7039agricultural industry and by our farmers. But as you know,7040innovation, not opportunity, comes with risk, and in 2022, FTX7041collapse, wiped out billions and devastated retirees, students,7042and small businesses. And I think that is why, Mr. Miller, you7043are so excited about making sure that there are bumpers and7044safeguards in this regulatory environment. So I am eager to7045support digital asset innovation, but there are countless7046examples how we just do need to have these appropriate7047regulatory protections.7048 So American policymaking and regulations, it seems, needs7049to be in line with business and the financial environment, and7050the enacted markets in crypto assets, or MiCA, regulation7051provides, it seems, some potential learning lessons for a7052unified regulatory framework, and it does seem that this7053bipartisan CLARITY Act improves on last year's version. So I7054just want to say, I do look forward to hearing from you and7055working with my colleagues to tackle these different risks and7056to make sure that we have a secure, transparent environment.7057 So my first question is really to you, Dr. Piwowar. I7058thought your earlier testimony was great. Given your former7059role as a Commissioner at the SEC, I would love to hear your7060insights on the MiCA framework in the EU. It seems like it7061establishes some clear rules for crypto asset issuers, and7062service providers, and investors, and it would make sense that7063maybe there are certain of those structural elements that could7064maybe enhance the CLARITY Act effectiveness. One provision that7065I was interested in is the inclusion of measures that prevent7066market abuse, like insider trading, market manipulation, and7067unlawful disclosure of insider information. And there also did7068seem to be more of an emphasis on the traditional banks having7069a role in addition to the Big Net, our internet platforms. Do7070you think that there are structural elements that we could7071learn from within MiCA or consider with the CLARITY Act in7072helping its overall effectiveness?7073 Dr. Piwowar. Yes. Thank you, Congresswoman, for the7074question. I am not familiar with the very specific provisions7075of MiCA, but what I can tell you is how the SEC does learn from7076what other regulators do, right? So the SEC has an Office of7077International Affairs that regularly works with regulators7078overseas, either bilaterally or multilaterally, through an7079organization called IOSCO, where we kind of learn from the7080mistakes of others, right? So in some cases, there is a second7081mover advantage. You kind of learn from those.7082 I will note, I mentioned the Crypto Task Force at the SEC.7083Next week will be their fifth roundtable. They have put out a7084list of specific questions, some of them on based upon some of7085the things that were happening in MiCA, 48 specific questions7086around custody, all kinds of stuff. They have had over 1007087meetings that they post on their website. And I see a lot of7088the firms that have come to see them do have experience with7089MiCA, so they are going to----7090 Mrs. McClain Delaney. That would be great.7091 Dr. Piwowar. They are providing some of that information to7092them.7093 Mrs. McClain Delaney. So that would be very helpful, yes.7094So I just wanted to put that up, and I might add some further7095questions because it just seemed like it would be a good7096starting point. The second thing is just, my background was in7097consumer protection and helping kids online, so I have always7098been concerned a little bit about consumer rights and privacy.7099I am concerned that this bill might weaken consumer protections7100by preempting key state safeguards and lacks clear language to7101preserve them. States like Maryland have strong protections,7102and I just want to make sure that we set a regulatory ceiling7103instead of a floor on this. Could any of you provide examples7104how the CLARITY Act as written will assure that our7105constituents won't lose any of these consumer protections and7106privacy under the bill?7107 Mr. Miller. That is a great question. I think by pushing7108industry participants into registration at the CFTC and the7109SEC, you are pushing them into mandated Know Your Customer7110requirements and onboarding requirements. It is not ambiguous.7111 Mrs. McClain Delaney. Anyone else?7112 Dr. Piwowar. And I will also note that in the securities7113world, where there is preemption, there still is a very7114important role for the state securities regulators. The SEC7115works very closely with the state securities regulators,7116including Maryland, on a number of issues where they can be7117very helpful in rooting out fraud.7118 Mrs. McClain Delaney. Thank you. Well, I just believe7119strong consumer protection and privacy are really important, so7120thank you, and I yield back and will submit some questions for7121the record.7122 The Chairman. The gentlelady yields back. I now recognize7123the gentleman from Kansas, Mr. Mann, for 5 minutes.7124 Mr. Mann. Thank you, Mr. Chairman, and thank you all for7125being here today. I represent the big 1st District of Kansas,7126which is 60 primarily rural counties in the central and western7127part of the State of Kansas mostly.7128 It is evident that both U.S. businesses and individuals7129need regulatory clarity around digital assets, and there are7130currently no well-defined rules to allow businesses to operate7131legally and successfully within the United States. The CLARITY7132Act will provide a foundation that enables innovation and7133ensures that the U.S. can lead in this rapidly evolving sector,7134and I appreciate the Chairman's leadership on this increasingly7135important issue. Without this foundation, America will continue7136to fall behind and risk pushing innovation abroad, which I7137don't believe anybody here in Congress wants, and delighted for7138you all being here today and being part of this conversation.7139 Just a handful of questions. First one is for you, Mr.7140Miller. Can you describe the different regulatory regimes that7141FTX.com, FTX U.S., FTX Derivatives were subject to?7142 Mr. Miller. Sure. Thanks for the question, Congressman. FTX7143U.S. was a spot exchange and followed the 50 state regulatory7144program that we have talked a bit about today. FTX U.S.7145Derivatives was registered with the CFTC and was subject to7146full examination by the CFTC. FTX International operated on a7147patchwork of registrations and licenses globally that were very7148much unclear at the time, and remain unclear certainly when7149compared to what you would get from the CLARITY Act.7150 Mr. Mann. So of the three, I guess, can you indicate kind7151of what you believe are the benefits are drawbacks to each7152different silo, if you will?7153 Mr. Miller. Sure. So the business in each of its verticals7154was a centralized exchange, and the most powerful regulatory7155piece was clear customer asset segregation requirements, and7156that is what you got from the CFTC's registration program for7157FTX U.S. Derivatives. Beyond just customer asset segregation,7158there is surveillance, and I think market surveillance shows up7159in some of our state programs, but not as clearly as it does at7160the U.S. Federal markets regulators, and so I think those are7161the two important pieces.7162 Mr. Mann. Great. Thank you. Next question for you, Ms.7163Pizzola. Conflicts of interest have been an increasing area of7164concern in the digital asset markets. How does the CFTC address7165potential conflicts of interest with current registered7166entities and regulations registrants?7167 Ms. Pizzola. Thank you for the question, Congressman. Today7168there are a variety of mechanisms for addressing conflicts of7169interest within the Commodity Exchange Act for exchanges. There7170is a specific core principle that requires designated contract7171markets to have policies and procedures or a program in place7172to mitigate and a procedure to resolve the conflicts of7173interest in the exchange's decision-making process. And then7174there are more prescriptive requirements for futures commission7175merchants with respect to their conflicts of interest. They7176specifically have to have policies and procedures to disclose7177any material incentives or conflicts of interest to their7178customers with respect to those customers' decisions to7179transact in the markets. So there is a very robust regime in7180place today to ensure that conflicts of interest are mitigated7181or disclosed both at the exchange level and then at the level7182of the broker intermediary.7183 Mr. Mann. Yes, thank you. I think that is helpful clarity7184for people. Next question for you again, Ms. Pizzola, as you7185may know, there are no regulators who oversee the centralized7186spot market exchanges across all commodity markets. What is7187different about digital assets and other commodity markets that7188warrants expanded regulatory oversight?7189 Ms. Pizzola. Thank you for the question. I think one7190difference is that for many commodity markets, they are not7191centralized exchanges that are sort of similar to those that7192exist for securities and derivatives. A lot of commodities are7193commonly bought and sold in OTC bilateral transactions. And I7194think the difference here is that we do see digital assets7195often trading in a manner that is similar to securities and7196futures contracts, both in that they are available for trading7197on centralized exchanges and that they are more readily7198accessible to retail and more widely traded by retail. It is7199easy for a retail market participant to just use their phone to7200buy crypto assets. They couldn't do that with oil and gas in7201the same way, and I think as we talked about, that is not7202inherently a bad thing. There is financial freedom, financial7203inclusion that comes along with that, but then I think that7204also brings sort of a dynamic of more of a need for retail7205protection perhaps than we would see in other markets.7206 I think, also, just finally to wrap up, it might make more7207sense for states to regulate in the area of other commodities7208where those transactions in the spot markets are taking place7209at a single physical location within the state. I think here7210crypto assets are inherently borderless, inherently in7211interstate commerce. As we talked about, you typically need the7212internet in order to be able to transact in them, absent sort7213of some of the new technologies that are coming online. So I7214think it is just sort of inherently sort of an interstate7215problem that requires sort of Federal regulation in a way that7216other commodities perhaps do not.7217 The Chairman. I thank the gentleman. I now recognize the7218gentlelady from Illinois, Ms. Budzinski, for 5 minutes.7219 Ms. Budzinski. Thank you, Mr. Chairman. I also do want to7220thank our Ranking Member Craig, and also our Subcommittee7221Chairman Johnson and Ranking Member Davis as well, and all of7222our collective work on these sets of issues related to digital7223assets. After the release of the CLARITY Act, I am grateful for7224the opportunity to engage directly with stakeholders today on7225this important legislation, so I just want to say thank you to7226the panelists for being here.7227 It is important to me that Congress take steps to address7228the lack of structure and regulatory clarity for firms,7229consumers, and other players in the digital asset industry.7230That is why I was glad to work on a bipartisan manner with the7231Chairman and his team last Congress on FIT21 and to support7232that as it got over the finish line in the House, especially as7233some of my major priorities were included in that bill. One of7234my priorities sought to preserve consumer legal rights and7235flexibility to ensure the protections and ability to recoup7236their assets in the event of a market collapse, and the other7237was prior approval for products before entities become fully7238registered, improving the process for customer engagement. I am7239glad to say that I see that these important provisions have7240been included in this updated market structure bill, the7241CLARITY Act, to safeguard consumers and their assets. As I look7242at the CLARITY Act, I do have a few questions that I think this7243panel is very well suited to answer.7244 Dr. Piwowar, decentralized finance, or DeFi, can be7245excluded from being regulated under some provisions of this7246Act. How could a regulator protect customers in a truly7247decentralized environment where there is no responsible entity7248and no traditional custody of assets?7249 Dr. Piwowar. Great question. A couple responses. One, note7250that I mentioned the SEC Crypto Task Force is doing a number of7251roundtables. One that they have already had and one that they7252are having next week are specifically dedicated to DeFi,7253looking at trying to get those answers.7254 Ms. Budzinski. Great.7255 Dr. Piwowar. Second thing I will note is that I remember7256when I was at the Commission and we had a lot of conversations7257with folks on talking about DeFi, and there was no regulated7258entity there. And I said, ``Well, how do you do that?'', and7259one of the responses, ``Well, smart contracts.'' ``Well,7260explain this to me.'' ``Well, smart contracts, basic computer7261code.'' I said, ``What does a computer code do?'' They said,7262``Well, basically routes orders on the way that customers do,7263the way they want them to do instead of being a broker-7264dealer.'' And I said, ``Did you take transaction-based7265compensation for that and the code? Could you do that?'' ``Yes,7266that is the legal definition of a broker-dealer.'' So what some7267people claim as DeFi is not truly DeFi, and those are the7268thorny issues that the SEC and the CFTC actually have to get7269to.7270 Ms. Budzinski. Right.7271 Dr. Piwowar. And to your point on what really is DeFi on7272that--what I like about the CLARITY Act is there is a specific7273study in there to look at those particular issues because there7274are smart people like Avery in here, like, way smarter than me7275to think about these things, but I don't know the answer to7276that.7277 Ms. Budzinski. Okay.7278 Dr. Piwowar. And the SEC and CFTC don't either, and so they7279are continuing to evolve and learn from folks.7280 Ms. Budzinski. Great, and I am glad that conversation7281sounds like it is continuing next week with some roundtable7282discussions on this point, so thank you. My next question, Ms.7283Pizzola, would you be able to answer, I think elaborate, on7284this on this point as well around DeFi?7285 Ms. Pizzola. Congresswoman, thank you, yes. I think it is7286appropriate certainly, as Dr. Piwowar said, to continue to7287study DeFi. I think it is certainly a nascent area of7288innovation that I think we don't want to see sort of quashed by7289sort of rushing to regulate it in the same way as sort of7290centralized markets. But I would also agree that if you have7291sort of activities that sort of closely resemble activities7292that are taking place sort of in a more centralized market,7293then I think we would sort of question whether it truly is7294DeFi. I think one sort of unique aspect of DeFi that sort of7295maybe warrants regulating it differently from centralized7296finance is the fact that under a truly decentralized setup, you7297sort of would have participants self-custody. They wouldn't be7298sort of giving control over their assets to a third party.7299 And so I think that is sort of a fundamental difference7300from sort of the intermediaries that are regulated under the7301CLARITY Act where they are taking custody of customer funds,7302and so we do need to make sure that segregation and customer7303protection measures are in place.7304 Ms. Budzinski. Okay. Mr. Miller?7305 Mr. Miller. Maybe to share a thought on DeFi. Our current7306regulators have statutes that give them the authority to do7307something here, and that could be a safe harbor, a pilot7308program. But the benefits of those is they get to put7309conditions on them, and those conditions might look like the7310CLARITY Act in certain respects, but it is a tool. It is a tool7311we want to keep on the table.7312 Ms. Budzinski. Okay, great. I am out of time. I yield back.7313Thank you.7314 The Chairman. The gentlelady yields back. I now recognize7315the gentlelady from Texas, Congresswoman De La Cruz, for 57316minutes.7317 Ms. De La Cruz. Thank you, Mr. Chairman, for hosting this7318important hearing today on American innovation and the future7319of digital assets. I would also like to thank our panel of7320witnesses for their time today.7321 Mr. Miller, thank you for sharing your recollection around7322the collapse of FTX. Learning from that failure is an important7323part of why we are here today. We want to make sure that there7324is never another collapse like this in the United States. In7325your testimony, you describe the collapse of FTX as insolvency7326due to fraud. How would the CLARITY Act protect against this7327behavior?7328 Mr. Miller. Thank you for the question, Congresswoman.7329Insolvency means the assets that are meant to be there are no7330longer there, and in the context of cryptocurrency businesses,7331we are usually talking about customer assets. The CLARITY Act7332requires customer assets to be held in a segregated and7333protected way, and in a way that they cannot be taken by not7334customers.7335 Ms. De La Cruz. So there are several of our farmers and7336ranchers listening to this hearing today and, like many7337Americans, saying, ``What does this have to do with ag? Why is7338this important?'' Does anybody on the panel want to answer for7339the viewing public today on why this is so critical to the7340future of our farming and ranching communities?7341 Mr. Miller. I said I was from Oklahoma, so I should start.7342I think it is about payments and the flow of transactional7343finance. Every one of the constituents you mentioned are7344running businesses, and they want access to credit, they want7345access to easy and transparent payments, and they don't want to7346be stuck behind a broker or an agent unnecessarily. So I think7347that is a critical component of why it is interesting to anyone7348running a business.7349 Ms. De La Cruz. So to those listening today, does that mean7350they could get faster payments for their products?7351 Mr. Miller. I would defer to Dr. Ching.7352 Dr. Ching. Thank you for the question, Congresswoman.7353Definitely. So I think to my colleague's point, payments7354infrastructure on blockchain is immensely, much more efficient7355than traditional payment methods. Today on Aptos, you can send7356money around the world for a hundredth of a cent and have it7357settle in under a second, and it is globally accessible. It is7358not something that is limited to one area or another. So I7359think it is a crucial technology for anyone running a business,7360as you said, to be able to support this technology and also7361build in programmable infrastructure. So not only can you have7362payments, you can have things that happen after those payments,7363maybe settle other accounts simultaneously. And so those7364combinations are just going to be very powerful for anyone7365running a business and supporting the newest generation of7366Web3.7367 Ms. De La Cruz. So what this really means is this is7368transformation for our farmers and ranchers because what I am7369hearing, and for the American public listening today--the7370everyday, common person--if a farmer or rancher is able to get7371their monies faster, that means they can buy more product7372faster, right, and they can harvest faster. And that means7373growth, growth for their family farm, perhaps even future7374generations. Is that correct?7375 Dr. Ching. Yes, that is correct. Also, there is no credit7376risk, there is no other settlement risk that comes into play,7377so it is just a much more efficient financial infrastructure7378for everyone.7379 Ms. De La Cruz. So no credit risk, no settlement risk. That7380is a pretty good deal for our farmers and ranchers. So it is7381important that we have some type of regulatory infrastructure7382in place so that farmers can use these tools to grow their7383farms and for the future generations in farming. Would you all7384agree?7385 Voice. Yes.7386 Ms. De La Cruz. Would you like to say something? Would you7387like to say something?7388 Ms. Pizzola. Yes, Congresswoman, thank you. I would agree7389as well. I would just add that I was inspired by the7390Subcommittee hearing back in April where we had, I believe it7391was called CattleProof and GEODNET, but in particular, I think7392sort of the CattleProof story of previously having had7393purchases of cattle using checks that maybe took days or weeks7394to clear and now being able to instead receive payment sort of7395almost instantaneous, I thought, really shows what Dr. Ching is7396speaking about in kind of a real-world use case of being able7397to have sort of those instantaneous payments. And I think that7398is very promising technology that, as you said, can allow for7399growth because you are getting your money faster and able to7400deploy it within the business for farmers and ranchers.7401 Ms. De La Cruz. And it sounds like for planning purposes,7402right, if you have a check, it can bounce, then you still have7403to chase the buyer of the product, get a new check or get7404another form of money. All of that takes time, but when you7405have immediate access to capital, that means you can plan for7406the future, you can grow your product, grow your market, and7407pass on the legacy of farming to future generations. With that,7408I yield back.7409 The Chairman. Thank the gentlelady and now recognize the7410gentleman from New York, Mr. Riley, for 5 minutes.7411 Mr. Riley. Thank you, Mr. Chairman, and thank you to our7412witnesses for being here. I think part of the backdrop for7413this, it seems like maybe it was a while ago, but in other ways7414it wasn't, is that 2008 financial crisis. I represent a rural7415district in upstate New York, and looking at the cutting edge7416of all the issues we are talking about today, it is hard not to7417remember Wall Street, basically, treating the economy like a7418casino. It is still really frustrating for folks that Wall7419Street got a bailout while the middle class, which deserves a7420bailout, didn't. And people just really don't trust Wall Street7421still because of that, and they might be looking for, because7422of that, alternative places to invest.7423 And I was texting earlier today, one of my buddies from7424high school, Mike Choji. He is really big into crypto and big7425supporter of it, and I asked him sort of his perspective on7426this, and I thought it was interesting. He said that crypto7427gives people like me--this is what Mike said--access to7428financial markets, kind of the way E-Trade used to do for7429stocks. But the thing with the stock market is it is still7430rigged for large players, and so he sees crypto as being more7431accessible for somebody like him. And I am wondering how we can7432make sure that as these new innovations are happening, we don't7433end up kind of going down the same path where this is something7434that is seen as accessible and fair for somebody like Mike7435Choji and not just run by the big players.7436 And I think that one of the lessons we learned from the7437financial crisis was that a lot of people just got really over7438leveraged, and I am worried that we could end up in a similar7439situation here when I read about situations where there is7440digital asset trading on margins with really high leverage. And7441so my question for all of you is just generally, with that7442backdrop and that still being forefront of mind for so many7443folks in upstate New York, what sorts of things would you tell7444them about the regulatory efforts and legislative efforts to7445make sure this works for them and not just the big players. And7446then more specifically on this leverage issue, am I thinking7447about that the right way, and if I am, what are the best ways7448to address it, including potentially with respect to the7449legislation we are considering. Commissioner Piwowar, I want to7450start with you on that, if you could give your perspective.7451 Dr. Piwowar. Sure. On that leverage point, I think you make7452a great point. Thinking back to the global financial crisis,7453right, what we saw was there was way too much leverage in the7454system that the regulators simply did not know anything about.7455If you think of the over-the-counter derivatives market, this7456is where the real credit risk was. I happened to be working in7457the White House during the global financial crisis, and part of7458my job was to look at and say, ``Well, which banks were exposed7459next?'' And the data that we had was completely useless because7460the current law at the time was actually the SEC and CFTC were7461prohibited from collecting information on the over-the-counter7462derivatives market. Dodd-Frank addressed that through Title VII7463and split up jurisdiction, very similar to what we are talking7464about today in terms of the swaps market and security-based7465swaps market. They could have done a better job on the front-7466end. I talk a little bit about that on my written testimony,7467but it now provides the regulators with the tools that they7468need to see the leverage in the system.7469 The other thing we noted was that a lot of these exposures7470were with the banks, and so now the bank regulators need to7471step up and do their job. The response for the last 4 years was7472keep crypto out of the banks because the crypto can bring down7473the banks. What we saw in the case of Silicon Valley bank, it7474was almost the opposite. And so what we need to do not only7475with the crypto market, and as Dr. Ching pointed out, it7476actually takes out credit risk, it takes out market risk, it7477takes out systemic risk, types of concerns from these markets,7478so I think it is actually working in the right direction.7479 Mr. Riley. Great. That is really helpful. Did anybody want7480to add anything on that?7481 Dr. Ching. I will just add one thing, which is that I think7482in the DeFi space, you definitely have much more freedom around7483the products that are there. I think this regulation will7484definitely help to understand the protections for consumers,7485but the other advantage you are going to get from DeFi is going7486to be transparency. And so I think in those kind of previous7487instances you mentioned, there was a lot of lack of7488transparency around how much were the risks of the overall7489financial markets. In the blockchain space, those risks are7490kind of very clear and present for everyone to see and analyze7491and kind of understand, and then kind of educate customers7492about. So I think these are the kind of tools you want to build7493up and support as we see these technologies progress further in7494the future.7495 Mr. Riley. That is really helpful. I appreciate it. I yield7496back, Mr. Chairman.7497 The Chairman. Thank the gentleman. I now recognize the7498gentleman from Iowa, Mr. Feenstra, for 5 minutes.7499 Mr. Feenstra. I want to thank the Chairman and Ranking7500Member for having this great hearing today.7501 The increased adoption of digital assets and the use of7502blockchain technology has the potential to change the world by7503lowering the cost of services for everyday Americans and7504increasing the security and clarity of digital transactions.7505However, the past few years we saw President Biden wage a war7506on digital assets, which squashed innovation and brought7507regulatory uncertainty to the marketplace. I want to thank7508President Trump and this community for recognizing that this7509help spurs on innovation by providing clear rules of the road7510and growth of digital assets in the United States. The bill7511before us today establishes distinct roles for the SEC and the7512CFTC, providing a structured pathway for digital asset firms to7513operate legally and with confidence. Ensuring consumer7514protections through strengthened transparency and7515accountability in the marketplace, fostering innovation through7516regulatory structure to encourage businesses to remain in the7517U.S.7518 Dr. Ching, thank you for taking the time to speak to us7519today. Your experience in the industry has great perspective.7520In your testimony, you emphasize the importance of regulatory7521clarity for token issuance and distribution. From your7522perspective, how does this bill ensure emerging blockchain7523applications are not unintentionally stifled by over rigid or7524over ambitious compliance frameworks, and then also, how does7525this benefit us also?7526 Dr. Ching. Thank you for the question, Congressman. I would7527like to talk back a little bit about the start of Aptos Labs7528and answer this question. Aptos Labs was founded here in the7529U.S. in 2021, and we did face a lot of uncertainty when it came7530to launching our token and the token issuance and distribution7531of it. We spent a lot of time trying to understand the previous7532launches and see what the best practice for in the space, but7533ultimately, we had to launch with all of uncertainty. This bill7534and the CLARITY Act is going to really help projects like ours7535to understand what the right rules are and how to understand7536the framework that best supports American innovation.7537 I also talked to hundreds of builders across the country.7538Many of them do not have the resources we have that can7539actually support that kind of investigation. This bill will7540really help them to get a lot of certainty and clarity in the7541market. Today there are estimated to be about 10,000 developers7542of blockchain technology, yet there are millions of programmers7543around the world and millions in the U.S. alone. We would love7544to see these programmers start to leverage their talents much7545more towards this technology base here in the U.S. as this7546CLARITY Act becomes very much a reality in the everyday world.7547 Mr. Feenstra. That is fantastic. I am glad to hear the7548benefits. There are so many great benefits that this is going7549to create. Mr. Miller, this bill gives the CFTC new authority7550regulating jurisdiction over digital commodities, cash, or spot7551markets. I want to talk about this a little bit. Can you speak7552how this expanded jurisdiction would close existing regulatory7553gaps and why CFTC oversight of spot markets is critical for7554protecting consumers and ensuring market integrity?7555 Mr. Miller. Thanks for the question, of course. So what the7556CFTC brings to bear is its expertise in markets: bids and7557offers, liquidity, preventing manipulation, preventing trading7558misconduct. And while today we have crypto markets that have7559some state regulatory programs, there is no clear trade7560surveillance, market monitoring, and market conduct obligations7561under those programs. The CFTC makes those the fundamental7562tenets of their regulatory approach.7563 Mr. Feenstra. Thank you. So what would you say to banks? I7564know banks are sort of concerned about some of these aspects.7565 Mr. Miller. Yes. So banks want to ensure that they have7566clarity from their regulators, that they are permitted to7567operate in any given asset class. And I think as we get more7568clarity around the types of products the CFTC and the SEC are7569regulating, the bank regulators get more and more comfortable7570about giving the banks the ability to deploy their capital into7571these markets, and ultimately, that brings up liquidity, and it7572brings up the resiliency of the markets with more participants.7573 Mr. Feenstra. That is great. So it is sort of a win-win for7574everybody.7575 Mr. Miller. It is all moving in the right direction.7576 Mr. Feenstra. Yep. All right. Thank you, and I yield back.7577 The Chairman. The gentleman yields back. I now recognize7578the gentleman from California, Mr. Costa, for 5 minutes.7579 Mr. Costa. Thank you very much, Mr. Chairman. I think this7580hearing is timely considering the fact that we will, I believe,7581next week be marking up the CLARITY Act. And I regret, for7582those who testified earlier, that I missed your comments, but I7583am going to ask some questions, and maybe you have already7584opined on that statement. But clearly, at this point in time,7585there does not appear to be a real regulatory framework in our7586country to deal with the efforts of digital assets and how7587those are transferred. Is that correct? Do I hear----7588 Mr. Miller. I'll say yes. Yes, there are 55 million7589Americans who hold digital assets, and it is not clear what the7590regulatory environment is for the service providers of that7591business.7592 Mr. Costa. And have the four of you had an opportunity to7593look at the markup, the draft of the digital market CLARITY Act7594that we will be hearing next week?7595 Mr. Miller. I have studied pieces of it.7596 Mr. Costa. I see a couple heads nodding. Let's start, is it7597Chelsea Pizzola?7598 Ms. Pizzola. Yes, sir.7599 Mr. Costa. Do you think that this really establishes that7600level of framework and if so, what is lacking or what is7601problematic, in your view?7602 Ms. Pizzola. I do think this establishes the appropriate7603framework for regulation of digital commodity markets within7604the United States. I think the bill appropriately allocates7605jurisdiction between the CFTC and the SEC in a way that7606reverses the prior ambiguity that had driven digital commodity7607markets----7608 Mr. Costa. Mr. Miller, do you agree?7609 Mr. Miller. I agree. It is thoughtful and balanced. It7610invites the regulators to coordinate, but it creates clear7611allocations of registration authority.7612 Mr. Costa. Any critiques on the current draft on how we can7613make changes or improve it as we look toward next week's7614hearing?7615 Mr. Miller. I think the biggest issue is that it is not7616adopted.7617 Mr. Costa. It is not what?7618 Mr. Miller. It is not adopted. It is not passed.7619 Mr. Costa. Oh, okay. Got it. No, I was reading some of the7620background. There is no obviously comprehensive framework at7621this point in time. Only nine of the digital asset service7622providers have registered with the SEC, five of those firms7623registered pursuant to settlement agreements arising from SEC7624enforcement actions, and no digital asset service provider is7625registered with the SEC as a national security exchange, so,7626therefore, there is no regulated platform to deal with trading7627of these digital asset securities, you would agree.7628 Dr. Piwowar. Congressman, I would say, yes, that the7629CLARITY Act provides that framework for them to do that. And7630then on your earlier question, just to add to what they were7631saying, I note that the CLARITY Act is a substantial7632improvement from the discussion draft that was out there. And I7633really appreciate the fact that the staff and the Members7634really took to heart some of the feedback that was coming in7635from folks on things like the definition of affiliated persons7636and how to deal with sort of dual registration stuff. As far as7637what else needs to get done, in my testimony, I point out that7638continue to work with SEC and CFTC staff. They are the ones7639that are going to have to implement this, and the CLARITY Act7640was just----7641 Mr. Costa. And do you believe that the SEC, this will then,7642if enacted into law, will give them the necessary tools to7643provide the regulatory oversight necessary to protect7644businesses from engaging in these transactions?7645 Dr. Piwowar. Yes, and it preserves their exemptive7646authority to allow them to tailor the regulations that fit this7647market that are unique and a little bit different than some of7648the markets they already oversee.7649 Mr. Costa. Dr. Ching, do you agree?7650 Dr. Ching. From our point of view, we have been studying7651the FIT21 and CLARITY Act. We see a lot of improvements as7652well. Thank you for the feedback that I think has provided by7653many counterparties, including ourselves, overall, we are very7654positive about the direction of this.7655 Mr. Costa. So you agree.7656 Dr. Ching. Yes, I agree.7657 Mr. Costa. By the way, I am a bit curious. Aptos Labs, I am7658familiar with Aptos, California. Does this have any thing to do7659with that?7660 Dr. Ching. It is exactly the same. Yes, so Aptos is a city7661in your state, and we named it after that.7662 Mr. Costa. Yes, it is.7663 Dr. Ching. Yes.7664 Mr. Costa. It is a nice part of California. Okay.7665 Dr. Ching. Beautiful place.7666 Mr. Costa. Finally, in terms of comparative analysis, or is7667there, I guess is the better question, in Europe or in Asia7668that would compare to establishing this type of a regulatory7669framework for the SEC? Is there anything that other parts of7670the world that they are already doing?7671 Dr. Piwowar. I was going to say, so we have a unique7672structure here where we have the SEC and CFTC as two markets7673regulators. Most places have a single market regulator, so7674there are a little bit of nuances that are going on there.7675Other places have moved, but because we are the biggest market7676in terms of, and I have talked about how our capital markets7677are the envy of the world, we are soon going to have the7678digital assets that are going to be the envy of the world, too,7679once the SEC and CFTC start implementing the regulations with7680the authorities that you provide them.7681 Mr. Costa. Well, my time has expired, Mr. Chairman, but I7682think it is helpful as we are moving forward on this effort to7683ensure that we complement our efforts because these efforts and7684transactions not only include the continental United States,7685but obviously other parts of the world where we do business.7686Thank you.7687 The Chairman. I thank the gentleman. I am now pleased7688recognize the gentleman that represents the rice and duck7689capital of the western United States, Mr. LaMalfa, for 57690minutes.7691 Mr. LaMalfa. Well finessed, Mr. Chairman. Well finessed,7692western. So Arkansas must not be the West. I appreciate it. I7693will put our rice and ducks up against anybody's.7694 Anyway, I wanted to clarify something that was mentioned7695earlier in this Committee on a concern about the funding for7696CFTC and its ability to do the work, and it is my understanding7697that it will be self-sustained through the next 4 years through7698a fee schedule that it will have on those being regulated. So I7699understand it is called Section 410. So there was a contention7700earlier that there wouldn't be the resources for CFTC to do the7701work, but that is not the case.7702 So that said, a couple thoughts on core principles. This7703will be focused on Ms. Pizzola. As we know, the core principles7704are a critical part of how CFTC regulates, and would you7705mention just some of the core principles that the Commission7706applies to these designated markets, how are they similar to7707the core principles applied to digital exchanges in the CLARITY7708Act so that we can get the contrast?7709 Ms. Pizzola. Of course. Thank you, Congressman. I think7710some of the key core principles that apply to DCMs that have7711analogs in the CLARITY Act are requirements to provide a7712competitive, open, and efficient market that is really meant to7713protect the on-exchange price discovery process. I think7714similarly, a core principle requiring publication of trading7715data in a timely manner, it is again meant to protect the price7716discovery mechanism on exchanges. I think as Mr. Miller7717mentioned earlier, that the requirement to monitor trading to7718prevent manipulation, price distortion, and disruptions,7719requirements to protect markets and market participants from7720abusive practices, these types of really sort of market7721integrity and market transparency mechanisms are a key reason7722that the CFTC-regulated markets have functioned so well over7723the previous decades. And I think the fact that the CLARITY Act7724has these core principles or sort of analogs of those core7725principles really is promising for its ability to have7726similarly robust digital commodity markets.7727 But I think at the same time, the CLARITY Act appropriately7728adds additional core principles that are tailored for digital7729assets. For example, there are requirements to disclose7730information that is specifically relevant to digital assets,7731like digital asset economics, source code, transaction history,7732that maybe you wouldn't see those requirements for other7733commodities because they just aren't applicable. But, I think7734in that regard, the CLARITY Act is very appropriately tailored7735to digital assets and the core principles that it sets forth.7736 Mr. LaMalfa. All right. Thank you. Just following up then,7737how do these core principles work to ensure that the exchanges7738are well run as well as provide strong consumer protection?7739 Ms. Pizzola. Well, I think some examples of ways that the7740core principles ensure exchanges are well run are things like7741recordkeeping requirements, requirements to have system7742safeguards in place, obligations to undergo examinations, for7743example. I think those are ways that the regulators can come in7744and make sure that there are records. And also, I think7745financial integrity and financial resourcing requirements,7746those are all ways that if the CFTC, for example, will come in7747and make sure that the exchange is, through examining records7748and through looking at the exchanges financial wherewithal,7749will make sure that it is being appropriately run and that7750there aren't any cybersecurity or other system safeguard7751concerns.7752 Mr. LaMalfa. All right. I would still like to follow up on7753some of the FTX situation previously with my remaining time and7754shoot this to Mr. Miller. Maybe it has been answered, but I7755would like to hear a little more on what do you think it would7756have been like if these consumer protections had been in place7757in the CLARITY Act for these digital assets, if they had been7758regulated under CLARITY Act? How much better would that have7759turned out?7760 Mr. Miller. Thanks for the question, Congressman. So you7761would have had an audit and examination requirement over7762customer funds, and you would have had an obligation of7763customer funds to be held in a segregated way. Those three7764tools ensure that customer funds cannot be accessed by7765founders, malfeasance, acting persons or otherwise. And so in7766the FTX case, there wouldn't have been a path for the founding7767team to access the customer funds without a regulator knowing7768about it.7769 Mr. LaMalfa. Okay. Good. I appreciate that. Thank you both,7770and, Mr. Chairman, I know with Mr. Crawford out of the room, we7771really do know where the best rice comes from, so thank you. I7772yield back, sir.7773 The Chairman. The gentleman yields back. Now, I am pleased7774to recognize Mr. Thanedar for 5 minutes.7775 Mr. Thanedar. Good afternoon, and I thank the panel members7776here, all of you, to be here and educate us and give us your7777expertise. I want to thank the bipartisan coalition, including7778Chairman Thompson and Chairman Johnson and Ranking Members7779Craig and Davis, who introduced the CLARITY Act. Effective7780digital asset regulation is key to a successful market where7781both buyers and sellers of digital assets can thrive. This7782bill, while not perfect, represents a major step in the right7783direction to ensure that United States can be a leader in7784future innovation in the digital asset market.7785 I am a serial entrepreneur myself, and I am looking at this7786from the entrepreneurial community. And my question is to any7787one of you on the panel, how does this CLARITY Act help in7788assuring the entrepreneurial community to stay in the United7789States because they take their laptops and computers and go7790anywhere in the world. How does this help them to stay in the7791United States, keep the development, the innovation here in the7792United States? How does this CLARITY Act help, and do you see7793areas where this CLARITY Act lack in giving that confidence7794that we do have a regulatory environment where they can foster7795and do better? So just wanted to get your input on any of this.7796 Dr. Ching. I will start, and thank you for the question,7797Congressman. As a fellow entrepreneur, I can say that launching7798tokens in the U.S. has been difficult. We went through a lot of7799challenges in launching our own token and a lot of uncertainty7800back in 2022. We already know that the internet has yielded so7801many great innovations in the U.S., from Netflix to Facebook to7802Amazon to Google, and so on and so forth. I would love to see7803the next iteration of these entrepreneurs happen for Web3 in7804America, and in order to have that happen, we have to have that7805regulatory clarity. We have millions of programmers here who7806are going to careers in other places, in other fields, because7807of the lack of clarity that exists today, and I think with the7808CLARITY Act, no pun intended, we are going to start to see that7809innovation happen here in America at tremendous scale.7810 We have talked to so many different projects in this space7811about what they want to do and how they want to launch tokens7812and how they want to build innovative products, whether it is7813digital identity, payments, infrastructure, commerce, and what7814we do see is that this lack of clarity makes it challenging for7815them. They don't have the necessary resources to find out how7816to best do things. And so I do believe strongly that with this7817new legislation, it is going to lead to a huge innovation wave7818within America, and America can be strong leaders in this space7819of blockchains and Web3.7820 Mr. Thanedar. All right. Well, many of you are familiar7821with the FIT21 bill from last Congress. Where does CLARITY Act7822improve upon FIT21 and where does it take a step backwards?7823Anyone?7824 Mr. Miller. Thank you for the question, Congressman. I7825think what the CLARITY Act gives us is direct and clear7826registration requirements. They tell the businesses and the7827founders, the entrepreneurs, where to go and which licenses7828they need. That is important. It also creates space for7829innovation around decentralized finance, and it instructs the7830regulators to continue thinking about that topic while leaving7831space for innovation. I think those are two critical7832components.7833 Mr. Thanedar. Thank you so much, and, Mr. Chairman, I yield7834back.7835 The Chairman. The gentleman yields back. I thank the7836gentleman. I now recognize the gentleman from Wisconsin, Mr.7837Van Orden, for 5 minutes.7838 Mr. Van Orden. Thank you, Mr. Chairman. Mr. Miller, I read7839your CV here, and it is very impressive. I do have one7840question, though.7841 Mr. Miller. Thank you.7842 Mr. Van Orden. Well, you are welcome. I see that you were7843the General Counsel for FTX U.S. Is that correct?7844 Mr. Miller. That is correct.7845 Mr. Van Orden. How did that turn out?7846 Mr. Miller. So you might recall or have heard in the news7847that the Global FTX Group entered into bankruptcy in November7848of 2022.7849 Mr. Van Orden. When were you on board?7850 Mr. Miller. I joined in 2021 and left after the bankruptcy7851file.7852 Mr. Van Orden. Did you contribute or did you profit7853financially from FTX?7854 Mr. Miller. My role there was as the General Counsel of FTX7855was----7856 Mr. Van Orden. That was not my question. I asked you if you7857profited from the failure of FTX.7858 Mr. Miller. I did not profit from the failure of FTX.7859 Mr. Van Orden. Okay. Well, thank you for clearing that up.7860I am going to ask you, starting with you, Doctor, tell me if7861this is an accurate statement, please. Bitcoin is a7862decentralized, scarce, and secure network for transferring7863value without any ability to restrict it. Altcoins are7864unregulated tech startups that regularly result in massive7865losses by retail investors while their promoters get rich. Is7866that accurate?7867 Dr. Ching. I definitely have my views.7868 Mr. Van Orden. Is that accurate?7869 Dr. Ching. In my view, I would think not, but----7870 Mr. Van Orden. Why not?7871 Dr. Ching. I think it is really this space----7872 Mr. Van Orden. How is that inaccurate, I guess would be the7873way to phrase that.7874 Dr. Ching. I think this space's lack of clarity around7875regulation has really led to that issue.7876 Mr. Van Orden. Okay.7877 Good to go. Sir, Bitcoin is a decentralized, absolutely7878scarce and secure network for transferring value without any7879ability to restrict it. Altcoins are unregulated tech startups7880that regularly result in massive losses by retail investors7881while promoters get rich. Is that accurate?7882 Dr. Piwowar. I don't know. I don't invest in Altcoins, and7883they are not under the SEC's jurisdiction.7884 Mr. Van Orden. So you have no idea what you are talking7885about then? Is that what you are telling me?7886 Dr. Piwowar. No, no, no. The ones that are under the SEC7887jurisdiction are the ones that I am more familiar with, initial7888coin offerings and things like that. So Altcoins, meme coins,7889stable coins the SEC has said that they are not under the same7890jurisdiction.7891 Mr. Van Orden. Yes.7892 So you are narrowly focused on one thing and you don't have7893an understanding, a broad understanding, of this entire7894ecosystem? Is that what you said?7895 Dr. Piwowar. I have a casual understanding of it, but as an7896expert testifying, it is based on the SEC's----7897 Mr. Van Orden. Thank you. I appreciate that. Mr. Miller?7898 Mr. Miller. Yes, sir.7899 Mr. Van Orden. Do you want me to read that again? Bitcoin7900is a decentralized, scarce, and secured network for7901transferring value without any ability to restrict it. Altcoins7902are unregulated tech startups that regularly result in massive7903losses by retail investors while promoters get rich. Is that an7904accurate statement?7905 Mr. Miller. I think we have several enforcement fraud-based7906actions against private----7907 Mr. Van Orden. That is not what I am asking. If you can7908reflect on your former vocation or current vocation when you7909were the General Counsel of FTX, would that statement be7910accurate?7911 Mr. Miller. The statement I----7912 Mr. Van Orden. Did retail investors get fleeced?7913 Mr. Miller. There are Altcoins offerings that we should not7914have, and the CLARITY Act will make them----7915 [Cross talking.]7916 Mr. Van Orden. I am not talking about the Act, sir. I am7917asking you a very direct question. So did retail investors get7918fleeced while a bunch of people got rich? One guy went to7919prison for 25 years working with FTX, which you were the7920General Counsel of there, sir. You should be intimately7921familiar with this. Is that an accurate statement or not?7922 Mr. Miller. There were customer losses when FTX filed for7923insolvency.7924 Mr. Van Orden. Okay. Enough of that. Ma'am, we are not7925listening. So is that an accurate statement? Should I read it7926again for you, please? Do you need----7927 Ms. Pizzola. Yes.7928 Mr. Van Orden. Okay. Here you go. Bitcoin is a7929decentralized, scarce, and secure network for transferring7930value without any ability to restrict it. Altcoins are7931unregulated regulated tech startups that regularly result in7932massive losses by retail investors while promoters get rich. Is7933that an accurate statement?7934 Ms. Pizzola. Congressman, we have seen Altcoins failures7935that did result in investor losses. I think we have seen----7936 Mr. Van Orden. Okay.7937 Ms. Pizzola. In other markets we have seen, similarly,7938sometimes see stocks go to zero and see massive losses. But I7939do think the bill puts in place the kind of disclosure7940mechanisms and other protections against insiders sort of7941dumping tokens that I think help.7942 Mr. Van Orden. Awesome. Thank you, and I want to be crystal7943clear. I view these types of currencies as a way to help guard7944against tyranny, and I want them to be independent from the7945government. They should be regulated only to the point where we7946can't fleece people, like Mr. Miller is the General Counsel for7947FTX, and that happened. I don't want that to happen again, but7948these currencies are critical for us to maintain freedom. We7949have to be able to exchange in commerce without the government7950getting in our business.7951 And so I am supporting your efforts. I just want you to7952really focus on what the heck is going on here and understand7953it ain't about you. It is not about making a dollar off another7954dollar. It is about making sure that American citizens and7955world citizens, because these are global commodities, to make7956sure that they have the ability to transact amongst themselves7957without the United States Government or other governments7958getting into our business. And with that, I yield back.7959 The Chairman. The gentleman yields back. I now recognize7960Ms. Tokuda from the great State of Hawaii.7961 Mr. Tokuda. Thank you, Mr. Chairman, and thank you to the7962witnesses that are here. Aloha, Dr. Ching. It is great to see7963another kama`aina in the room.7964 The potential for digital assets to transform our modern7965financial systems is undeniable, and I appreciate the7966Committee's commitment to developing a thoughtful bipartisan7967framework to regulate these new technologies. Last Congress, we7968took steps to develop a modern framework for regulating digital7969assets with the FIT21 Act, and many of us did raise strong7970concerns that the legislation did not go far enough in7971establishing strong consumer protection standards, particularly7972around disclosures, fraud prevention, and cybersecurity7973safeguards. In the wake of several high-profile cases of7974cryptocurrency fraud and bankruptcy among crypto exchange7975companies, as was just mentioned, like the collapse of FTX in79762022, I believe it is crucial that we bake robust, strong7977consumer and investor protections into our regulatory framework7978for digital asset markets. We have an important opportunity7979with the CLARITY Act to prevent future market catastrophes by7980setting the right conditions to ensure security and7981transparency for investors while also promoting innovation in7982this area.7983 Dr. Piwowar, your testimony highlights the importance of7984consumer protection measures in Federal security laws, such as7985disclosure requirements, that aid informed decisions and best-7986interest standards and other fiduciary duties that ensure fair7987treatment. As we develop frameworks for regulating digital7988assets, what are the key customer protection elements that we7989should take into consideration, and how do the protections in7990the CLARITY Act compare to those provided by the SEC for other7991types of financial transactions?7992 Dr. Piwowar. Thank you for that question. It is the same7993ones that the SEC already has, right? The foundation is7994disclosure, right, so giving proper disclosure about meaningful7995information to make informed investment decisions about whether7996to buy-sell securities or vote their shares, so that is where7997it starts with. Then there is the protection of the actual7998customer assets, and Ryne talked about at the CFTC. It is7999basically the same thing at the SEC. It is different underlying8000laws, but it is basically the same thing where you safeguard8001the customer assets, you don't allow the company to play with8002those assets, and in the event of a failure of the firm, that8003those customer assets are moved very quickly to a solvent8004institution that is there. And so those are very much the same,8005and then you mentioned best-interest standard. There are the8006conflicts of interest that are still there involved with not8007putting the firm's interest in front of the customer. So8008whether it is best interest for broker-dealers, or whether it8009is a fiduciary duty for investment advisors, or best-execution8010requirements in terms of the trading that is involved, those8011are all principles based, and we talked about the benefits of8012principle-based regulations, that they can be tailored for the8013specific markets.8014 Mr. Tokuda. Is there anything in particular that you would8015want to add or strengthen when it comes to consumer protection8016into the Act itself or----8017 Dr. Piwowar. I think what the Act recognizes is that the8018disclosures for digital assets are not going to be the same as8019for public companies in a couple ways: one, what is the8020disclosed and how long it is disclosed. What I really like8021about the Act is that when you have public companies or8022investment companies, they stay securities for their entire8023life, right? When it comes to digital assets, you have this8024issue of, early on, a central common enterprise, which is the8025definition that is used under the Howey Test for an investment8026contract, you have control by insiders. Insiders have8027infrastructure information around the public offering, but as8028the blockchain matures, and I really like the phrase that is8029used in the Act, ``evolves or matures into a decentralized8030blockchain system,'' that information becomes less important8031and, in fact, control goes away. And so the disclosure8032requirements sort of go away as the blockchain becomes mature.8033So I think that is an appropriately-tailored way to think about8034it.8035 Now, in terms of whether it has got the exact numbers and8036the right numbers in there, this is where I think the SEC staff8037can be very helpful in providing some maybe tweaks around the8038edges in terms of getting the specifics right.8039 Mr. Tokuda. Okay. I am pretty sure it was addressed, but I8040do think oversight discussions are really critical as we8041develop this as well. Actually, I wanted to move on to you, Dr.8042Ching. For myself, it is always an issue of accessibility,8043especially in our rural and remote communities like where both8044of us grew up, and one of the promises of new financial8045technology is that it can broaden financial access. But for8046that to happen, rural communities like ours, many of which8047still face gaps in broadband access and limited exposure to8048financial innovation, need to be able to come along for the8049ride, if you will. So as somebody that comes from the State of8050Hawaii, I am sure you are familiar with the challenges we face8051with connectivity, especially in the Nupur Islands. Rural8052communities also tend to have higher under-banked population.8053Can you speak to the role a Federal framework for digital asset8054markings can play in promoting equitable access to new8055financial technologies?8056 Dr. Ching. Thank you for the question, Congresswoman. I8057just want to start off by saying I think education is a big8058piece of this. I participated in the first inaugural Hawaii8059Blockchain Summit last year and also been exploring some8060efforts in the islands around tokenizing drivers' licenses, as8061well as some efforts even in Moloka`i to support different8062kinds of value exchange using blockchain-based technology. I do8063share your concerns as well, though, with the lack of broadband8064access, that it is difficult for everyone within the islands to8065kind of experience and benefit from the technology as well.8066 Earlier on in the hearing we did discuss that blockchain is8067undergoing transformation where perhaps without internet8068access, you can still interact with each other and then have8069those transactions settled to the blockchain a later point when8070they do come into contact with internet. And so we are going8071to, from our point of view, explore those technologies to make8072sure we can actually enable that in the future.8073 Mr. Tokuda. Thank you very much, and thank you, Mr.8074Chairman, for always prioritizing access in rural America, like8075both of our districts. Thank you. I yield back.8076 Mr. Johnson [presiding.] Very good. In the queue is Mr.8077Rose, followed by Mr. Messmer at this time, and with that, the8078gentleman from Tennessee is recognized.8079 Mr. Rose. Thank you, Mr. Chairman, and thanks to Chairman8080Thompson and Ranking Member Craig for holding this important8081hearing, and thank you to our witnesses for taking time to be8082with us today.8083 Dr. Piwowar, regarding Section 109 of the CLARITY Act,8084which pertains to international cooperation, I would like to8085explore the safeguards the SEC would likely implement when8086entering into information-sharing agreements with foreign8087regulatory authorities. Specifically, what measures would the8088SEC take to ensure that sharing sensitive information with8089foreign regulators doesn't compromise U.S. national security or8090the proprietary business interest of digital asset companies?8091 Dr. Piwowar. Thank you for that question. The information-8092sharing agreements with SEC primarily are in the enforcement8093context and are information about fraud that is global in8094nature. So if you have somebody perpetrating fraud from one8095country and it affects U.S. investors, and then the proceeds of8096that fraud are put into a bank or financial institution in8097another country, the information-sharing agreements allow the8098regulator--allows the SEC to find out from the regulators where8099the fraud was being perpetrated to try to stop that fraud, and8100then also to work with the regulators in the other countries to8101freeze the bank accounts to get the customer money back for the8102customers.8103 Mr. Rose. Thank you for that. The CLARITY Act requires four8104joint rulemakings between the SEC and the CFTC in order to set8105up efficient and functioning digital commodity markets.8106Importantly, these joint rulemakings clearly delineate their8107respective responsibilities. Opponents of this bill have8108criticized these joint rulemakings, citing the practical8109challenges of the SEC and CFTC coordination. Dr. Piwowar or Mr.8110Miller, and you both can speak to this, can you highlight some8111of these joint rulemakings and explain why it is essential for8112the CFTC and SEC to coordinate on these matters?8113 Dr. Piwowar. Yes, thank you, Congressman. Yes, in my8114testimony, one of my recommendations was to try to narrow the8115amount of actual joint rulemaking that has to go through on the8116back end. Having been at the SEC and implement some of the8117Dodd-Frank implementations where many of them were joint8118rulemakings, it is difficult to do those. So I would urge you8119to actually talk to the staff and see how much you can get done8120on the front-end because it slows it down on the other end. It8121is not because they don't work well together. It is just8122because they have different authorizing statutes, different8123ways of looking at things, and their time could be better spent8124actually implementing the regulations rather than actually8125writing them.8126 Mr. Miller. Thank you for the question. We are trending8127towards a single marketplace with equities, cryptocurrencies,8128other tokenized assets, and so the exchange places in many8129respects might be dual registered. And so the two agencies, if8130the exchange place is registered with both of them, need to8131identify a primary regulator and figure out what the role of8132the other regulator is. And there is a history at the two8133agencies of doing this all the way back to Shad-Johnson through8134the Dodd-Frank Act and going forward, so I believe they will do8135it. I do agree with Commissioner Piwowar that the more8136instruction that comes in the legislation, the better.8137 Mr. Rose. Thank you. And so I take it both of you think it8138is not ideal, but inescapable that there need to be the joint8139rulemakings. Is that a fair----8140 Dr. Piwowar. Yes, there are some issues where they just8141have to get together and do it, so I will give one quick8142example is futures contracts on stock market indexes, right? So8143a futures contract on the S&P 500 Index is given to the CFTC,8144right, for jurisdiction, but if you have a single stock futures8145contract, that behaves exactly like the stock and you are8146concerned about insider trading, and so the SEC is given8147jurisdiction over that. But what do you do with narrow-based8148indexes of three or four or five or nine stocks or whatever?8149Well, that was where the SEC and the CFTC had to come together8150on what Shad-Johnson and some other things come together and8151actually hammer out those things. So there are some places8152where they have to hammer out those things, but the more you8153can handle those on the front-end, the quicker the rulemakings8154will actually get done.8155 Mr. Rose. And I believe as a part of recent executive8156action that you are going to end up going through OIRA a couple8157of times on these things. Do you have concerns about that?8158 Dr. Piwowar. I do not. I have always been a strong8159proponent of cost-benefit analysis, economic analysis at the8160agencies. The agencies have always been subject to judicial8161review and have had rules thrown out on cost-benefit analysis.8162I think going through additional review actually would kind of8163help and decrease the risk of having these things overturned.8164 Mr. Rose. All right. I think my time has expired, so I will8165yield back the balance of my time. Thanks, Mr. Chairman.8166 Mr. Johnson. Thank you, Mr. Rose. The gentleman from8167Indiana is now recognized for 5 minutes.8168 Mr. Messmer. Thank you, Mr. Chairman, and thank you for the8169witnesses for being here today. Dr. Ching, you mentioned that8170Aptos had to fight through regulatory inefficiencies to make8171its way to market. Did the lack of clarity impact your start8172date, harm your revenue, or decrease or delay customers'8173involvement?8174 Dr. Ching. Thank you for the question, Congressman. It8175mainly impacted our ability to launch to market, a time to8176market, as well as impacted our ability to understand exactly8177how we could educate folks about token usage. We definitely8178tried to be as conservative as possible and also just apply8179best practices.8180 Mr. Messmer. Okay. Can we assume the challenges you faced8181are endured by other blockchain technologies?8182 Dr. Ching. Definitely. We are not alone in this space.8183 Mr. Messmer. Okay. Thank you. Mr. Miller and Dr. Ching, as8184individuals who have experienced extremes of the current8185regulatory system and the absence of statutory structure, each8186of you has an enlightening perspective to share. On one end of8187the spectrum, honest investors are being punished, while on the8188opposite end of the spectrum, spotty regulations have allowed8189bad actors to cause incredible damage. Would each of you speak8190to how the CLARITY Act provides regulatory guide rails as8191described in Mr. Miller's testimony instead of a blanket that8192suffocates innovation?8193 Mr. Miller. Thank you for the question. Our learned8194experience as markets professionals is that responsible8195regulation promotes innovation, promotes growth, and promotes8196the deployment of capital, and so I think that is where the8197CLARITY Act is striking the right balance. It says here is a8198structure, opt into it, you get certainty and then you can do8199your business.8200 Mr. Messmer. Thank you.8201 Dr. Ching. I also agree with that. I am very supportive of8202all your efforts.8203 Mr. Messmer. Super. Thank you. With the obvious failure of8204the current regulatory structure to support innovation in8205digital asset markets, I feel the need to ask why it has taken8206so long to pass legislation, but I think your testimonies have8207already explained the draft and redraft nature of Congress and8208the regulatory pendulum of Administrations very well. The8209CLARITY Act, like you said in your testimony, Mr. Miller, marks8210a bold step in actually producing a legislative solution. It8211does so using input gathered not only from this year's round of8212comments, but last year's as well. One of the notable strengths8213of the CLARITY Act is the inclusion of the CFTC's core8214principles regulation. Mr. Miller, can you speak that this8215adaptive regulatory style will keep the legislation relevant in8216an ever-changing industry?8217 Mr. Miller. Thank you for the question. So the core8218principles approach in the Commodity Exchange Act and CFTC8219rules allows innovators and entrepreneurs to build their8220business and educates them on what the expectations are from a8221principles-based perspective of regulators, and I think that8222approach has proven durable over the years, and it is the right8223approach now.8224 Mr. Messmer. Okay. Thank you. Thank you, Mr. Miller. Now,8225Ms. Pizzola, do you think the CLARITY Act checks the right8226regulatory boxes in integrating both prescriptive and adaptive8227methods to govern digital asset market structures?8228 Ms. Pizzola. Congressman, yes, I do. I think it8229appropriately provides the kind of flexibility that Mr. Miller8230was just talking about for exchanges to tailor their compliance8231methods to their particular business models, which I think we8232have seen be very successful in regulation of designated8233contract markets. There is that flexibility that is appropriate8234for the exchanges. I think for the regulated intermediaries,8235the regulation is a bit more prescriptive in some areas, sort8236of record keeping, chief compliance officer requirements,8237disclosures, things of that nature. And I think it is, perhaps8238appropriately so, a little bit more prescriptive just because8239there is that direct interface that those intermediaries have8240with customers. They may be receiving customer funds, but they8241are also interacting on a daily basis with those customers. So8242there may be sort of more instances for trust building, but8243also for potential fraud and things like that when you sort of8244got face-to-face interaction or otherwise direct interaction8245every day.8246 Mr. Messmer. Okay. Well, thank you. Thank you both. I am8247encouraged that the text in front of us and heartened that8248developers, lawyers, and regulatory experts here have come8249together in agreement that the CLARITY Act gets it right. So8250thank you all, and I yield back my time.8251 Mr. Johnson. Thank you, the gentleman from Indiana. Before8252we adjourn today, I invite the Ranking Member to share any8253closing comments she may have.8254 Ms. Craig. Thank you so much, Mr. Chairman. If this hearing8255proved anything, it is that there is bipartisan agreement that8256we need clear rules of the road to provide sufficient customer8257protections for retail investors and to allow innovators in8258this space to do what they do best. The CLARITY Act is a good8259first step toward this shared goal. I want to thank the8260witnesses for joining us to share the firsthand perspective8261that we need to make informed public policy, and I want to8262thank the Chairman here for holding this hearing, and the8263Subcommittee Chairman. I hope we can continue to work together8264to strengthen this bill and broaden support for it in the U.S.8265House. I still firmly believe that any market for digital8266assets must be fair. If the United States is to be a leader in8267this space, we must make sure digital assets do not become an8268avenue for political corruption, but we will have an8269opportunity to talk more about that a little bit later. Again,8270thank you, and I yield back.8271 Mr. Johnson. We are on the cusp of something special here,8272a major victory for consumers, markets, and innovators, and I8273think it is remarkable. I want to thank the hearing panelists8274today because I do think the standard D.C. way all too often is8275to do things that are polarized and partisan, insular,8276uninformed, kind of detached sometimes from the real work of a8277marketplace. And yet this process, the CLARITY Act, building on8278the successes of FIT21, has been the opposite of that. It has8279been bipartisan, it has been collaborative, it has been8280informed, and it has been done together in a bipartisan and8281bicameral conversation, and with many stakeholders, primarily8282across the technology and consumer protection sphere. And I8283think we are, Madam Ranking Member, at a spot where we can make8284further improvements to the bill and ultimately land in a place8285that is going to be a huge success for everyone involved.8286 With that, under the Rules of the Committee, the record of8287today's hearing will remain open for 10 calendar days to8288receive additional material and supplemental written responses8289from the witnesses to any questions posed by a Member.8290 With that, this hearing of the Committee on Agriculture is8291adjourned.8292 [Whereupon, at 12:35 p.m., the Committee was adjourned.]8293 [Material submitted for inclusion in the record follows:]8294 Submitted Transcript by Hon. Glenn Thompson, a Representative in8295 Congress from Pennsylvania82968297 ROUNDTABLE: AMERICAN INNOVATION AND THE FUTURE OF DIGITAL ASSETS82988299 (BLUEPRINT FOR THE 21ST CENTURY)83008301 ______83028303 TUESDAY, MAY 6, 20258304 U.S. House of Representatives8305 Subcommittee on Digital Assets, Financial Technology, and8306 Artificial Intelligence,8307 Committee on Financial Services;83088309 joint with the83108311 Subcommittee on Commodity Markets, Digital Assets, and8312 Rural Development,8313 Committee on Agriculture83148315 Washington, D.C.83168317 The Subcommittees met, pursuant to call, at 10:00 a.m., in Room83181300, Longworth House Office Building, Hon. Bryan Steil [Chairman of8319the Financial Services Subcommittee on Digital Assets, Financial8320Technology, and Artificial Intelligence] presiding.8321 Members present (Committee on Financial Services): Representatives8322Steil, Huizenga, Davidson, Rose, Timmons, Stutzman, Nunn, Downing,8323Haridopolos, Moore, Hill (ex officio), Lynch, Foster, Gottheimer,8324Garcia, Liccardo, Waters (ex officio), Sherman, and Himes.8325 Members present (Committee on Agriculture): Representatives8326Johnson, Rose, Lucas, Austin Scott of Georgia, Rouzer, Mann, Finstad,8327Nunn, Bresnahan, Messmer, Taylor, Thompson (ex officio), Wied, Davis of8328North Carolina, Budzinski, Jackson, Thanedar, McDonald Rivet, Figures,8329Vindman, Mannion, McClain Delaney, and Craig (ex officio).83308331 Mr. Steil. The Subcommittee will come to order. I note that today's8332Committee activity will be viewed----8333 Ms. Waters. I object to this joint hearing. Pursuant to the House8334rules, this joint hearing requires unanimous consent, and I do not8335consent.8336 Mr. Steil. You are recognized. May I ask the basis for the8337objection from the Ranking Member?8338 Ms. Waters. I object to this joint hearing. Pursuant to the House8339rules, this joint hearing requires unanimous consent, and I do not8340consent.8341 Mr. Johnson. Does the lady have a question?8342 Mr. Steil. Will the Ranking Member yield?8343 Mr. Johnson. Madam Ranking Member?8344 Mr. Steil. Will the Ranking Member yield?8345 Mr. Johnson. Mr. Chairman, I would ask if the lady would yield for8346a question.8347 Mr. Steil. Will the Ranking Member of the Committee on Financial8348Services yield to a question?8349 [Pause.]8350 Mr. Steil. I will ask again. Will the Ranking Member of the full8351Committee on Financial Services yield to a question from the8352Subcommittee Chairman?8353 Mr. Johnson. Mr. Chairman, I would just note, by way of context,8354for the Ranking Member, I understand your objection, or I understand8355that you have made it. I just want to get a better insight into what is8356the basis of your objection, so that if there is something that we can8357do to remove that problem we can work in good faith to do so.8358 [Pause.]8359 Ms. Waters. I object to this joint hearing because of the8360corruption of the President of the United States and his ownership of8361crypto and his oversight of all the agencies. I object.8362 Mr. Johnson. Mr. Chairman, before I yield I would just note that a8363good regulatory product, good regulatory rules of the road I think8364would provide an environment where people would have more faith in the8365marketplace. And I think these conversations are a critically important8366part of getting there. Thank you.8367 Mr. Steil. The Chairman of the full Committee on Financial8368Services, Mr. Hill, is recognized.8369 Mr. Hill. Thank you, Mr. Steil. I want to be really clear and set8370the record straight today. The Ranking Member has expressed concern8371about the conflicts of interest, which is why she is disrupting today's8372joint hearing. Through her actions today, the Ranking Member has thrown8373partisanship into what has historically been a strong, good, working8374bipartisan relationship.8375 For those of you that may not know, we held a similar hearing, a8376similar joint hearing in this same building in May 2023, under the8377leadership of Chairman Thompson, then Ranking Member David Scott,8378former Chairman McHenry, and Ranking Member Waters. The purpose of that8379hearing, like today's hearing, is to discuss the importance of rules8380for digital assets so that every market participant must abide by them.8381 I was encouraged by the engagement that we received from last8382Congress by Members on both sides of the aisle. There was overwhelming8383support from the House Democrats and Republicans on legislation that8384brings digital asset markets into the regulatory perimeter and closes8385the gaps in regulation, gaps that we all agree exist, gaps that8386President Biden agrees that exist, gaps that President Trump agrees8387that exist. Members worked hard to provide robust consumer protections,8388and they did so in a manner that would make our constituent proud.8389 We left our differences at the door, and we were honest and8390transparent in our legislative work. Members on both sides of our8391committees are committed to crafting legislation to provide that8392regulatory clarity to encourage responsible actors in the digital asset8393ecosystem. That is what most of the Members in this room are here to8394discuss today.8395 As the Ranking Member currently pointed out, to hold a joint8396hearing we must receive unanimous consent from both Republicans and8397Democrats to proceed. The Ranking Member received ample notice, more8398than 6 weeks, and negotiated an additional witness for the minority.8399Yet after that good-faith effort, the Ranking Member is objecting8400today. We agreed not to notice legislation to this joint hearing, yet8401the Ranking Member is objecting today. We determined a seating chart,8402discussed opening statements and witnesses, yet the Ranking Member is8403objecting today.8404 I want to thank Agriculture Ranking Member Craig and her staff,8405Subcommittee Ranking Member Don Davis, Chairman Behnam, and our8406witnesses who traveled here to be dedicated to their time to share8407their views with the Committee. I also want to thank Chairman Thompson,8408Subcommittee Chairs Johnson and Steil, and my staff for your commitment8409for working relentlessly with the minority.8410 Hearings are an opportunity for Congress and the American people to8411explore important matters of policy together. Whether we agree or8412disagree on policy, we hold them publicly so that our constituents can8413understand how we work to better their lives.8414 This hearing would have served as a forum for Financial Services8415and Agriculture Members to learn from our panelists and discuss8416solutions to issue. And given the cross-jurisdictional nature of the8417work, a joint hearing has been very, very needed.8418 While I understand the Ranking Member has concerns, but by8419objecting to this hearing the Ranking Member is undermining the8420opportunity for these two committees to engage in a conversation of8421vital importance to the American people. That is a loss for our8422committees, the House, and the public at large.8423 Those of us who remain in this room will not sit idly by and8424abandon the urgent work we have before us, that our committees have set8425out to do. We will sit together, hear from these good witnesses, and8426ask questions and learn from your expertise. We will do the difficult8427work of finding common ground on issues like digital assets that matter8428so strongly to Americans. We will try not to silence one another over8429policy disagreements.8430 This is just the beginning of the discussion, and I look forward to8431seeing how we can move forward in a bipartisan way. And I yield back to8432the chair.8433 Ms. Waters. Mr. Chairman?8434 Mr. Steil. Thank you very much, Mr. Chairman.8435 Ms. Waters. Mr. Chairman?8436 Mr. Steil. Does the Ranking Member insist upon her objection?8437 Ms. Waters. I insist upon my objection, and I would like everyone8438to join me in CVC Room 217 to discuss what we should be discussing is8439heard----8440 Mr. Steil. The objection to convening this meeting----8441 Ms. Waters. Trump's crypto corruption.8442 Mr. Steil. The Ranking Member's objection to the meeting is heard.8443We will now move on to a roundtable.8444 Mr. Lynch. Mr. Chairman, may I be heard on the objection?8445 Mr. Steil. The Ranking Member of the Subcommittee, Mr. Lynch, is8446recognized.8447 Mr. Lynch. Thank you, Mr. Chairman, and to my colleagues on the8448Agricultural Committee, as well. Ranking Member Waters has objected to8449this hearing because of the clear conflicts of interest between8450President Trump and his family's personal crypto ventures and the8451legislative proposals our Committee are considering. President Trump8452and his family are exploiting the presidency to enrich themselves,8453using their personal crypto business, World Liberty Financial.8454 Never in American history has a sitting President so blatantly8455violated the ethics laws----8456 Mr. Steil. I ask the Ranking Member----8457 Mr. Lynch. Reclaiming my time.8458 Mr. Steil. The gentleman was offered a moment to comment----8459 Mr. Lynch.--for financial gain.8460 Mr. Steil. The gentleman was offered a moment to comment on the8461objection.8462 Mr. Lynch. President Trump's crypto dealings are estimated to be a8463total of $2.9 billion----8464 Mr. Steil. The gentleman is no longer recognized.8465 Mr. Lynch.--and nearly 40 percent of his total wealth----8466 Mr. Steil. You will be recognized----8467 Mr. Lynch.--between issuing a meme coin, a governance token----8468 Mr. Steil. The gentleman, Mr. Lynch, would be noticed if he was in8469a hearing----8470 Mr. Lynch. [Unclear.]8471 Mr. Steil.--of which he would have the ability to speak----8472 Mr. Lynch.--to proceed to speak over the Trump family to provide8473every detail of his dealings containing his conflicts of interest.8474 Mr. Steil. Ranking Member Lynch, you are no longer recognized by8475the chair. The gentlelady's objection is heard.8476 We will now move into a roundtable.8477 Ms. Waters. I insist on my objection.8478 Mr. Lynch. Will my remarks be entered into the record?8479 Mr. Steil. It is too bad for the Ranking Member that it is not a8480hearing. If it was a hearing, the Ranking Member would be protected by8481House rules. There was an objection from the Ranking Member of the full8482Committee----8483 Ms. Waters. The Ranking Member insists on her objection. I object.8484 Mr. Steil. The objection is heard. The objection is heard, and we8485will now move into a roundtable. We want to hear from our participants,8486who traveled to share their expertise with us. And I would ask that8487participants make brief remarks.8488 To keep our Members on track, I would also ask that they limit8489their comments and questions to 5 minutes.8490 To open the roundtable, I would like to ask Agriculture8491Subcommittee of Commodity Markets, Digital Assets, and Rural8492Development Chairman Johnson to offer remarks.8493 Mr. Johnson. Well, a rose by any other name smells just as sweet.8494This is the second public event these two committees have done8495together. I think it is a remarkable degree of cooperation and8496partnership, and I think it builds on the work of last term, where8497Democrats and Republicans, Ag and Financial Services, worked together8498to get things done.8499 And for me today, we get so lost in some of the terminology. What8500about the Howey Test, and what about this, and what about custody, and8501these things matter. But ultimately, to me, it comes down to two8502gentlemen, Mark and Mike. The Ag Subcommittee, or maybe the full8503Committee--I forget--had a really good hearing a couple of weeks ago,8504where we talked about the real-world applications. And Don Davis was8505there and helped me manage that Subcommittee hearing, where we talked8506about the real-world use cases of digital assets and blockchain8507technology, and how they can enhance the lives of everyday Americans.8508 Mark Tague, a fourth-generation cattleman in Oklahoma, he co-8509founded CattleProof to improve those cattle markets. Mike Horton, an8510engineer in California, developed GeoNet to create an accessible,8511world-wide precision mapping network. These are real-world problems8512that these gentlemen have used blockchain technology to help solve.8513Without tokens, the blockchain wouldn't work and neither CattleProof8514nor GeoNet would exist.8515 And so let's not forget these stories as we talk through the CFTC8516and the SEC and jurisdictional battles and the Howey Test and8517decentralization, exempt offerings, and secondary trading. This legal8518discussion only matters because if we get it right it will empower8519entrepreneurs and it will encourage innovation. If we give Americans8520like Mark and Mike certainty about how to build with digital assets,8521they will create better services that improve our country.8522 So, to me, that is really the point of the hearing. The regulatory8523framework only matters because innovation matters. And I do want to8524close, Mr. Chairman, by thanking our panelists for traveling here, for8525taking their time to prepare their remarks, and to help make sure that8526we get a better product. I want to thank my colleagues on the other8527side of the aisle who stay here and continue to do their work.8528Ultimately, the world is run by those who show up, and for Members who8529have shown up, they are giving a beautiful gift to these committees, to8530the House, and ultimately to the American people.8531 With that I yield.8532 Mr. Steil. The gentleman yields back. I now recognize the Ranking8533Member of the Agriculture Committee, Mr. Davis, to offer remarks.8534 Mr. Davis of North Carolina. Thank you, Mr. Chairman, and to the8535witnesses who are here this morning.8536 I strongly believe the future of American innovation depends on our8537ability to lead in the digital economy. Digital assets and blockchain8538technology are not passing trends. They are foundational technologies8539with the potential of revolutionizing everything from financial8540services and supply chains to how we deliver aid, store data, and8541connect rural communities to global markets.8542 And if we want to ensure that innovation continues to flourish, we8543must provide a clear and forward-looking regulatory framework, and that8544means working to bring certainty to innovators, investor, and8545consumers. We must clarify the roles of the SEC and the CFTC, reduce8546regulatory fragmentation, and ensure the rules reflect the unique8547nature of this technology.8548 I also emphasize the enormous potential digital assets hold for8549communities like the ones that I represent in eastern North Carolina.8550This technology can unlock new pathways for rural development,8551financial inclusion, and economic resilience. But that can only happen8552if we create a policy environment that fosters innovation while8553upholding market integrity and investor protection.8554 Let's be clear. American leadership in this space is not8555guaranteed. Other countries are moving quickly to attract talent,8556capital, and infrastructure. If we do not act with vision and purpose,8557we risk ceding that leadership, and with it the value that defines our8558markets. I look forward to working with my colleagues to ensure the8559United States remains a global leader.8560 Thank you, and I look forward to hearing from our witnesses, and I8561yield back.8562 Mr. Steil. I thank my colleague for his remarks. I will recognize8563myself. But before I begin my remarks I would like to acknowledge what8564just occurred. For over a month, the majority on both the Financial8565Services Committee and the Agriculture Committees worked in good faith8566to organize this Subcommittee hearing, designed to foster really8567meaningful dialogue on digital assets and the legislative solutions8568needed to close the existing regulatory gaps.8569 While some of my colleagues have chosen to leave the room, our work8570continues undeterred.8571 This legislation is simply too important not to engage in an open8572and public discussion about how the United States can lead in Web3. I8573remain hopeful they will soon recognize the stakes and the critical8574importance of robust, nonpartisan engagement in this process.8575 More than 15 years ago, a nine-page document, the Bitcoin White8576Paper, sparked a shift in how we think about money, trust, and value.8577That idea sparked the digital asset ecosystem. Innovators have since8578built decentralized networks that offer services once thought8579unimaginable.8580 But innovation has not followed a straight line. Outdated8581regulatory frameworks and a ``regulation by enforcement'' approach by8582then-Chairman Gary Gensler and the Biden-Harris Administration have8583stifled clarity and pushed jobs, investment, and leadership offshore.8584Worse, the uncertainty has exposed consumers to greater risk from fraud8585and mismanagement.8586 Congress has both the opportunity and responsibility to act. We8587must pass comprehensive, bipartisan legislation that provides clarity8588and fosters responsible innovation.8589 Last month, Chairmen French Hill and GT Thompson introduced six8590core principles that now form the basis of the discussion draft8591released yesterday. Today's roundtable will evaluate those principles8592and address key questions about: (1) asset classification, (2) agency8593jurisdiction over centralized intermediaries, (3) reducing regulatory8594fragmentation, and (4) establishing guardrails that support innovation.8595 To me, the path forward is clear. The choices we make now will8596determine whether the United States remains a global leader in digital8597finance or if we fall behind.8598 And I thank our panelists for being here today, and I look forward8599to a thoughtful and productive conversation.8600 I will now recognize the Ranking Member of the Committee on8601Agriculture, Ms. Craig, to offer remarks.8602 Ms. Craig. Thank you so much to our witnesses for being here today.8603This is a really important conversation.8604 I am here because I think we need to be engaged in part of the8605discussion to agree on the rules of the road as they relate to crypto.8606It isn't going away, and we have a responsibility to be here and be8607part of the solution.8608 If we are successful in working together, then legitimate8609enterprises will innovate and thrive, and consumers and retail8610investors will be protected. If we fail to find a bipartisan solution8611to these pressing questions, we will witness more scandals, and8612consumers will not have the protections that they so clearly need.8613 It is important and it is legitimate to call out the self-dealing8614from the Trump Administration related to hawking meme coins from the8615White House. It is corrupt, it is wrong, and it makes this process of8616coming together to regulate crypto more partisan than it needs to be.8617While these conversations may be difficult, they are important for our8618constituents.8619 I am pleased that we are moving forward with this roundtable today,8620and with that, Mr. Chairman, I yield back.8621 Mr. Steil. I thank the gentlelady for her remarks. The Chairman of8622the Committee on Agriculture, Mr. Thompson, is recognized to offer8623remarks.8624 Mr. Thompson. Thank you, Mr. Steil. For 2\1/2\ years, our8625committees have worked together on legislation, writing rules of the8626road for digital asset markets. I am proud of what we accomplished last8627Congress, with FIT, and it is a great example of what can happen when8628we work together.8629 Unfortunately, today is an example of what happens when we cannot8630work together. We wind up with a second-best solution. But the8631discussion today will go on. I appreciate all our colleagues who have8632chosen to make time for these witnesses and this discussion today. We8633have a rare opportunity to make law this Congress and to be the authors8634of legislation which will change the way we use the internet and how we8635interact in the digital commodity.8636 I want to thank Chairman Hill, Chairman Steil, and the entire8637membership of the Financial Services Committee for your continued8638partnership in this work.8639 I would also be remiss if I didn't recognize our terrific Committee8640leadership and Ranking Member Craig, Chairman Johnson, and Ranking8641Member Davis. We are blessed with an abundance of thoughtful8642legislators who are eager to work on digital asset legislation.8643 Finally, welcome and thank you to our witnesses, and I especially8644want to welcome back to Chairman Behnam. I appreciate all the time and8645effort you each have spent preparing for today, and I look forward to8646the discussion and yield back the balance of my time.8647 Mr. Steil. The gentleman yields back. Does the Subcommittee chair,8648Mr. Lynch, are you interested in offering comments?8649 Mr. Lynch. I am. I would like to address the roundtable, which I8650did not before.8651 Mr. Steil. I will recognize that.8652 Mr. Lynch. Thank you, Mr. Chairman. President Trump's crypto8653dealings are estimated to total about $2.9 billion in value and nearly865440 percent of his total wealth. Between using his meme coin, governance8655token, and USDE stablecoin, of which 75 percent of the proceeds go to8656the Trump family, every detail of his dealings contains a conflict of8657interest.8658 Last week, The New York Times released an extensive investigation8659outlining President Trump's many conflicts of interest. To put it8660bluntly, I quote, ``World Liberty Financial has eviscerated the8661boundary between private enterprise and government policy in ways8662without precedent in American history.''8663 I know this hearing, this gathering has been planned for a while,8664but last Thursday, in a meeting in Dubai, Trump's family's company made8665a deal with a Dubai investor to invest $2 billion that will benefit the8666Trump family.8667 I understand crypto. I understand the other issues here. But this8668is a mechanism by which other people outside, foreign interests, can8669actually influence our President, not just this one but in the future,8670as well. And I think that is a relevant issue before this forum.8671 Thank you. And I do thank the witnesses for their willingness to8672come here and assist the roundtable with its work. Thank you, Mr.8673Chairman, and I yield back.8674 Mr. Steil. The gentleman yields back. The Chairman of the Financial8675Services Committee, Chairman Hill, is recognized.8676 Mr. Hill. Thank you, Chairman. I want to thank our witnesses again8677for your missions, to share your views with us today.8678 As noted, look, we provided the minority 6 weeks of notice and8679lavishly structured a joint process between the Ag Committee, the8680Financial Services Committee, minority, and majority. So I just8681continue to be disappointed in Ranking Member Waters' decision to exit8682the meeting and objection.8683 In the 118th Congress we made tremendous progress. We made8684significant strides to build bipartisan, bicameral consensus on how to8685craft a regulatory framework for digital assets. Seventy-one Democrats8686in the last Congress joined Republicans in passing last Congress'8687regulatory framework view, that Mr. Thompson and I offered, FIT21. It8688is the precursor of the work we are doing here today. We have turned8689the page. We are approaching it in a fresh way, and this roundtable is8690essential to getting new views on how to go in a different direction.8691 To my friends on the other side of the aisle, our door is always8692open. No regulatory framework that is fit for purpose for digital8693assets, that provides oversight, development, and innovation in8694America, that is a failure, just as no clarity for what is a quality,8695dollar-backed stablecoin, if we don't do that, that is a failure,8696because that leaves the regulatory gap, that was pointed out thoroughly8697by both President Biden and President Trump. And this Committee,8698working together with Ag and Financial Services on a bicameral,8699bipartisan basis, we are going to get the job done.8700 And I want to thank all of you for being here today. I want to8701thank our chair, and I will yield back.8702 Mr. Steil. The gentleman yields back. I would like to briefly8703introduce our participants today.8704 Mr. James Rathmell is General Counsel at Haun Ventures, a venture8705capital firm that supports cryptocurrency-related startups.8706 Mr. Alex Miller is the Chief Executive Officer at Hiro Systems, a8707company that provides infrastructure and tools to developers building a8708digital global economy on top of Bitcoin.8709 Mr. Daniel Davis is Partner and Co-Chair of Financial Markets and8710Regulation at Katten Muchin, and is the former General Counsel at the8711Commodity Futures Trading Commission.8712 Mr. Greg Tusar serves as Vice President of Institutional Products8713at Coinbase, where he leads the development of the firm's efforts in8714prime brokerage, in custody, financing, and exchange.8715 The Honorable Rostin Behnam, a Distinguished Fellow at the Psaros8716Center, Georgetown University, and former Chairman of the U.S.8717Commodity Futures Trading Commission.8718 We thank you all for taking your time to be here, and if you would8719like to each make some remarks we will just go from the left to the8720right, starting with Mr. Rathmell.8721 STATEMENT OF JAMES RATHMELL, J.D., GENERAL COUNSEL, HAUN VENTURES8722 MANAGEMENT LP, MENLO PARK, CA8723 Mr. Rathmell. Chair Steil, Chair Johnson, Ranking Members Lynch and8724Davis, and Members of the Subcommittee, thank you for the privilege of8725speaking today.8726 My name is James Rathmell, and I am the General Counsel of Haun8727Ventures, a venture capital firm founded by Katie Haun, who was a8728Federal prosecutor and a General Partner at Andreessen Horowitz. Prior8729to Haun Ventures, I was in legal practice, where I primarily focused on8730securities offerings of all kinds, from venture capital financings to8731IPOs to capital markets transactions.8732 At Haun Ventures, we invest in teams building with frontier8733technology. We believe crypto, i.e., cryptographic primitives with8734economic incentives, has the potential to modernize financial8735infrastructure and digital ecosystems. With new primitives, money,8736assets, and markets can become like everything else on the internet--8737transferrable at the speed of information, accessible, programmable,8738and auditable.8739 Our portfolio companies reflect the ambition of this moment. Plume8740is streamlining the tokenization of real-world assets with built-in8741legal and compliance tools. BVNK uses stablecoins and decentralized8742infrastructure to make global payments for businesses as seamless as8743sending an email.8744 Aleo embeds infrastructure for digital identity and authentication8745while protecting the sensitive data of everyday users. And Farcaster is8746reimagining social media by returning control to users and developers8747through decentralized protocols.8748 These teams want to build and expand in the United States, but they8749need clarity to do so, not special treatment, just consistent rules8750that reflect how these systems actually work.8751 At the heart of today's hearing is something deceptively simple:8752digital assets. A digital asset is not inherently a stock, currency, or8753investment contract. In many cases it is something entirely novel: a8754computing primitive that evolves over time and serves multiple8755purposes, depending on the context. We need legislation that accounts8756for the unique properties of digital assets and evolves with them.8757 But why are existing laws inadequate to meet the present need? A8758token might start its life primarily as a mechanism for capital8759raising, with the initial transactions involving security-like8760characteristics. But as adoption grows, that same token may evolve to8761primarily serve other functions: as a means of payment, as a governance8762mechanism, or to provide access to services on a protocol.8763 This evolution isn't incidental. It is the explicit goal of many8764projects. They aim to decentralize over time, becoming governed by8765open-source communities and secured through trustless consensus.8766Digital assets are the bedrock of this incentive mechanism.8767 A successful legal framework must accommodate this transition. If8768done right, it can unlock more resilient, transparent, and accessible8769financial and digital infrastructure.8770 It is not the case that digital asset issuers refuse to comply with8771the law. Our industry has tried every single pathway available under8772existing securities laws to conduct a token offering. But a core8773reality remains: protocols depend on liquid markets, price discovery,8774community participation, and disintermediation. Existing law simply8775doesn't contemplate this. That is the legal black hole that many8776projects face today.8777 So what would a better blueprint look like? We need a graduated8778framework that adapts to a project's lifestyle. Early on, lightweight8779disclosure regimes can help address information asymmetries. As8780networks mature and decentralize, the focus should shift to market8781integrity and price discovery.8782 Moreover, decentralized networks have incredible amounts of high8783resolution, real-time data. Our portfolio company Artemis, for example,8784has developed tools for parsing and analyzing this data, everything8785from market statistics to developer activity to application usage.8786 U.S. financial regulators were early movers in the 1980s and 1990s8787to adopt electronic systems and make data freely available through the8788internet. Here, too, they should lead and work with the private sector8789to ensure that on-chain data is standardized and disseminated into the8790market.8791 The United States has led before. In the 20th century, we built the8792world's most dynamic capital markets by balancing investor protection8793with financial and technological innovation. We have the opportunity to8794do that again with crypto. If we don't act, innovation won't wait. It8795will simply move elsewhere. And we will lose not only economic8796opportunity but also the chance to shape the rules of the road8797according to our values.8798 We believe that the future of capital markets, the global financial8799system, and the internet will run on open-source blockchains. So what8800is at risk is not just American innovation in the digital asset space,8801but ceding our hard-won leadership role in traditional markets, as8802well.8803 This Congress has a historic opportunity. The blueprint you create8804today will determine whether the next generation of digital asset8805innovation happens here or abroad.8806 Thank you, and I look forward to your questions.8807 [The statement of Mr. Rathmell follows:]88088809 Prepared Statement of James Rathmell, J.D., General Counsel, Haun8810 Ventures Management LP, Menlo Park, CA8811 Chair Steil and Chair Johnson, Ranking Members Lynch and Davis, and8812the distinguished Members of both Subcommittees, thank you for the8813privilege of testifying today.8814 My name is James Rathmell, and I'm the General Counsel at Haun8815Ventures, a venture capital firm founded by Katie Haun, who served as a8816prosecutor in the Department of Justice for over a decade and was a8817General Partner at Andreessen Horowitz. Prior to Haun Ventures, I was8818in legal practice, where I primarily focused on securities offerings of8819all kinds, including venture capital financings, IPOs, and capital8820markets offerings by established public companies.8821 At Haun Ventures, we invest in teams innovating with frontier8822technology. We believe that crypto, which we define as decentralized8823cryptographic primitives paired with economic incentives, holds the8824potential to modernize financial infrastructure and digital ecosystems.8825With new cryptographic primitives, we believe money, assets, and8826markets will become like everything else on the internet: transferable8827at the speed of information, accessible, programmable, transparent, and8828auditable. This is made possible because of decentralized protocols,8829which are designed differently from both existing internet platforms8830and existing financial networks--in that they leverage digital assets,8831the subject of today's hearing, for economic incentives and8832coordination. Furthermore, decentralized protocols are often built on8833open-source code, enabling transparency, innovation, and competition as8834the best ideas rapidly proliferate into superior product offerings.8835 Our portfolio companies reflect the diversity and ambition of this8836moment. The founders behind these projects are building and expanding8837in the United States, and they are asking for a clear, consistent set8838of rules so they can build with confidence. Clarity isn't about giving8839them special treatment, it's about giving everyone, from developers to8840investors to users to regulators, a shared understanding of how these8841systems work and how we will ensure fair market participation.8842 Our portfolio company Plume is pioneering the tokenization of real-8843world assets, streamlining the complex process of bringing real estate,8844commodities, and financial instruments onchain and integrating relevant8845legal, regulatory, and compliance standards directly into its8846infrastructure. Another portfolio company, BVNK, uses stablecoins and8847decentralized infrastructure to make global payments for businesses as8848fast and seamless as sending an email, something traditional systems8849still fail to do.8850 Beyond finance, Aleo is a new blockchain that embeds privacy-8851preserving computing and infrastructure to protect sensitive consumer8852data and security; this technology provides the basis for a new and8853more secure digital identity, which can in turn be leveraged to combat8854problems like authentication and deep fakes. And our portfolio company8855Farcaster is helping reimagine social media through an open,8856decentralized protocol that returns control and data to users and8857developers.8858 At the heart of today's conversation is something deceptively8859simple: digital assets. Much of the confusion in current law--and the8860frustration felt by entrepreneurs--arises from the fact that we are8861dealing with a new asset class not contemplated by existing frameworks.8862A digital asset is not inherently a stock, or investment contract, or a8863currency. In many cases, it's something entirely novel: a new computing8864primitive that can represent many different things depending on the8865context in which it's used, and which can evolve over time.8866 This is why we need legislation that recognizes the unique8867characteristics of digital assets and offers a framework that evolves8868with them. Digital assets are not just financial instruments--they are8869building blocks for a new digital and financial system. They can carry8870value, confer rights and privileges, enforce rules, and facilitate8871coordination at scale.8872 The title of today's hearing is apt. What we urgently need is a8873blueprint--an architectural schematic--for the next century of American8874innovation to unlock the inherent potential of digital assets. We8875cannot reasonably expect that the blueprint from which we built the8876house of 20th century American innovation will do the job.8877 In 1996, the jurist and legal scholar Frank Easterbrook famously8878delivered a lecture titled ``Cyberspace and the Law of the Horse,'' in8879which he argued that we did not need new ways of legal thinking with8880respect to the internet, any more than we needed an entire branch of8881study dedicated to equine law: ``Lots of cases deal with sales of8882horses,'' Easterbrook said, ``others deal with people kicked by horses;8883still more deal with the licensing and racing of horses, or with the8884care veterinarians give to horses, or with prizes at horse shows. Any8885effort to collect these strands into a course on `The Law of the Horse'8886is doomed to be shallow and to miss unifying principles.'' \1\8887Easterbrook's conclusion was that novel and unique legal frameworks for8888the internet were superfluous.8889---------------------------------------------------------------------------8890 \1\ Frank H. Easterbrook, ``Cyberspace and the Law of the Horse,''8891University of Chicago Legal Forum (1996).8892---------------------------------------------------------------------------8893 Of course, this conclusion was wrong in 1996 as the internet was8894emerging, and it remains wrong now that the total amount of economic8895activity on the internet measures in the trillions of dollars per year.8896The laws governing the internet are of paramount national and global8897concern, and the lesson from the past 30 years is that we need to8898continually sharpen our thinking to meet the present moment of8899technology. Easterbrook's words also sound eerily familiar to those of8900us in the digital assets industry, who have long been told that crypto8901entrepreneurs should simply abide by the existing rules. Like the8902internet before it, digital asset innovation warrants a tailored8903approach that respects longstanding legal principles, while adapting8904them to meet the moment. We're grateful to the Members present here8905today for tackling this challenge head-on.8906 But why are existing laws inadequate to meet the present need?8907 Perhaps the most challenging aspect of regulating digital assets is8908that the same token can serve multiple functions simultaneously. A8909token might start its life primarily as a mechanism for capital8910raising, with the initial transactions involving security-like8911characteristics. But as the network develops and adoption grows, that8912same token may evolve to primarily serve other functions--as a means of8913payment, a governance mechanism, or to provide access to services on a8914network or protocol.8915 In fact, this evolution is not merely incidental. Rather, it is the8916explicit goal of many digital asset projects. They aim to transition8917from centralized development efforts to decentralized networks, which8918are governed by their communities and secured through game theoretic8919incentive mechanisms. These networks ultimately rely on trustless8920consensus--where participants reach agreement without relying on8921intermediaries--and digital assets are the bedrock of this mechanism. A8922successful legal and regulatory framework must accommodate this8923transition rather than stifle it, because enabling decentralized8924innovation can unlock more resilient, transparent, and broadly8925accessible financial and digital infrastructure.8926 Of course, one way that digital assets can be used is for capital8927raising purposes--so that a project can hire people, lease office8928space, and pay for development costs. For those seeking to raise8929capital in a traditional securities offering, there are a few pathways.8930 The most frequently used, especially for venture-backed companies8931like the ones in our portfolio, is Regulation D. Reg D was adopted in89321982, and allows an organization to conduct a private securities8933offering without registering with the SEC, as long as the sales are to8934accredited investors of a certain income bracket, net worth, or degree8935of professional licensure. Reg D is an incredible success story: many8936of the world's largest and most innovative companies were originally8937seeded from venture capital investments under the Reg D exemption. From8938July 2022 to June 2023, over 19,000 operating companies relied on Reg D8939to raise more than $275 billion.\2\8940---------------------------------------------------------------------------8941 \2\ Mark T. Uyeda, Commissioner, U.S. Securities & Exchange8942Commission, ``Remarks at the 51st Annual Securities Regulation8943Institute'' (Jan. 22, 2024), https://www.sec.gov/newsroom/speeches-8944statements/uyeda-remarks-securities-regulation-institute-012224.8945---------------------------------------------------------------------------8946 However, Reg D is not without its drawbacks. For one, a typical Reg8947D offering consists of a highly negotiated and bespoke set of legal8948documents, costing tens or hundreds of thousands of dollars in legal8949fees to paper. Moreover, and as I will discuss in greater detail below,8950private securities lack liquid markets and therefore efficient price8951discovery. Finally, Reg D offerings do not enable broad community8952participation.8953 These drawbacks led to the creation of two other exemptions signed8954into law in 2012. Regulation A+, also known as Reg A+ or the ``mini-8955IPO'', was designed to facilitate access to capital for early-stage and8956mid-stage companies and to bridge the gap between private and public8957markets by allowing broader investor access. Regulation Crowdfunding,8958also known as Reg CF, was built to support small businesses and8959startups that may not attract institutional capital but have strong8960community support.8961 Unfortunately, Reg A+ and Reg CF have been mostly unsuccessful at8962achieving these goals, representing less than 1% of private capital8963raised in recent years.\3\ Commissioner Uyeda at the SEC, who himself8964worked on the proposing and adopting releases for Reg CF a decade ago,8965recently concurred with the assessment that Reg CF has failed as a8966mechanism for low-cost capital formation by startups and small8967businesses, since an offering can cost more than $500,000 in fees8968despite a total offering cap of just $5 million.\4\8969---------------------------------------------------------------------------8970 \3\ David Krause, ``Why Aren't Reg A Offerings More Popular Among8971Small Businesses?,'' The CLS Blue Sky Blog (Apr. 27, 2023), https://8972clsbluesky.law.columbia.edu/2023/04/27/why-arent-reg-a-offerings-more-8973popular-among-small-businesses/.8974 \4\ Uyeda, supra note 2 (``In 2012, the JOBS Act introduced the8975concept of crowdfunding into the Federal securities laws, and in 2015,8976the Commission adopted Regulation Crowdfunding (`Regulation CF'). I8977worked on both the proposing and adopting releases for Regulation CF.8978Almost 10 years later, has Regulation CF achieved its intended goal of8979`provid[ing] startups and small businesses with capital by making8980relatively low dollar offerings of securities . . . less costly'?8981Unfortunately, the answer is `probably not.' '').8982---------------------------------------------------------------------------8983 And then of course, there are public offerings. Today, an IPO will8984typically cost millions or even tens of millions in fees paid to8985lawyers, accountants, FINRA, the exchanges, transfer agents, and the8986SEC itself for filing and registration.\5\ This does not include8987ongoing legal and compliance costs of being a public company, which can8988be in the millions of dollars per year. Leaving digital assets aside8989for a moment, these compliance costs are one reason we have seen the8990number of publicly listed companies decline by 50% since the late89911990s.\6\8992---------------------------------------------------------------------------8993 \5\ PwC, ``Considering an IPO? First, understand the costs,''8994https://www.pwc.com/us/en/services/consulting/deals/library/cost-of-an-8995ipo.html.8996 \6\ Wes Moss, ``The Decline In U.S. Stocks To Choose From: What It8997Means For Investors,'' Forbes (Feb. 3, 2025), https://www.forbes.com/8998sites/wesmoss/2025/02/03/the-decline-in-us-stocks-to-choose-from-what-8999it-means-for-investors/.9000---------------------------------------------------------------------------9001 It's important to note that every single one of these pathways--Reg9002D, Reg A+, Reg CF, and IPO--has been tried by digital asset issuers. It9003is simply not the case that market participants have defiantly refused9004to comply with existing laws. However, beyond the substantial costs to9005lawyers, auditors, and others, as well as the inadaptability of9006disclosure-based regimes for the particularities of digital assets,\7\9007an existential risk looms over those who have tried to shoehorn digital9008assets into existing securities laws: the need for liquid markets.9009---------------------------------------------------------------------------9010 \7\ Paul Grewal, Faryar Shirzad, and Thaya Knight, ``Digital Asset9011Securities Regulation: A Petition for Rulemaking from Coinbase,''9012Harvard Law School Forum on Corporate Governance (Aug. 1, 2022)https://9013corpgov.law.harvard.edu/2022/08/01/digital-asset-securities-regulation-9014a-petition-for-rulemaking-from-coinbase/.9015---------------------------------------------------------------------------9016 If you look at the largest decentralized blockchains today--9017Bitcoin, Ethereum, Solana--it is strictly necessary to acquire the9018associated digital assets (i.e., BTC, ETH, SOL) to use and participate9019in the corresponding network. If we followed Google from its venture-9020backed origins through its 2004 IPO, there was never a moment in which9021everyday users needed to own and spend Google stock to run searches;9022where the price of Google stock was instrumental to secure Google.com9023or incentivize users to improve the software; or where the lack of an9024active trading market in Google stock directly imperiled the9025functionality of the search engine.9026 Meanwhile, liquid markets with robust price discovery are an9027essential, non-negotiable precondition for the successful functioning9028of crypto protocols. This is the legal black hole many projects find9029themselves in: perhaps a project may find a way to conduct a digital9030asset offering under an existing pathway--even one that is costly and9031poorly suited to the unique characteristics of tokens--but often there9032is no viable next step if the asset lacks a functioning market to9033support its transfer, sale, and use for the intended purpose on a9034network or protocol.9035 Ensuring that digital assets and decentralized systems can operate9036as designed will benefit all market participants--both institutional9037and retail. The current regime, characterized by excessive compliance9038costs, high barriers to entry, and a reliance on multiple9039intermediaries, is not only impeding innovation but also failing to9040deliver on its core promises. It is ill-equipped to address the unique9041attributes of digital assets and, as a result, is falling short on both9042consumer protection and market integrity.9043 So what could be a better blueprint? Any market structure9044legislation will need a fit-for-purpose regulatory regime that evolves9045with project maturity. This would recognize the changing nature of9046digital assets throughout their lifecycle and apply appropriate9047oversight at each stage.9048 During the earliest stages, when a project is raising funds and9049beginning development, we should look to lightweight disclosure-based9050regimes to address information asymmetries between insiders and the9051public. Rather than shoehorning digital assets into ill-fitting9052securities laws, we should create a new pathway specifically designed9053for digital assets that address their unique risks and opportunities.9054For instance, many projects are open-source-meaning that the source9055code is available for anyone with sufficient technical knowledge to9056analyze and use. This is quite different from the information9057asymmetries that exist with securities, where issuers and their9058insiders may have specialized knowledge about a company that needs to9059be disseminated into the market to create an even playing field.9060 As a network launches, decentralizes, and matures, the regulatory9061focus should shift accordingly to ensure market integrity, liquidity,9062and efficient price discovery. This is the only way networks and9063protocols will achieve their true potential. Such a graduated approach9064would provide the clarity entrepreneurs need while ensuring appropriate9065protections for market participants at each stage. It would recognize9066that the same token can have different regulatory and policy9067implications at different points in its lifecycle.9068 In the 20th century, the United States did the world a profound9069service by building the most reliable, transparent, and robust capital9070markets in history--through a regulatory approach that balanced9071investor protection with innovation. We have the same opportunity with9072crypto. If we fail to seize it, that innovation will not wait; it will9073simply happen elsewhere. And if it does, we risk not only ceding9074economic opportunity but also the ability to shape the rules of the9075road in a way that reflects our values.9076 I believe this Congress has a historic opportunity to establish a9077framework that will secure American leadership across both financial9078and non-financial use cases in our industry for decades to come. The9079blueprint we create today will determine whether the next generation of9080digital asset innovation happens here in the United States or9081elsewhere.9082 For the sake of our economic competitiveness, national security,9083and the millions of Americans who stand to benefit from these9084technologies, I urge you to seize this opportunity.9085 Thank you for your time, and I look forward to your questions.90869087 Mr. Steil. Thank you very much.9088 Mr. Miller, you are recognized to share your remarks.9089 STATEMENT OF ALEX MILLER, CHIEF EXECUTIVE OFFICER, HIRO SYSTEMS;9090 PARTNER, CHAOTIC CAPITAL, BOZEMAN, MT9091 Mr. Miller. Thank you. Chair Steil, Ranking Member Lynch, Chairman9092Johnson, Ranking Member Davis, good morning. Thank you for inviting me9093today.9094 My name is Alex Miller, and I am the CEO of Hiro Systems. I have9095spent the last 15 years of my career on one thing, which is helping9096builders build. Our mission at Hiro is to enable developers to build a9097global, seamless, decentralized and interconnected economy on top of9098Bitcoin via the Stacks network, a fully decentralized blockchain that9099is one of the oldest and largest Layer 2s to Bitcoin. It provides the9100speed and programmability that doesn't exist on Bitcoin but helps bring9101it to everyone and actually bring it the scale and capacity to be used.9102 Why I am really here today, though, is that Hiro is a little bit9103unique. We have been not only very proudly based in the U.S. since our9104founding, but when we built the first version of the Stacks blockchain9105about 7 years ago, which was known as Blockstack at the time, we ran9106the first, and I believe we are the only company still around to have9107run an SEC-qualified, Regulation A offering for tokens.9108 We believed deeply, from the beginning, that for a project to have9109the firmest base to be a generational project it needed to be built the9110right way, decentralized with trust and within compliance to the laws,9111so that there was no question that it would remain around. And for that9112reason we chose to make the initial offering of STX, which is the token9113that is used for gas and to create the incentives that are necessary9114for any decentralized system to work via Regulation A, so that9115everyone, not just the accredited investors who traditionally make up9116Reg D or the international investors who make up Reg S offerings, could9117participate.9118 Unfortunately, we ran headlong into the challenge that is trying to9119fit the square peg of new technology into the round hole of the current9120law. Due to the lack of a clear regulatory structure, trying to do it9121the right way has cost us, at this point, more than the $15 million9122that we raised through that Regulation A offering. If we had not raised9123also through Reg D and Reg S, we would have spent every penny that we9124had simply trying to come in and register.9125 It has caused to have to create suboptimal compliance structures,9126that has made the experience worse for the users and developers on this9127network. And it has put us at a competitive disadvantage to projects9128based outside the U.S. who are less decentralized and less transparent.9129 Hiro was built by developers and for developers, and we proudly--9130proudly--believe in the power of free markets and decentralized9131technology to unleash the creativity and lift millions out of poverty.9132We, as a society, have hundreds of years to show how important9133predictability and certainty is to business. And just because the9134technology is different does not mean that the needs of entrepreneurs9135and builders are any different than they were 100 years ago.9136 While there have undoubtedly been bad actors in crypto, the current9137regulatory ambiguity helps them at the expense of honest actors and9138good projects. Clear regulatory frameworks will enable ethical projects9139to flourish, while ambiguity helps that aren't.9140 So my ask of you today is this: give builders the regulatory9141clarity that they are asking for, with fit-for-purpose, cost-effective9142structures that let them get back to building while providing9143disclosures, transparency, and confidence to investors. Doing so will9144encourage this ethical innovation, protect consumers, and most9145importantly, reassert America's position as a global leader in9146technology.9147 Again, thank you for having me today, and I look forward to9148discussing this more with you.9149 [The statement of Mr. Miller follows:]91509151 Prepared Statement of Alex Miller, Chief Executive Officer, Hiro9152 Systems; Partner, Chaotic Capital, Bozeman, MT9153I. Introduction9154 Chairman Steil, Ranking Member Lynch, Chairman Johnson, Ranking9155Member Davis, and Members of the Subcommittees:91569157 Thank you for inviting me to testify at today's hearing. My name is9158Alex Miller, and I am the CEO of Hiro Systems PBC, a company that makes9159tools for developers building decentralized applications on top of the9160Bitcoin and Stacks blockchains.9161 I've spent the last 15 years of my career helping software9162developers build new technology. This includes 8 years at Stack9163Overflow, the largest knowledge-sharing community in the world for9164developers, where I ran numerous parts of the business that enabled9165more than 50 million people per month to collaborate with their co-9166workers and strangers around the world. I've also been a founder,9167employee, advisor, or board member of startups and nonprofits both9168large and small.9169 I'm an ardent and true believer in the power of free markets to9170unleash human potential. There has never been a force as powerful for9171improving the lives of billions of people as the last hundred years of9172capitalism and markets, which has allowed the ingenuity and creativity9173of builders to unleash a pace of advancement we've never seen before.9174 At Hiro, we believe that the more you can enable easy, fast, and9175simple interactions between people, the more you can build and the more9176opportunity you can create for everyone. Blockchain technology has the9177potential to do this by facilitating more efficient, distributed, and9178secure financial transactions for consumers and financial institutions9179across the globe. We in the United States are fortunate to have access9180to legal and capital markets that many across the world do not--markets9181that have helped maintain our position as the technological and9182economic leader for generations. The potential of blockchain technology9183to create open markets globally is what makes its development an9184inevitability; there is too much promise and potential for it not to9185happen. The only question is whether the U.S. will be at the forefront9186of this next evolution, embedding our values in its DNA, and once again9187harness technology to increase our prosperity.9188 We also believe in building it right. Hiro was the first company,9189and the only still-operating, to qualify a Regulation A offering with9190the Securities and Exchange Commission (SEC) for sales and9191distributions of tokens,\1\ an integral part of blockchain networks.9192That experience gives us a unique ability to provide insights into what9193needs to change to support development of the industry.9194---------------------------------------------------------------------------9195 \1\ Hiro qualified its token offerings under Regulation A under the9196Securities Act of 1933, which is an exemption designed to enable9197companies to raise capital without incurring the more burdensome9198registration and reporting requirements applicable when a company9199conducts an initial public offering. We believe the lessons of our9200experience apply not only to Regulation A but other offering mechanisms9201that the SEC or Congress might consider for digital assets.9202---------------------------------------------------------------------------9203 We believed from the outset that our network and operations needed9204to comply with the Federal securities laws and regulations. We found,9205however, significant roadblocks and a lack of clarity within the SEC's9206processes, which were unnecessarily time consuming because they9207involved repetitive rounds of inquiries and apparent lack of9208coordination. In addition, when we sought to exit the reporting regime,9209the SEC staff could not provide clear guidance on when and how to do9210so. Hiro was also ill-served by the absence of a clear pathway for9211sales of its digital assets on exchanges. Further, some of the9212disclosure and financial reporting requirements imposed on Hiro were9213onerous without providing token purchasers and holders meaningful9214protections.9215 Hiro's experience reveals unnecessary obstacles that, in our view,9216Congress could help alleviate by taking the following steps:92179218 Congress should provide a regulatory framework and mandate9219 that the SEC adopt rules for digital asset offerings that are9220 clear, appropriate for the unique nature of digital assets and9221 their networks, and minimizes uncertainty.92229223 Congress should adopt, or require the SEC to adopt, a clear9224 legal standard for exiting any registration, qualification, or9225 reporting regime for digital assets--including because a9226 network is ``decentralized'' and so should no longer9227 appropriately be responsible for ongoing reporting, as9228 discussed below.92299230 Congress should adopt rules to clarify that programmatic9231 sales of digital assets (i.e., preprogrammed sales made through9232 exchanges in blind bid/ask transactions) by an issuer are not9233 securities transactions subject to the Federal securities laws9234 and specifically SEC registration or qualification.92359236 Congress should require the SEC to adopt standards for9237 disclosures and financial information that evolve over the9238 lifecycle of a project so as to provide purchasers appropriate9239 material information about blockchain networks and digital9240 assets but not be overly burdensome on issuers, particularly9241 those that are early-stage companies.92429243 Separately, from the disclosure considerations, in order to foster9244the most vibrant open ecosystem, Congress should protect the right for9245developers to contribute to the deployment of open-source software9246without attribution of liability for third party use.9247 I discuss these requests in more detail below.9248II. Hiro's History and Background on the Digital Asset Offering Process9249 Hiro's mission is to provide developers crucial infrastructure and9250tools needed to create applications and utilities using a layered9251solution, with Bitcoin's network at the base, that will, in turn, build9252a stronger digital global economy and facilitate better, more efficient9253transacting. Hiro, then known as Blockstack, began by building the9254first version of our ``Stacks'' blockchain, which was deployed in9255October 2018. Stacks is one of the first, and still largest, Bitcoin9256Layer 2 blockchain networks to work towards the vision of scaling the9257Bitcoin network for billions of users and millions of transactions per9258day. Because all blockchain infrastructure has limitations as to how9259much activity they can support, ``Layer 2'' networks like Stacks exist9260to bring additional functionality and scale to the most well-known9261public blockchains (like Bitcoin), by allowing more transactions to9262happen faster and for a lower cost on a separate chain, before being9263combined into a single transaction on the base blockchain for ultimate9264security.9265 Like many blockchain networks, to enable an open and permissionless9266system, the Stacks blockchain needs a mechanism to provide incentives9267for miners to perform key functions; as a result, the first version of9268the network introduced the Stacks token, referred to as STX, which9269offers a reward for those constructing and validating transactions.9270Without an incentive mechanism like STX, decentralized networks like9271the Stacks network simply cannot function. At the time, although we9272disagreed with this view, the SEC viewed all tokens, such as STX, as9273securities subject to its jurisdiction, which meant we needed to9274distribute the STX in compliance with applicable SEC regulation.92759276 We believed deeply from day one that for a generational project to9277have the strongest base and legitimacy, it needed to be built the9278``right way''--leaving no doubt about its legal compliance and with9279open access to all.92809281 For that reason, we chose to make the initial offering of STX9282through a qualification process with the SEC, under Regulation A. The9283goal was that anyone, not just the traditional venture capital and9284institutional investors who can usually invest in an exempt,9285unregistered offering, could participate. We were the first, and are9286now the only still-operating, company to complete a token offering9287qualified by the SEC.9288 In choosing this path, we hoped to encourage participation in the9289network and show it was possible for a U.S. company to raise capital9290through a digital asset with regulatory certainty.9291 We did not, however, anticipate the difficulty we faced engaging9292with the SEC in our effort to qualify the token offering. Our process9293was filled with uncertainty and was extremely protracted, lasting 129294months, far beyond a more typical registration process. This came at9295tremendous cost to the company--$2.8 million from initiation of the9296offering process through qualification--and undercut confidence within9297the industry that engaging with the SEC or its Staff is a good idea.9298III. Lessons Learned9299 We approached the SEC with the intention of complying with the9300Federal securities laws. To date, we have spent well more than $159301million dollars on the offering process, compliance with the reporting9302regime, and our defense against an unwarranted investigation triggered9303by our attempts to work with the Staff. That amount represents more9304than the entire amount raised through the offering. Though we walked9305willingly into the SEC's doors, we were in many ways left with a9306competitive disadvantage relative to other projects, especially those9307based outside the U.S.9308 Based on our experience, I believe that there is limited efficacy9309for existing registration and qualification processes as a mechanism9310for a tailored disclosure regime without significant substantive9311amendments. Below are a number of considerations for future legislation9312or regulation to address the challenges we encountered.9313A. Congress Should Provide a Regulatory Framework and Mandate that the9314 SEC Adopts and Implements Rules for Digital Asset Offerings9315 Congress should pass legislation requiring the SEC to adopt and9316implement rules for digital assets that are clear, appropriate for the9317unique nature of digital assets and their networks, and minimize9318uncertainty. Providing clear rules of the road for these entities and9319assets will enable a more normal process for the offering.9320 Blockstack did everything it could to facilitate collaborative9321discussions with the SEC. We initially engaged with the SEC Staff on a9322number of regulatory concerns and provided analysis with our positions9323on issues we thought would be of concern to the Staff, with the goals9324of assuring the Staff of our thoughtful and collaborative approach and9325receiving constructive feedback regarding their concerns. Following9326several rounds of productive conversations, the Staff agreed that it9327was appropriate for us to file our application for potential9328qualification of the offering, and we started speaking with the Staff9329responsible for reviewing filings.9330 This began a long and arduous process. Unfortunately, there was no9331apparent overlap between the Staff in our initial meetings and the9332Staff responsible for the review of Regulation A filings, which had9333evidently not seen the analysis we circulated. This necessitated9334additional time to discuss the same subset of issues repeatedly. In9335fact, throughout the process, new Staff were introduced into the9336conversations on an ongoing basis many times, typically without9337background or briefing, leading them to submit the questions and9338comments we had already answered and/or re-open topics that were9339previously (we thought) closed. We exchanged more than 15 rounds of9340comments (both written and verbal) with the Staff of different9341divisions of the SEC during this time. By contrast, registered initial9342public offerings typically take much less time--it is more typical to9343have 2-3 rounds of comments, even when a company is raising orders of9344magnitude more money.9345 If Congress were to adopt, or direct the SEC to adopt and9346implement, rules for digital assets that are clear and appropriate for9347the unique nature of digital assets and their networks, it would9348minimize uncertainty about its disclosure and financial reporting9349requirements and reduce the need to engage on compliance questions and9350seek guidance. This could help prevent the long and costly process Hiro9351endured.9352B. Congress Should Codify a Clear Off-Ramp from Registered Or Qualified9353 Offerings for Decentralized Network Creators9354 As part of any legislation passed, Congress should provide a means9355to exit registration or qualification and related reporting. Hiro's9356difficulties also exemplify how critical that would be to the industry.9357 Once Hiro's offering was qualified, we determined that we would,9358within a short period of time, achieve a ``decentralized'' network and9359may not appropriately be responsible for ongoing reporting regarding9360the STX tokens and network. The premise was that once the network9361operated independently of Hiro, the need for disclosures would be9362obviated, because Hiro would no longer have the ability to primarily or9363materially influence the value of the STX relative to others involved9364in the network. Hiro also would no longer have nonpublic insights into9365factors related to the STX or the network that should be communicated9366to token holders.9367 We therefore again engaged with the Staff to discuss our thoughts9368on the level of decentralization that we believed would be fulfilled9369based upon anticipated technical, operational, and economic changes to9370the network. Version 2 of the Stacks blockchain, released in January93712021, contained a wide variety of upgrades, including, in our view,9372fully decentralizing it such that Hiro could no longer control any9373subsequent changes to the network.\2\9374---------------------------------------------------------------------------9375 \2\ Muneeb Ali, Stacks Cryptocurrency Expected To Reach Non-9376Security Status in the United States (December 7, 2020), https://9377blog.blockstack.org/stacks-cryptocurrency-expected-to-reach-non-9378security-status-in-the-united-states. Relevant factors included owning9379less than 10-15% of the tokens, requiring token holder consent for9380changes (which could be proposed by anyone), integration of significant9381numbers of non-affiliated miners, and many others.9382---------------------------------------------------------------------------9383 Hiro provided notice to the Staff and token holders through filings9384that disclosed Hiro's plan to file the Form 1-Z ``Exit Report'' (to9385cease its Regulation A reporting obligations) 6 months after it9386determined that decentralization was achieved. Following the launch of9387the decentralized version of the network in January 2021 and several9388additional months of discussions, Hiro informed the Staff of our intent9389to file our Form 1-Z in July 2021.9390 Almost immediately, Hiro's engagement with the Staff stalled until,9391shortly thereafter, the SEC's Enforcement Division opened an9392investigation into Hiro related to `potential securities violations'.9393In other words, our efforts to participate in a collaborative process9394appeared to send us down the path to a costly referral to enforcement.9395 At no time did the SEC articulate what supposed securities9396violations they were investigating, just wide ranging and scattered9397`requests for information'. Hiro faithfully complied with all9398enforcement-related requests spanning a period of 3 years. We spent9399more than $2.5 million in legal costs and countless hours responding.9400Each time the pattern was the same: the SEC would send a request, we9401would comply, and the Enforcement Division would go silent for months,9402until the next request. This pattern continued until the SEC's9403investigation was suddenly and unexpectedly closed on July 9, 2024.9404Hiro continued to meet its reporting obligations under Regulation A9405until the filing of our Exit Report on January 8, 2025, which we had9406delayed during the investigation out of caution (meaning that we also9407incurred ongoing reporting costs in the interim).9408 It is critical that any regime that requires regulatory approval or9409other action for distribution of digital assets provide a clear and9410realistic way to exit that regime. We continue to believe, consistent9411with prior statements by the SEC and its staff and our own experience9412building a blockchain network, that once a system is decentralized, an9413issuer should no longer appropriately be responsible for ongoing9414filings. However, the uncertain and broad boundaries of what9415constitutes ``sufficient decentralization'' (including as referenced9416under the SEC Staff's 2019 Framework for Digital Assets) materially9417constrained Hiro's ability to take actions to exit the Regulation A9418reporting regime with certainty.9419 The process Hiro experienced was exceedingly costly to both Hiro9420and users, and it is unclear what the benefit has been to STX holders.9421Every substantial business decision required consulting with lawyers.9422More importantly, to avoid any or all implications that we could9423somehow control or materially influence the network, we have avoided9424activities we were concerned could be viewed as technical foot faults,9425such as providing STX as consideration in service provider contracts9426without twelve month holding periods. Each of these decisions has come9427at a cost to us and users--for example, by limiting liquidity of the9428assets--without any obvious upside. We have also foregone opportunities9429within the scope of our entrepreneurial enterprise best suited to our9430unique and critical subject matter expertise, in the fear that any9431potential influence over the development of the network at all would9432threaten the Staff and the SEC's view of our status.9433 I truly do not believe users or investors are well served by9434developers who effectively and fully renounce their project in the9435``name'' of decentralization, which is what we believed we needed to do9436in light of our experience. Instead, we recommend focusing on9437parameters for decentralization that limit that misalignment between9438developers and users by allowing involvement of the developer of a9439network, as long as the developer cannot control operational or9440management decision making. I believe this is best met through a bright9441line definition of decentralization provided by Congress that is based9442on (a) the ownership of token supply across affiliates/related parties9443and (b) the technical control over the network.9444 It is also worth noting that there were collateral consequences to9445the lack of certainty related to other market participants: Even after9446our Regulation A token offering, it wasn't clear to third parties how9447they could permissibly engage with the Stacks token. For example, could9448it be listed on exchanges? Which party could list it on an exchange?9449Who could provide custody arrangements? These are all questions that we9450hoped would have finality post-offering following an extensive process;9451we would hope they would be answered by additional clarity on9452decentralization.9453C. Congress Should Adopt Rules To Clarify that Programmatic Sales Using9454 Exchanges by an Issuer Are Not Securities Transactions9455 I also believe our company and the broader crypto market has been9456ill-served by the absence of a clear pathway to conduct token sales on9457exchange prior to network decentralization or maturity. Clarifying that9458pre-programmed sales of digital assets on exchanges in blind bid/ask9459transactions by an issuer are not securities transactions subject to9460SEC registration or qualification should be a priority. In many9461instances where Hiro's capital needs could have been met by periodic9462open market token sales, we were required to solicit venture capital9463investment or private placements to investment firms, which was both9464more costly and less supportive of development of the network. A legal9465framework including this standard would have eased this considerably.9466 We understand that there can be a concern about issuers and their9467affiliates flooding the market with an unrestricted asset, which could9468harm existing holders. To avoid a scenario where large tranches of9469tokens are sold on the market by a development team using programmatic9470sales, a blended approach could be taken whereby tokens could only be9471sold through programmatic sales (a) after 12-24 months, to allow the9472market to assess their performance and ability to meet disclosure9473requirements, and (b) subject to annual caps, which could be based on a9474number of factors such as circulating supply, team supply, or prior9475annual expenditures.\3\9476---------------------------------------------------------------------------9477 \3\ This approach would be consistent with the ``dribble out''9478provisions under current Rule 144, which provides a safe harbor to9479secondary transactions for certain otherwise restricted securities.9480---------------------------------------------------------------------------9481D. Congress Should Require the SEC To Adopt Appropriate and Tailored9482 Requirements for the Disclosures Needed for Digital Asset9483 Offerings, Which Should Evolve Over the Lifecycle of a Project9484 and Not Include Audited Financial Statements9485 Congress should mandate that the SEC adopt clear requirements for9486disclosures in digital asset offerings, and those disclosures should9487not include audited financials. We have spent approximately $450,0009488annually on external finance and legal costs related to audit9489obligations and semi-annual disclosures and an additional $500,000 as9490it relates to internal finance and legal personnel necessary to9491maintain our compliance as a reporting entity, representing upwards of94927% of our total annual expenses.9493 Were the audited financials simply a function of cost that provided9494tremendous benefits to investors, our calculus on the expense might be9495different. However, we have not found them to be an efficient use of9496our capital due to the lack of usefulness to crypto users and9497investors. We believe unaudited financials with a signed attestation as9498to their accuracy, should be sufficient.9499 The disclosures made pursuant to Regulation A are intended to9500provide investors with information about the enterprise. While the9501business may change, the focus on the enterprise is static. On the9502other hand, the development of a blockchain network shapeshifts. It9503begins with the developer, which could be an enterprise, or could be a9504single or set of entrepreneurs with a vision. Following inception, the9505core functions, ideation, and development move from one entity to meet9506other builders, hobbyists, companies, and tinkerers; much of what the9507blockchain network becomes with each passing year through developments9508and upgrades no longer rests within the originating enterprise.9509 With that difference in lens in mind, the utility of disclosures9510related to a single entity--the Regulation A filer--within a network of9511interconnected but distinct persons and organizations diminishes. While9512the status of Hiro's internal corporate governance, financial and9513compliance structures continued to elevate through our expenditures9514related to disclosures and audited financials, it did not give users9515what they needed. Instead, users interacting with our products or the9516network consistently reached out for information or metrics relevant to9517their uses.9518 The feedback and commentary we receive from users is almost9519principally related to our developer tools and network metrics and9520functionalities. As a result, in lieu of audited financial statements,9521we believe investors would be better served by being provided the most9522pertinent details of a project to a crypto investor, like key persons9523to the project and their compensation arrangements, token holdings by9524the issuer and related parties, and disclosures of both anticipated and9525past token sales on a 15 or 30 day timeline, supplemented by9526blockchainspecific information such as a third-party security audit,9527key governance rights, information security practices, and procedures9528for multi-signature transactions, if applicable. At the beginning of a9529project, when a project's or the issuer's financials may be relevant to9530the project's long-term viability, financial statements may be relevant9531as well, but we do not believe subjecting them to audit is necessary in9532light of the cost, especially given that they will likely recede in9533relevance in many cases. Therefore, financials with an attestation from9534an accountant should be sufficient.9535 Given the differences in mechanisms across blockchain networks, it9536would be difficult to prescribe a universal set of elements that should9537be subject to review in third parties audits, and so we recommend a9538principles-based approach to the financial information that should be9539provided. We do believe, though, that one unifying principle is that9540data within blockchain networks should be open and publicly verifiable9541by independent parties without need for supplementation by any9542development team. This would capitalize on the unique transparency that9543blockchains provide in order to help address concerns about an issuer,9544project, or affiliates falsifying or misrepresenting any data or9545metrics in the same way a formal audit does for financial statements.9546E. Congress Should Protect the Right for Developers To Contribute Open-9547 Source Software Without Attribution of Liability for Third9548 Party Use9549 Finally, Congress should mandate protections for developers to9550contribute to open-source software deployed in permissionless9551blockchain protocols. Collaboration and open experimentation have been9552at the heart of almost all scientific progress, especially9553technological ones like the internet. Builders fearing they will be9554subject to personal civil or criminal liability for the actions of9555others they have no control over, using code they contributed to a9556public good, will have a chilling effect on long term progress. In9557order to ensure the progress of this industry in the U.S., developers9558need assurances that the use of their software contributions by third9559parties will not result in legal liability.9560IV. A Look Ahead9561 Our effort towards regulatory compliance has been no small endeavor9562for an early-stage, 40-person company. While we have been disappointed9563by the opportunity for the U.S. regulatory regime to lead in this arena9564that is lost to time, we are incredibly encouraged by the work of the9565SEC in 2025 as evidenced by, for example, the creation and engagement9566of the Crypto Task Force and Staff Statements by the Division of9567Corporation Finance. If the SEC is focused on marshalling its resources9568towards transparent communication and industry engagement, and Congress9569mandates and supports that effort, I think we will see a markedly9570stronger digital asset industry emerge as a result. Whether the SEC9571adopts a framework similar to the Token Safe Harbor 2.0 or defers9572creation of new registered offerings for digital assets to await9573Congressional market legislation amendments, we believe our experience9574should be instructive on the limitations of qualification and9575registration regimes in their current forms as a means for token9576offerings.9577 Hiro is built for developers by developers. We proudly believe in9578the power of free markets and blockchain technology to unleash the9579creativity of millions. As a civilization, we have hundreds of years of9580history to show how important predictability and certainty is to9581entrepreneurs, and just because a technology is new, does not mean9582these needs are any different. To fulfill the vision, builders need9583regulatory clarity and fit-for-purpose, cost-effective structures to9584provide meaningful disclosures to investors, so that builders can move9585quickly and with confidence in doing what they do best: building.9586 Thank you to both Subcommittees for your focus on charting a new9587path for digital assets in the U.S.95889589 Mr. Steil. Thank you very much, Mr. Miller.9590 Mr. Davis, you are recognized to offer your comments.9591 STATEMENT OF DANIEL J. DAVIS, J.D., PARTNER AND CO-CHAIR,9592 FINANCIAL MARKETS AND REGULATION, KATTEN MUCHIN ROSENMAN LLP,9593 WASHINGTON, D.C.9594 Mr. Davis of Washington. Good morning. Thank you, Chairmen Steil9595and Johnson, Ranking Members Lynch and Davis, and Members of the9596Subcommittees and Committees for this opportunity.9597 My name is Dan Davis. I am Partner at Katten Muchin Rosenman and9598the co-chair of the firm's financial markets and regulation practice.9599From 2017 to 2021, I had the honor as serving as the General Counsel of9600the Commodity Futures Trading Commission with, among others, then-9601Commissioner Behnam. It is good to share a table with you.9602 I speak today in my personal capacity.9603 I have two points regarding the CFTC to make in these remarks.9604First, the CFTC is already engaged in a significant portion of the9605digital asset markets, and second, that the CFTC is the natural Federal9606regulation to provide additional authority for the digital asset spot9607market.9608 First, the CFTC is already engaged in a significant portion of the9609digital asset market. Let's start with basics. A digital asset is a9610commodity. Every court to address that question has ruled that a9611digital asset is a commodity. If I sell that digital asset to somebody9612else, that is presumptively a commodities transaction. The CFTC has9613enforcement authority over that transaction. If there is fraud or9614manipulation, the CFTC can prosecute that transaction, but that is all9615it can do.9616 If I put a future on top of that digital asset, you get full CFTC9617regulatory jurisdiction. I have to register, I am examined, and I have9618to comply with CFTC core principles and regulations. If I put a swap on9619top of that digital asset, again, full CFTC jurisdiction. And if I put9620an option on top of that digital asset, full CFTC jurisdiction. Also,9621if I sell that digital asset to a retail person and I offer them9622financing or leverage, and I don't actually deliver the digital asset9623to them within 28 days, that is also full CFTC jurisdiction, and that9624is Section 2(c)(2)(D) of the CEA.9625 So the CFTC already has a lot of jurisdiction over a wide array of9626digital assets. How much, exactly? Well, right now there are about 209627or so CFTC-regulated products, based on digital assets that are either9628trading or have been self-certified to trade. Those 20 or so digital9629assets account for about 83 percent of the global market capitalization9630of all digital assets, 83 percent. Thus, the CFTC and its regulated9631entities are monitoring, surveilling, and engaging in at least 839632percent of the digital asset market, and they have been doing so for9633about a decade now.9634 I am encouraged by many parts of the bill, but one part that jumps9635out at me is Section 202, that recognizes that secondary market9636transactions should not be securities, but commodities transactions9637subject to CFTC regulation. I believe that is the correct application9638and interpretation of the Howey Test. I would go one step further than9639Section 202, and I would say that digital assets issued by issuers in9640blind bid/ask transactions are also commodities transactions and not9641securities transactions.9642 That brings me to my second point. If there is to be a Federal9643regulator over the digital asset spot market, the CFTC is the natural9644choice. As I have just illustrated, the CFTC already interacts with a9645large portion of the digital asset environment. It has, at this point,9646extensive experience with the trading and operation of these products.9647In addition, the Commodity Exchange Act's principle-based and self-9648certification approach to regulation provides an environment in which9649these markets can develop with strong customer protections and market9650resiliency. The CFTC knows how to look over these markets, examine9651entities for compliance with core principles, and work with market9652participants to understand how these products and trading works and to9653innovate to make these markets the envy of the world.9654 We have a great opportunity to improve regulatory clarity and bring9655trading in these important markets to the United States. I again thank9656you for your time, and look forward to the discussion.9657 [The statement of Mr. Davis of Washington follows:]96589659 Prepared Statement of Daniel J. Davis, J.D., Partner and Co-Chair,9660 Financial Markets and Regulation, Katten Muchin Rosenman LLP,9661 Washington, D.C.9662 Chairmen Johnson & Steil, Ranking Members Davis & Lynch, and9663Members of the Subcommittees:96649665 Thank you for the opportunity to appear before you today and share9666my views about digital asset regulation, including the Commodity9667Futures Trading Commission's (CFTC) role in digital asset regulation. I9668had the honor of serving as the CFTC's General Counsel from 2017-20219669and currently advise clients about CFTC and digital asset regulation in9670my role as a partner with Katten Muchin Rosenman LLP. However, my9671appearance before you is in my personal capacity; I am not representing9672or speaking on behalf of any other person, private sector agency or9673governmental agency.9674 I would like to address a few issues in my testimony today,9675including the current jurisdiction that the CFTC has over the digital9676asset market, including the spot market, the CFTC's substantial9677experience regarding digital assets, and the protections that the9678Commodity Exchange Act (CEA) and rules currently offer for investors,9679particularly to retail customers.9680CFTC Jurisdiction Regarding Digital Assets9681 As these Subcommittees are well aware, the CFTC is the primary9682regulator of the futures, options on futures, and swaps markets. The9683CFTC also regulates leveraged retail commodity transactions. The CFTC's9684full ``regulatory'' authority includes the ability to require9685registration and examine registered entities that offer these products.9686 The CFTC also has enforcement jurisdiction (or anti-fraud and anti-9687manipulation jurisdiction) in the commodities markets at large. Thus,9688if the CFTC thinks that there is manipulation or fraud in a spot market9689for a commodity--such as gold or Bitcoin--it can institute an9690enforcement action to enjoin that activity and seek recompense of ill-9691gotten gains from that activity.9692 Why is it important for the CFTC to have anti-fraud and anti-9693manipulation authority over the spot markets? Quite simply, because the9694spot markets highly influence the derivatives markets. Spot markets and9695derivatives markets are highly correlated. For example, there is a 99.99696percent correlation between bitcoin's spot market price and the price9697on CFTC-regulated bitcoin futures products.\1\ If somebody can9698manipulate the price of the spot market, they generally also can9699influence the price of derivatives products based upon the underlying9700asset.\2\9701---------------------------------------------------------------------------9702 \1\ Grayscale Investments, LLC v. SEC, 82 F.4th 1239, 1245 (D.C.9703Cir. 2023). In Grayscale, the D.C. Circuit concluded that the SEC's9704denial of Grayscale's application for a bitcoin exchange-traded product9705was arbitrary and capricious because the SEC ``failed to explain its9706different treatment of similar products.'' Id. at 1242.9707 \2\ See, e.g., In re Coinbase, Inc., CFTC No. 21-03 at 3-4 (Mar.970819, 2021).9709---------------------------------------------------------------------------9710 Former CFTC Commissioner Dawn Stump provided an excellent9711explanation about the rationale and nature of the CFTC's anti-fraud and9712anti-manipulation authority for the spot market:97139714 The public should be aware that where cash commodity markets9715 are concerned, this limited authority (anti-fraud/manipulation/9716 false reporting, as opposed to day-to-day regulatory oversight)9717 is bestowed upon the CFTC as a tool to assist in its primary9718 function of regulating derivatives products, such as futures.9719 Futures contracts serve a price discovery function. Well-9720 functioning futures (and other derivatives products) rely upon9721 a sound underlying cash market and may reference cash market9722 indexes in their pricing. Therefore, cash market transactions9723 can potentially be part of a scheme to manipulate prices of9724 derivatives products that are regulated by the CFTC. Congress9725 has recognized these relationships between prices of cash9726 transactions and derivatives products, and thus the CEA9727 provides the CFTC with limited enforcement authorities with9728 respect to cash transactions.\3\9729---------------------------------------------------------------------------9730 \3\ Concurring Statement of Commissioner Dawn D. Stump Regarding9731Enforcement Action against Coinbase, Inc., (Mar. 19, 2021), https://9732www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement031921.97339734 Thus, CFTC enforcement actions in the spot market are not primarily9735focused on policing the spot market for its own sake. The CFTC9736emphasizes, instead, its role in regulating the derivatives markets.9737 The CFTC nevertheless has actively used its enforcement authority9738in the digital assets space. It has brought at least 80 enforcement9739actions involving digital asset commodities. In the last fiscal year,9740almost 20 percent of the Commission's enforcement actions related to9741digital asset commodities.\4\9742---------------------------------------------------------------------------9743 \4\ CFTC Releases FY 2024 Enforcement Results, CFTC Release No.97449011-24 (Dec. 4, 2024) (available at https://www.cftc.gov/PressRoom/9745PressReleases/9011-24).9746---------------------------------------------------------------------------9747 The CFTC has a long history of involvement with digital assets. As9748early as 2014, the first Bitcoin denominated cash-settled swaps,9749options and non-deliverable forwards began trading on CFTC-registered9750swap execution facilities.\5\ The next year the CFTC found that Bitcoin9751and other virtual currencies were commodities.\6\ The first cash-9752settled Bitcoin futures contracts began trading on CFTC-registered Cboe9753Futures and CME in 2017.\7\ During the same year, the CFTC for the9754first time designated a swap execution facility and derivatives9755clearing organization to transact in physically deliverable Bitcoin9756swaps contracts. Also in 2017, the CFTC's LabCFTC released a primer on9757virtual currencies.\8\ CFTC's LabCFTC, which when I was at the CFTC9758reported to me as General Counsel, has grown and is now the Office of9759Technology Innovation that reports directly to the Chairman.9760---------------------------------------------------------------------------9761 \5\ Stan Higgins, TeraExchange Receives US Approval to Launch First9762Bitcoin Derivative, COINDESK (Sept. 12, 2014), https://9763www.coindesk.com/tech/2014/09/12/teraexchange-receives-us-approval-to-9764launch-first-bitcoin-derivative/; In re TeraExchange LLC, CFTC Docket9765No. 15-33 at 3 (Sept. 24, 2015) (``On September 11, 2014, Tera filed9766with [the CFTC Division of Market Oversight] a submission self-9767certifying the Bitcoin swap for trading on its [swap execution9768facility]. Tera began offering the Bitcoin swap for trading on9769September 12, 2014.'').9770 \6\ See In re Coinflip, Inc., CFTC No. 15-29 (Sept. 17, 2015).9771 \7\ CFTC, Release No. 7654-17 (Dec. 1, 2017), https://www.cftc.gov/9772PressRoom/PressReleases/7654-17.9773 \8\ LabCFTC, A Primer on Virtual Currencies (Oct. 17, 2017),9774https://www.cftc.gov/sites/default/files/idc/groups/public/documents/9775file/labcftc_primercurrencies100417.pdf.9776---------------------------------------------------------------------------9777 Since 2017, the CFTC has released additional backgrounders on9778virtual currencies and related derivatives products.\9\ And CFTC Staff9779in 2018 released an advisory regarding their priorities and9780expectations when reviewing new virtual derivatives products to be9781listed on CFTC regulated markets.\10\ The CFTC and its staff have9782continued to monitor the development of the digital assets market and9783recently withdrew the 2018 advisory because of ``additional [CFTC]9784staff experience in the intervening years, as well as increasing market9785growth and maturity'' in the digital asset space.\11\9786---------------------------------------------------------------------------9787 \9\ See CFTC Backgrounder on Self-Certified Contracts for Bitcoin9788Products, https://www.cftc.gov/sites/default/files/idc/groups/public/9789@newsroom/documents/file/bitcoin_fact9790sheet120117.pdf; CFTC Backgrounder on Oversight of and Approach to9791Virtual Currency Futures Markets (Jan. 4, 2018), https://www.cftc.gov/9792sites/default/files/idc/groups/public/%40customerprotection/documents/9793file/backgrounder_virtualcurrency01.pdf.9794 \10\ See CFTC Staff Advisory No. 18-14 (May 21, 2018), https://9795www.cftc.gov/node/214951.9796 \11\ See CFTC Staff Advisory No. 25-07 (Mar. 7, 2025), https://9797www.cftc.gov/PressRoom/PressReleases/9059-25. The new Advisory notes,9798for example, that ``since 2018, average daily volumes in aggregate9799across all Bitcoin futures have increased over 300 percent, and9800aggregate open interest has increased by over 800 percent.'' Id. at n.98014.9802---------------------------------------------------------------------------9803 Today, there are many actively trading derivatives contracts on9804digital assets on CFTC-registered markets, with additional products9805that have been self-certified for trading.\12\ These contracts are9806based on a number of digital assets, including the two most-traded9807digital assets, Bitcoin (BTC) (63.5% of global crypto market cap) and9808Ether (ETH) (7.3%).\13\ Other derivatives products that are either9809trading or have been self-certified for trading on CFTC-regulated9810markets include: XRP (4.4%), Solana (SOL) (2.5%), USDC (2.1%), Dogecoin9811(DOGE) (0.9%), Cardano (ADA) (0.8%), Chainlink (LINK) (0.3%), Avalanche9812(AVAX) (0.3%), Stellar (XLM) (0.3%), Shibu Inu (SHIB) (0.3%), Hedera9813(HBAR) (0.3%), Bitcoin Cash (BCH) (0.2%), Polkadot (DOT) (0.2%),9814Litecoin (LTC) (0.2%), Pepe (PEPE) (0.1%), Cronos (CRO) (0.1%), Bonk9815(BONK) (0.1%), and others.\14\ Collectively, these various digital9816assets account for over 83 percent of global digital asset market9817capitalization.9818---------------------------------------------------------------------------9819 \12\ Products are ``self-certified'' by a CFTC-registered entity.9820An entity self-certifying a product must provide to the CFTC ``[a]9821concise explanation and analysis of the product and its compliance with9822applicable provisions of the [Commodity Exchange] Act, including core9823principles, and the Commission's regulations thereunder.'' 17 CFR 982440.2(a)(3)(v). Furthermore, a registered entity must ``provide [to CFTC9825staff] any additional evidence, information or data that demonstrates9826that the contract meets, initially or on a continuing basis, the9827requirements of the [Commodity Exchange] Act or the Commission's9828regulations or policies thereunder.'' Id. 40.2(b). In certain9829circumstances, the Commission can stay the trading of the contract. Id.9830 40.2(c).9831 \13\ The percentage of market cap for these digital assets (noted9832in parentheses ``(XX%)'' for each digital asset) was taken from9833coinmarketcap.com on April 30, 2025.9834 \14\ See, Designated Contract Market Products, https://9835www.cftc.gov/IndustryOversight/9836IndustryFilings/9837TradingOrganizationProducts?Category=&Date_From=&Date_To=&Organizat9838ion=&Show_All=0&Status=Certified&Subcategory=&Type=&page=0 (visited9839Apr. 30, 2025).9840---------------------------------------------------------------------------9841 This long-standing and active oversight of digital asset9842derivatives has given the CFTC unique insights, expertise, and9843understanding of the operation of spot digital asset markets. For9844example, products trading on CFTC markets must not be readily9845susceptible to manipulation. Thus, the CFTC and CFTC-registered9846entities must monitor the digital asset spot market--over 83 percent of9847that market--to comply with current CFTC requirements. As Dr. Chris9848Brummer has noted, this activity on CFTC-regulated markets has allowed9849``the CFTC [to] gain[ ] expertise in overseeing the9850institutionalization of significant infrastructures intersecting9851directly with the digital asset commodity spot market.'' \15\ The CFTC9852and CFTC-registered entities understand the digital asset spot market9853because they has been reviewing that market for a number of years.9854---------------------------------------------------------------------------9855 \15\ Testimony of Chris Brummer before the Subcommittee on9856Commodity Exchanges, Energy and Credit at 5 (June 23, 2022), https://9857agriculture.house.gov/uploadedfiles/brummer_9858congressional_testimonythe_future_of_digital_asset_regulation.pdf.9859Indeed, last year the CFTC voluntarily opened up to public comment9860consideration of a registered entity's proposed changes to the market9861structure for certain digital asset derivatives products. CFTC Seeks9862Public Comment on FTX Request for Amended DCO Registration Order, CFTC9863Release No. 8499-22 (Mar. 10, 2022), https://www.cftc.gov/PressRoom/9864PressReleases/8499-22. The CFTC received 1,500 comments in response.9865See https://comments.cftc.gov/PublicComments/CommentList.aspx?id=98667254&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1_509867. Although the request was ultimately withdrawn, the public comment9868process provided the CFTC with valuable insight into a host of9869questions regarding the market structure and operation of digital asset9870exchanges.9871---------------------------------------------------------------------------9872 Furthermore, the CFTC has clarified the scope of its authority to9873regulate retail commodity transactions that involve leverage,9874financing, or margin. A key statutory requirement for CFTC jurisdiction9875is whether ``actual delivery'' of retail commodity transactions have9876occurred within 28 days. The CFTC engaged in extensive rulemaking with9877the digital asset community and provided thorough guidance about the9878meaning of ``actual delivery'' as that phrase applied to digital9879assets, with multiple examples of acceptable and non-acceptable9880practices.\16\ With Commission-backed guidance on this issue in place9881after receiving and incorporating extensive public feedback, the9882Commission has used its enforcement authority to have market9883participants follow the guidance.\17\9884---------------------------------------------------------------------------9885 \16\ CFTC Final Interpretive Guidance, Retail Commodity9886Transactions Involving Certain Digital Assets, 85 Fed. Reg. 37734 (June988724, 2020).9888 \17\ See, e.g., In re Payward Ventures, Inc., CFTC No. 21-20 (Sept.988928, 2021).9890---------------------------------------------------------------------------9891 Neither the CFTC nor any other Federal regulator has plenary9892regulatory authority over the trading of digital assets that qualify as9893commodities. Based on the CFTC derivatives products based on digital9894assets described above, I believe that at least 83 percent (and likely9895more) of the digital asset spot market transactions would fall within9896the CFTC's current enforcement authority. It is, therefore, a9897relatively short step to provide the CFTC with the additional9898regulatory authority to require registration and oversee these digital9899asset spot markets. A regulatory regime based on ``core principles''--9900key goals for CFTC registrants to achieve but with reasonable9901discretion to achieve those goals--would be a good fit for regulation9902of the digital asset spot market. This market is ever changing and9903regulatory regime that requires high standards while encouraging9904responsible innovation would provide participants in this area to9905flourish and be competitive with international counterparts.9906Customer Protections Provided in the CFTC Regime9907 Entities subject to current CFTC jurisdiction must provide9908extensive protections to customers purchasing CFTC-regulated products.9909And the CFTC and the National Futures Association (NFA) \18\ have not9910hesitated to enforce these customer protections. In addition to the9911anti-fraud and anti-manipulation authority described above, there are9912significant rules regarding the segregation and protection of customer9913funds. CFTC-registered futures commission merchants (FCMs) must provide9914general written disclosures regarding the risks of futures trading and9915specific disclosure regarding their own circumstances.\19\ FCMs and9916introducing brokers must have privacy policies and have procedures in9917place to protect customer information.\20\9918---------------------------------------------------------------------------9919 \18\ The NFA has been designated by the CFTC as a registered9920futures association.9921 \19\ 17 CFR 1.55; NFA Rule 2-30.9922 \20\ See, 17 CFR Parts 160 and 162.9923---------------------------------------------------------------------------9924 The CFTC also has extensive rules to protect retail customers9925engaging in certain foreign exchange transactions.\21\ Entities engaged9926in retail foreign transactions must register,\22\ meet minimum9927financial requirements,\23\ and comply with various recordkeeping and9928reporting requirements.\24\ These entities must also provide9929appropriate disclosures to retail customers about the risks of engaging9930in these types of transactions, noting, among other things, that the9931customer can ``rapidly lose all of the funds [they] deposit for such9932trading and [they] may lose more than [they] deposit.'' \25\9933---------------------------------------------------------------------------9934 \21\ See generally, 17 CFR Part 5.9935 \22\ Id. 5.3.9936 \23\ Id. 5.6-5.7.9937 \24\ Id. 5.10-5.11.9938 \25\ Id. 5.5(a)(2)(b).9939---------------------------------------------------------------------------9940 The NFA has additional rules that protect customers. For example,9941NFA members and associates must observe high standards of commercial9942honor and just and equitable principles of trade. This includes dealing9943fairly with customers and others at all times.\26\ NFA members must9944also comply with express standards in all communications with the9945public generally and promotional literature specifically.\27\9946---------------------------------------------------------------------------9947 \26\ NFA Rule 2-4.9948 \27\ NFA Rule 2-28.9949---------------------------------------------------------------------------9950 The NFA additionally requires members to provide specific9951disclosures regarding their digital asset activities and comply with9952certain conduct standards regarding their activities involving the9953digital assets Bitcoin and Ether.\28\ Should the CFTC gain regulatory9954jurisdiction over digital asset spot markets, then one would expect9955similar types of protections for retail customers to be provided.9956---------------------------------------------------------------------------9957 \28\ NFA Rule 2-51; see also NFA Interpretive Notice 9073.9958---------------------------------------------------------------------------9959Conclusion9960 There appears to be a significant gap at the Federal level in the9961regulation of spot digital assets.9962 The CFTC has extensive experience in the digital asset space9963through both its (1) overseeing of trading of digital asset-based9964derivatives on CFTC-regulated exchanges and (2) asserting its anti-9965fraud and anti-manipulation enforcement authorities over the spot9966markets. The CFTC and NFA also have significant experience in providing9967protections to customers participating in these markets. This9968experience would provide an excellent foundation should Congress decide9969to give the CFTC regulatory jurisdiction over the digital asset spot9970markets.9971 Thank you for the opportunity to appear before the Subcommittees. I9972look forward to answering any questions you may have.99739974 Mr. Steil. Thank you very much, Mr. Davis.9975 Mr. Greg Tusar, you are now recognized to share your comments.9976 STATEMENT OF GREG TUSAR, VICE PRESIDENT,9977 INSTITUTIONAL PRODUCT, COINBASE GLOBAL, INC., SAN9978 FRANCISCO, CA9979 Mr. Tusar. Thank you. Good morning Chairmen Steil and Johnson,9980Ranking Member Davis, and Members of the Committee. Thank you for the9981opportunity to testify today. I appreciate the opportunity to discuss9982the future of financial markets and the critical need for regulatory9983clarity in the digital asset space.9984 My name is Greg Tusar, and I serve as Vice President of Institution9985Product at Coinbase. I spent over 30 years working at the intersection9986of technology and finance, and one thing I have learned is that markets9987work best when rules are clear and technology is embraced, not ignored.9988 Today we are experiencing a major market shift, similar to the9989transition from floor trading to electronic trading, which I9990experienced firsthand at Goldman Sachs. This is a major technological9991shift that will enable new products and services across markets and9992asset classes. It will open up opportunities for both crypto and9993traditional players alike, and will create new economic opportunities9994for millions of Americans. But we need smart rules to help us usher in9995this transition in order to foster innovation, protect consumers, and9996ensure U.S. leadership.9997 This is a once-in-a-generation moment to go back to first9998principles and design markets for the 21st century. This discussion9999draft released yesterday is a strong step in that direction. Although10000we are still digesting the Digital Asset Market Structure Act, it seems10001to build on the bipartisan consensus in FIT21 that would modernize our10002outdated systems and expand access to financial opportunity.10003 Today I would like to highlight three recommendations for Congress10004to consider as you move forward on market structure legislation.10005 First, we need to close the gaps in the current system. Today there10006is no Federal regulator with spot market authority over digital10007commodities. Exchanges and intermediaries are regulated by a patchwork10008of state laws that impose varying levels of consumer protections and10009create confusion in the market. The CFTC is the right Federal regulator10010to oversee the spot market. It has long overseen crypto derivatives,10011and has decades of experience with complex markets. Through its10012thoughtful work, it has also helped enable exchange-traded products10013under the jurisdiction of the SEC. We should now empower it to do the10014same for crypto spot markets in order to ensure national standards,10015proactive oversight, and consistent protection for every consumer, no10016matter the ZIP Code they live in.10017 Second, we need to resolve the confusion over token classification.10018Today, developers are forced to guess whether a digital asset might be10019deemed a security, now or down the road, and often after lengthy10020litigation. This ambiguity has driven responsible projects overseas and10021allowed other countries to take the lead. Congress must draw clear10022lines and give both the SEC and CFTC distinct but complementary roles.10023 Third, as I mentioned earlier, Congress should embrace the first10024principle of creating efficient, fair, and customer-focused market10025solutions. This means harnessing the benefits of technology to mitigate10026risks and modifying rules to meet customer expectations. A good example10027of this regulatory evolution happened in the late 1990s, when the SEC10028finalized Regulation ATS. This rule recognized that electronic trading10029was evolving outside of traditional exchanges and should be brought10030inside the regulatory perimeter. The new rules enable exchanges and10031brokers to operate order-matching systems, also known as alternative10032trading systems, which reduce the risk of opaque and fragmented10033markets. This framework is still in place today, and is a good fit for10034crypto.10035 Coinbase supports the approach in the discussion draft that would10036allow for the ATS structure as well as create symmetry across the CFTC10037and SEC for regulating digital asset commodities and digital asset10038securities, respectively.10039 In closing, I want to thank both committees for your leadership on10040crypto legislation. We are excited to move to more fully digest the10041discussion draft released yesterday, and look forward to building on10042the bipartisan success of FIT21.10043 Thank you, and I look forward to your questions.10044 [The statement of Mr. Tusar follows:]1004510046 Prepared Statement of Greg Tusar, Vice President, Institutional10047 Product, Coinbase Global, Inc., San Francisco, CA10048 Good morning Chairman Hill, Chairman Steil, Chairman Thompson, and10049Chairman Johnson, and Ranking Members Waters, Lynch, Craig, and Davis.10050Thank you for the opportunity to testify before you today. It is an10051honor to join you in discussing the future of financial markets, the10052critical need for regulatory clarity in the digital asset space, and10053the role of Congress in fostering innovation while protecting10054consumers. The decisions made here will define not only the trajectory10055of this industry but also the position of the United States as a global10056leader in financial innovation.10057 My name is Greg Tusar and I am the Vice President of Institutional10058Product at Coinbase. I lead teams focused on delivering products and10059services to the largest institutional participants in global markets,10060including asset managers, hedge funds, family offices, and corporate10061clients. Our offerings include Prime Brokerage, Custody, Financing, and10062access to Coinbase Exchange, the largest regulated spot crypto exchange10063in the United States. We also operate a Commodities Futures Trading10064Commission (CFTC) regulated Designated Contract Market (DCM), an NFA10065registered Futures Commission Merchant (FCM), and have a Securities and10066Exchange Commission (SEC) Registered Investment Advisor (RIA). Coinbase10067has extensive experience in highly regulated markets, and has an10068industry leading track record of integrating the highest standards of10069reliability, security, and trust into the evolving digital asset10070ecosystem.10071 Today, I hope to share perspectives informed by more than thirty10072years of experience in financial market infrastructure, electronic10073trading, and the migration to digitally-native systems. My career began10074at TLW Securities--a firm that specialized in program trading--where I10075eventually served as CEO before the company was acquired by Spear,10076Leeds & Kellogg (SLK) and then by Goldman Sachs in 2000. There I served10077as a partner responsible for building the firm's electronic trading10078business and guiding their market structure investments.10079 Based on these experiences, I know firsthand how thoughtful market10080structure design and regulation can drive efficiency, power innovation,10081protect consumers, and redefine the way financial markets operate. I10082also know that, at times, we need to take a fresh look at regulatory10083frameworks that may unnecessarily impede the integration of new10084technologies.10085 Transitioning from floor trading to electronic systems was not just10086a technical exercise--it was a seismic shift in how orders were10087matched, costs were reduced, and access was democratized. It introduced10088unprecedented speed, efficiency, and access, but also required a10089complete reimagining of market rules. How should orders be prioritized?10090How could participants ensure equal footing when order books were10091digitized? And most importantly, how could the industry ensure10092transparency and fairness in a system no longer reliant on physical10093presence? Financial market regulators worked with the industry to10094grapple with these novel questions, and did so in a way that encouraged10095continued integration of emerging technology.10096 That moment in history resonates deeply with me, particularly as we10097enter a similarly profound change to the financial system today. In the100981990s, markets became electronic, ignited by the rise of electronic10099communications networks. Now, they are becoming digitally-native with10100the rise of crypto. The integration of open blockchain systems into our10101financial system will deliver better outcomes for participants while10102safeguarding trust. And we can foster this innovation here, in the10103United States, instead of driving it elsewhere.10104 For this to happen, we need regulatory clarity: clear guidelines10105that allow market participants to build novel products and services10106without compromising the safety and soundness of our markets. We also10107need to understand that the role of regulation is to provide needed10108protections, and not to enshrine certain business models in perpetuity.10109Coinbase Background10110 Coinbase offers a suite of products that empower tens of millions10111of consumers, institutions, and developers worldwide to discover,10112transact, and engage with crypto assets and Web3 applications. Founded10113in 2012, Coinbase has embraced regulation from the very beginning. As I10114noted in my introduction, we are regulated by both the CFTC and SEC,10115along with over 50 additional regulators across the United States.10116 We are a registered money services business with FinCEN under the10117U.S. Treasury Department, and hold 46 state money transmission10118licenses, a Louisiana Virtual Currency Business Activity License, as10119well as both a BitLicense and limited purpose trust company charter10120from the New York Department of Financial Services (NYDFS).10121Additionally, our decision to go public in April 2021 marked a critical10122milestone--achieved after extensive review and engagement with the SEC.10123This experience reinforces our commitment to transparency, consistent10124regulations, and the essential role of robust capital formation markets10125in fostering innovative companies.10126 For more than a decade, Coinbase has been at the forefront of10127building and implementing strong consumer protection measures, prudent10128risk management, and best-in-class security practices.10129 Core to our consumer protection efforts is our rigorous listing10130process. Prior to listing any asset for trading or custody, our teams10131evaluate the assets against extensive legal, compliance, and10132information security standards. Additionally, we hold customer assets101331:1 at all times, safeguarding them with industry-leading security10134standards and never lending or rehypothecating assets without customer10135authorization. Our safeguards--administrative, technical, and10136physical--are designed to exceed legal requirements and industry10137standards. Customer assets are appropriately ledgered, segregated, and10138managed in separate accounts and remain distinct from Coinbase's10139corporate assets.10140 We also maintain an unwavering dedication to anti-money laundering10141(AML) compliance, as well as effective partnerships with law10142enforcement--both of which are vital for ensuring safety and integrity10143in the rapidly growing crypto space. Our comprehensive Financial Crimes10144Compliance program adheres to the U.S. Bank Secrecy Act (BSA), AML10145laws, and sanctions requirements, aligning with the same standards10146expected of traditional financial institutions. This focus allows10147Coinbase to keep customers--and the U.S. financial system--safe from10148bad actors.10149It's Time to Update the System10150 Today, I am here to discuss how the Financial Innovation and10151Technology for the 21st Century Act (FIT21), which passed with a10152resounding bipartisan House vote of 279-136 in 2024, can evolve to10153better meet the needs of consumers, investors, and innovators. The10154evolution of legislation is not new--good bills become better all the10155time. We applaud the work of the 118th Congress to develop and pass10156FIT21, which was a substantial contribution towards creating clear,10157thoughtful, and consistent rules. The overwhelming bipartisan support10158for FIT21 reflected the growing recognition that modern rules are10159essential for fostering innovation, protecting consumers, and10160maintaining America's leadership in global financial markets.10161 The legislation should build on the foundation established by10162FIT21, retaining many of its core principles while refining critical10163areas to address emerging challenges. This effort should clarify asset10164classifications--defining which digital asset transactions are10165securities and which are commodities--and empowering the CFTC to10166oversee spot markets for digital commodities. These steps are key to10167ensuring customer protections, promoting market transparency, and10168encouraging responsible innovation within U.S. borders.10169Gaps in Current Regulatory Frameworks10170 Despite the rapid growth of digital asset ownership, use, and10171integration into financial systems worldwide, the regulatory frameworks10172governing their activity in the United States have lagged behind. This10173has been problematic--not only for developers and market participants,10174but also for consumers, who are left without the benefits of Federal10175regulatory protections. Closing these gaps in regulation has never been10176more urgent. Today, critical shortcomings hold this industry back,10177undermining its potential and exposing market participants to10178significant risks.10179Misaligned Regulators10180 One of the fundamental challenges in digital asset regulation lies10181in the lack of clear regulatory boundaries between agencies like the10182SEC and CFTC. This lack of clarity has led to a tug-of-war over which10183asset transactions are securities and which are not securities. And the10184two agencies took different approaches to resolving the problem--10185leaving market participants and the American people in the middle. The10186SEC took the failed approach of regulation by enforcement, rather than10187providing market-wide guidance to help developers understand when10188certain characteristics might trigger the Federal securities laws. This10189resulted in opaque and lengthy litigation battles with individual10190companies that provided zero certainty for the markets or consumers. In10191contrast, the CFTC worked to understand digital assets and provide some10192pathways for digital asset services within the scope of their10193jurisdiction. But the CFTC's activity was ultimately limited given both10194the limits of their statutory scope and the conflict with the SEC over10195certain assets.10196 The two agencies have also taken different approaches to the10197treatment of innovation more generally. A good example is the approval10198of Bitcoin futures contracts versus the approval of Bitcoin exchange-10199traded products (ETPs). The CFTC approved the first Bitcoin futures10200contract launched by the Chicago Mercantile Exchange (CME) on December1020118, 2017. This marked a significant milestone in the integration of10202cryptocurrency into mainstream financial markets, and also recognized10203that Bitcoin is a commodity, effectively digital gold. And yet the SEC10204did not approve a Bitcoin ETP until 2024, and only did so after a10205Federal appeals court ruled that the agency's refusal to provide a10206green light was arbitrary, capricious and inconsistent with law.10207 This bifurcated and conflicting--and sometimes unlawful--approach10208to regulating crypto has created significant obstacles for innovators10209seeking to build responsible projects in the United States. Between the10210lack of clarity and the high probability of legal action from the SEC10211over the last 4 years, many innovators have opted to domicile their10212operations in overseas jurisdictions with clear rules. An explicit10213demarcation of jurisdictional authority between the SEC and CFTC--and a10214mandate from Congress for the agencies to provide the public with10215clarity--would resolve many of these uncertainties, restoring trust and10216ensuring market integrity.10217 The root of the current regulatory confusion is token10218classification. Although I am not a lawyer and this is outside of my10219area of professional expertise, current frameworks fail to offer10220objective criteria for determining how assets should be classified,10221forcing developers and market participants to operate in regulatory10222gray areas. The lack of clarity isn't just a legal challenge--it10223stifles innovation and investment by limiting product designs and10224features that might otherwise have been offered if their regulatory10225treatment was clear.10226 Although I will not focus on this specific topic in my testimony,10227the need for Congress to address the issue of token classification is10228absolutely critical to the healthy functioning of markets. The United10229States needs a consistent framework for token classification that10230reflects the unique qualities of digital assets whose value and10231functionality is derived from a blockchain network, and Congress has a10232critical role in bringing this about. The treatment of such assets must10233be based on the premise of technology neutrality. If the assets are not10234securities, then they should not be treated like securities. Today, the10235inability for developers to predict whether their project will be10236treated as a security prevents responsible innovation and risks their10237token being excluded from secondary market distributions critical for10238growth. For investors and institutions, misclassification or overly10239discretionary enforcement actions can result in substantial losses and10240damaged reputations.10241Spot Market Vulnerabilities10242 Although derivatives markets for digital assets are subject to10243comprehensive oversight by the CFTC, spot markets--the platforms where10244assets are actively bought and sold by investors--largely lack Federal10245supervision. The CFTC's current authority is limited to fraud and10246manipulation in digital commodity spot markets, with no authority to10247proactively regulate the markets. As a result, market participants face10248a fragmented approach to spot market oversight, with regulation and10249enforcement scattered across state-level regulators in a patchwork10250system that fails to provide consistent rules or guardrails.10251 This oversight gap is particularly impactful for retail users, who10252should be able to trust that their preferred intermediaries for asset10253trading and custody meet rigorous safety and operational standards no10254matter where they live. Good actors will strive to implement10255comprehensive and consistent standards, while the lack of Federal10256oversight leaves consumers exposed to potential bad actors who exploit10257the fractured system. Empowering the CFTC to oversee these10258intermediaries would address these vulnerabilities. It would ensure10259consistent national rules, improve consumer safeguards, and allow for10260proactive monitoring to mitigate risks and deter manipulation and10261fraud.10262 As a long-time market practitioner, there is no doubt in my mind10263that the CFTC is well-prepared to take on this task. With decades of10264experience overseeing complex and volatile futures and derivatives10265markets, the agency has developed robust mechanisms for ensuring market10266safety even under extreme conditions. Since 2014, the CFTC has expanded10267this expertise to include derivatives referencing digital assets, which10268serve as the foundation for pricing the crypto ETPs market. The CFTC10269moving proactively on digital asset futures enabled the creation of10270ETPs by demonstrating that there was an orderly and functioning market,10271not one prone to manipulation, which could be used to help price the10272ETPs.10273 Finally, the CFTC's principles-based approach to regulation,10274combined with its history of aggressively enforcing against bad actors,10275demonstrates its capability to advance customer protections while10276allowing innovation to flourish. By focusing on regulatory outcomes10277rather than prescriptive rules, the CFTC's approach to markets creates10278a flexible framework that accommodates the rapid evolution of10279technology while maintaining market integrity.10280The Benefits of a Federal Framework10281 Throughout my career, I've built successful trading systems that10282have navigated a complex system of requirements. From my experience,10283unnecessary complexity generates risk, and eliminating it benefits to10284both consumers and service providers. Establishing a uniform set of10285standards through a Federal regulatory framework would be beneficial10286for replacing a patchwork of state-level regulation characterized by10287duplicative and sometimes conflicting compliance burdens. In its place10288would be a uniform set of consumer protections with lower system10289complexity and regulatory compliance costs.10290Uniform Customer Protections Across All States10291 The lack of a Federal regulatory framework can lead to uneven10292protections depending on the state in which they reside. In some cases,10293if standards are too low or absent, this could leave consumers without10294protections they need. For example, the New York Department of10295Financial Services requires Bitlicense holders like Coinbase to provide10296certain disclosures about digital assets that are not required in other10297states. If an exchange or intermediary wanted to avoid these10298disclosures, it could simply decide to avoid operations in New York.10299 It is also possible that regulatory requirements are set in ways10300that unnecessarily prevent residents of a jurisdiction from accessing10301legitimate services. A good example of this is staking: an essential10302part of blockchain operations in which participants earn rewards by10303helping to secure blockchain networks or validate transactions.10304Consistent with Federal and state law--and recent actions and10305statements by the SEC--more than 40 states allow their residents to10306stake through a service provider. Yet a few states still prohibit this10307activity. By introducing a common set of rules and standards at the10308Federal level, Congress can ensure more uniform customer protections10309and fair access to important products and services for consumers.10310Unified rules also provide greater trust and confidence in the market,10311empowering more Americans to engage safely with digital finance and10312protecting retail investors who rely on Federal regulatory safeguards.10313 But uniform rules alone will not solve the problem. If Federal laws10314do not expressly preempt state law, there is bound to be continued10315uneven and unequal enforcement across the states. Such patchwork10316enforcement is often not the result of disparate legal standards, but10317rather the result of inconsistent application of standards that may10318otherwise be identical in law. Strong preemption is thus a critical10319element for any legislation. Otherwise, state and other authorities10320could and likely will continue to classify assets and activities in10321ways that Congress has explicitly rejected. Further, given the long10322tail of enforcement risk this industry has faced over the years,10323Congress should also apply preemption retroactively to ensure10324subsequent state regulators cannot undermine the purposes of the bill10325through litigation directed at past conduct.10326Reducing Duplicative Regulatory Oversight10327 The current regulatory environment for digital assets burdens both10328intermediaries and other businesses offering crypto products with10329duplicative compliance requirements imposed by overlapping state and10330Federal regulations, and leaves consumers with little consistency in10331protections and often arbitrary barriers to accessing legitimate10332products and services. For example, exchanges operating across multiple10333states must navigate a maze of different rules, licensing requirements,10334and operational standards--while also ensuring adherence to Federal AML10335guidelines.10336 This collage of rules creates inefficiencies that increase costs10337for both businesses and their customers. Platforms expend significant10338resources on complying with multiple oversight mechanisms that often10339require the exchange to set up systems in each state that are different10340shades of gray, rather than directing those resources toward10341innovation, security improvements, or expanding access for underserved10342communities. National standards would consolidate these requirements10343under a single framework, creating streamlined pathways for compliance10344that free innovators to focus on building transformative solutions.10345Reducing regulatory overlap also supports better enforcement by10346ensuring agencies can focus on key priorities rather than spreading10347their efforts across fragmented compliance jurisdictions. Perhaps most10348importantly, consistency gives consumers some clarity on what10349protections they can expect and how to best set their expectations when10350engaging in the crypto markets.10351Keeping the U.S. Globally Competitive10352 National standards don't just resolve inefficiencies--they help10353position the United States as a global leader in digital finance and10354blockchain innovation. While Singapore, Switzerland, and the European10355Union have adopted unified frameworks that attract talent and capital,10356the fragmented U.S. regulatory landscape coupled by an enforcement-10357first approach has pushed innovators overseas. Without a clear,10358consistent roadmap for compliance across all states, developers and10359businesses find themselves focusing on jurisdictions where regulations10360are predictable and accessible, leaving the United States at a10361competitive disadvantage.10362 Unified Federal standards create an environment where innovators10363can operate confidently, knowing their compliance obligations are clear10364and consistent throughout the country. These standards signal to10365investors, developers, and institutions that America is committed to10366fostering responsible innovation in the digital asset space, attracting10367the talent and capital needed to maintain global leadership.10368Congressional action on national standards would not only streamline10369oversight, but also allow the United States to set the tone for how10370blockchain-based systems evolve globally. This would embed American10371values like transparency, fairness, and consumer protection into the10372technology's development.10373Core Elements of Legislation10374Consumer Protection in Digital Asset Markets10375 Consumer protection is the foundation of any well-functioning10376financial system. In digital asset markets, ensuring retail investors10377are safeguarded requires a regulatory framework designed to meet the10378unique characteristics of this emerging industry. A robust regulatory10379framework isn't just about reducing these risks--it's about fostering10380trust. When consumers are confident that the platforms they use are10381safe, transparent, and accountable, markets thrive, innovation10382accelerates, and more participants engage.10383 At Coinbase, consumer protection is central to everything we do,10384and our global experience provides a roadmap for how strong frameworks10385can protect retail participants while enabling innovation. Based on10386this experience, we believe regulators should adopt a balanced and10387principles-based approach to ensure consumer safety without stifling10388progress.10389Protecting Retail Customers and Fostering Trust10390 Retail customers are engaging with digital asset markets at10391unprecedented levels. Whether buying Bitcoin, participating in10392decentralized finance, or transacting in stablecoins, consumers across10393the U.S. deserve clear, consistent protections that allow them to make10394informed decisions without fear of exploitation. Key components of a10395robust framework include:1039610397 1. Transparency Requirements: Consumers need access to timely,10398 accurate, and relevant information about the platforms and10399 products they engage with. Requiring platforms to disclose10400 material information--including tokenomics, fees, market10401 risks, and operational security--helps retail investors10402 assess opportunities and risks.1040310404 2. Strong Standards for Asset Listings: A reliable consumer10405 protection framework should require exchanges to rigorously10406 evaluate tokens before listing them for trading. This10407 ensures assets meet clear legal and compliance metrics,10408 protecting consumers from engaging with fraudulent or10409 economically unstable tokens.1041010411 3. Custody Standards and Asset Segregation: Federal requirements10412 ensuring that customer assets are legally segregated from10413 house funds are critical to safeguarding customer holdings.10414 Centralized platforms should also be required to adopt10415 rigorous security solutions to ensure digital assets remain10416 secure. We believe the CFTC is equipped to regulate10417 custody, just as they would all other elements of digital10418 asset markets.1041910420 4. Market Manipulation Oversight: Platforms should implement10421 proactive measures to prevent market manipulation and bad10422 actor behavior, including automated monitoring tools and10423 transparent reporting of suspicious activity to regulators.10424 These safeguards prevent unfair trading practices and10425 reinforce market integrity.10426Customer-First Regulatory Structure10427 A first principle for any market structure legislation should be to10428leverage rules that have worked in the past, but also recognize that10429technology and innovation can render some rules and requirements10430obsolete. As I noted earlier in my testimony, I have experienced first10431hand that regulations should evolve to meet both the demands of10432customers and the capabilities of platforms and technology. I helped10433stand up Goldman Sach's alternative trading system (ATS) more than10434twenty years ago, and from that experience, I believe the same10435regulatory structure can serve digital asset trading.10436 The SEC first introduced Regulation ATS in December 1998, with the10437rules becoming effective on April 21, 1999. This regulation allowed10438broker-dealers and national securities exchanges to operate and10439register an ATS, giving brokers order-matching capabilities.10440 ATS platforms played a critical role in the technological evolution10441of securities trading in traditional financial markets, and they can do10442the same for the trading of all digital assets, including securities,10443commodities, and payment stablecoins. These venues provide10444intermediaries like broker-dealers with the ability to offer an order-10445matching engine while operating under rigorous oversight frameworks.10446For digital assets, ATS inclusion within the broader regulatory10447framework would serve several key purposes:1044810449 1. Meeting Customer Demand: Customers engaged in digital asset10450 markets expect the benefits provided by blockchain10451 technology and integrated models, including efficiency,10452 speed, and cost effectiveness. An ATS framework for digital10453 assets ensures that customers continue to benefit from both10454 existing streamlined business models and robust, well-10455 understood rules.1045610457 2. Facilitating SEC-Compatible Trading Venues: The ATS model creates10458 a bridge for regulatory compliance under SEC authority,10459 allowing trading venues to operate in a highly-regulated10460 environment while focusing on innovation. By applying ATS10461 rules to digital assets, legislation could ensure that10462 digital securities are traded responsibly under SEC10463 jurisdiction, side-by-side with digital commodities.1046410465 3. Creating a Path for Institutional Adoption: ATS rules provide a10466 familiar regulatory framework for institutions entering10467 digital asset markets. Institutions increasingly seek10468 compliance-forward trading platforms, and ATS regulations10469 ensure that venues meet the rigorous operational and10470 transparency standards that institutional investors demand.10471 This clarity encourages more institutional capital to flow10472 into digital assets, strengthening market integrity.1047310474 4. Ensuring Broad, Equitable Market Access: ATS platforms are10475 designed to facilitate fair trading while ensuring10476 equitable access for all participants. Using this model for10477 digital assets under SEC regulation minimizes the risks of10478 market manipulation, ensuring robust protections for retail10479 and institutional investors alike.10480The Practical Alignment of ATS Rules and Digital Assets10481 Coinbase strongly supports an ATS model for its compatibility with10482existing market structures and its ability to address current gaps in10483crypto trading regulation. Digital asset markets face significant10484challenges around fragmented oversight and inconsistent rules. Applying10485ATS frameworks to these markets would provide a proven regulatory model10486with modifications tailored to the unique properties of blockchain10487ecosystems.10488 In practice, ATS rules can apply directly to digital asset markets10489in the following ways:1049010491 1. Disclosure Requirements: ATS platforms are required to provide10492 detailed disclosures regarding execution practices, systems10493 architecture, and operational conflicts of interest.10494 Extending this transparency to digital assets would ensure10495 that participants trust trading venues and understand the10496 risks associated with executed trades.1049710498 2. Broker-Dealer Collaboration: ATS platforms are registered broker-10499 dealers to ensure compliance and investor protections. This10500 model encourages collaboration between innovation-focused10501 trading venues and compliance-forward intermediaries,10502 creating a partnership structure rooted in accountability.1050310504 3. Adaptations for Blockchain Systems: While ATS rules apply to10505 traditional trade execution, the adaptability of this10506 framework allows regulators to craft provisions10507 specifically for blockchain-based tokenized environments10508 and digital securities, reflecting the decentralized,10509 programmable nature of these assets. In fact, despite many10510 features of the ATS model that are a natural fit for10511 digital asset markets, there are important elements of10512 securities regulation that will need to evolve to reflect10513 the specifics of crypto asset markets and distributed10514 ledger technology. An ATS model would permit this necessary10515 evolution.1051610517 One of the greatest risks to digital asset adoption is instability10518caused by inconsistent oversight in trading venues. By integrating ATS10519rules into the framework, legislation could provide a clear, reliable10520pathway for regulated trading venues, creating unprecedented stability10521for market participants. Under ATS compliance rules, platforms offering10522digital securities could meet investor demands for transparency,10523operational security, and predictable reporting.10524Parallel ATS Structure Needed Under the CFTC10525 As noted above, Coinbase strongly supports an ATS model that allows10526brokerage, dealer, exchange and custodial activities to be undertaken10527within the same legal entity. We would also urge Congress to create a10528similarly efficient and customer-first model under the jurisdiction of10529the CFTC. This would reduce the risk of regulatory arbitrage and ensure10530that customers benefit from this innovative approach to regulation.10531 Throughout my career, I've learned that efficiency and trust are10532paramount in financial markets. For digital asset platforms to operate10533at scale and deliver the protections and transparency consumers10534deserve, simplicity in operational structures is essential. Forcing10535digital asset businesses to split core functions--such as trading,10536custody, and brokerage--into separate entities does not benefit the10537market. It instead creates unnecessary operational complexity, drives10538up costs for consumers, and diminishes market efficiency. Platforms10539like Coinbase have already demonstrated how an integrated technology10540stack can deliver seamless experiences to its customers in a safe and10541secure manner.10542 In traditional financial markets, regulatory frameworks that10543require the separation of critical functions do so to mitigate10544conflicts of interest and promote market fairness. However, the unique10545characteristics of blockchain technology challenge the assumptions that10546have underpinned these rules for decades. Custody no longer needs to10547take place at a centralized clearing agency because transactions are10548recorded and settled on public blockchains. By eliminating a previously10549needed piece of infrastructure, integrated technology stacks can take10550advantage of atomistic settlement in ways that de-risk the financial10551system by removing settlement risk. This makes it less costly to10552operate by eliminating capital requirements to protect against10553settlement failures.10554 Done responsibly with the right guardrails in place, integrated10555structures do not undermine consumer protection or market integrity.10556Instead, they foster greater transparency, enhance capital efficiency,10557create resiliency, and result in better outcomes for all participants10558in the ecosystem--from retail customers to institutional players.10559 Digital asset platforms like Coinbase have already demonstrated how10560this can work in practice--it is how we are setup today. By10561incorporating trading, custody, and settlement into a single legal10562entity, we reduce the number of intermediaries to which customers need10563to pay fees. This approach creates efficiency and eliminates many of10564the friction points that hinder innovation in traditional financial10565systems. As noted above in relation to an ATS model, several key10566benefits emerge from a unified structure in digital asset markets:1056710568 1. Enhanced User Experience: Integrated platforms provide a seamless10569 experience for users. For example, a customer who purchases10570 digital assets on an exchange can have those assets10571 securely stored in custody systems within the same10572 platform, eliminating the need for manual transfers to10573 external holding entities. This not only improves10574 convenience but also reduces operational risks, as10575 consumers avoid potential errors or delays caused by10576 fragmented workflows.1057710578 2. Faster and More Cost-Effective Transactions: With trading,10579 custody, and settlement services housed under one roof,10580 platforms can settle trades in real-time and at a lower10581 cost. This efficiency is particularly important in fast-10582 moving markets where delays between trade execution and10583 settlement can expose both retail and institutional10584 investors to unnecessary risks.1058510586 3. Improved Transparency and Accountability: Blockchain technology10587 itself provides unparalleled transparency, allowing for10588 real-time auditing of transactions and fund flows. When10589 integrated platforms leverage this inherent transparency,10590 they not only simplify regulatory compliance but provide10591 regulators and consumers clear oversight into how their10592 processes operate.1059310594 4. Innovation Enablement: By reducing intermediaries, a unified10595 structure allows exchanges to create and deploy innovative10596 products more quickly. Whether it's digital securities,10597 payment stablecoins, or new custody solutions, integrating10598 these functions allows platforms to operate at the speed of10599 technological development, rather than at the pace dictated10600 by segmented regulatory structures.1060110602 Countries like Singapore and Switzerland allow integrated10603operations, demonstrating the broad acceptance and competitive10604advantages of this approach. For example, Swiss providers like SEBA10605Bank operate as unified entities offering trading, custody, and lending10606services within a single framework. Similarly, the Monetary Authority10607of Singapore's (MAS) regulatory framework supports integrated digital10608payment tokens services, allowing platforms to combine brokerage and10609custodial functions efficiently. This unified model is one familiar to10610the most sophisticated market participants, and encourages them to10611bring their experience and expertise to the digital asset markets.10612Further, unified models enable seamless compliance processes, and10613foster innovation due to reduced operational fragmentation.10614Guardrails to Address Potential Risks10615 The benefits of a single entity can be fully realized with10616appropriate safeguards to mitigate concerns about conflicts of10617interest. Historical rules separating functions in traditional markets10618were designed to address specific risks, such as exchanges prioritizing10619their own trades over client orders or commingling funds10620inappropriately. The advent of the ATS model shows that regulators have10621long concluded that these risks can be mitigated in traditional10622markets. In the context of digital assets, these risks can be managed10623even more effectively leveraging long-standing regulatory best10624practices, as well as blockchain technology. The following guardrails10625are examples of how regulators can balance the advantages of a unified10626structure with robust oversight:1062710628 1. Customer Fund Segregation: Platforms must be required to legally10629 separate customer assets from operational reserves,10630 ensuring that consumer funds remain secure and untouchable10631 in the event of organizational distress or bankruptcy.1063210633 2. Operational Firewalls: To prevent conflicts of interest,10634 vertically-integrated platforms should implement internal10635 policies to prevent conflicts of interest between the10636 broker, exchange, and custody functions. This could include10637 designating separate personnel to work on specific10638 functions.1063910640 3. Third-Party Oversight: The CFTC or the registered futures10641 association should regularly check compliance for all10642 platforms, helping to verify adherence to guardrails and10643 ensuring that consumer protections remain strong.1064410645 Permitting platforms to operate as unified entities does not mean10646removing oversight--it means creating smarter oversight tailored to the10647strengths of blockchain technology. Unified operational frameworks10648combined with proportionate and targeted guardrails creates win-win10649scenarios for customers and the market.10650Unified Custody Framework under the CFTC10651 Custody of digital assets is one of the most critical aspects of a10652functioning and secure ecosystem. Whether for retail customers or10653institutional participants, safe and compliant custody solutions are10654essential to ensure trust and protect assets from theft, fraud, or10655improper access. Custody regulation in the United States will also10656equip American firms and institutions to compete globally based on the10657firm foundation of regulatory oversight in the United States. As10658discussed above in relation to integrated models, we urge Congress to10659ensure that exchanges, brokers, and dealers can custody assets or10660leverage a CFTC-regulated custodian. For digital commodities, we10661believe the CFTC is best positioned to act as the Federal regulator. A10662custody framework under the CFTC would enable a unified tech stack,10663unlocking major operational efficiencies.10664Why Custody Regulation is Critical for Digital Assets10665 Digital asset markets operate very differently from traditional10666financial systems in terms of custody. Assets are stored in10667cryptographic wallets, with security relying on advanced techniques10668including cold storage, access controls, and distributed systems that10669leverage blockchain technology. Unlike traditional systems, digital10670asset custody involves greater technical expertise and programmability,10671which offers both risks and opportunities. Regulators must adopt an10672approach that reflects these unique dynamics while prioritizing safety,10673access, and cost efficiency.10674 A robust Federal framework for custody ensures that:1067510676 1. Consumer Assets Are Protected: Custody regulation guarantees that10677 consumer funds remain insulated from operational risks at10678 exchanges or platforms, providing a critical safeguard10679 against bankruptcy scenarios and fraud.1068010681 2. Transparency is Embedded: Standardized custody requirements build10682 trust by mandating auditability and visibility into custody10683 practices, allowing regulators and participants to verify10684 safekeeping measures and safeguards.1068510686 3. Innovation Can Continue: Regulatory clarity creates an10687 environment where innovators can pursue novel custody10688 models like decentralized custody solutions and10689 programmable security protocols without unnecessary legal10690 ambiguity.10691There Should Be An Option for Custody Regulation at the CFTC10692 As was provided for in FIT21, platforms should have the ability to10693utilize state pathways for custody regulation, including state trust10694and bank charters and credit unions. However, it would be a missed10695opportunity if new legislation does not also enable the CFTC to serve10696as a custody regulator. Allowing the market regulator to serve as the10697custody regulator, as many digital asset proposals have done over the10698years, would simplify the overall regulatory approach. Digital10699commodity custodians and trading platforms could develop more unified10700technology stacks that achieve greater operational efficiencies. In10701just the same way, one regulator can see the whole picture, and in the10702process, better protect consumers.10703 Digital assets require regulatory flexibility to keep up with the10704rapid evolution of technology. The CFTC distinguishes itself with its10705principles-based regulatory approach, which focuses on market outcomes10706rather than rigid, prescriptive practices. The CFTC's approach would be10707well-suited to building on long-standing principles, such as the10708segregation of funds, operational security, and regular audits, while10709also enabling innovation to improve market functions.10710Applying AML Standards to Centralized Crypto Actors10711 It is imperative that any future legislation aligns AML obligations10712for centralized crypto entities with those currently applied to10713traditional financial institutions. This includes on- and off-ramps10714connecting the tokenized digital ecosystem to the traditional banking10715system--key gateways in maintaining financial integrity.10716Blockchain's Transparency and Traceability in Combating Illicit Finance10717 Contrary to misconceptions about digital assets being a haven for10718illicit activity, blockchain technology offers unparalleled10719transparency and traceability. Every transaction is permanently10720recorded on a public ledger, enabling compliance professionals and law10721enforcement to monitor, trace, and prevent illicit activity more10722effectively than traditional systems. This inherent transparency10723empowers platforms like Coinbase to implement robust AML, terrorist10724financing, and sanctions compliance programs that exceed regulatory10725standards.10726 Through advanced blockchain analytics, Coinbase monitors suspicious10727activity in real-time, flags violations, and ensures any attempts at10728illicit exploitation leave a digital trail that law enforcement can10729investigate. Innovations such as smart contracts enable automated10730compliance measures, like restricting funds from sanctioned wallets or10731flagging large transactions for review.10732Coinbase's Commitment to AML and Sanctions Compliance10733 Coinbase has built a comprehensive global compliance framework that10734adheres to regulatory requirements such as the BSA and the Patriot Act,10735ensuring the integrity of the digital asset system. Key elements of10736this framework include:1073710738 Rigorous KYC Protocols: Verifying user identity and10739 assessing risk to prevent illicit actors from accessing the10740 platform.1074110742 Advanced Transaction Monitoring: Using software to identify10743 suspicious patterns and anomalies linked to money laundering or10744 terrorist financing.1074510746 Automated Sanctions Screening: Enforcing sanctions10747 compliance by screening wallets and users against global10748 watchlists such as OFAC.1074910750 Collaborations with Law Enforcement: Sharing intelligence,10751 aiding investigations, and recovering assets from bad actors in10752 partnership with agencies such as the FBI and Homeland Security10753 Investigations (HSI).10754Enhancing National Security Through Collaboration and Blockchain Tools10755 Digital asset platforms like Coinbase actively support national10756security initiatives by monitoring and addressing threats such as10757terrorist financing, sanctions evasion, and criminal activity. For10758example:1075910760 Combating Terrorist Financing: Blockchain transparency aids10761 in uncovering networks attempting to move funds to terrorist10762 organizations.1076310764 Sanctions Compliance: Platforms rigorously screen10765 transactions against international sanctions, providing10766 regulators with tools to enforce compliance even across10767 decentralized systems.1076810769 AML Investigations: Partnerships with law enforcement have10770 led to dismantling criminal networks involved in activities10771 like human trafficking and ransomware.10772Congress's Role in Strengthening Compliance Frameworks10773 Congress has an important role to play in ensuring that AML,10774sanctions compliance, and counter-terrorist financing measures are both10775effective and aligned with the capabilities of digital asset10776technology. Building on existing regulatory frameworks, Congress should10777consider advancing legislation that:1077810779 1. Encourages Platforms to Register in the United States: Providing10780 a path for onshoring this industry is the single biggest10781 thing Congress can do to help national security. By10782 providing a framework for platforms to register in the10783 United States, AML compliance standards are appropriately10784 applied across intermediaries. This reduces gaps that bad10785 actors can exploit.1078610787 2. Leverages Blockchain Transparency: Regulatory approaches should10788 embrace the unique transparency of blockchain systems to10789 identify novel methods for combatting illicit finance, such10790 as real-time transaction monitoring and cross-border10791 coordination tools.1079210793 3. Enhances Collaboration with Agencies: Formalizing partnerships10794 between digital asset platforms and law enforcement will10795 ensure that private sector expertise helps strengthen10796 investigations across borders.10797Decentralized Finance (DeFi) at an Inflection Point10798 DeFi, one of the most transformative blockchain innovations, offers10799programmable, permissionless, and globally accessible financial tools10800through decentralized smart contracts. It has the potential to10801democratize access to financial services, reduce costs, and address10802inefficiencies in traditional systems--especially for underserved or10803unbanked populations. However, DeFi is still in its early stages.10804Premature regulation could stifle this innovation, driving it offshore10805or limiting its ability to serve global markets effectively. Just as10806electronic trading systems needed time to mature before regulation,10807DeFi requires flexibility to evolve responsibly.10808Unique Benefits and Risks of DeFi10809 Unlike centralized platforms, DeFi operates on transparent, public,10810and permissionless protocols without centralized operators. Innovations10811such as composability--the ability to seamlessly connect financial10812services--have the potential to redefine finance by offering greater10813efficiency, transparency, and fairness. The ecosystem is also10814organically addressing risks, such as smart contract vulnerabilities10815(i.e., coding errors or bugs) and governance attacks (i.e., malicious10816manipulation of the protocol), through rapid iteration, governance, and10817the development of insurance mechanisms. Haphazard and unfocused10818regulation now could discourage innovation and drive developers to10819jurisdictions with lower standards, hampering progress and financial10820inclusion efforts.10821A Balanced Approach to DeFi Regulation10822 Recognizing DeFi's transformative potential means providing it the10823regulatory room to grow, while still addressing risks over time. Just10824as the approach to electronic trading adjusted as systems matured, DeFi10825deserves the same opportunity to prove its advancements in10826transparency, efficiency, and financial inclusion. Congress should10827avoid regulating DeFi prematurely under new legislation before the10828sector develops and any perceived risks are better understood. Instead,10829policymakers should continue to embrace the principles adopted in10830FIT21:1083110832 Tech Neutral: Ensure legislation allows blockchains,10833 developers, and technology providers to innovate and deliver10834 software and hardware that enables new products and services.1083510836 Collaborate: Develop public-private working groups to better10837 understand DeFi.1083810839 Risk-Based: Encourage innovation by allowing DeFi protocols10840 to mature naturally while assessing risks and benefits.10841Now is the Time to Act10842 Regulating digital assets responsibly is not just about protecting10843markets today--it's about shaping the future. Congress maintaining the10844goal of positioning the United States as the global leader in10845innovation sends a powerful message to developers, consumers, and10846investors: America is committed to building frameworks that protect its10847citizens while allowing transformative change to thrive. We cannot10848afford to sit back while other nations leapfrog us in deploying a10849foundational technology like blockchain. What's at stake is our ability10850to shape the rules of the future and ground them in American values.10851 I urge Congress to act with urgency and convictiony to provide10852clarity, enforce protections, and give innovators across the United10853States the certainty they need to build responsibly. With swift action,10854you have the power to set the course for this industry and reaffirm10855America's leadership in shaping the future of technology and finance.10856 Thank you to both Chairs and Ranking Members for this opportunity10857to testify. I look forward to answering your questions.1085810859 Mr. Steil. Thank you very much.10860 The Honorable Rostin Behnam is recognized for 5 minutes to share10861your remarks.10862 STATEMENT OF HON. ROSTIN BEHNAM, J.D., DISTINGUISHED FELLOW, PSAROS10863CENTER FOR FINANCIAL MARKETS AND POLICY, MCDONOUGH SCHOOL OF BUSINESS,10864 GEORGETOWN UNIVERSITY, WASHINGTON, D.C.10865 Mr. Behnam. Chairman Hill, Chairman Thompson, Ranking Member Craig,10866Chairman Steil, Ranking Member Lynch, Chairman Johnson, and Ranking10867Member Davis, I am honored and grateful to testify before you today.10868 Between 2017 and 2025, I had the privilege of serving first as a10869Commissioner then as the Chairman of the CFTC. During that more than 710870year period I observed the significant growth of the digital asset10871market and wider adoption of digital assets by both institutional and10872retail investors in the United States. I also observed the digital10873asset market endure multiple periods of dramatic volatility, often10874significant in size and scale.10875 Throughout this time I publicly repeated one consistent message to10876Congress--under current U.S. law, there is a gap in regulation for the10877non-security digital asset market.10878 The regulatory gap remains today, and has facilitated countless10879scandals and fraudulent activity. First and foremost, filling the10880regulatory gap will provide the needed customer protections that10881American investors have been accustomed to in traditional markets. One10882common refrain in connection with past legislative efforts to fill the10883non-security gap suggests that a U.S. regulatory framework will10884legitimize the digital asset market, leaving opportunities for bad10885actors and industry players to capitalize on regulatory loopholes and10886unwitting retail investors.10887 Though well intentioned, I believe this argument is the loophole.10888It has only left, for far too long, the vast majority of the digital10889asset market unregulated and American investors vulnerable to fraud and10890manipulation.10891 I have consistently called for new legislative authority for the10892CFTC in order to provide core customer protections in the non-security10893digital asset market. As both committees consider a legislative10894solution, I believe it is critical to rely on durable legal precedent10895as the framework to define digital tokens as securities or commodities,10896and recognize that the nature of commodity assets do not necessitate an10897identical regulatory framework as do securities.10898 Given the critical role the SEC plays in the oversight of security-10899based digital assets, the committees should consider legislating a10900disciplined, flexible, and balanced framework for the determination of10901tokens as either commodities or securities. Where intermediaries handle10902both security and non-security tokens in the cash market, separate10903jurisdiction is critical to a healthy, comprehensively regulated10904ecosystem. Currently there are numerous examples of individuals and10905entities dually registered with the CFTC and the SEC. In these10906instances, each agency retains its licensing authority over the10907registrant.10908 Any regulatory system that contemplates a different model, where10909one agency defers to the other or is simply notified of activity within10910its jurisdiction, will be nothing more than a paper clip and a Band-Aid10911on the existing gap in regulation, leaving bad actors and arbitrageurs10912opportunities to exploit weaknesses and leave American investors at10913risk. Further, any framework where each agency does not retain its10914exclusive licensing authority portends a future of blurred jurisdiction10915across other financial products, like agricultural and energy, to name10916a few.10917 While preserving each agency's authority is critical, supporting10918cross-agency collaboration, consistent with what is practiced today,10919and which may include tools like portfolio margining and other netting10920mechanisms is also beneficial, where appropriate.10921 As both committees continue to consider legislation to fill the10922gap, I would like to focus attention on the components of a regulatory10923framework that would ensure the CFTC has the tools to provide customer10924and market protections.10925 First, the principles-based oversight model has served the CFTC and10926its regulated markets well, striking an appropriate balance between10927clear outcomes-based requirements and measured flexibility to meet10928those outcomes.10929 Second, appropriate funding is necessary to meet the mandate of any10930legislatively enacted regulatory program. I would strongly encourage10931the Committee and the Congress to consider a permanent fee-for-service10932model, exclusively assessed on digital asset registrants.10933 Third, and following my earlier point, any legislative package10934should require registrants to provide information regarding traded10935tokens to ensure investors have access to material information.10936 Fourth, an effective legislative effort mandating a regulatory10937framework for digital assets must include a role for self-regulatory10938organizations.10939 Fifth, it is essential that legislation provide comprehensive10940authority for anti-money laundering, know-your-customer, and customer10941identification program, built off of existing requirements under U.S.10942law for market participants.10943 And finally, a comprehensive education and outreach program will10944enable the investing public to understand both the risks and10945opportunities of this technology.10946 The current divide between the U.S. and our international10947counterparts creates regulatory arbitrage opportunities that are10948exploited by bad actors and prohibits the U.S. from truly contributing10949to much-needed multilateral coordination efforts. Further, the10950potential economic benefits and innovation arising from this technology10951ultimately will be unmet without regulatory certainty.10952 The principles and regulatory foundations that have made U.S.10953capital markets and derivatives markets the deepest, most liquid, and10954most resilient in the world provide an effective model for the digital10955asset commodity market. We need to act thoughtfully but with urgency to10956fill this harmful regulatory gap in order to give American investors10957the protection they deserve.10958 I thank both committees for your focus in this area, and look10959forward to answering your questions.10960 [The statement of Mr. Behnam follows:]1096110962 Prepared Statement of Hon. Rostin Behnam, J.D., Distinguished Fellow,10963 Psaros Center for Financial Markets and Policy, McDonough School of10964 Business, Georgetown University, Washington, D.C.10965 Chairman Hill and Ranking Member Waters, Chairman Thompson and10966Ranking Member Craig, Chairman Steil and Ranking Member Lynch, Chairman10967Johnson and Ranking Member Davis, Members of the Committees, I am10968honored and grateful to testify before you today on this important and10969timely topic.10970The Gap In Regulation10971 Between 2017 and 2025, I had the privilege of serving first as a10972Commissioner, then as the Chairman of the U.S. Commodity Futures10973Trading Commission (``CFTC'').\1\ During that more than 7 year period,10974I observed the significant growth of the digital asset market and wider10975adoption of digital assets by both institutional and retail investors10976in the United States. Over this time, digital assets evolved from a10977little known financial product to one that has become ubiquitous10978globally, owned by nearly one in five Americans according to a 2024 Pew10979study,\2\ and easily accessible to the public.\3\10980---------------------------------------------------------------------------10981 \1\ Chairman of the U.S. Commodity Futures Trading Commission10982(2021-2025); Commissioner of the U.S. Commodity Futures Trading10983Commission (2017-2021).10984 \2\ https://www.pewresearch.org/short-reads/2024/10/24/majority-of-10985americans-arent-confident-in-the-safety-and-reliability-of-10986cryptocurrency/.10987 \3\ https://www.sec.gov/files/rules/sro/nysearca/2024/34-99306.pdf.10988---------------------------------------------------------------------------10989 While I served at the CFTC, the digital asset market endured10990multiple periods of dramatic volatility, often significant in size and10991scale. Throughout this time, I publicly repeated one consistent message10992to Congress: under current U.S. law, there is a gap in regulation for10993the nonsecurity digital asset market. In 2022, a Financial Stability10994Oversight Council report highlighted this gap in regulation of the spot10995market for digital assets that are not securities.\4\ This gap for non-10996security tokens continues to constitute a majority of the digital asset10997market measured by market capitalization.\5\10998---------------------------------------------------------------------------10999 \4\ Financial Stability Oversight Council, Report on Digital Assets11000and Financial Stability Risks and Regulation (Oct. 2022), Report on11001Digital Asset Financial Stability Risks and Regulation 202211002(treasury.gov).11003 \5\ https://coinmarketcap.com/.11004---------------------------------------------------------------------------11005 The regulatory gap remains today, and must be filled with targeted11006legislation; it has facilitated countless scandals and fraudulent11007activity, some very small and typical in criminal form, others massive11008in profile. First and foremost, filling the regulatory gap will provide11009the needed customer protections that American investors have become11010accustomed to in traditional markets regulated by the CFTC and the U.S.11011Securities and Exchange Commission (``SEC'').11012 Further, based on my current observations and those while at the11013CFTC, I do not believe policy inaction will deflate public interest for11014digital assets; inaction will only result in greater risk to our11015financial markets and investors. As the digital asset market continues11016to integrate into traditional financial institutions, concerns11017regarding broader market resiliency and perhaps even financial11018stability will grow. In short, our current trajectory is not11019sustainable.11020 One common refrain in connection with past legislative efforts to11021fill the non-security gap suggests that a U.S. regulatory framework11022will legitimize the digital asset market, leaving opportunities for bad11023actors and industry players to capitalize on regulatory loopholes and11024unwitting retail investors. Though well intentioned, I believe this11025argument is the loophole; it has only left, for far too long, the vast11026majority of the digital asset market unregulated and American investors11027vulnerable to fraud and manipulation. Between pursuing comprehensive11028regulation that does not undermine existing law, or inaction, there is11029only one choice: comprehensive regulation, full stop.11030A Legislative Solution to Empower Regulators11031 I have consistently and publicly called for new legislative11032authority for the CFTC in order to provide core customer protections in11033the non-security digital asset market.\6\ Today's joint hearing11034demonstrates the healthy engagement and collaboration that these two11035committees, and also the two respective agencies overseen by these11036committees have enjoyed over many decades. Similar to debates around11037security and commodity futures during the advent of financial11038derivatives fifty years ago, or security based and commodity based11039swaps throughout the deliberation of the 2010 Dodd-Frank Wall Street11040Reform and Consumer Protection Act, I believe the digital asset market11041is another milestone in the evolutionary arc of financial markets that11042pose unique, but solvable policy questions.11043---------------------------------------------------------------------------11044 \6\ See, Rostin Behnam, Chairman, CFTC, Testimony Before U.S. House11045Committee on Agriculture, https://www.cftc.gov/PressRoom/11046SpeechesTestimony/opabehnam42 (Mar. 6. 2024); see also, Rostin Behnam,11047Chairman, CFTC, Testimony on The Future of Digital Assets: Providing11048Clarity for Digital Asset Spot Markets Before the U.S. House Committee11049on Agriculture, https://www.cftc.gov/PressRoom/SpeechesTestimony/11050opabehnam42 (Mar. 6. 2023).11051---------------------------------------------------------------------------11052 As both committees consider a legislative solution, I believe it is11053critical to rely on durable legal precedent as the framework to define11054digital tokens as securities or commodities, and recognize that the11055nature of commodity assets do not necessitate an identical regulatory11056framework fit for securities. Most notably, a key pillar of the11057securities law is bridging information gaps between an issuer of11058securities and prospective investors through mandated disclosures.11059While information about a public company's audited financial11060statements, executive leadership team, and business risk factors, to11061name a few, are identifiable and quantifiable for security issuers, and11062critically important to investors, the same is not the case for11063commodity assets.11064 Any credible digital asset regulatory framework of commodity11065digital assets must include disclosures, but more limited in scope by11066virtue of the characteristics of the underlying asset. Put more simply,11067and using Bitcoin as an example, there simply is no regularly11068reportable information on this commodity token that fits neatly into11069the securities regime. In addition to disclosures for digital asset11070investors about risk of loss and the static characteristics of a token,11071the primary focus of a comprehensive market regulatory framework for11072commodity tokens like Bitcoin should rest on the principles of fair,11073orderly and efficient markets. The argument that the CFTC is not a11074disclosure based agency is only true insofar as commodities cannot11075fulfill the securities regime.11076Dual Registration11077 Given the critical role the SEC plays in the oversight of security-11078based digital tokens, the Committees should consider legislating a11079disciplined, flexible, and balanced framework for the determination of11080tokens as commodities or securities. As mentioned, the SEC and CFTC11081have a longstanding partnership that facilitates strong, robust11082regulation of securities and commodity derivatives markets.11083 Where intermediaries handle both security and non-security tokens11084in the cash market, separate jurisdiction is critical to a healthy,11085comprehensively regulated ecosystem. Currently, there are numerous11086examples of individuals and entities dually registered with the CFTC11087and SEC, most typically as a broker-dealer and futures commission11088merchant, or investment advisor and commodity pool operator. In these11089instances, each agency retains its licensing authority over the11090registrant. Any regulatory system that contemplates a different model,11091where one agency defers to the other, or is simply notified of activity11092within its jurisdiction, will be nothing more than a paper clip and11093band-aid on the existing gap in regulation, leaving bad actors and11094arbitrageurs opportunities to exploit weakness and leave American11095investors at risk. Further, any framework where each agency does not11096retain its exclusive licensing authority portends a future of blurred11097jurisdiction across other financial products, like agricultural and11098energy, to name a few.11099 While preserving each agency's authority is critical, supporting11100cross-agency collaboration, consistent with what is practiced today,11101and which may include tools like portfolio margining and other netting11102mechanisms is also beneficial where appropriate.11103Targeted with Flexibility11104 As both Committees continue to consider legislation to fill the11105regulatory gap, I would like to focus attention on the components of a11106regulatory framework that would ensure the CFTC has the tools to11107provide customer and market protections. The CFTC has been involved in11108the digital asset market for over a decade, sharpening its expertise11109and skillset in a balanced, deliberative fashion. The CFTC has also11110been at the forefront of many of the most complex and historic11111enforcement cases, working closely with other state and Federal civil11112and criminal authorities.11113 First, the principles-based oversight model has served the CFTC and11114its regulated markets well, striking an appropriate balance between11115clear outcomes-based requirements, and measured flexibility to meet11116those outcomes. Core principles such as compliance with fair and11117orderly trading, system safeguards, financial resource requirements,11118and products not being readily susceptible to fraud or manipulation,11119serve as a solid foundation to build transparent and resilient markets,11120regardless of asset class. In light of the novel nature of digital11121assets, the CFTC would then, consistent with a legislative mandate,11122tailor rules to meet the risk and characteristic profile. The CFTC11123would also have flexibility to adapt with a changing market landscape,11124should the digital market evolve in a manner not first contemplated.11125 Second, appropriate funding is necessary to meet the mandate of any11126legislatively enacted regulatory program. The CFTC is currently funded11127for its mandate; it is funded to regulate digital commodity cash11128markets. I would strongly encourage the Committees and the Congress, as11129it would in any instance where it increases an agency's mandate, to11130consider a permanent fee-for-service model, exclusively assessed on11131digital asset registrants, that is commensurate with the11132responsibilities outlined in any legislative effort. As with other fee-11133for-service models, Congressional appropriators and the agency should11134work together to set budget levels and subsequently set fees to meet11135those budget levels.11136 Third, and following my earlier point about the need for a sensible11137disclosure regime, any legislative package should require registrants11138to provide information regarding a commodity token's structure,11139purpose, market-based characteristics, and general risks to ensure11140investors have access to material information.11141 Fourth, a reliable self-regulatory organization (``SRO'') has been11142critical to the success of the CFTC and SEC for decades. Both the11143National Futures Association, in the case of the CFTC, and FINRA, in11144the case of the SEC, have served as effective boots on the ground for11145both agencies, complementing and supporting the missions of each. Any11146effective legislative effort mandating a regulatory framework for11147digital assets must include a role for SROs.11148 Fifth, it is essential that legislation provide comprehensive11149authority for anti-money laundering (``AML''), know-your-customer11150(``KYC''), and a customer identification program (``CIP''), built off11151of existing requirements under U.S. law for market participants. With11152the right tools, including AML, KYC, and CIP authority, the digital11153asset ecosystem will not only become exponentially safer but also less11154vulnerable to terrorist organizations and illicit activity.11155 Finally, given the broad adoption of digital assets by a11156significant portion of the American population,\7\ a comprehensive11157education and outreach program, built off of both the SEC and CFTC's11158customer education programs, will enable the investing public to11159understand both the risks and opportunities of this technology.11160---------------------------------------------------------------------------11161 \7\ Id., at 2.11162---------------------------------------------------------------------------11163International Competition11164 While CFTC Chairman, I had the privilege of serving as the Vice-11165Chairman of the International Organization of Securities Commissions11166(``IOSCO''). IOSCO's member agencies regulate more than 95% of the11167world's securities markets in over 130 jurisdictions.\8\ As Vice-Chair,11168I saw major and developing economies establish regulatory frameworks11169for the new asset class.11170---------------------------------------------------------------------------11171 \8\ International Organization of Securities Commissions, About11172IOSCO, https://www.iosco.org/v2/about/?subsection=about_iosco (last11173visited July 8, 2024).11174---------------------------------------------------------------------------11175 The current divide between the U.S. and our international11176counterparts creates regulatory arbitrage opportunities that are11177exploited by bad actors, and prohibits the U.S. from truly contributing11178to much needed multilateral coordination efforts. Further, the11179potential economic benefits and innovation arising from this technology11180ultimately will be unmet without regulatory certainty. Investors,11181entrepreneurs, and various other stakeholders simply cannot participate11182fully with confidence without regulatory protections and certainty.11183Conclusion11184 The principles and regulatory foundations that have made U.S.11185capital markets and derivatives markets the deepest, most liquid, and11186most resilient in the world provide an effective model for the digital11187asset commodity market. We need to act thoughtfully, but with urgency,11188to fill this harmful regulatory gap in order to give American investors11189the protection they deserve.11190 I thank both Committees for your focus in this area, and look11191forward to answering your questions.1119211193 Mr. Steil. Thank you very much. We thank all of our participants11194for being here and sharing your expertise.11195 We will now move on to questions in the roundtable. As this is a11196roundtable and not a hearing, I will control the time. I ask all of our11197Members to hold their questions to roughly 5 minutes, and I will do my11198best to alternate between not only parties but also full committees.11199 We will begin by the chair of the Subcommittee on Agriculture, Mr.11200Dusty Johnson.11201 Mr. Johnson. I will start by thanking former Chair Behnam. It was a11202remarkable investment of your time last Congress. You and I talked on11203Saturdays. You and I talked on Sundays. You understood it was not your11204job to craft legislation, but instead to provide the Members of this11205Committee insight needed to try to do right by this complicated policy11206issue. And, sir, you have been a clear and consistent voice that11207legislative inaction endangers consumers, and you said it again in your11208testimony today. It is a clarion call that does right by this process,11209and I just want to thank you for that.11210 Mr. Davis, I thought your testimony was spot on. You talked about11211the CFTC being the natural choice to be the digital asset spot market11212regulator. You talked a little bit about why, but tell us more.11213 Mr. Davis of Washington. First of all, the CFTC has the experience.11214I was in the room when Chairman Giancarlo, in 2017, was discussing11215Bitcoin futures and the wrestles that the agency was having with it11216back then. This agency has been wrestling with those issues ever since,11217and actually before that time.11218 And there is a lot of learning that has been gained there. When you11219have a Bitcoin futures market, if a company self-certifies that, they11220have to say that that product is not readily susceptible to11221manipulation. The only way you can know that is if you are monitoring11222and surveilling the underlying Bitcoin spot market.11223 So a natural part of the CFTC monitoring and examination regime has11224been the spot market. Obviously, it started with Bitcoin, which11225accounts for, on any given day, about 60 to 65 percent of the market.11226It grew to Ether, which is another eight to ten percent of the market.11227And as I noted in my remarks, there are now 20 digital assets that are11228either self-certified or trading.11229 So you have an agency that has the experience of understanding,11230looking under the hood, looking how the spot market operates, where it11231works well, where it doesn't, has examined parties, CFTC registrants,11232and as Chairman Behnam can attest, has brought a number of enforcement11233actions for fraud and manipulation that require an understanding again11234of how the spot markets work.11235 And I guess I would just add, principles work. Core principles11236allow entities to use innovation, productive, effective thinking, to11237find effective ways to resolve the problems that we all know we exist11238in any market--worries about fraud, worries about manipulation, worries11239about cybersecurity, worries about reporting. The core principle11240construct that the Commodity Exchange Act embraces really would allow11241this market to thrive.11242 Mr. Johnson. Mr. Tusar, in your testimony you noted, similarly,11243that the CFTC has decades of expertise in complex markets. What else11244would you add to Mr. Davis's comments?11245 Mr. Tusar. I wholeheartedly agree that the principles-based regime11246is the right regime for the digital asset ecosystem and market to11247really develop. This is a critical moment in the evolution of this11248space, and it needs a market structure that allows for innovation, but11249that also has the strong consumer protections that the CFTC and11250Commodity Exchange Act provide. And so those two principles are11251critically important.11252 As I noted in my remarks also, Regulation ATS offered the same11253thing in the securities world. That similar parallel infrastructure in11254the CFTC regime will be critically important to allow exchanges to11255evolve, and also recognizing the unique characteristics of digital11256assets. They settle instantaneously. They don't have the same sort of11257credit risks and characteristics that normal securities or commodities11258have. So putting both of those things together will be critically11259important.11260 Mr. Johnson. For each of the panelists, you said it in your11261testimony, each of you in a different way. But I want to make sure I11262understand. Basically a yes-or-no question. Does the absence of a clear11263regulatory regime do a disservice to consumers, investors, and11264innovation in the digital asset space?11265 Mr. Rathmell?11266 Mr. Rathmell. Yes.11267 Mr. Johnson. Mr. Miller?11268 Mr. Miller. Absolutely.11269 Mr. Johnson. Mr. Davis?11270 Mr. Davis of Washington. Yes.11271 Mr. Johnson. Mr. Tusar?11272 Mr. Tusar. Yes.11273 Mr. Johnson. Chair Behnam?11274 Mr. Behnam. Yes.11275 Mr. Johnson. Thank you. With that, Mr. Chairman, I yield back.11276 Mr. Steil. The gentleman yields back. The Ranking Member of the11277Subcommittee on Agriculture, Mr. Davis, is recognized.11278 Mr. Davis of North Carolina. Thank you so much, Mr. Chair. I want11279to direct a question towards Chairman Behnam. It has been made evident11280by you that Congress is required to take action in order to address the11281regulatory deficiencies pertaining to digital asset markets. As the11282former chair of the CFTC, you directly observed the ramifications of11283inaction as well as the promise of legislation solutions that my11284colleagues and I are endeavoring to promote. I listened to your11285testimony earlier, and it seems like you have laid out what seems to be11286a very reasonable framework.11287 My first question is, what would you prioritize within that11288structure that you outline, and then the second part of the question11289would be, what is the importance of all of this moving together, the11290interchangeability of this framework, for instance, of Congress failed11291to provide adequate funding or if we didn't educate? I would really11292love to hear more in terms of this framework that you laid out.11293 Mr. Behnam. Thanks, Congressman. Above all else, and Mr. Davis11294alluded to this, the CFTC has been very active on the enforcement side11295of the ledger over the past 11 years. The first case that CFTC brought11296was in 2014, in the spot market with very limited authority.11297 So as the Committee and these committees think about what authority11298is needed, it is much like the traditional authorities that both the11299CFTC and the SEC have in traditional markets. And I alluded to this,11300within the core principles it is around registration of intermediaries,11301whether it is exchanges, brokers, custodians, introducing brokers, or11302anyone sort of in the trade cycle that is involved with giving access11303to financial assets to customers. That has to be the centerpiece, and I11304believe, at least in the draft that I saw briefly yesterday, that is11305the centerpiece of what you are proposing, and that has to be the11306starting point.11307 Everything else I listed, which is critical, the CFTC is not going11308to be able to do the work if they don't have the appropriate funding.11309And I wrote this in my submitted testimony at more length, with any11310Congressional mandate there is going to have to be more funding, and I11311think that is a critical piece because without that this job just won't11312get done appropriately. And we need this to get done appropriately.11313 Above all else, customer education. Far too often I personally11314experienced, or the agency has experienced very vulnerable individuals,11315sometimes from low-income communities, who just don't have financial11316literacy to understand the risks associated with digital assets.11317 So it is a multi-piece puzzle that has to be built one piece at a11318time. But I would encourage and certainly support the Committee's11319effort to do this comprehensively and as quickly as possible, but in11320one shot. And doing anything piecemeal and holding out for another sort11321of effort down the road, I understand things are difficult, but11322ultimately, if we are going to do this right, it has to be done11323comprehensively, and that is the registration, that is the11324surveillance, that is examination, that is making sure cyber and11325operational risk, that is communication, funding, education. It is a11326lot, but it is very, very much comparable to what we do in traditional11327derivatives markets or traditional securities markets.11328 Mr. Davis of North Carolina. Thank you so much, Mr. Chair.11329 My next question, and this would be for everyone, but I would11330definitely start with Mr. Tusar, the discussion draft of the market11331structure bill was released yesterday. Any early thoughts? I would just11332love to hear any early thoughts.11333 Mr. Tusar. I appreciate the question. Thank you, Congressman. Early11334thoughts, as I said in my opening remarks, it is a strong step in the11335direction of making a few things very clear. First of all, and maybe11336most importantly, token classification, which today is very unclear11337with respect to the difference between commodities and securities and11338which fall under which regulatory regime. So it is excellent to see11339forward progress in that direction.11340 Also, importantly, that there is the potential for there to be11341harmonization between the digital asset securities and digital asset11342commodities trading. Because what we anticipate is that these things11343will need to exist not just side by side but in the future in some11344integrated way. So it is important that the two regimes, on the CFTC11345and SEC side, are harmonized to the greatest degree possible, so that11346consumers are afforded the same protections and those sorts of things11347as we anticipate that they will exist on the same platform, and the11348expectations will be similar.11349 And thirdly, that there is a potential path to have an integrated,11350Federal-level regime for custody potentially, as well, which we think11351is important. The potential for leaving custody unaddressed on the11352commodities side leaves open for the potential to be Federal-level11353regulation for trading and listing of assets, but state-level11354regulation for custody, which we think leaves the potential for gaps11355there, as well.11356 But we feel, in conclusion, it is a strong step forward.11357 Mr. Davis of North Carolina. Thank you. I yield back.11358 Mr. Steil. Thank you very much. I know some people chose to leave,11359but I think if you look around this room, a lot of Members of both11360parties and both the Agriculture Committee and the Financial Services11361Committee is here, because this topic is so important. And I think the11362danger we have in this country is if we put our head in the sand and11363fail to regulate in this space, we actually have more risk than we do11364today.11365 Some of my other colleagues will say, ``No, we live in a laissez-11366faire. Why regulate at all?'' And I think what is lost in that is that11367there is currently a large number of regulations that don't fit well in11368the digital age, in the token age, and in digital tokens.11369 So what I want to do with you, Mr. Miller, if I can, is let's go11370back and learn a lesson about Hiro. You went through the Reg A process.11371You commented on this. Is the current exemption framework for raising11372capital compatible with the digital asset ecosystem?11373 Mr. Miller. In short, it is definitely not compatible. If you look11374at all of the current securities law exemptions and registration11375schemes and qualification schemes, they are based on the fundamental11376idea of either a debt or equity offering in a company. And again, as11377somebody who has spent a long time in the startup world and worked with11378investors, Reg D works great for raising from a credited investor and11379angel investor.11380 Mr. Steil. So to dive into it, so the people that are investing,11381are they getting the clarity that they should?11382 Mr. Miller. No.11383 That is the fundamental thing, is the registration scheme is all11384about aspect of the company. So Hiro remained, long after11385decentralization, remained a reporting issuer with the SEC. You can go11386see these reports about the dev tools business, fixing nothing.11387 Mr. Steil. So it doesn't get the information that an investor11388needs.11389 Mr. Miller. No.11390 Mr. Steil. And then the question then becomes, of course, what was11391the cost associated with it? What did you raise and what did you spend?11392 Mr. Miller. Right. So our Reg A raised about $15 million. It cost11393probably $3 million to run the Reg A.11394 Mr. Steil. And this is my frustration, because what we want to do11395is make sure that the next innovators are in dorm rooms and basements,11396not in boardrooms and law firms.11397 Mr. Miller. Exactly.11398 Mr. Steil. And it sounds like as you went through this process you11399probably spent a lot of time in boardrooms and law firms.11400 Mr. Miller. Absolutely.11401 Mr. Steil. And if you didn't have that kind of capital you probably11402couldn't do this in your parents' basement.11403 Mr. Miller. Nope.11404 Mr. Steil. Because you would have to spend millions of dollars, in11405very tall buildings, attorneys, navigating through with the regulatory11406agencies. Correct?11407 Mr. Miller. And that is why we see small teams who are trying to be11408upstarts moving offshore today.11409 Mr. Steil. And so you would agree that we have to create a new11410system for digital assets to be able to efficiently go through the11411process, and provide the clarity to prevent abuse.11412 Mr. Miller. Absolutely.11413 Mr. Steil. All right. Let me jump over. Another impediment of the11414digital asset ecosystem is the legal classification of the assets. Are11415they securities, commodities, or maybe something else entirely? Mr.11416Rathmell, your guidance has been a useful project in determining11417whether or not there will be classified as a security or not. The SEC11418put forward a rule, 2019, a 60 factor test. Is this helpful at all, or11419does it just add more complexity into the system?11420 Mr. Rathmell. We are grateful for the clarity, certainly. The11421challenge that we have consistently run into in this space, as Mr.11422Miller alluded to, is that we have startup teams who may have raised11423perhaps a few million dollars, who are spending a disproportionate11424amount on reading the legal tea leaves, and I think the 2019 guidance11425is kind of part and parcel of that. A 60 factor test is not really11426workable for an entrepreneur.11427 Mr. Steil. It is not workable. Do you create your own internal11428process?11429 Mr. Rathmell. For us, particularly, at a venture capital firm?11430 Mr. Steil. Say it again?11431 Mr. Rathmell. For us, specifically, a venture capital firm?11432 Mr. Steil. Yes.11433 Mr. Rathmell. Certainly we have looked at the 2019 guidance. We11434have looked at the Hinman speech as we are assessing the security11435status of an offering. But certainly there is a comprehensive kind of11436across this space a lack of legal clarity.11437 Mr. Steil. So even with the guidance that came from the SEC, you11438are finding yourself spending big bucks on attorneys rather than on11439innovation development. Fair?11440 Mr. Rathmell. Absolutely, and the same is true for all of our11441founders.11442 Mr. Steil. So let me jump over to you if I can, Mr. Tusar, as we11443wrap this up. Because the other logical path, of course, people would11444say, ``Well, don't worry, Mr. Steil. We can go for a state approach.''11445And I think your background at Coinbase really gives us an opportunity11446to dog into that. Can you kind of highlight the impact the existing11447regulatory structure for digital asset trading platforms and how it11448exists, in particular at the state level? Maybe that is a path.11449 Mr. Tusar. Yes. Thank you for the question, Congressman. We think11450it is critical that there be Federal-level regulations, that today we11451have a variety of different approaches. We have money transmission11452licenses from state to state, which leaves customers with different11453levels of protection, different levels of our ability to have products11454state by state when it comes to things like staking, and different11455levels of disclosure that are required.11456 So we have advocated for some time that there absolutely needs to11457be Federal-level regulation, and so we are excited for this bill to11458move forward, to close the gap as it exists today.11459 Mr. Steil. Thank you very much. I think what we have heard is the11460current state regulatory framework doesn't work. The current SEC11461regulatory framework doesn't work. And the work of Chairman Thompson11462and Chairman Hill to bring forward this market structure legislation is11463absolutely essential to provide clarity, to make sure that there is11464innovation and development occurring in the United States without the11465need for high-priced attorneys, and making sure that the United States11466wins Web3, and we are in a position now to compete with China.11467 I will yield back. I will now recognize the Ranking Member on the11468Financial Services Subcommittee, Mr. Lynch, to offer comments, or ask11469questions.11470 Mr. Lynch. Thank you, Mr. Chairman. Much appreciated.11471 I think the greatest asset, that the greatest characteristics of11472our financial system writ large is trust. I think that is really what11473sets us apart from other countries. That is why we do so well with11474foreign investors. People trust the system, that the laws will apply,11475and they have a menu of rights that they can exercise.11476 In the last few weeks, under the Trump-appointed leadership of the11477SEC, the SEC dropped almost every single lawsuit against some of the11478worst offenders in the crypto industry, companies such as Crypto.com,11479Ripple, Kraken, Gemini, Binance, Coinbase, Robinhood, and Uniswap.11480Those all have a proven history of irresponsible, predatory, or illegal11481practices.11482 Then the Trump-appointed Prudential Banking Regulators were11483directed to rescind the thoughtful guidance that advised financial and11484depository institutions to exercise caution in engaging with crypto.11485This is a just a concern, because you have people's deposits, and there11486is supposed to be a stability there, and then you have crypto that is11487extremely volatile. It was a commonsense guidance.11488 And then, a few weeks ago, the Justice Department announced it is11489disbanding the National Cryptocurrency Enforcement Team, which had been11490charged with combatting fraud and illicit financing crypto.11491 Brick by brick, President Trump is showing us how democracies die.11492We are seeing long-standing investor and consumer protections11493dismantled, all to further President Trump's personal interests. And I11494believe all of these moves serve to have a corrosive effect on that11495trust that I talked about in the beginning.11496 And in an even more appalling move, President Trump advertised a11497private dinner, this is outrageous. It would be funny if it wasn't11498true--advertised a private dinner at his golf club for the top 22011499investors in his meme coin--in his meme coin--that has zero value in11500reality, followed by a private White House tour for the top 50. That11501just screams government for sale right there.11502 And then, last week, as I mentioned before, at a conference in11503Dubai it was announced that a fund backed by Abu Dhabi would be making11504a $2 billion business deal using President Trump's firm's digital11505coins. A foreign government will be making a direct, major contribution11506to President Trump's wealth, which stands to make the Trump family11507hundreds of millions of dollars.11508 Mr. Davis, Mr. Behnam, I am aware of your history. Mr. Davis, you11509are a former general counsel. Don't you think that that undermines--11510look, if you are really hoping for the greatest future for crypto, that11511scamifies everything. It looks seedy, shady. Is there a way to promote11512crypto without--first of all, do you think that is helpful to crypto,11513all of those measures?11514 Mr. Davis of Washington. Sir, I have no comment on what the11515President or what his family is doing.11516 Mr. Lynch. I don't blame you. if I was an attorney I wouldn't11517answer the question either.11518 Mr. Behnam, CFTC, you have been in this seat before. You are11519familiar with the ethics laws, and so are you, Mr. Davis. Do you think11520those breach the ethics laws, either one of you? Mr. Davis or Director11521Behnam?11522 Mr. Behnam. Congressman, I said this last week or a few weeks ago11523in response to a question about a similar issue or the same issue.11524There are well built-out and decades-old ethnics rules around all11525government officials, whether it is elected officials, appointees, or11526everyone across the U.S. Government, and it is extremely important that11527those rules are upheld, for the same reasons you stated at the11528beginning of your comment. And I say this often, as well. The health11529and the size and the demand for U.S. capital market instruments,11530whether it is equities or derivatives, is because of the rule of law,11531because of the confidence in the integrity that foreign investors, but11532also U.S. investors, have in the accountability of our regulators,11533whether bank regulators or market regulators. And I do think for that11534continued success and growth and economic----11535 Mr. Lynch. Okay. Just reclaiming the last 15 seconds of my time.11536All I am saying is, some of those moves might have pumped up the short-11537term price of crypto. I think in the long term is very, very bad for11538crypto. You want to have credibility. You want to have trust. And I11539don't think you are getting that with all those moves that I just11540remarked upon.11541 Thank you, Mr. Chairman. I appreciate your courtesy, and I yield11542back.11543 Mr. Steil. The gentleman yields back. The Chairman of the11544Agriculture Committee, Mr. Thompson, is recognized.11545 Mr. Thompson. Chairman, thank you so much. Chairman Behnam, welcome11546back. It is nice to see you here.11547 In 2023 and 2024, there was some uncertainty about the legal status11548of Ether as then-SEC Chair Gensler asserted Ether may, in fact, be a11549security, despite the CFTC publicly stating it was a commodity several11550years prior. You and other suggested that a sudden reversal in the11551settled treatment of a digital asset could be disruptive for anyone11552participating in the derivatives market.11553 Please describe the uncertainty and confusion caused by the SEC11554claiming one thing and the CFTC claiming the opposite.11555 Mr. Behnam. Thanks, Mr. Chairman. As we had contracts listed, and11556now there are many more than when I was chair, when contracts are11557listed on CFTC exchanges as derivatives, there is essentially an11558assumption that the underlying asset is a commodity. So when we had11559listed Bitcoin futures in 2017, and then listed Ether futures a few11560years later, there was an assumption, legally, that the underlying11561asset in that case, Bitcoin and Ether, were commodities.11562 So any confusion in the public markets about what those assets11563were, along this security-commodity line would certainly create11564confusion, regulatory uncertainty, and potentially legal liability for11565any market participant who wanted to participate in some sort of11566innovative project or entrepreneurial project that involved those11567assets, as it relates to the two market regulators.11568 Mr. Thompson. Very good. Thank you. Mr. Miller, Mr. Rathmell, and11569Mr. Tusar, what effect does this confusion have on digital asset11570ecosystem and innovation?11571 Mr. Miller. So as I said, beyond the fact that we spent untold sums11572of time and money trying to guess at what the laws were, and even11573worse, what the laws would be in a few years, since when you have an11574agency interpretation it might change every 4 years, even today we just11575see, unless you are an absolutely huge, very well-funded team, you11576can't afford to take the risk of operating here. So these upstart11577teams, ones who are going to be the massive companies of the future,11578are choosing to go to other jurisdictions, whether it is in the Middle11579East or in areas of Southeast Asia, or things, where they aren't having11580to pay $1,000+ an hour for a lawyer to tell them, ``Well, I don't know11581what the law might be.''11582 Mr. Rathmell. I would say something similar. Markets demand11583clarity, ultimately, and during this kind of very tumultuous period11584that we saw over the past half decade-plus, I was routinely approach by11585founders who were just trying to build their businesses, including some11586projects that were building on Ethereum. And these are founders that11587shouldn't have to understand the nuances of securities and commodities11588laws, who are just trying to build projects here in America, and who11589shouldn't have to spend millions of dollars on legal advice from11590lawyers who don't have a legislative or regulatory framework that they11591can actually reasonably interpret. And spending time with those11592founders and seeing them try to become armchair lawyers felt like a11593great wasted opportunity, because they were spending time doing that11594rather than building their businesses here in America.11595 Mr. Thompson. Very good. Mr. Tusar, any thoughts.11596 Mr. Tusar. Yes, Mr. Chairman. I would suggest that one of the11597greatest impacts is to the competitiveness of the U.S. as the hub for11598what we think is innovation for the future of the internet, the future11599of payments on the internet, and having that talent and that capital11600move to jurisdictions. The U.S. is the only in the G20 that does not11601have clear rules of the road, as is proposed in this bill. And I think11602are we not to act with urgency, I think we will continue to see that11603flight of capital and talent overseas.11604 Mr. Thompson. Very good. Mr. Davis, Section 3 of the Commodity11605Exchange Act closes with its final purpose, to promote responsible11606innovation and fair competition. How does regulating digital assets11607fulfill CFTC's purpose of promoting responsible innovation and fair11608competition in the markets?11609 Mr. Davis of Washington. Because well-functioning markets allows11610innovation to thrive. When the entrepreneurs know what the rules--and I11611am talking myself out of business. I am saying not use the lawyers as11612much. When you don't have to use the lawyers as much, when you are11613spending more of your time innovative and less of your time trying to11614figure out what in the world am I allowed to do in this ecosystem, the11615innovation succeeds. And we have seen that since the passage of the11616Commodity Futures Modernization Act a quarter of a century ago. The11617differentiation and types of products that have been allowed to trade11618in CFTC markets have grown tremendously. A number of those products11619have failed, but the ones that succeeded have succeeded tremendously.11620And that is because the self-certification system and the core11621principles system creates an environment in which innovation can get to11622the top.11623 Mr. Thompson. Very good. Thank you, Chairman.11624 Mr. Steil. The gentleman yields back. The gentleman from Virginia,11625Mr. Vindman, is recognized.11626 Mr. Vindman. Thank you, Chairman. Good morning, everyone. Like many11627of my colleagues on this Subcommittee, I am genuinely excited about the11628innovation and dynamism in your industry. Just last month, we heard11629from witnesses leveraging this technology in remarkable ways, from11630modernizing cattle trading to advancing geospatial mapping. And one11631area I am particularly interested in is the national security11632application that are meaningful and significant.11633 But while the potential is substantial, the public also sees some11634elected officials misuse these tools to scam Americans and risk11635themselves and their political allies. That kind of behavior undermines11636public trust and taints an otherwise promising innovation. Even more11637troubling, it opens the door to foreign adversaries to influence senior11638U.S. officials by purchasing large volumes of coins they promote or11639create.11640 As a former White House ethics lawyer that advised senior White11641House officials, I find these actions deeply troubling, as do the11642American people. The American people recognize the President's scheme11643to profit off his own support for what it is, and frankly, there is a11644concern about emoluments.11645 So as each of you, and as my colleague, Mr. Lynch mentioned, the11646foundation for your industry is trust. How are you currently building11647trust in digital assets? I will start with Mr. Miller.11648 Mr. Miller. I think one of the great innovations that Bitcoin did11649bring to folks is, we can talk about it being money, we can talk about11650it being ledger, whatever. It is fundamentally that it allowed11651decentralized trust across the world, right. No matter where you are,11652with very little computing power, you can agree on what the history of11653something was. You can agree that, hey, going forward this is what we11654believe. And I think being able to have that on a borderless basis, and11655create trade and interaction and communication across the world like11656that, is an incredibly powerful trust-building primitive, that we11657haven't seen before, in a way. And I think using that to allow for11658transparency and interaction is one of the most powerful things we can11659do for a global economy, going forward.11660 Mr. Vindman. So on that point, I think it is important to11661distinguish between transparency, which I think is very much there, and11662then trust, which is more foundational, and goes to the question of11663whether there are conflicts of interest, or where is investment going.11664 Chair Behnam, do you have any comments on how do we build trust in11665digital assets, and specifically, how do we ensure that there are no11666conflicts of interest, to the earlier question about financial11667conflicts of interest from members of the government.11668 Mr. Behnam. Thanks, Congressman. Ultimately, the trust is going to11669be built with a regulatory system in place, and that trust, as I11670mentioned earlier to Mr. Lynch, around our traditional markets, exists11671because of a comprehensive regulatory system, which many registrants11672will complain about, because in part it is burdensome, it is a11673challenge. But it ultimately creates a level playing field and one11674where market participants can trust that there is a system of11675transparency, where there are no conflicts of interest, which is a core11676principle in and of itself.11677 So I do believe the step that the Committee is taking towards a11678regulatory system will be a step towards building trust. And over time,11679as markets become transparent, as they become what U.S. investors are11680accustomed to, and the protections that they afforded, and ultimately11681you have the rule of law and enforcement on the back end if you do have11682bad actors, and you will have bad actors, the trust will gradually11683grow. And I do think there will be a symmetry between what we have11684experienced in this country over 100 years, with our financial markets,11685and what the potential is in digital assets, as well.11686 Mr. Vindman. Thank you. I think one of the important points here is11687the fact that conflicts of interest have to be part of the regulatory11688regime, to make sure that we maintain trust. And, frankly, the trust11689that is being developed now in digital assets that have promising11690futures is not undermined by conflicts, something completely outside of11691the control, really, of the industry, and sort of prevent the growth of11692this industry.11693 So with that I yield back. Thank you.11694 Mr. Steil. The gentleman yields back. The gentleman from Tennessee,11695Mr. Rose, is recognized.11696 Mr. Rose. Thank you, Chairman Steil, and thanks to Chairman Johnson11697for holding the roundtable today, and thank you to our witnesses. And11698please know that your participation today will prove to be very helpful11699as we go about the work of trying to figure out how to fill in the gaps11700in the regulatory framework in this space.11701 I am fortunate enough to sit on both the Financial Services and the11702Agriculture Committees and have seen firsthand the level of11703coordination needed between the committees to get digital asset market11704structure legislation out the door. This partnership is telling for two11705reasons, I believe. One, it demonstrates Congress' commitment to11706providing the digital asset ecosystem regulatory and legislative11707clarity. And two, it signals the need for the regulators under each11708Committee's jurisdiction to work together, as well.11709 Mr. Davis, while you were at the CFTC, was there ever a policy11710issue that required such coordination between multiple Congressional11711committees and your agency?11712 Mr. Davis of Washington. I guess I am not aware of a particular11713policy, but I know that the Chairmen that I served under, Chairman11714Giancarlo and Chairman Tarbert, were actively talking with Congress and11715with their counterparts at the SEC. I know there was engagement among11716the commissioners. I know there was engagement among the Divisions of11717Enforcement and some of the other divisions.11718 So again, I don't know if there was a specific policy, but I know11719there has always been an active amount of engagement between both of11720the agencies and with Congress.11721 Mr. Rose. And Mr. Davis, do you agree that the SEC and CFTC must11722work together in order to adequately oversee this space? And tell us,11723if you will, maybe one or two of the key challenges with regard to such11724a partnership.11725 Mr. Davis of Washington. Absolutely. That coordination is critical.11726I think as has been alluded to already, one of the complications in the1172750 year relationship between the CFTC and the SEC is sometimes not11728having a full understanding of where the line is between the11729jurisdiction of the two agencies. I have spent an inordinate amount of11730time in private practice, advising clients and litigating the SEC on11731that very question.11732 And so I think where Congress can provide an enormous amount of11733benefit in this space is as precise and specific delineations as11734possible between the jurisdiction of the SEC and the CFTC. As I noted11735in my opening remarks, I think Section 202 of the draft bill is a good11736example. I think it is pretty clear when you are reading that there are11737a host of secondary market transactions between third parties, that the11738bill would place within the CFTC's jurisdiction pretty clearly.11739 Those types of provisions from Congress are critical, because11740whatever Congress passes there are going to be some edge cases where11741the CFTC and the SEC either don't agree or have difficulty getting to11742agreement. And so the more precise, the more quantitative, like11743Congress has done with security futures, the more accurate wording that11744you use, the less opportunity there is for fights between the agencies11745to happen in the future. There are going to be disagreements, but11746Congress can do a great job in this bill of really narrowing the area11747of disagreement by making as clear as possible where those11748jurisdictional lines are.11749 Mr. Rose. And I know we want to do that, but as I am sure you11750appreciate, the more specific we are, the greater the potential that we11751wall off the opportunities for future innovation that might be beyond11752those rules. So it is kind of a delicate balance to strike, and we11753appreciate your input.11754 Many traditional financial firms have expressed interest in11755becoming involved in the digital asset ecosystem. I talk to these11756businesses on a regular basis. A key objective of any digital asset11757market structure regulation should be, in my view, to put these more11758traditional entities on an equal playing field with the crypto native11759firms.11760 Mr. Davis, what is necessary, from a regulatory and legislative11761perspective, to create a level playing field for traditional as well as11762new market entrants?11763 Mr. Davis of Washington. I think, again, clarity, so that smaller11764entities have an easier time entering the ecosystem. I also think the11765CFTC registration system right now for current registrants is clear11766about what you need to do and not to do, to get registered with the11767CFTC. I think applying that same type of registration principles, and11768coming up with a process that is efficient. It is important that11769registrants, that those registrations not be delayed, because delay11770impacts the ability of certain participants to weather that process and11771to be able to get registered.11772 So it is important to have an efficient process where any type of11773registrant who can satisfy the core principles is allowed a11774registration.11775 Mr. Rose. Thank you, and thanks to all of our witnesses, and I11776yield back, Mr. Chairman.11777 Mr. Steil. The gentleman yields back. The gentleman from11778California, Mr. Liccardo, is recognized.11779 Mr. Liccardo. Thank you, Mr. Chair. Thank you to all the witnesses11780for sharing your insights. I appreciate learning here.11781 I do join in the frustration expressed by the Ranking Member. We11782can't ignore the elephant in the room. There is an emoluments clause in11783the Constitution for a reason. There have been anti-bribery statutes11784for decades for a reason. And since apparently we need more, I11785introduced, a couple of months ago, the Modern Emoluments and11786Malfeasance Enforcement Act, which is H.R. 1712, and I encourage my11787colleagues to join as cosponsors and join the couple dozen folks who11788have already joined in, because apparently we need a law to tell the11789President and other Federal officials that they cannot get engaged in11790issuing digital assets or commodities or securities or anything else11791that, of course, would have been obvious to us before any of us ran for11792office.11793 I would like to get to the gist here, because I think there is some11794really important testimony. We obviously just saw yesterday, for the11795first time, a draft of very important legislation that I know we will11796be considering in a matter of days for markup. And I guess, Chair11797Behnam, have you had a chance to review the draft? I know it is quite11798lengthy.11799 Mr. Behnam. Yes, Congressman, thanks for the question. I think I11800received it about 3 or 4 o'clock yesterday. So I did review it section11801by section, and I went through a little bit of the text. So I have a11802general idea but there is more work to be done.11803 Mr. Liccardo. I won't hold you to the detail, but you mentioned six11804recommendations, in particular, in your testimony. I appreciate that--11805the anti-money laundering, the KYC, the customer ID program. Based on11806your review, do you believe that this draft addresses some of those11807core concerns?11808 Mr. Behnam. Short answer is yes because giving the authority to the11809CFTC to register some of the intermediaries in the digital asset space11810in a traditional way, that are based off of the core principles of the11811Commodity Exchange Act would mandate and permit also the CFTC to create11812a regulatory structure that does all that I have said and that you11813repeated, around AML, KYC, CIP, cyber, conflicts of interest, and other11814very important core principles.11815 Mr. Liccardo. Are there any shortcomings or gaps that you believe11816need to be addressed?11817 Mr. Behnam. At my first reading, in terms of the core principles11818and how they would apply to the digital assets, there are no major11819gaps. There are some other issues that I probably identified that I11820think are worth a conversation. But with respect to your specific11821question, nothing glaringly stood out at me as I reviewed it last11822night.11823 Mr. Liccardo. Then with regard to the other five recommendations,11824was there one or two that stick out that you think we need to be11825attending to as we are considering a markup of this draft?11826 Mr. Behnam. Well, ultimately the thing that concerns me is, and I11827mentioned this in my written testimony and oral testimony, as well, we11828have these two market regulators, and they have historically functioned11829quite well together over many, many decades. It is not an ideal11830situation, I understand, for registrants who play in both markets. I11831suggested that you have dual registration in many circumstances, in11832traditional securities markets and derivatives markets.11833 I don't think, as much as there will be people who oppose this11834path, I don't think it is one that we want to stray from. There will be11835circumstances where participants in the digital security space and the11836digital commodity space should be dually registered. If you don't go11837down that road--and the exact words I used is if you have a model where11838there a deferral or a notice filing to another agency--you create gaps,11839and the market will then start to observe and identify these gaps and11840exploit those gaps.11841 So it might be hard to imagine what those circumstances are11842precisely, today, but given my experience I have no doubt that if there11843are situations where there is not comprehensive, exclusive licensing11844authority for each agency in their distinct jurisdiction, you may be11845creating unintended risks that will ultimately come back to hurt us.11846 Mr. Liccardo. Mr. Tusar, as you think about Coinbase's many11847customers, do you share concerns of Chair Behnam about the possibility11848of those gaps existing in ways that could harm investors?11849 Mr. Tusar. We do worry about gaps, yes, and thank you for the11850question, Congressman. In addition, however, I would say we also worry11851about the fact that digital assets are unique in that unlike futures11852and equities, users may not distinguish between what is a digital asset11853commodity and what is a digital asset security, and the various forms11854of token classification that the bill lays out very successfully.11855 And, therefore, from the end-user's perspective, we think it is11856important that these two regimes are as harmonized as possible so that11857the same sorts of protections are afford, because that will be sort of11858the expectation of those that are using digital assets. So to the11859greatest degree possible, while respecting the unique lanes that each11860agency lives in, to the degree that the mechanics of how trading and11861custody and those sorts of things can be harmonized, I think that will11862be critically important for the bill.11863 Mr. Liccardo. Thank you, gentlemen. I yield.11864 Mr. Steil. The gentleman yields back. The Chairman of the Financial11865Services Committee, the gentleman from Arkansas, Chairman Hill, is11866recognized.11867 Mr. Hill. Well, thank you, Chairman Steil, and thank you again for11868your joint leadership of this effort. Under the Biden-Harris11869Administration the SEC used a whole, wide range of interchangingly and11870interchangeably terms for digital assets, confusingly interchangeably11871terms, that were arguably, but most of them were themselves not11872securities, creating a lot of legal uncertainty. I mean, it just went11873around and around. I felt like for 4 years we went around in circles on11874that. And the lack of clarity made it practically impossible for any11875market participant to come in and register under the rules at the SEC.11876It was confusing to Congress. It was confusing to law firms. It made a11877lot of money for law firms, I assume, here in Washington, D.C.11878 So in light of all that confusion, market participants developed11879processes to analyze and classify assets under their own rulemaking. So11880Mr. Tusar, you certainly are one of those that, at Coinbase, you all11881created your own listing standards. Could you explain how you navigated11882that as a public company and a registered firm? How did you navigate11883that listing process?11884 Mr. Tusar. Yes, thank you for the question, Mr. Hill. Coinbase has,11885today, a very rigorous listing standard that looks at a variety of11886qualitative and quantitative factors. We have listed approximately 30011887assets for trading on our centralized exchange out of the thousands and11888thousands that we evaluate, so we have about a 90 percent rejection11889rate.11890 The sorts of factors that we look at are, is it secure? Is the11891underlying blockchain on which this is built secure? How does the asset11892fare under our interpretation of the Howey rubric? Is there an active11893development community? So there is a whole host of factors that we look11894at. And after that, we look at is this an asset that customers want and11895are asking us for, and subject to those things we will go ahead and11896list it.11897 But we have this standard in place that we have developed over a11898number of years, and we feel very good and strongly about.11899 Mr. Hill. How would you feel about nothing having uniform listing11900standards that you would find in a regulatory framework approach? Does11901that hurt the ecosystem's development? Has it driven business offshore?11902You may be doing a good job of it, but has it been confusing and not11903productive for other people who are trying to perform an exchange type11904function?11905 Mr. Tusar. Thank you for the question. I think one of the most11906important elements of this bill is providing that clarity. Out of all11907of the things in the bill, the token classification is probably the11908single most important element, because that is precisely, to your11909point, what will decide whether somebody feels comfortable and safe11910doing their project and development here in the U.S. or will move it11911overseas. So I think it is critically, critically important.11912 Mr. Hill. Would you say for global leadership in the U.S. where on11913a bicameral, bipartisan basis, that it important that we craft a11914regulatory framework and have a dollar-backed stablecoin regime in the11915U.S.? Do you think both are important?11916 Mr. Tusar. Both are critically important.11917 Mr. Hill. Which one is more important, in your view, big picture-11918wise, for the ecosystem?11919 Mr. Tusar. Oh, that is a good question, Chairman.11920 Mr. Hill. You don't want to be pinned down?11921 Mr. Tusar. I think they are both equally important.11922 Mr. Hill. Okay. I will take that as a good answer.11923 Mr. Rathmell, you have done so much work in the early emerging11924stage in the digital asset space. How important is it to have a11925regulatory framework so that you know what the governance token sales11926and blockchain system rules are to you for all your emerging companies?11927I can't imagine they even know how to undertake their projects. How do11928you know what to invest in without a framework?11929 Mr. Rathmell. Thank you, Chairman. You are exactly right. This is11930one of the great challenges we have run into in this space. I have11931advised companies for the better part of a decade in this space, and I11932have never seen so many seed-stage founders who are so curious about11933the current state of policy and legislation, and they probably all11934could take the California bar if they wanted to. It is quite11935impressive.11936 But it is also distracting. It is incredibly distracting from11937founders who want to build the future of capital markets, the future of11938digital infrastructure, the future of financial infrastructure here in11939America, that they have to become armchair lawyers and pay, again,11940millions of dollars in legal fees to try to make sense of the current11941law, which is inherently unclear.11942 Mr. Hill. I appreciate the whole panel. Chairman Behnam, it is so11943good to see you, and thank you for your leadership on the Commission11944and for your continued advice and counsel to our Members on both sides11945of the Capitol.11946 And with that, Mr. Chairman, I yield back.11947 Mr. Steil. The Chairman yields back. The gentlewoman from Maryland,11948Representative McClain Delaney, is recognized.11949 Mrs. McClain Delaney. Thank you, Mr. Chairman, and thank you to our11950witnesses again for being here today. I found each of your testimonies11951really illuminating, and I really look forward to working more on this11952issue.11953 As was discussed, we are in the middle of a digital revolution11954where assets no longer need to be physical to have value. And this11955presents great opportunity and serious risks, especially with the11956anonymity of digital assets being exploited for potential illegal11957activities. Fraud, volatility, scams, money laundering are all threats11958that an unregulated and unchecked system allow to thrive. And without11959oversight we invite chaos in our financial systems and in harm's way.11960 I am deeply supportive, however, because I sit on the Ag Committee,11961of the innovation that digital assets can offer in so many different11962fields. But I do have real concerns, and in particular, about the deep11963concerns about actors that are drawn to markets that lack a fundamental11964regulatory framework. And a lot can happen on the Dark Web, including11965human trafficking and money laundering and other illicit activities,11966and that is why I think it is so important that we have smart, nimble,11967market-driven innovation regulations, not to stifle innovation but to11968shape it, but to weed out bad actors, protect consumers, and ensure11969transparency and stability.11970 So I have so many questions to focus on, but I am going to start11971with this first one about maybe some illicit financing. Yesterday, the11972Financial Services Committee and Ag Committee released this draft bill11973to establish a regulatory framework, and for both Mr. Behnam and Mr.11974Miller, could you share any preliminary thoughts you had on what this11975bill does right and how we can make sure it relates to anti-money11976laundering and where it can be strengthened? And just how prevalent are11977risky digital asset exchanges, such as those that lack know-your-11978customer, CYC rules, or are connected to the Dark Web? And are there11979any lessons from the EU's MiCA regulatory regime?11980 Mr. Miller. Sure. So I will agree with what Mr. Davis and Behnam11981both said in that giving clear authority for overall trading to the11982CFTC, I think it is a huge advancement here. As we have said,11983regulatory unclarity or ambiguity gives gaps that bad actors can11984exploit and makes it harder for those who are trying to enforce the11985laws to actually get in and do that.11986 So I think the fundamental structure offered here of we are clearly11987making these as digital commodities, and if you are very early on and11988need to pre-sale some of those in order to raise the funds to build the11989network, that becomes under the SEC authority. I think that general11990concept, we just got the bill so still working through some of the11991details there, but I think that fundamental structure is very good and11992allows kind of the expertise when it comes to exactly preventing bad11993actors from exploiting the system, the same way that they do every11994other monetary system that exists, right, like people, like bad actors11995especially like money. They are going to try and take advantage of11996anything that is there.11997 So I think by creating the really clear structure that is being11998proposed and that we are talking about today is the number one thing11999that we can do to----12000 Mrs. McClain Delaney. To weed out bad actors.12001 Mr. Miller.--to weed out bad actors.12002 Mr. Behnam. Thanks, Congresswoman. I will point out one specific12003thing because I suggested this earlier, to an earlier question. Within12004the core principles, a lot of the issues you raise, which are12005critically important, will be addressed, just by default of what the12006core principles require.12007 But from a CFTC perspective, relative to other agencies within the12008U.S. Government, AML is a key one that I think would have to be more12009prescriptively outlined in the legislative text. Again, I haven't had a12010full chance to read through it so it may, in fact, be there. But there12011was always a delta between the U.S., CFTC, and the Treasury Department12012within FinCEN and the authority that they have around anti-money12013laundering.12014 Know-your-customer is a very key component, certainly at the12015Federal level but also, Mr. Tusar mentioned, the state-level12016requirements that many of the intermediaries have to follow. There are12017so many requirements along the state lines. But I say within the12018Federal regime, AML is a key component, where it can be strengthened12019within the market regulator requirements.12020 Mrs. McClain Delaney. That is great. I am going to reference12021something that Congressman Rose said earlier about consumer protections12022and a level playing field. Creating safe harbors or special exemptions12023for digital assets risk is great, but we could disadvantage players12024like community banks that do a lot of financing for farmers. In this12025new legislation discussion draft on digital asset market structure, how12026can we make sure that there is an even playing field, and again, are12027there any lessons learned from the EU's structure. I am diving deep,12028and I still haven't looked at all 212 pages yet, so I am trying to12029figure out from you all how you all are seeing in terms of this other12030competitors and making sure that there is an even playing field.12031 Mr. Behnam. Congressman, very briefly I would say in terms of your12032first question and level playing field----12033 Mr. Steil. Cognizant of the time, I would ask maybe you would just12034offer the reply in writing to the gentlewoman's question. We will12035reclaim the time. We just want to make sure we get through all of our12036questions here today.12037 We will now recognize the gentleman that we see in stereo, both in12038the portrait on the wall and here in the flesh, Mr. Lucas, from12039Oklahoma.12040 Mr. Lucas. That is a lovely face on the wall, isn't it, Mr.12041Chairman? Thank you.12042 [Laughter.]12043 Mr. Lucas. I want to start with my good friend, Mr. Behnam. Would12044the bill we are considering today appropriately account for the risk12045management strategies of digital assets covered by both the regulators,12046and along that line, how should we think about cross-margining for12047transactions under the CFTC and the SEC?12048 Mr. Behnam. Thanks, Congressman, and I did mention this in my12049written testimony as a benefit of cross-agency collaboration, where I12050think the initial reaction is always burdensome, duplicative regulation12051by multiple agencies is a challenge. I think it is important to be12052comprehensive, as I alluded earlier to Mr. Liccardo, and I think in12053balance we should lean towards comprehensive regulation to avoid those12054risks, which can cause unintended consequences.12055 That said, to your question, there are mechanisms within the two12056agencies, like portfolio margining, like other netting mechanisms, that12057would enable market participants to manage their balance sheets and12058their capital requirements if they have exposure to products that do12059have symmetries along risk lines.12060 Mr. Lucas. Continuing with you, Mr. Behnam, on a related topic that12061is near and dear to my heart, sitting on both the Financial Services12062and the Ag Committee, should we apply this same logic to the clearing12063of U.S. Treasuries and their derivatives? We have discussed this12064before, but it is worth repeating. How can we incentivize clearing and12065making it a more friendly, regulatory environment, particularly for12066clearing of our most critical asset class?12067 Mr. Behnam. Thanks, Congressman, and you and I have probably had12068this discussion in the past, and as the clearing mandate begins to roll12069out over the next 12 to 24 months, if not sooner, clearing is a healthy12070component of market infrastructure. We learned that after the financial12071crisis in 2008, and I think that is a reason the SEC made steps in the12072Biden Administration to mandate clearing. But we do have to incentivize12073it and make sure that folks want to be in that market. We have seen12074high periods of volatility in the Treasury market over the past few12075years because of COVID and some other sort of mini-flash crashes, and12076we want as many people in there as possible. Capital restraints are one12077of the biggest barriers to entry into the Treasury market, and I do12078think what you suggested, different mechanisms to allow netting across12079different products, whether it is cash in futures or otherwise, will12080create incentives, but also if well thought out, will also be protected12081by smart regulation and not create unintended consequences.12082 Mr. Lucas. Turning with my remaining time to Mr. Davis, in my view12083the draft we are considering today is a good start to creating a simple12084regulatory framework for digital asset markets. However, even the most12085simple framework must include clear revenues for market participants to12086get technical assistance and feedback. And that is why my bill, the12087Securing Innovation in Financial Regulation Act codifies LabCFTC and12088the SEC's FinHub. Both of these offices make the Commissions more12089accessible to market participants and foster fintech innovation.12090 Mr. Davis, can you speak to the benefits for market participants of12091having a responsive and accountable regulator?12092 Mr. Davis of Washington. Yes, greatly beneficial. LabCFTC is near12093and dear to my heart. When Chairman Giancarlo created LabCFTC he had it12094report to me as the general counsel, which was a great benefit to me12095and I think to the agency. It was eventually moved to report to the12096Chairman, and then Chairman Behnam made it the Office of Technology12097Innovation, I believe. So it has been a great progress across12098Administrations.12099 So I am a big advocate of having a portion of the agency being12100focused on innovation and focused on engaging with the public. During12101my tenure at the CFTC, LabCFTC met with hundreds of people who were12102interested in CFTC space. They were interested in fintech. They were12103interested in digital assets. And LabCFTC didn't give advice per se,12104but was able to give information, to give some ideas about where12105entrepreneurs and other interested parties could go to help navigate12106the regulatory structure that we have here.12107 And again, that internal entity was able to advise the agency about12108what it was seeing out in the market. It was really an attempt to help12109the agency have its finger on the pulse of what was going on with the12110public.12111 So I think that type of outreach, that type of activity is critical12112for any agency.12113 Mr. Lucas. Seems like my bill might be on the right track. With12114that, Mr. Chairman, I yield back.12115 Mr. Steil. The gentleman yields back. The gentleman from Alabama,12116Mr. Figures, is recognized for 5 minutes.12117 Mr. Figures. Thank you, Mr. Chair, and thank you to the witnesses12118for your time here today.12119 Look, I think it would be remiss not to, as we are seeking out12120answers and a pathway forward on further legitimizing this very12121innovative industry, I think it would be remiss not to mention the12122impact that the President's own action in this space is having on these12123efforts, when this would be something that we can come to agreement on.12124But when we see the decay, the erosion of ethical standards and norms12125of just acceptable conduct from government officials using their12126position for personal gain, that is dangerous. It is dangerous and it12127is not helpful to what we are seeking to do in this industry. I mean,12128can you imagine an environment where President Obama said, ``I am only12129meeting with people who buy my cryptocurrency''? Or President Biden.12130Can you imagine what the reaction would have been? It certainly12131wouldn't be silence. It certainly wouldn't be saying, ``Oh, that is12132okay.'' We cannot continue to go down this road, certainly not at a12133time where we are on the precipice of doing something that is much12134needed.12135 Mr. Tusar, I want to start with you. In the absence of an12136environment where we have had clear regulation, can you talk to me a12137little bit about the steps that Coinbase has taken? Because I can12138remember a world where Coinbase was at the frontier of essentially12139begging for regulation in this space, and you guys have gone above and12140beyond in terms of trying to enhance public confidence and trust and12141guard against scams and fraud. Can you talk a little bit about the12142efforts that Coinbase has engaged in over the past several years in12143this space?12144 Mr. Tusar. Thank you for the question, Congressman. Coinbase, as12145you say, has been leaning into trust and compliance from its outset and12146using that to differentiate ourselves in a space that sometimes has12147been challenged in that regard. And that has taken a few different12148forms.12149 Number one, as I mentioned today, we are a money services business12150under FinCEN. We apply the same KYC and AML standards that banks do12151today. We are registered in any place that we can. Today we operate a12152designated contract market with the CFTC. We are registered as a12153registered investment advisor with the SEC. So we have really leaned12154into, wherever possible, registering under the appropriate authorities.12155 And I think, most importantly, have been advocating, through policy12156efforts and others, for Federal-level regulation, precisely what this12157bill aims to accomplish. And I think we are quite excited about the12158potential for this bill to pass and move forward with Federal-level12159regulation.12160 Mr. Figures. Thank you. I look forward to continuing to work with12161you guys.12162 One of the benefits of cryptocurrency has often been financial12163freedom, access to financial resources, particularly for marginalized12164communities. It is something that we consistently hear about and12165consistently hope that we can further that goal.12166 Can you guys talk to me about how a more clearly define coordinated12167regulatory framework gets us closer to that end, and making sure that12168we are expanding access of financial resources and tools to communities12169that don't typically have them or communities that typically face12170significant barriers in accessing it, and making sure that this is not12171just an industry that benefits Wall Street but also hits the everyday12172person in terms of accessing its full potential.12173 And we can start, left to right.12174 Mr. Rathmell. Thank you, Congressman. It is a great question.12175Financial inclusion is absolutely part and parcel of the promise that12176the digital asset industry has promised to bring. It has already had12177great success on that front.12178 I think, most crucially, in looking at the draft legislation today,12179is ensuring that we bake in some of the core promises of digital assets12180as a technology. So disintermediation between consumers, kind of free12181and fair access to open-source software, transparency, auditability,12182accountability. That is really how we are going to realize the promise12183of financial inclusion that this technology can bring.12184 Mr. Figures. Mr. Miller?12185 Mr. Miller. Yes. The current gap in regulation and clarity has kept12186a lot of players out of the space, folks who do have existing12187relationships with members of the communities that you are talking12188about, where if they were able to leverage those relationships they12189would let those members of those communities and the underserved12190communities get access to these.12191 So I think by creating clear structure for them, by creating a12192clear set of rules, we are going to bring in a lot more players to the12193space, which obviously gives consumers a lot more choices to work with,12194as well.12195 Mr. Figures. Thank you. I yield back, Mr. Chair.12196 Mr. Steil. The gentleman yields back. The gentleman from Ohio, Mr.12197Davidson, is recognized.12198 Mr. Davidson. Thank you, Mr. Steil. Thank you, Chairmen. I thank12199our colleagues for sticking around and making the most of this12200gathering. It is a shame it is not a hearing, and I hope we don't lose12201the momentum that we need to finally get something done in this space.12202 I have been working since I got to Congress in 2016, to provide12203some form of legal clarity. We thought we had momentum in 2018 on the12204Token Taxonomy Act, to just define really one of the most fundamental12205questions, a bright-line test for what is and what is not a security.12206It is crazy that we don't yet have that. I mean, you think of a sport.12207Usually that is one of the first things that you do is you define,12208well, what counts as a score? You get it across the end line, you get12209it across the goal, through the net, who finishes the race first--and12210that is part of why people love it. You know for sure. Even with that12211there is debate every now and then. Some umpires miss balls and strikes12212from time to time. But we have added technology to make it so it is12213almost impossible, whereas a viewer, watching it on TV, you don't know12214whether it was a ball or a strike, and batters have homed in on that in12215baseball.12216 But a lot of this space is more like modern art or interpretive12217dance, where it is all in the eye of the beholder. You guys have all12218developed your own tests and been able to operate in the market, to12219some extent, in the context where you have dealt with this uncertainty,12220and frankly, at great risk to you and your investors.12221 So Mr. Tusar, as you have all kind of highlighted, getting this12222bright-line test is vital. Do you think all five of you, given the text12223that we currently have before us, would apply that test and get the12224same answer?12225 Mr. Tusar. That is an excellent question. Thank you, Congressman.12226The token taxonomy and classification in the bill is not really my area12227of expertise. My hope would certainly be yes, and my sense is this is a12228significant step forward from what existed before.12229 Mr. Davidson. Thank you. Mr. Davis, do you feel, having read the12230text, that everyone would get the same answer?12231 Mr. Davis of Washington. I think we would be close. I think we12232would be close.12233 Mr. Davidson. Hopefully, we want 5 and 0. I mean we certainly don't12234even really like the idea, with a sample size of only 5, that there12235would be a 20 percent risk of missing. So we would love to see it be 5-122360, and I hope we continue to refine it so we are positive everyone is12237going to look at the same thing and get the same answer.12238 So I think that is the kind of clarity the market needs. That is12239what is going to attract capital investment in this space. And I think12240a lot of people really just moved on and said, ``Yes, I'm not going to12241risk all my stack over this.'' And certainly when you look, Mr.12242Rathmell, Andreessen Horowitz has done that to some extent, and looked12243at other sectors, and made comments about it.12244 I think one of the other things that has held a lot of interest is12245self-custody. I mean, if you really just change who the account-based12246relationships are, you really haven't radically changed the market. The12247tech is kind of interesting. But the space isn't even really12248interesting without self-custody. And I think about self-custody in12249relation to the Second Amendment. I mean, the Second Amendment widely12250known, whether people like it or hate it, it says the right to keep and12251bear arms shall not be infringed. But think if it said the right to12252keep and bear arms shall not be prohibited. Think of all the layers12253that could be put onto that.12254 So when we think about the text here today, before us, it says,12255``The head of a Federal agency may not prohibit,'' whereas my Keep Your12256Coins Act, that I have introduced, says, ``The head of a Federal agency12257may not prohibit, restrict, or otherwise impair.'' It doesn't say12258``infringe,'' but it is essentially ``impair.'' You can't limit it. So12259one word, ``prohibit'' versus ``impair,'' you think about the12260difference there.12261 Mr. Miller, could you highlight what is at risk with the inclusion12262or exclusion of one word?12263 Mr. Miller. Absolutely, and it is not just the Second Amendment. It12264is the First Amendment. It is the Fourth Amendment. ``Prohibit'' is a12265much less protective term than ``impair,'' ``infringe,'' ``abridge,''12266any of those.12267 And I think the entire point of what we are talking about with this12268industry is decentralization, and without the ability for people to run12269their own software, to self-possess their own assets, in their own12270wallets, on their computers, we lose a lot of that decentralization. As12271you said, you are just moving to a different centralized authority.12272 And so to me, yes, it is absolutely critically important that we12273preserve the right and access to self-custody, and the protections for12274developers who build those self-custodial laws. If you are not actually12275holding on and possessing the private keys for someone, then no, you12276aren't controlling that.12277 Mr. Davidson. Right, and you shouldn't be regulated as a custodian.12278So those are important distinctions. I wish I had about a half hour of12279your time, personally, but thank you for what you do, and may God bless12280you all with great success, and I yield back.12281 Mr. Steil. The gentleman yields back. We will go from the state of12282Ohio to the state of Indiana. Mr. Messmer is recognized for 5 minutes.12283 Mr. Messmer. Thank you, Chairman. The digital asset ecosystem in12284America is operating under a reign of terror, as I think each one of12285your testimonies have pointed out. It is ironic because the heavy blank12286of regulations, litigation that are meant to protect consumers is12287suffocating the very innovation that can improve safety.12288 Mr. Tusar, can we agree that the enforcement-first approach to12289regulating digital assets has, on aggregate, been harmful to the12290digital asset industry in America?12291 Mr. Tusar. Thank you for the question, Congressman. A hundred12292percent yes, and it has also harmed competitiveness of America on the12293global stage.12294 Mr. Messmer. Okay. Thank you. And Mr. Tusar, also, you drew the12295conclusion that industry is incentivized to set up shop outside the12296American borders due to the current disjointed regulatory framework.12297What safety risks does this present for American consumers?12298 Mr. Tusar. Thank you for the question, Congressman. In the end,12299consumers want and should be afforded the same protections as they get12300today when they hold futures or equities or these sorts of things, and12301bringing it to a Federal-level regime would afford those protections,12302where today those don't exist. And it is critically important.12303 Mr. Messmer. Thank you, and I agree. Americans are always safer12304when regulations are built in D.C., not in the EU or Singapore or12305anywhere else.12306 As a principles-based regulator, the CFTC offers flexibility and12307outcome-driven compliance. The SEC, on the other hand, is a rules-based12308agency emphasizing prescriptive compliance frameworks. This contributes12309to the regulatory tension in emerging markets like digital assets,12310where we are still fighting to figure out what is the best regulatory12311approach. Clear guidelines are, without a doubt, necessary, but we have12312to thread the needle. They can't be so prescriptive that they become12313obsolete as technology evolves.12314 Mr. Davis and Mr. Rathmell, I know it has been asked, but it is12315important enough to ask again. In your view, is either the SEC or CFTC12316approach a better fit for regulating digital assets?12317 Mr. Davis of Washington. As I noted in my comments, I think for the12318secondary market transactions and for a lot of the commodity market12319activity that is happening right now, the CFTC is the natural12320regulator. They already have a lot of experience in the area, and core12321principles is very consistent with the growth of the digital asset12322market. I do agree that there are some circumstances initially in the12323development of certain coins that you may want to do a capital-raising12324activity. That type of activity is more within the purview of the SEC.12325 Mr. Messmer. Thank you. Are there specific needs for prescriptive12326rules, and if so, how can Congress best future-proof those?12327 Mr. Davis of Washington. Yes, I mean, I think Chairman Behnam12328talked a little bit about this with like anti-money laundering, for12329example. AML/KYC is an important aspect of any regulatory ecosystem, so12330that might be an area where you might want to give a little bit more12331specifics about how to proceed.12332 But I think a number of things, like reporting and cybersecurity12333and operational resilience are the types of things where we need to12334have a productive discussion with the industry about what the12335technology is and what the technology can do. And only through that12336mutually beneficial relationship can both the regulator of the industry12337determine the best courses to meet the goals that a core principle12338regime has.12339 So I would err on the side of flexibility at the beginning, and12340then the regulators have the opportunity, under core principles, to12341make more prescriptive rules, if circumstances require.12342 Mr. Messmer. As needed. Thank you. Mr. Tusar, Mr. Davis, earlier12343Chairman Johnson got each of you on record as saying the lack of a12344regulatory framework is a threat to consumers. Can you give specific12345examples of a risk consumers will face if the flaws in the current12346regulatory structure aren't resolved?12347 Mr. Tusar. Thank you for the question, Congressman. I think we have12348referenced consumer asset protection, for example, the sorts of regimes12349both on the CFTC and the SEC side, that clearly delineate the assets12350that belong to the customer and the assets that belong to the entity,12351in the event of insolvency or bankruptcy. Those kinds of protections12352are critically important to engendering the trust that we have talked12353about quite a bit in this hearing, and ultimately to protecting12354consumers in the face of issues. And that is critically important.12355 Mr. Messmer. Thank you. Mr. Davis, anything to add?12356 Mr. Davis of Washington. I don't have much to add. It is a part of12357both the SEC and the CFTC regimes for vibrant customer protections.12358They take slightly different forms, depending on the nature of the12359market. But, for example, giving the CFTC authority over the spot12360market will extend those customer protections to customers who want to12361buy Bitcoin and Ether and those other digital assets.12362 Mr. Messmer. Thank you. I yield back my time.12363 Mr. Steil. The gentleman yields back. The gentleman from Florida,12364Mr. Haridopolos, is recognized.12365 Mr. Haridopolos. Thank you, Mr. Chairman. I appreciate everyone12366coming in today and once again highlighting the fact that we lost 412367years of reality, and the capital markets have gone elsewhere because12368of this uncertainty. And it is frustrating as we go through meeting12369after meeting, hearing the horror stories of the last 4 years, where so12370many folks want to do business here in the United States and basically12371are turned away or led the wrong way by the previous Administration.12372And I very much love the fact that the Ag Committee and, of course, our12373Financial Services Committee is working in tandem here to get this12374done, in the place of playing some politics, which always happens in12375this building too often.12376 That said, it would help me if we could just kind of go down the12377list, and I apologize, I have been kind of in and out of meetings12378today. Could you walk me through, maybe in just a brief way, starting12379with you, James, when you were negotiating or talking with the SEC12380prior, trying to figure out this regulation, walk me through how much12381time you spent with each of the folks at the SEC and what they are12382telling you along the way, and then what the end result was. So if we12383can just kind of walk down that, that would be great.12384 Mr. Rathmell. Yes, so the history of the industry's engagement with12385the SEC is how many years, the better part of a decade. And so I think12386it has changed and evolved over time, under various Administrations. I12387can say that the challenge that we have consistently run into is12388recognizing the need that the existing rules are not a perfect fit for12389the industry and for the flourishing of this industry in the United12390States, and inaction, unfortunately, meeting over meeting, consistent12391inaction to actually move the ball forward.12392 Mr. Haridopolos. Mr. Miller?12393 Mr. Miller. I think one of the big challenges is the SEC is built12394to deal with much larger, more established companies than the startups12395who are working here. So as an example, when you are a company of our12396size, you don't talk to the SEC. Your expensive lawyers talk to the12397SEC, right. They don't answer questions, really. They ask you12398questions. You have to try and interpret them. So it just means that12399every interaction you have, and there are, obviously, some very good12400people at the SEC, who try and work with folks. But it just means that12401everything is weeks and weeks of turn, tens of thousands of dollars for12402a single question when it comes up, if not more, and it comes back to12403why we are asking for purpose-fit, clear regulation, instructions for12404these folks. They have made attempts such as with FinHub to do this.12405But the more we can move to that, so that the cost of engaging in this12406kind of process approaches that of a Reg D exemption, where you are12407spending $100,000 to do a deal instead of what we experience with a Reg12408A, where you are spending millions to do a deal, like that is what it12409is going to take to bring back the certainty and predictability that12410entrepreneurs need to start their companies here.12411 Mr. Haridopolos. Thank you.12412 Mr. Davis of Washington. Most of my interactions with the SEC over12413the past 4 years have been on the enforcement side in defending crypto12414companies who either approached the SEC about trying to figure out12415something or were met with a subpoena by the SEC. My clients have been12416spending a lot of money on their litigation costs as opposed to kind of12417developing regulatory solutions to the types of puzzles that we have in12418this space.12419 Mr. Haridopolos. Thank you. Mr. Tusar?12420 Mr. Tusar. Thank you for the question. Our experience has been one12421of attempting to come in and register, really only to find that there12422was not a path, and that was years of attempting to find such a path12423and then pursuing the litigation that we had. I will say that that has12424changed quite a bit now, and there is more engagement, which we are12425very grateful for. And I think that engagement from the agency, as we12426have also seen from the CFTC for quite some time, is critical to12427finding the right rules of the road and providing the clarity that is12428needed.12429 Mr. Haridopolos. Thank you.12430 Mr. Behnam. Not sure I am fit to answer this question perfectly,12431but I will say, Congressman, in response, this is a growing industry12432and there are a lot of novel legal questions and policy questions and12433risk questions. So as much as the past may have not been ideal, I think12434it is encouraging the direction of travel for the committees and12435Congress, and I think providing this clarity is obviously critical for12436folks sitting at this table. But as I have said many times, my focus is12437always customer protections and market resilience, and I think that12438should be the priority of the Committee, as well.12439 Mr. Haridopolos. I appreciate it. And one last thing, Mr. Chairman.12440We had a wonderful meeting last week with the CFTC and the SEC, and12441some Members of the Financial Services Committee have expressed12442concerns that only the SEC can handle this new issue. I happen to think12443that the CFTC has the capability, given the work that they have done,12444of course, in the commodities and handling billions of dollars.12445 Are there any reservations any one of you five have about the12446capabilities at the CFTC to handle this type of issue.12447 Mr. Davis of Washington. None.12448 Mr. Miller. No.12449 Mr. Tusar. No.12450 Mr. Behnam. Congressman, I am going to add a little bit. I know we12451are out of time, but this is an important point, and I did submit it in12452my written testimony so I would encourage you, if you have time, to12453read it. It is more than just a question about resources and size.12454 Mr. Haridopolos. I agree.12455 Mr. Behnam. I talked about this in terms of when there is a12456Congressional mandate, appropriators appropriate money that is12457commensurate with the mandate. So if Congress does pass a law and the12458President signs it, the expectation should be that there will be12459additional funds.12460 Mr. Steil. The gentleman's time has expired. You can offer more in12461written testimony.12462 Mr. Haridopolos. Thank you. I appreciate the indulgence.12463 Mr. Steil. The gentleman yields back. The gentleman from Iowa, Mr.12464Nunn, is recognized.12465 Mr. Nunn. Well, thank you, Mr. Chair, and I want to say thank you12466to the bipartisan nature of this conversation. This is bigger than any12467one party. This is going to be the future of where our nation is going12468forward together. So thank you for leading the charge and making sure12469that these conversations happen.12470 One of the biggest challenges in the digital asset space, as we all12471know, is the overlapping claims of authority between both the12472Securities and Exchange Commission and CFTC. Being a guy from Iowa, we12473know CFTC very well. As a Member of both the Financial Services and the12474Ag Committee, I think that we saw conflicts occur firsthand when the12475SEC, under its previous leadership, attempted to take control of nearly12476all digital assets and effectively sideline the CFTC. That is now how12477this is designed, and it should not be how it is going forward.12478 So I would like to consider an analogy. My kids got a chocolate12479coin for Easter, and in this, on its own function, it can also be like12480a commodity with a wrapper around it. Similar to corn or soybean on how12481it happens, it can then be traded, when it has this wrapper around it,12482like a security.12483 When first offered through an ICO, a funding mechanism as it is, it12484is wrapped in a structure that resembles a security offering. The12485underlying Ether, in this case, was still chocolate, but because of the12486wrapper, Ether was part of the securities transaction at the time, in12487this case the gold foil.12488 This wrapper now has come off for Ether, and it is traded and12489functions like a commodity. And I would like to offer this discussion,12490Mr. Chair, that blockchain projects need the option to raise capital12491and grow, but the current landscape is still too complex, and prior12492Administrations actually only added to the confusion, making the12493ability for this gold coin never to have come into existence if it had12494been left.12495 Look, Mr. Tusar, you have been the Vice President, you are12496currently the Vice President of Coinbase. What are some of the key12497characteristics that distinguish the digital asset functioning as a12498commodity versus one that would function as a security?12499 Mr. Tusar. Thank you for the question, Congressman. I will say that12500not being a lawyer and not really going deep on sort of the exact12501interpretation of Howey, it is not my area of expertise, but my hope is12502that this bill makes clear the distinction between those so that we can12503choose the appropriate regime and regulatory authority to apply.12504 Mr. Nunn. And would you agree that legislation would help with12505that, coming out of this Committee?12506 Mr. Tusar. Yes, Congressman.12507 Mr. Nunn. Absolutely. Chairman Behnam, we have had conversations12508before. I appreciate your service again on both sides of the aisle12509here. But your leadership at CFTC really helped establish this in a12510lasting opportunity for us. Last Congress, we publicly discussed how12511Ether was either a commodity or wasn't. Do you still believe CFTC is12512the right regulator to take Ether, after it is wrapped, back in the12513community space?12514 Mr. Behnam. Congressman, thanks for the question, and the short12515answer to that question is yes. We had discussions about some of the12516components of Howey and the decentralized nature of Ether and other12517tokens, and ultimately that is where the line needs to be drawn. It is12518not a perfect analysis, certainly with a 100 year old test, but I do12519think, as I said in my written testimony, it is a pretty durable12520precedent that we should base the analysis on, and I do think the draft12521bill does that, as well.12522 Mr. Nunn. I would agree with you. Mr. Rathmell, you have identified12523here that the lack of clear Federal framework has driven developers to12524avoid launching new tokens out of fear that they will be retroactively12525labeled securities by the SEC. Are you seeing any change now that the12526Trump Administration has prioritized digital asset legislation?12527 Mr. Rathmell. Thank you, Congressman. We have seen a change in the12528general attitude in the market. I think there is a lot of hope. There12529is a lot of enthusiasm that there is going to be market structure12530legislation, but the rules have yet to be written. And so we really do12531need to pass legislation to provide that crystal-clear clarity for12532founders to have the certainty they need to pursue token projects and12533decentralization.12534 Mr. Nunn. And then, Mr. Tusar, I would like to go back here. When12535you are providing the CFTC with spot market authority, would that give12536your clients greater confidence to support U.S. capital formation,12537having it come back here to the U.S.12538 Mr. Tusar. Thank you for the question, Congressman. It absolutely12539would. I think that is exactly the sort of clarity, clear rules of the12540road that people would feel more comfortable and not at risk for being12541able to develop their projects, and we think it is critical for U.S.12542competitiveness, going forward.12543 Mr. Nunn. So, Mr. Chair, what I am hearing, and I think this has12544happened across the board, we believe that we have the opportunity now12545to bring digital assets back into the United States. We have the12546opportunity to create legislation that forms clear regulation. We have12547an opportunity to take a digital asset, in this case chocolate, wrap it12548in a way that the SEC has a partnership so they can go [unclear], and12549then still take it back to the CFTC so it can be traded in an effective12550way. And I will just say, Mr. Chairman, it is a pretty sweet deal, if12551you don't mind me saying so.12552 I really appreciate the Committee coming forward on this. Thank12553you.12554 Mr. Steil. The gentleman from Iowa will present the candy to the12555chair for further review, to be held on the record.12556 The gentleman from Montana, Mr. Downing, is recognized.12557 Mr. Downing. Thank you, Mr. Chair, and I will share in that12558chocolate, as well.12559 Thank you, Mr. Chair, for holding this, and thank you to the12560witnesses for being part of this incredibly important roundtable. I12561really appreciate your time here.12562 I also sit on the Capital Markets Subcommittee, and we spend a lot12563of time talking about how to raise capital, how businesses can go12564public, a lot of that sort of stuff. And unfortunately, the Gensler SEC12565made it really difficult for innovators and entrepreneurs to raise12566capital, especially in the digital asset space.12567 And Mr. Miller, from my home state of Montana, thank you for being12568here. I know you talked about it a little bit before, but I am just12569curious, if you were to do it again would you do another Reg A offering12570in this environment, and why or why not?12571 Mr. Miller. Thank you for the question, and we would not opt to do12572that. So as I mentioned during my opening statement, we ended up likely12573spending more on all of our compliance with the Reg A, the filing, the12574ultimate investigation by the SEC, than we actually raised from it. So12575there is really no way to do it, and this is what does have me hopeful12576about what we are seeing in the bill that came out, is that is exactly12577what we tried to do. Let's do an offering and then decentralize the12578network, and it becomes a commodity. And it is when we tried to take12579that step, because there was no framework, because there was no basis12580in the law for it, we were just left to the whim of the interpretation12581of the SEC, who is responsible, as let's launch an enforcement12582investigation and cost you another $3 million.12583 Mr. Downing. Do you think it would be helpful if Congress created a12584specific digital asset exemption?12585 Mr. Miller. I think there is no other option than for Congress to12586create a specific digital asset exemption.12587 Mr. Downing. Thank you. I am going to go to Mr. Rathmell. The12588previous Administration sought to treat every digital asset, regardless12589of its purpose, as a security, and actually, as a former regulator, it12590made it difficult for me as a regulator. Somebody was mentioning the12591Howey Test earlier, and just understanding that, and the ambiguities of12592actually running a business and not knowing where that bar was I think12593is incredibly disadvantageous for digital assets in this space.12594 And I was hoping you could explain to me why it is a bad idea to12595treat every digital asset the same.12596 Mr. Rathmell. Thank you for the question, Congressman. A digital12597asset is ultimately a computing primitive, so much like the chocolate12598coin example, the wrapper can contain many different assets. It is12599multimodal. It can evolve over time, has many different attributes. And12600therefore, having a uniform application is (a) undermining the promise12601of the asset class, and (b) making it absolutely impossible to comply12602with the law.12603 Mr. Downing. So would that promote or hinder U.S. innovation?12604 Mr. Rathmell. Having regulatory clarity would promote U.S.12605innovation, absolutely.12606 Mr. Downing. Thank you. Mr. Tusar, many digital asset skeptics have12607expressed concerns that consumers and investors are at a heightened12608risk of being scammed or losing money in the crypto industry. At the12609same time, many crypto companies have stayed away from doing business12610in the United States due to opaque regulations.12611 So would consumers be better protected if more digital asset12612companies were encouraged to do business, with some commonsense12613consumer protections, in the United States?12614 Mr. Tusar. Thank you for the question, Congressman. There is no12615question that it would be the case that there would be more confidence12616and more consumer protections if something like the bill under12617discussion here were passed and we had clear rules of the road for12618Federal-level regulations, and importantly, for Federal-level12619regulations here.12620 Mr. Downing. I think it is important that we get this right, that12621we are innovating in the United States of America, that we make it12622clear where the bar is set when digital assets are coming, and make it12623clear how it is being treated in a regulatory framework. So I really12624appreciate you all sharing your perspectives with this, and I will say12625roundtable--I am not sure what to call it at this point. I appreciate12626it. I think this is an exciting time in the United States of America to12627create some clarity so that we can innovate and make sure that people12628understand what the rules of the road are so that we continue to grow,12629obviously, this incredible opportunity for us.12630 So on that I yield my time. Thank you, Mr. Chairman.12631 Mr. Steil. The gentleman yields back. The gentleman from Illinois,12632Mr. Foster, is now recognized.12633 Mr. Foster. Thank you, Mr. Chair, and to our witnesses, and my12634apologies. I had to calm a set of scientists who are pretty much12635panicked at what is happening in our scientific enterprise in this12636country these days.12637 When I have described to my staff the 212 page bill under12638discussion, it strikes as more or less 212 pages of regulatory12639arbitrage, that when I talk to foreigners, foreign financial people,12640about the United States, they think it is, frankly, insane that we have12641two regulators, CFTC and SEC, that often end up regulating12642indistinguishable products, or almost indistinguishable products, with12643endless time wasted in courts trying to split hairs on this.12644 This does not happen in countries that have a unified market12645regulator. And when I first came to Congress, gee, 17 years ago, I read12646this big blueprint for financial modernization by, I think it was Hank12647Paulson and friends back then, and high on that list were references12648going back to the past of the need to merge the regulation of the two12649operations.12650 And it strikes me that crypto may be an opportunity to begin that,12651that even if you believe that the path towards formally merging the12652regulators may take decades to complete, that there may be an12653opportunity to make a unitary crypto regulator, that is a joint project12654of both, joint project of these committees, and that would actually12655allow a single point of contact for crypto startups, which is one of12656the things they complain to me all the time, and I am sure they12657complain to everyone else.12658 So I was wondering, I am sure you have all heard of proposals of12659various kinds to do this, and if you could just sort of go down the12660line and describe what are the aspects of that that you think might be12661feasible, might be attractive, and any advice you would have to Members12662of Congress that might be interested in finally listening to the advice12663we have gotten from everybody for the last 30 years and starting down12664this road.12665 So if we just start on the left and march down.12666 Mr. Rathmell. No, thank you Congressman. It is a very thoughtful12667question. You are absolutely right. There is incredible fragmentation12668both at the Federal and state level in terms of our market regulation.12669I can't speak to the particular opportunity over the coming decades to12670merge the SEC and CFTC, or other Federal market regulators, but what I12671can say is that digital assets are, in many ways, kind of a forcing12672function to unify regulation in that our belief at Haun Ventures is12673that digital assets and blockchain technology will be the underpinning12674of the future capital markets, global financial system, and the12675[unclear] internet.12676 And so there is very much a unique opportunity here to, through the12677unifying nature of this technology, bring some unifying principles to12678the market.12679 Mr. Foster. But principles, not an organization. That doesn't give12680you a single point of contact. Mr. Miller?12681 Mr. Miller. Yes. I think the clarity and simplicity is the biggest12682thing I would ask for there. I think there are other folks here who are12683much more experienced on the internal workings of agencies and how to12684maybe best set it up. But I think as long as whoever is designated as12685regulator has the expertise to understand the crypto market and what12686they are dealing with and looking at, and I think understands the12687importance of, again, we are not talking about these large public12688companies with $1 billion a year in revenue who can afford $10 million12689a year in compliance cost. We are talking about people who maybe raised12690a couple million dollars, or even bootstrapping it, and where the12691compliance costs and the engagement needs to be in the five, maybe six12692figure range. As long as whatever set-up we come up hits that, I think12693that is the most important thing.12694 Mr. Foster. Mr. Davis?12695 Mr. Davis of Washington. It is very tricky because both the SEC and12696the CFTC have different regulatory philosophies, different mandates,12697different organizations, and different areas of focus. So I know this12698idea, it seems to recycle all the time, and it is worth discussing. But12699as someone who has been in the middle of the CFTC and has worked with12700the SEC on a number of issues, it is very difficult for me to see12701practically how the mergers of those two agencies would be accomplished12702without a lot of unintended consequences.12703 Mr. Tusar. Congressman, I am not sure that I have a lot to say on12704the benefits of merging the two, but I would reflect back on my remark12705at the very opening in my statement, which is this bill is a once-in-a-12706generation opportunity to think from first principles about all of our12707market structures, be they on the CFTC side or the SEC side. Digital12708assets today, in the way that they settle, for example, and the real-12709time nature of their settlement, means that we don't have credit risks12710and other things building up in our system in a way that our current12711market structure, on both the equities and the futures side, are12712intended to deal with. And I think that is a once-in-a-great-while12713opportunity to think, from first principles, about how we create12714consumer protection, fair and orderly markets, and all these things,12715taking advantage of some of the real efficiencies of the digital asset12716space.12717 Mr. Behnam. Congressman, I think it is easy to make a comparison12718across borders about why we are unique relative to other jurisdictions,12719having two market regulators. Some even have a single central bank and12720market regulator. But the missing factor or assumption there is that12721there is a distinct, comparable size in markets, and that is what truly12722sets America apart and why two market regulators are critical.12723 Adding to what Mr. Davis said, if you look at the size of the12724securities market alone and the derivatives market alone, they are, by12725multiple factors, greater than any other jurisdiction in the world. So12726merging the agencies or any suggestion otherwise, which wouldn't12727surprise me for a registrant to suggest that, and I believe pretty12728strongly given my former role, would be a disservice to the American12729public and American investors.12730 Mr. Foster. Okay. So it will just persist for another 30, 50 years12731until we have another really big crisis that we can't let go to waste.12732During Dodd-Frank we got rid of one banking regulator, and that was12733sort of the limit of what we had political muscle to do.12734 Okay, well, anyway, thank you for this.12735 Mr. Steil. Thank you very much, Mr. Foster. The gentleman from12736Ohio, Mr. Taylor, is recognized for 5 minutes.12737 Mr. Taylor. Thank you, Chairman Steil and Chairman Johnson for12738holding this hearing today, and thank you to all the witnesses for your12739time and insight and sacrifices to be here.12740 I must say, I am struck by what happened here today. Our Democratic12741colleagues have made serious allegations about the President's misuse12742of cryptocurrency, and their solution seems to be sabotaging a hearing12743dedicated to establishing a framework to prevent abuses in12744cryptocurrency. If they believe President Trump is wrongly benefitting12745through malfeasance, surely it would be their duty to do all they can12746to advance a regulatory framework so that it doesn't happen again.12747Apparently it is not that urgent.12748 I have lived in rural southern Ohio my entire life. When I decided12749to run for office I did so primarily because I wanted to help enact12750policies that would spur economic growth across the country, and12751particularly in the communities I represent. As a small business owner,12752I ran into several regulatory and bureaucratic hurdles that impeded12753growth due to, in my opinion, overregulation.12754 Mr. Miller, in your testimony you mentioned how, in Hiro's case,12755efforts to comply with unclear digital asset regulations ended up being12756extremely time-consuming and costly. Can you tell us where your12757resources and time might have been directed had those hurdles not been12758in the way?12759 Mr. Miller. Thank you for the question, Congressman. Fundamentally,12760we are a developer tools company, right. We build the infrastructure12761and the tooling that builders need in order to go build this next12762generation of technology and applications. So every dollar of ours,12763every hour of ours that got spent on sitting in rooms with lawyers and12764trying to guess at what the law might be or what it might become one12765day was just one more minute we couldn't spend trying to enable folks12766to build.12767 Mr. Taylor. Mr. Rathmell, the United States has long been a pioneer12768in innovation and entrepreneurship. In order to continue to be a leader12769in this place we need to create an environment that is both an12770attractive place for startups and one that encourages our best and12771brightest to take risks. Without a clear framework it sounds like the12772U.S. is in danger of falling behind the rest of the world.12773 Can you speak more about how you think entrepreneurs and innovators12774will respond if the United States continues without a regulatory12775framework?12776 Mr. Rathmell. Thank you, Congressman. It is a great question. My12777primarily concern would be that we have already seen a flight from the12778United States as the premier market and innovation, and that without12779correcting course that we would see further flight.12780 Mr. Taylor. Could you tell me a little bit about what other12781countries have done with their regulatory framework that encourages12782innovation in the digital asset industries?12783 Mr. Rathmell. We have seen, in the EU, and we have seen in the12784U.K., and we have seen in other jurisdictions that they moved quickly12785with a unifying framework that is workable, that works for token12786launches, addresses consumer protection, addresses market integrity.12787And it is the inaction in the United States that has caused so much12788trouble.12789 Mr. Taylor. Thank you. Any framework that we put into place for12790digital assets will likely require the cooperation of the SEC and the12791CFTC, as we discussed a few moments ago. Mr. Davis, what are some12792examples where the SEC and CFTC have had to work together, and what12793lessons can we learn from those experiences to apply to market12794structure legislation in the digital asset space?12795 Mr. Davis of Washington. An excellent example is security futures.12796That was a new product that came online a couple of decades ago. And it12797wasn't clear from statutory text on which side the line was. In that12798circumstance, the then two Chairmen of the respective agencies got12799together and hammered out a mostly quantitative process for determining12800when a future was just a future and subject to CFTC jurisdiction, and12801when something should be considered a security future and subject to12802both agencies' jurisdiction.12803 That was the Shad-Johnson Accord. That was presented to Congress,12804and Congress implemented that. I think that is a great example of12805success of the agencies working together to come up with--and there are12806still debates about some aspects of that test. But a lot of that test,12807it is very clear one way or the other whether you are meeting one of12808the standards or not. So the agencies have certainly shown that.12809 I think you have also seen that early on after Dodd-Frank. Both12810agencies had to a lot of joint rulemakings, in a very short period of12811time. I was not there at the agency at the time. I am told it was an12812incredibly busy period, and there was a lot of work with the SEC.12813 So the agencies have definitely demonstrated the ability to work12814collaboratively together. It helps when you get good marching orders12815from Congress.12816 Mr. Taylor. Thank you, and thank you to all of you. Chairman, I12817yield back.12818 Mr. Steil. The gentleman yields back. The gentleman from South12819Carolina, Mr. Timmons, is recognized for 5 minutes.12820 Mr. Timmons. Thank you, Mr. Chairman, and I want to thank all of12821you for being here today. It is unfortunate that our colleagues across12822the aisle have not made full use of this time. I am glad that we have12823not wasted your time and that we have been productive with this, not12824hearing, roundtable today.12825 It is really important because your insights are essential as we12826work to pass a comprehensive market structure bill for the digital12827asset sector. Today I want to highlight the transformative potential of12828blockchain technology in not only reshaping our financial systems but12829in redefining how we interact with government itself. For that12830innovation to take root and thrive here in the United States, we need12831clear, effective legislation that end to the regulatory uncertainty12832developers face today. For too long, digital asset innovators have12833taken their business abroad, to places like Hong Kong and the EU. They12834have clearly defined rules, and other jurisdictions with more favorable12835regulatory environments, such as the Caribbean or the Middle East.12836 But now, for the first time, the industry has a champion [audio12837distortion] and a Congress ready to act. And we have a real opportunity12838for a framework that supports innovation while providing the clarity12839and oversight needed to protect consumers and ensure market integrity.12840This is not a partisan issue. Republicans and Democrats have been12841working on this for years, and we are ready to get the job done.12842 I would like to start with you, Mr. Rathmell. In your testimony you12843stated that clarity isn't about giving digital assets special treatment12844but rather about establishing a consistent set of rules so that you12845build confidence here in the United States. I completely agree. When it12846comes to pioneers in this space, in your view how does not having a12847clear legal framework hold back their inability to innovate,12848particularly in reference to the tokenization space?12849 Mr. Rathmell. Thank you, Congressman. It is a great question. The12850primary way in which it hinders American innovation is that it is a12851misallocation of time and resources. We have seed-stage founders--I12852have also represented many seed-stage start-ups outside of the crypto12853industry, and those founders are not spending their days and nights12854worried about enforcement actions, concerned about the regulatory12855framework, and on the phone hours and hours and hours with very12856expensive lawyers, try to read the legal tea leaves. And so that12857misallocation of time, away from building products that consumers and12858enterprises are using, away from thinking about how they can be12859innovating and bringing value to the American market, it is waste.12860 Mr. Timmons. So I have a question specifically with regard to12861[audio distortion] market structure there is a bipartisan bill that has12862been filed regarding NFTs. I view those three as all important.12863Obviously, they are not going to go together. But this proposed12864legislation has studied grantees. Do you think that the [audio12865distortion] proposed bill, by a year plus, would that be--how would12866that impact the overall development of this ecosystem?12867 Mr. Rathmell. Well, certainly digital assets can take many forms12868and functions, as we have talked about at length today. I think one of12869the greatest challenges in moving these pieces of legislation together12870is going to be ensuring that all of those different use cases are12871covered under reasonable framework that is applicable to the use case12872of that digital asset.12873 Mr. Timmons. Thank you. [Audio distortion] process of passing laws12874and regulations to govern digital asset markets. One consistent theme12875across many of these efforts is how they treat decentralized finance,12876or DeFi. For example, in the EU, U.K., and Hong Kong, they have all12877[audio distortion]. Mr. Rathmell, in your view, why do these12878jurisdictions take that approach, and do you think Congress should12879consider doing the same?12880 Mr. Rathmell. Yes, and thank you, Congressman. The DeFi space is a12881particularly interesting and complex corner of our industry. An12882interesting element of DeFi is that it is really a realization of kind12883of one of the core promises of crypto, which is that it is12884fundamentally a disintermediated technology. And the existing kind of12885global market regulations really do focus on, generally do focus on12886intermediaries as a core regulatory hook. And so addressing DeFi on its12887own grounds and making sure that it has the space to flourish and12888actually generate the incredible value that it can for consumers and12889the public and enterprises is very important.12890 Mr. Timmons. Thank you, Mr. Chairman. I yield back.12891 Mr. Steil. Microphone issues here. The gentleman yields back. Would12892Mr. Stutzman like to be recognized, or would Mr. Moore like to be12893recognized? Mr. Stutzman is recognized.12894 Mr. Stutzman. Thank you, Mr. Chairman, and thank you to each of the12895witnesses here today for your expertise and sharing with us your12896perspective and testimony. As was mentioned, this is obviously, I think12897one of the issues that could be bipartisan, and if there is anything12898that is new to Congress, this is one of those issues that is kind of12899new to all of us, and we are trying to understand and wrap our heads12900around the direction of a very exciting technology, and very innovative12901and important not only to the United States but to the world. And this12902is an amazing piece of technology that could be an economic development12903tool to emerging countries and others around the world that are truly12904trying to find stability and currency issues, and also with, of course,12905the governance in other parts of the world that are just, frankly,12906criminal, that this could really be a helpful tool. So I appreciate12907your expertise and what you are discussing today.12908 Mr. Tusar, I would like to talk with you just a little bit. In your12909testimony, it is time to update the system, you mentioned in your12910testimony that the legislation would be built on a foundation12911established by FIT21, and then you said, ``this effort should clarify12912asset classifications defining which digital assets are securities and12913which are commodities, and empowering the CFTC. We talked about this a12914little bit the other day in another meeting, but these are really, I12915mean, it can be both, right? It depends on how you want to use the12916tool.12917 What are some of your thoughts further on how do we clarify? And so12918you mentioned addressing emerging challenges. What other challenges12919would you suggest, or have you dealt with? Because I know security for12920Coinbase and any other company is highly important and it also gives12921confidence to the users.12922 Mr. Tusar. Thank you for the question, Congressman. Yes, security12923for digital assets is probably the single most important thing we do12924for consumers and it gives people confidence in Coinbase. I think that12925some of the other issues, I think the number one most important thing12926to come out of this bill is classifications. We are excited for some of12927that to provide the necessary clarity going forward.12928 Mr. Stutzman. Thank you. I guess I am having some mic issues here.12929I want to jump back to Mr. Miller. Capital raising is a critical12930component of both the traditional security markets and the digital12931asset ecosystem. In the traditional security markets, investors provide12932capital in exchange for legal claims and ownership repayment or income12933streams.12934 In the digital asset ecosystem, do investors receive the same12935rights from their participation in a capital raise, and are the12936proceeds of the raise used in the same manner as the proceeds from12937traditional securities offerings?12938 Mr. Miller. So in short, no. They look definitely very different.12939In the traditional capital raise, you have very established structures12940around equity, whether the rights of shareholders are governed by the12941corporate laws of whatever state you were formed in.12942 The digital asset world and blockchain, it looks very different for12943these folks. It can also vary by exactly [audio distortion] simply that12944there can be more direct engagement through government mechanisms that12945are built into blockchain. The tokens that you are holding almost12946always are going to have a facility and a purpose to it, what is being12947used to pay for and create the transactions on the network. And most12948importantly, it is the incentive mechanism for a network. You cannot12949have a decentralized interaction with all these different parties12950without some sort of incentive mechanism, the same way that we have12951dollars in much of the economy.12952 So it is simply very different and it comes back to why we are12953coming here today and asking, and saying yes, a purpose-fit structure,12954legislation, that creates a category that would be necessary for us to12955really have [audio distortion] that people need.12956 Mr. Stutzman. So comparing your more traditional pitch deck and12957disclosures and the language that investors would have access to12958through a particular capital base, how would you compare that to a12959crypto piece, where it seems like an investor may be doing it at 10:0012960at night, before they go to bed, and it is a little bit more cavalier.12961I mean, are there enough safeguards in place and explanations in place12962for the more, I guess, amateur investor? [Audio distortion] into the12963game.12964 Mr. Miller. Yes, absolutely. I think we might have the idea of12965someone just hitting ``Buy'' on their phone, while lying in bed, but12966you also see in this industry a huge number of people--again now that12967it is decentralized on a distributed basis, to do really incredible12968research. They will go through the white papers. They will look into12969these things. They will check the code. It is all published on GitHub.12970These are open-source blockchains where the code is freely available.12971 Mr. Steil. The gentleman's time has expired. Thank you very much.12972 Mr. Stutzman. Thank you.12973 Mr. Steil. The gentleman from North Carolina, Mr. Moore, is12974recognized for 5 minutes.12975 Mr. Moore. Thank you, Mr. Chairman. I am not sure if this mic is12976working or not. I don't know that it is working or not. I have never12977been accused of being a quiet guy, so either way I think we will be12978fine.12979 So I guess you will just have to hear me this way. Thank you, Mr.12980Chairman. At some point, by the way, Mr. Chairman, I am going to have12981to understand the rules, how two or three people that are having a12982meltdown for some reason can disrupt a Committee and make it a12983roundtable. But I am going to read up on that at some point later on.12984 I do want to thank our witnesses who have been very generous with12985their time to be here today and to provide very helpful information to12986this hearing today. And what it seems to me is that, frankly, our12987country really is at a crossroads right now when it comes to the12988regulation of digital assets. Frankly, the lack of framework that we12989have in the country really seems to have pushed everything offshore and12990allowed businesses, of course, to be based offshore. That is how12991capital is going to flow, and that is what is happening.12992 But it seems to me that if we want to try to keep moving things12993back to the United States, that is certainly what the President is12994wanting to do, do manufacturing here, I think it is incumbent upon us12995as the world power, the world-dominating power, economically,12996militarily, you name it, that when it comes to digital assets that we12997have more of that here in the U.S. So I applaud, Mr. Chairman, the12998leaders of the respective committees, both the Ag as well as Financial12999Services, in taking this seriously.13000 But I will ask a question first to Mr. Rathmell, and I will just13001simply say this. What does it mean for the U.S. that, as has already13002been alluded to, even Representative Taylor mentioned this, that the EU13003and the U.K.----13004 Mr. Steil. The gentleman will suspend for just a minute. Some of13005these mics are cutting out. We are going to continue to try to do this.13006I know a lot of people are watching on a livestream and unfortunately13007aren't able to hear. [Audio distortion.]13008 Mr. Moore. They are kind of flickering. They look like Christmas13009lights. They are green and red, and they flicker off and on over here.13010I don't know. Maybe the mics are tired. I don't know.13011 Let me just say, here is the question. What are the long-term13012consequences, frankly, if we simply allow digital assets, and this13013whole capital as a result, to be offshore instead of here in the United13014States?13015 Mr. Rathmell. Thank you, Congressman. First and foremost, it means13016that we are ceding leadership in the digital assets industry and all of13017the next generation of innovation that entails. More critically, we13018believe that the future of everything from consumer technology to the13019global financial system to global capital markets is going to be13020leveraging this technology in the future. It is not just about ceding13021future innovation over the coming decades, but it is also ceding kind13022of a leadership role with respect to the areas that we traditionally13023have been leaders on.13024 Mr. Moore. Okay, and I agree with you, frankly. But, this isn't a13025new issue. I think in 2020, my understanding is the Federal Reserve13026Bank in San Francisco determined that one in eight Americans purchased13027digital assets. I believe that number now is one in three. That is a13028tremendous increase. And the notion that we would allow \1/3\ of our13029population to not be able to fully participate in an environmental13030regulatory arrangement in the United States just is confounding. So13031digital assets are not going away. It is not only the future but it is13032also the present.13033 Mr. Tusar, I will ask you a question, as well. By the way, thank13034you for being here today. Given this, how important is it that Congress13035act to establish the well-regulated digital asset marketplace.13036 Mr. Tusar. Thank you for the question, Congressman. I think it is13037critically important, and I think as Mr. Rathmell said, not just the13038importance of having consumers be protected, all the things that we13039have talked about, but I think the point that was just made is13040critical, that this is really the future of capital markets, and for13041the U.S. to continue to be the envy of capital markets around the world13042with respect to how collateral is moved, and all of the things are sort13043of critically important to well-functioning markets.13044 This bill is the foundation of a lot of that technology that will13045be in place. So for the U.S. to continue to be the capital market13046leader around the globe, this is critically important.13047 Mr. Moore. I agree with those comments, as well. Again, the mics13048are doing all sorts of great stuff over here right now. You don't know13049the chair of the Administration Committee do you?13050 [Laughter.]13051 Mr. Steil. There is an engineer on the way.13052 Mr. Moore. For what it is worth, they do work better than the heat13053in my office. I will just say that.13054 [Laughter.]13055 Mr. Moore. Let me just wrap up with this and say this. I want to13056thank each and every one of you for testifying today. I think your13057testimony is extremely helpful, and it does show the opportunity that13058we have to get serious folks in the room and enact a bipartisan piece13059of legislation. I hope that some of the folks who decided to do13060something different this morning may at some point come back to the13061table. Regardless of whether they do, I think both these committees are13062going to move in a very serious way to really try to address this, and13063I just thank you all for taking your time today to be here, before13064Congress.13065 And with that, Mr. Chairman, I yield back.13066 Mr. Steil. The gentleman yields back. We are in the Agriculture13067Committee room, not Financial Services, so maybe--no, I am teasing to13068our good friends at Ag. But the gremlins are at work. We do have an13069engineer on the way.13070 The gentleman from Michigan, Mr. Huizenga, is recognized.13071 Mr. Huizenga. Thank you, Chair Steil. And while this may have13072started off a little awkwardly I am hoping we are finishing strong13073today, because this is so important what we are dealing with here.13074Having now in Congress, this is my eighth term, having been on the very13075front end of digital asset discussions for a very long time on this,13076this day has been long coming, and it is necessary.13077 I am going to try to hit a couple of things here. Many digital13078asset projects reach the point where they are no longer reliant on a13079group or an organization but rather their success is contingent on the13080collective contributions of a dispersed network of users. Mr. Miller13081and Mr. Rathmell, can you address why this is a key point in the13082development of a digital commodity project?13083 Mr. Miller. Sure. I think it is relevant for two purposes. One,13084obviously, when we are looking at current securities law, the current13085regulatory regime is all based on someone having control over this13086thing, so that is really one of the points at which the current regime13087breaks and really needs something new.13088 But just fundamentally, those are two very different pieces. One13089organization or one entity has the ability to make changes and issue13090things to create. That is a very different environment than when you13091have [audio distortion] centralized group of people who are13092participating in an open economy. And there is really no way for that13093to thrive here without the [audio distortion] legislation to it. And13094since that is really where the world is going, what is happening one13095way or another, I very much want to see it happening here.13096 Mr. Huizenga. Mr. Rathmell?13097 Mr. Rathmell. Thank you, Congressman. Fundamentally, the securities13098laws are based on the principle of information asymmetries existing out13099in the marketplace, where you have a certain set of participants who13100have specialized information about their company. And digital asset13101projects, especially once you have reached decentralization, you should13102be much more focused on market integrity, efficient price discovery,13103broad-based participation in the markets, to ensure that efficient13104price discovery, and anti-fraud provision and the like.13105 So once you achieve that point at which the token is effectively13106decentralized, it is critical that you shift your regulatory focus, as13107well.13108 Mr. Huizenga. And it really is talking about changing the risk for13109the holders. Correct?13110 Mr. Rathmell. Correct, yes.13111 Mr. Huizenga. Okay. How should we, or how should a regulatory13112regime for digital assets recognize that transition?13113 Mr. Rathmell. The transition is really when we think about those13114information asymmetries no longer being a driving force of the value of13115the asset. So when an asset is primarily----13116 Mr. Huizenga. It is mature.13117 Mr. Rathmell. It is mature. Correct. When it is primary determined13118by supply and demand dynamics, the use on the blockchain network,13119security of the blockchain network, that is when you achieve a point at13120which market integrity is the primary driver and the primary regulatory13121focus.13122 Mr. Huizenga. I am going to stick with you. In my various roles on13123this Committee I have been Chairman and Ranking Member of the Capital13124Markets Subcommittee, primarily with the Securities and Exchange13125Commission. And whether it was Jay Clayton, Gary Gensler over the last13126number of years I think we saw some very different approaches to the13127use of the SEC. The Gensler-Biden Administration chose to regulate13128digital assets by enforcement, and the SEC, under the Trump13129Administration, has taken a very different approach. Crypto task force,13130they have really had just a different attitude at the SEC.13131 So Mr. Rathmell, can you some of the actions that the current SEC13132has already taken with respect to digital assets and explained the13133impact of what this activity has had for digital asset projects and the13134markets that have been built around.13135 Mr. Rathmell. Absolutely. I will highlight three quick things, very13136briefly. First is just engagement with industry, really understanding13137the concerns of industry and not having market participants who don't13138feel like the door is being shut in their face. That is very important.13139 Second is really actually putting out--obviously, the market13140structure legislation will be the ultimate driver of how these markets13141are regulated, but putting out, under existing law, clear legal13142analysis and clear legal guidance that is publicly available to13143entrepreneurs is a really incredible step forward. And I think the13144amount of legal guidance that we have seen, and legal analysis that we13145have seen coming out CorpFin, coming out of the SEC broadly, just in13146the past couple of weeks, has far outpaced what we have seen in the13147preceding 5, 6, 7 years.13148 Mr. Huizenga. I am going to submit some questions, as well. But if13149you could give me, each one of you, a super quick answer to this13150question. If Congress were to not pass a digital asset market structure13151legislation, what would be your biggest concern? Just give me your top13152concern if we don't actually get this done.13153 Mr. Rathmell. The loss of American innovation.13154 Mr. Miller. Complete loss of competitiveness in the international13155economy on this.13156 Mr. Davis of Washington. Fighting things out in the courts instead13157of developing here.13158 Mr. Tusar. I agree with the point on competitiveness and U.S.13159capital fleeing elsewhere.13160 Mr. Huizenga. Okay. That is a key. Okay. Mr. Behnam?13161 Mr. Behnam. Continued unchecked fraud and manipulation of markets.13162 Mr. Huizenga. All right. Well, with that, Mr. Chairman, I know my13163time has gone over, and I yield back.13164 Mr. Steil. The gentleman yields back.13165 I want to thank all of our participants. I think what we heard13166today is the need to move forward on a market structure bill. We began13167this by trying to have a joint Subcommittee hearing between Agriculture13168and Financial Services, an open, public dialogue on incredibly critical13169and important legislation. Disappointing, a small number of Members13170chose to protest and walk out. But what I think we actually saw today13171was a large number of Members from both the Majority and the Minority13172side engage in the substance of the topic, because that is what the way13173calls for.13174 I think in the closing question from my colleague, Mr. Huizenga, I13175think what we actually laid out is failure to act has consequences, and13176if we fail to act and seize this moment, we will find ourselves in a13177situation where we are being outcompeted by other countries like China.13178 This is an opportunity for the United States to seize the moment,13179to step up, to lay out a framework so that innovation in development is13180occurring here in the United States of America and not abroad, to13181provide clarity so that the new inventors, creators, innovators, and13182developers are here and working and finding themselves with their ideas13183in basements and dorm rooms, not in boardrooms and law firms.13184 This is an opportunity for us to seize the moment. It is13185disappointing that a small number of individuals chose to put their13186head in the sand and exit the room and prevent us from having a13187hearing. But I think today's roundtable, with your testimony, with the13188questions and the comments provided here in this room, provide us with13189a clear path forward, and shows the importance of the market structure13190legislation introduced this week by Chairman French Hill and Chairman13191GT Thompson. And I thank all of you for participating today.13192 I know there may be some additional questions submitted to our13193experts here at the roundtable. I would ask that you would provide13194comments back to the Committee with short notice.13195 So we appreciate all of you being here today. We thank everyone for13196their participation, and the roundtable is concluded.13197 [Whereupon, at 12:58 p.m., the roundtable was adjourned.]1319813199 [all]Witnesses
10 witnesses appeared, with 30 papers on file.
Documents
The committee filed 2 documents for the meeting.