Here is the first part of the transcript from the video:
"Thank you foreign thank you foreign thank you foreign foreign thank you foreign anymore foreign foreign thank you thank you very much foreign foreign thank you foreign [Music] foreign before foreign [Music] [Music] foreign [Music] foreign [Music] thank you you know thank you foreign foreign foreign will come to order without objection the chair is authorized to declare a recess the committee at any time this hearing is entitled the future of digital assets providing Clarity for the digital asset ecosystem without objection all members will have five legislative days within which systematic transmission materials to the chair for inclusion in the record I'll now recognize myself for five minutes no four minutes to give myself an opening stamp nearly 15 years since the Bitcoin white paper an idea has become the new internet architecture with ownership digital identity and value storage native to technology digital Assets Now are no longer a new technology they're used all over the world and America has always LED technology invention and if not invention implementation and today we're at risk of falling behind competitors around the globe this hearing has been years in the making bipartisan years in the making over the past several months this committee has engaged in an unprecedented joint effort with our colleagues on the agriculture committee earlier this month chairman Thompson and I along with subcommittee chairs French shell and Dusty Johnson released a discussion draft that would close the gaps between our Securities and commodities laws and provide much needed Clarity for digital assets we adhere to the time-tested principle of same risk same regulation while modernizing our regulatory framework to better match this Innovative technology in fact requirements set out in the draft Bill are much more onerous than the requirements for traditional Financial intermediaries as I've said in all of our markups I have an open door this should be a bipartisan process and I intend it to be so please share your input this is a draft bill there's plenty of time for us members to find common ground on how we legislate here but be advised I intend for this committee to mark up some form of this legislation when we return from the July 4th recess let's start with where I know we all agree consumer protection the draft bill would require trading platforms to comply with strict requirements regarding the segregation of customer assets similar to most traditional intermediaries we also address how digital asset issuers raise capital for their projects the U.S has the deepest and most liquid Capital markets in the world we intend to keep that we want to keep that strategic Advantage here in the United States to the best of our ability we know informative disclosures are critical to helping investors make informed decisions by making disclosures fit for purpose the draft bill will ensure issuers provide users with necessary information including the number of tokens in circulation the concentration of assets held by Affiliates and and much much more additionally we enhanced the sec's ability to detect and punish fraudulent actors and activity today traditional Financial intermediaries are registered with the federal regulator digital asset trading platforms should be no different the draft legislation will establish requirements for digital asset trading platforms ensuring Americans and their assets are protected the draft bill will provide a workable path for trading platforms to register with the SEC and or the cftc it provides Clarity to those assets that are offered as part of an investment contract and therefore security and I would submit the central part of this bill is this a workable time frame and a workable time period for assets started as part of an investment contract to transition to a digital commodity if the network is functional and decentralized I think that is the central piece of this legislation."
"We're at a critical moment for American dynamism we can choose the side of Financial Freedom Innovation inclusion and American competitiveness and important consumer protections at the same time or we can let this moment pass Us by and surrender our leadership of the Global Financial system to other countries I hope we'll choose the former I yield back I'll now recognize the ranking member of the full committee who as chair last Congress started this long Arc for uh for stablecoin legislation and the discussion that we're centering on today on this Market structure bill with that I'll recognize the ranking member Ms waters for four minutes for opening statement thank you very much Mr chairman good afternoon last week Republicans posted a bill that would rewrite our nation's Securities and commodities laws committed Democrats are taking a serious and thoughtful look at this piece of legislation however the bill is 160 pages long highly complex and was only made public last about a week ago any bill would so dramatically overhaul our nation's capital markets must be worked on collaboratively with the minority we also need the analysis and views of our independent Regulators the administration and the stakeholders on the implications of this legislation with that said I have some initial concerns I'd like to discuss today for starters I'm particularly worried that the Republican bill would allow crypto firms that are currently being sued for violating our Securities laws to continue doing business through provisional registration we witnessed last year when disgrace FTX CEO Sam bankman freed defrauded millions of customers and now the SEC is taking actions against firms like binance and other firms for potentially similar Behavior the bill appears to Halt any enforcement actions by the SEC against crypto firms even when they have committed fraud this provisional registration could reward Bad actors with a get out of jail free card and allow them to continue harming consumers and investors we also know that FTX illegally co-mingled customers funds to make undisclosed Investments and to trade against its own customers the SEC has ramped up its enforcement against other crypto firms for the same misconduct broker dealers today are and have been for decades prohibited from co-mingling customer assets so I wonder why Republicans would legitimize this illegal practice for crypto firms and allow customer funds to be put at risk another point I'd like to raise is that three crypto firms recently received approval to operate legitimately under our Securities laws Franklin Templeton received approval to offer a money market fund on the blockchain OTC markets received approval to trade crypto Securities and promethium of which the CEO is our witness today received approval to custody and trade crypto assets as SEC chair ginsman has repeatedly said the door is always open for crypto companies to register with the SEC despite the claims of some in the industry our Securities laws which have worked for every other industry for 90 years can also work for crypto firms turning to the stablecoin bill that was also noticed for this hearing I'm encouraged by the Legislative progress that's being made that said while Republicans have heeded a few of our concerns there's still major red flags including the Bill's lack of diversity and inclusion protections weak consumer protections and holy insufficient oversight by the FED of State chartered stable coin issues so I look forward to returning to the negotiating table to finish what we started last Congress I do believe that Mr McHenry and I had gotten a long way in dealing with stable coins and I'm sorry that it got interrupted somehow but I'm looking forward to getting back and negotiating and see if we can move stable coins forward I look forward to those continued conversations and I appreciate you starting this long discussion on digital assets under your leadership and uh my intention is to utilize those conversations we've had and come to some reasonable conclusion um that we both can support um and I want to thank the the former chair and the current ranking member for that the chair now recognizes chairman of the subcommittee on digital assets Financial technology inclusion the gentleman from Arkansas."
"Framework with strong consumer protections the two proposals notice that the hearing are the result of that good work importantly the market structure bill would prevent another FTX from happening by ensuring customer assets are protected by providing robust guard rails to mitigate conflicts of interest and by establishing clear oversight and supervisory Authority for federal Regulators to ensure Market participants like dealers exchanges and custodians are compliant with our Securities and related commodity laws like then chair Waterman Waters said in November after FTX we need a legislative action to ensure that digital asset entities cannot operate in the shadows and that's exactly what we've done I want to be clear clear we want feedback from our members and look forward to that during the course of the hearing today and I yield back to the chair the chair now recognizes the ranking member of the subcommun and digital assets Financial technology and inclusion the gentleman from Massachusetts Mr Lynch for one minute thank you Mr chairman and ranking member I must say I continue to have grave concerns with key elements of this bill both these bills under consideration which I believe will serve to fundamentally undermine a broader Financial system by creating a whole new regulatory carve out dedicated to digital assets these bills create a loophole that allow non-bank any non-bank security issuer to digitize or tokenize its products so it will be able to avoid compliance with existing investor protections and financial stability regulations I'm also deeply concerned about the new roles defined for the SEC and the cftc the bill these bills are both targeted at greatly reducing the sec's authority and would hinder its ability to conduct adequate enforcement our financial system which is the Envy of the world and the source of U.S Primacy and Global Finance is in its Essence built on trust and the investor protections afforded by the rule of law I would urge my colleagues to take a critical view of these bills and consider how the insecurity and volatility that these changes will inject into our traditional Financial system and which will endanger the trust and confidence in that system thank you and I yield back gentleman yields back today we welcome the testimony of a great panel Jeremy elaire Mr alaire is the co-founder chairman and CEO of circle koi Garrison Mr Garrison's uh partner at Steptoe and Johnson former counsel to SEC commissioner Hester purse Thomas Sexton III Mr Sexton is the president and CEO of the National Futures Association uh emen goon sharir is the founder and CEO of Dr Syria is founder and CEO of Ava Labs finally Aaron Kaplan Mr Kaplan is the founder and co-ceo of promethium incorporating we thank each other for taking for taking your time here issueville will be recognized for five minutes give an oral presentation or testimony without objection your written statements we made part of the record Mr o'lear you're recognized for five minutes chairman McHenry ranking member Waters and members of the committee it's an honor to be here today I'm Jeremy alaire chairman and CEO of circle I co-founded Circle 10 years ago with the vision that digital currency would transform how value was exchanged five years ago we launched usdc today usdc has grown to become one of the largest dollar digital currencies in the world usdc powers tens of thousands of applications and has handled over 10 trillion dollars in transactions the core of circles day-to-day mission is expanding the role of the Dollar on the internet the demand for safe and secure dollars on the Internet is real and growing stable coins and blockchain networks will likely become strategic infrastructure for the future of the internet it's a profound moment for the dollar in the world today currency competition is real and is increasingly defined by technological competition no Nation understands this better than China with its own state-controlled digital yawn complete with embedded surveillance the steps the U.S government takes now will have a significant impact on dollar competitiveness in the decades that follow ing to take the appropriate steps could have devastating consequences for America."
"As a nation we need to ensure that the dollar is the most competitive currency on the internet there also needs to be universal access to the safest and most secure digital dollars possible these digital dollars must be backed by the safest assets the world must have the safety and Assurance needed to exchange value without fears of Bank runs access and safety are cornerstones of keeping the dollar competitive but at the heart of dollar competitiveness must be technological superiority that means unleashing the innovation made possible by software the internet and free market competition we're here today to consider and discuss proposed stablecoin legislation I appreciate the substantial and bipartisan work you've all done delivering a stablecoin bill to President Biden's desk should be a national priority already other major nations are enacting laws to regulate the use of dollar stable coins rather than let other countries Define our future the United States needs to lead the development of global rules that will determine how our currency moves around the world the broad parameters of this bill are strong providing for robust supervision strict reserve requirements Redemption custody and Reporting requirements that protect consumers the bill also provides roles for both state and federal regulators and supports both bank and non-bank issuers at the same time there are several issues on which I'd like to comment the first is the respective roles state and federal banking Regulators should play we need to ensure an important continuing role for states in the growth of well-regulated stablecoin adoption to start we need nationally established standards that set a high bar for all issuers and that can be enforced by federal Regulators where appropriate a second issue is related to Reserves Circle believes issuers should only hold reserves that are even safer than for banks where fractional reserves put the safety of money used for payments at risk a simple solution would be to afford issuers limited rights to basic fed Services facilitating more timely redemptions protecting consumers and financial stability and without needing to provide access to the discount window finally our questions around custody and safe keeping the harsh lessons of 2022 teach us that we need stronger protections around the custody of digital assets Common Ground solution would be to require that any stablecoin intermediary be required to hold them with either a state or federally chartered qualified custodian back in the late 90s and early 2000s we went through an intense hype cycle and then a dramatic crash in the development of the web there were total losses scams and frauds a combination of proactive policy and private sector development led to a period that made America the uncontested technology leader we're in a similar moment today but we don't have the luxury of time the tech capability Gap that existed then has now been closed by China the dollar is at a Crossroads and currency competition is now technology competition I ask all of you as members of Congress to consider this moment ask what value system we want to enshrine in law and how do we safely and deliberately unrelease the creative forces of U.S led Technology Innovation thank you again for the opportunity to be here today I'd be happy to answer any questions you may have thank you Mr Garrison you're now recognized for five minutes thank you chairman McHenry ranking member Waters and members of this committee for inviting me here today my name is Coy Garrison I'm a partner at step two in Johnson where I advise participants across the digital asset industry on Securities Law compliance prior to one year ago I was an attorney at the SEC where I had the honor of serving as counsel to commissioner Hester purse I'm testifying today on my own behalf and not on behalf of my firm or any client of my firm my message to you today is simple Congress must act to bring sensible regulation to the digital asset industry today's discussion draft is thoughtful and measured it would create a workable regulatory framework for the industry with much needed investor protections before highlighting the positive aspects of the draft I'd like to discuss why."
"third party that constitute the transaction the contract or the scheme that is the security further as of today there simply is no case law addressing the application of the Howie test to a secondary Market transaction in an investment contract and if that is not enough adding to the complexity the SEC staff has taken the position that a digital asset that at one point in time may represent a security May over time no longer represent the security if the network becomes sufficiently decentralized there is no clear guidance on how this happens second congressional action is needed because the SEC has refused to create a workable regulatory framework digital asset trading platforms cannot register under existing rules because those rules are not designed with the realities of how digital assets trade or operate existing Equity Market structure rules do not contemplate Concepts made possible such as instantaneous settlement the potential for trading of Securities and non-securities on the same platform and the lack of a need for intermediaries for various functions the SEC has shown little interest in considering changes to existing rules the commission is instead relying on enforcement actions some of which will take years of litigation and appeals to result in any binding judicial precedent absent a congressional directive to the SEC to engage in rulemaking the status quo will likely persist for the foreseeable future third congressional action is needed because the lack of Regulation harms investors responsible industry participants and the U.S economy the status quo fails to protect people that are trading digital assets while there are a number of responsible platforms appropriately safeguarding customer assets and monitoring against fraud and manipulation some platforms have notoriously put their customers assets at dramatic risk and cause significant loss while enforcement actions are important tools to hold wrongdoers accountable they simply cannot replace sensible Market regulation that can help deter identify and mitigate wrongdoing fortunately the market structure direct draft provides a foundation for a responsible regulatory framework and addresses a number of the regulatory uncertainties I've just highlighted the bill forces the SEC to turn its focus to producing a more workable regulatory regime and to also responsibly divide responsibility of the digital asset spot markets between the SEC and the cftse first the bill would create a new exemption where a digital asset can be sold pursuant to an investment contract to non-accredited investors with important investor Protections in place second the bill would require the SEC to modernize its secondary trading rules to permit the trading of digital assets third the bill would also provide the first framework for how we Network and become decentralized and it creates a formal process to transfer regulatory responsibility from the SEC to the cftc fourth the bill gives the cftc authority to regulate the spot markets and digital asset Commodities in a responsible manner in conclusion the discussion draft would provide regulatory certainty that is needed to ensure that the digital asset industry can innovate and grow the US economy thank you for your tremendous work on this important legislation and I look forward to your questions thank you and I recommend to the panel you bring the microphones closer this is the best technology that we can bring to you from the 1940s um uh Mr Saxon you're now recognized thank you chairman McHenry ranking member Waters and committee members for inviting National Futures Association to appear before you today my name is Tom Sexton and I am the president and CEO of NFA we applaud this committee's and the house committee on agriculture's joint work the committee's June's second discussion draft contains the critical customer protections that Congress should adopt as it moves forward with developing a statutory framework for spot digital asset commodities Congress in 1974 authorized the creation of registered Futures associations NFA is the only one Congress and the cfdc 1982 gave us a responsibility to regulate firms engaging in exchange traded derivatives over the years Congress expanded the cfdc's jurisdiction and we are entrusted with additional responsibilities over spot retail Forex and swaps NFA is solely a regulator and we partner closely with the cfdc to perform our work we currently have approximately 3 000 Global member firms that the cftc requires to be members of NFA and 42 000 individual associate members we have approximately 520 employees and our budget is approximately 140 million dollars all paid for by the industry our seven Primary Response areas of responsibility are described in my written testimony let "
me highlight too first we monitor and examine our members for compliance with nfa's rules one key oversight area relates to customer funds Futures commission Merchants by rule must hold these funds in segregated Accounts at qualified depositories which are separate from the scn's proprietary and operational funds each day we receive reports directly from these depositories holding These funds to ensure that an fcm hosts sufficient money to cover the amount owed to customers second we investigate possible rule violations and vigorously enforce our rules our enforcement efforts are coordinated closely with the cftc and if necessary law enforcement over the past 10 years nearly 25 individuals have gone to prison due to criminal misconduct many involving retail customers initially investigated by NFA my written testimony describes our strong track record in two areas and how we partnered with the cfdc to protect retail customers and prosecute retail trading abuses and fraud in both cases our enforcement actions and customer filed arbitrations drop precipitously due to our actions let me highlight how we tackle customer abuse is in the spot retail Forex Market Forex dealers appear to function similar to firms that offer digital asset Commodities they solicit retail customers except customer funds operate an electronic trading platform and may take the other side of the trade with customers in 2008 Congress gave the cftc anti-fraud and Regulatory jurisdiction overspot retail Forex transactions and their dealers Congress prudently placed a fence around these spot Forex transactions within the commodity exchange act and created a separate registration category for Forex dealers who Congress required to be members of an RFA today NFA and the cfdc impose extensive customer protection rules upon these dealers let me now turn to our involvement with spot digital asset Commodities member firms engaging in spot digital asset Commodities are already within our doors NFA has proactively acted oversea members engaged in this activity in 2018 we required members to provide enhanced disclosure requirements and an investor advisory to customers more recently we filled a jurisdictional Hole by adopting a rule that imposes anti-fraud and supervision requirements on members engaged in this activity nfa's rule currently covers Bitcoin and ether retail customers have suffered significant monetary harm in schemes involving digital asset Commodities and deserve protection only Congress can create a federal registration and a regulatory regime therefore we encourage you to provide the cfdc with regulatory authority to complement its current anti-fraud authority over spot digital asset Commodities only then can the cftc adopt the discussion draft's critical customer protections including those relating to customer assets business conduct and disclosures minimum Capital requirements and Trade Practices finally I want to voice our strong support for the critical role as provided in the discussion graph that an RFA should play to partner with the cftc to regulate this area NFA has always been willing to take on the additional responsibilities entrusted to it by Congress and the cftc and we will do so again to the extent requested thank you and I'm happy to take any questions thank you now Dr sarir you're recognized for five minutes Sherman McHenry ranking member Waters and members of the committee it's an honor to be here with you today I thank you for the opportunity to appear before you as a computer scientist to discuss blockchain technology its innovative uses why it's impactful to our economy and why it must thrive in the United States I'm the founder and CEO of lava Labs a blockchain software company headquartered in Brooklyn with the mission to digitize the world's assets we have developed some of the most significant recent technological innovations in blockchain including the biggest breakthrough in consensus protocols since Bitcoin I was previously a professor of computer science at Cornell University for almost 20 years I consulted with various U.S government agencies and made fundamental contributions to distributed systems operating systems and networking I'm also currently a member of the cftc's technology advisory committee we are living through a period of unprecedented technological progress and transformation computers initially set this trend in motion with isolated mainframes and personal computers that lack network connectivity the emergence of the internet marked a pivotal shift from isolated local Computing to global scale Computing using what we call client server architectures this new paradigm which enabled us to connect to services operated by others gave rise to systems that cater to the entire world created
"millions of jobs and solidified the United States position as a global economic leader blockchains represent the next phase of networked computer systems whereas client service systems rely on point-to-point communication blockchains facilitate many-to-many communication allowing multiple computers to collaborate achieve consensus act in unison and share Services Under adverse Network conditions this enables the development of unique digital assets more efficient Financial Services programmable assets and computer games and digital identity Solutions among many other Innovative applications my full written testimony contains examples of blockchain applications that tangibly improve people's lives the implications of this breakthrough are far-reaching because blockchain and the digital uniqueness it creates allow us to redefine trust ownership Commerce Recreation and Communications also ultimately transforming how we interact with digital systems and each other the determination of the regulatory regime for blockchains must start and end with the functionality and features of the digital assets and not the technology used to create them at Java Labs we call this a sensible token classification blockchains have the ability to build into their technological fabric any set of rules that are then automatically applied to all relevant transactions this enables us to build efficient self-enforcing networks for example the Avalanche software allows anyone to build custom blockchains with Creator defined rule sets including Financial regulations other blockchains are working on their own equivalent Solutions now let me be clear on three key points first decentralized networks are a desirable goal for many reasons that have nothing to do with regulations governing use cases in fact they're more resilient secure auditable and available than traditional systems blockchain Builders did not set out to develop technology to evade laws we set out to solve hard computer science problems second soquenization also was not created to evade laws it's the natural product of blockchains and an improvement over traditional systems just like computer databases or an improvement over paper filing cabinets third as we enter this new era we must support this revolutionary technology by doing so we can ensure that the United States remains at the Forefront of innovation propelling the next generation of Internet Technologies and ushering in great economic growth the U.S won the first wave of Internet Revolution precisely because it enabled the freedom to innovate responsibly the United States must follow the same path of enabling free but responsible growth of blockchain Technology through sensible regulation of blockchain applications and tokens based on implementation and use case otherwise there are two critical Paths of failure for any regulatory framework first the blockchain platforms themselves should not become regulated at the protocol layer this would be the equivalent of regulating internet services in internet routers which would have doomed the vibrant internet we have today second the tokens and smart contracts created with blockchains should not be lumped into homogeneous and incompatible categories this would be the equivalent of regulating a social media application the same way we regulate a custom consumer Healthcare application instead tokens and smart contracts must be regulated based on their function and features finally it's essential to remember that just as good people are committed to Public Service there are also good people committed to building Technologies to improve lives by working together we can lay the groundwork for trustworthy efficient and self-enforcing systems that serve as the foundation for our modern economy I thank the committee for the opportunity and look forward to your questions thank you Dr sharir now Mr Kaplan you recognize for five minutes committee chairman McHenry ranking member Waters and esteemed members of the committee thank you for the opportunity to testify at today's hearing on the future of digital assets providing Clarity for the digital asset ecosystem my name is Aaron Kaplan and I am the founder and co-ceo of Promethean as an attorney my background is in Securities laws since 2013 I have dedicated my career to the application of distributed Ledger technology to the Securities industry and the related regulatory issues promethium and its subsidiaries are building a public marketing Mr Kaplan if you pull your mic closer be helpful promethium and its subsidiaries are building a public market and custodial infrastructure for digital asset Securities pursuant to the federal Securities laws promethium has developed proprietary technology in the United States integrating the " "requirements and investor protections of Securities regulation and efficiencies of distributed Ledger technology promethium subsidiaries are Securities and Exchange Commission registered broker dealers and finra members promethium ATS is an SEC registered alternative trading system that matches orders for buyers and sellers of digital asset Securities under the federal Securities laws promethium Capital was recently approved as the first special purpose broker dealer meaning it is the first SEC registered custodian for digital asset Securities under the federal Securities laws by operating under the sec's established regulatory Frameworks through registered entities overseen by the SEC and finra Promethean provides Americans participating in the crypto and web 3 space with the investor protections of the federal Securities laws through this promethium is developing a parent orderly Market ensuring customers assets are properly segregated secured and custody in the vast majority of cases crypto is a financial instrument offered to the public as an investment intermediaries are required to be regulated by the SEC based on the services they provide to the public properly regulating crypto trading clearing settlement and custody under the Securities laws provides a proving mechanism through which to allow and encourage responsible participation and Innovation while at the same time ensuring that investors are protected there has been much discussion lately about the need for greater regulatory Clarity for digital assets the essential point at hand is not about more or less regulation or even new regulation but rather the application of the existing regulatory Frameworks to digital assets the federal Securities laws have been tried and tested for almost 90 years and have allowed the United States to establish the world's most trusted and Advanced Financial markets the SEC is by far the most capable Financial Market regulatory agency in the world the SEC relies on finra a self-regulatory organization whose mission is Market integrity and investor protection to regulate the Securities markets together the SEC and finra employ approximately 8 000 employees to oversee these vital Securities functions put simply the federal Securities Law is an oversight from the SEC and finra have proven to be the most effective system to protect investors operate fair and orderly markets and protect customers funds and assets as early as July 2017 the SEC put the industry on notice in the Dow report stating that digital assets and related Financial Services could and likely did implicate the federal Securities laws subsequently the SEC created a Marketplace framework with the release of the four-step process on July 8 2019 and the three-step process on September 25th 2020. thereafter the SEC created the framework for the clearance settlement and custody of digital asset Securities through the special purpose broker-dealer release on December 23 2020. these releases provide the framework for a compliant path forward for crypto in the United States I want to stress that point there is a compliant path forward to for crypto in the United States that the SCC has clearly laid out those who argue for new laws are simply not willing to comply with existing applicable Securities laws and regulations new legislation is not in the best interest of the investing public or the blockchain industry legislative efforts will take years to implement while the American public will continue to operate on Reckless unlawful Platforms in conclusion the United States Fosters Innovation to the vibrancy of our Capital markets U.S capital markets flourish under the established regulations of the federal Securities laws overseen by the SEC in finra in order for Innovation to continue to thrive in the digital asset space the protections afforded by the federal Securities laws need to be in place proper regulation under the federal Securities laws is not a hindrance to Innovation rather a prerequisite that will allow Innovation to flourish thank you again for the opportunity to testify at this hearing and I look forward to answering any questions I'll recognize myself for five minutes Mr Garrison Dr sarir let's start with you Mr Garrison how many foreign Regulators have proposed new regulatory Frameworks for digital assets you're looking about half a dozen to a dozen okay including Europe including Europe and Europe is that Europe is far more advanced than we are okay yes uh we see Venture capitalists now deploying offices American Venture Capital firms going there to to seek to invest um are other countries implementing new regulations around digital assets specific to digital assets they are whole uh whole cloth new regulations okay and do you think consumers are protected here in the United States by our lack of clear rules no they are not okay uh Dr schreer um how does the threat of enforcement action stymie Innovation and hold back developers from new projects here in the United States lack of clarity around regulations involving the issuance of tokens like holds back quite a few uh innovators from actually residing in the United States and we're seeing actual uh people who are active in this field move wholesale out of our borders to other jurisdictions and that's been pressure on you to develop your technology overseas not here in the United States well I'm very happy to be in the United States myself but but I can see the pressure on other people okay now Mr Garrison in terms of the cost structure of uh of potential action enforcement action by the SEC what does that look like for for a firm wait what does that look like I don't want to get in the book of big long what they charge but it's not cheap right it's not your hundreds of thousands of dollars in into the millions depending on the charges okay so as I said we want a purpose-built regime for the for digital assets right we want it same risk same regulation that's the focus uh Mr Saxton um in in the draft here uh we've said that decentralization is the key um if a digital asset Association is associated with the decentralized and functional Network they'd be treated as Commodities uh with the cftc and the and your organization be able to serve as primary Regulators over the digital commodity spot Market chairman McHenry if that's the definition as far as a commodity is concerned then the cftc and NFA would be able to implement that definition within uh and and regulate that in the spot Market okay so over here in the financial services committee we have Securities Law protections for consumers we have consumer protection that is a key part of our discussions is there like kind consumer protection in the world of Commodities absolutely everything from segregation Capital requirements risk disclosures you monitor the trading that occurs uh The Exchange is due on the exchanges there's a very similar type of customer protections are in place with regard to retail participants Dr schreer uh about about decentralization what are the features what are the end goal what's the end goal state of a decentralized network that a functional decentralized Network what are the attributes of it give us some some sort of not not your 401 class maybe your 201 class uh for your college day simply put a decentralized network aims to provide a service wherein even though some of the actors in the system might be what we call Byzantine they might be acting in uh in uh they're in an adversarial fashion the system is still able to maintain its safety and integrity guarantees for all of its users these networks are more resilient than other computer network systems correct so we see the security Exchange Commission ramping up uh their enforcement action time for our hearings I would I would think that has to be some contemplation from our friends over there what we're trying to build is consensus around changes in law around a new object a new asset a new architecture new digital architecture um Mr Garrison if you have an innovator who wants to set up a shop here in the United States in the world digital assets how would you advise them I tell them that the laws the regulations are very uncertain and often those conversations end with the entrepreneur deciding to either launch offshore or to drop the ID altogether so let's pivot to stable coins uh Mr Lair how are you where are you currently regulated where is circle currently regulated circles regulated in a number of jurisdictions were regulated across the United States by state payments and banking supervisors were regulated in Singapore as a major payment institution we're in registration with the French government and we're also regulated by the FCA in the UK do you comply with any moderate money laundering rules here in the United States yes absolutely comprehensive BSA AML programs which we've had in place for a very long time okay are are you licensed in the state of New York we have a bid license in New York and we're also licensed as a money transmitter in the state of New York okay uh thank you all for your testimony I appreciate uh I appreciate the wide-ranging panel we have here I'll now recognize the ranking member Miss waters for five minutes well um thank you so much Mr chairman I did not anticipate that we would have such strong advocacy for cftc and for SCC so this is interesting Mr Kaplan while Democrats are taking a serious look at the Republicans Market structure Bill I'm deeply concerned that some of the most basic investor protections are missing from the ", "bill verse any come England of investophones must be strictly prohibited we saw with the collapse of FTX that much of the fraud and investor harm came from the co-mingling of customer funds which enables CEO bankman freed to steal his customers property the bill also seems to permit trading facilities to trade against their own customers and engage in other activities prohibited by today's security laws do you agree that commingling of customer funds should be prohibited will your firm co-mingle customer assets Mr Kaplan foreign our firm will not co-mingle customer firms and that customer assets with that of the firm our model does not have proprietary trading or Market making activities thus customer assets will not be commingled with firm assets because in that sense there are no firm assets and customer assets will be properly segregated as outlined by Securities in exchange act Rule 15c33 now when it comes to the investor protections of the federal Securities laws we saw the dangers of what happens when they're not in place with FTX the federal Securities laws would have done the most in terms of preventing an ftx-like situation they ensure fair and orderly markets they ensure that markets are not manipulated they ensure that you can't trade against your customers accounts necessarily they also ensure proper segregation of customer funds and assets from that of the firm these were major issues when it came to FTX and they could have been prevented had there been proper regulation and oversight with the SEC so in order for the best route going forward I think the best way to protect the American public is with the application the federal Securities laws which are purpose-built to protect investors there's literally no need to recreate the wheel here thank you very much as a special purpose broker dealer are there activities you are prohibited from doing but that are permitted for crypto brokers in the Republican bill and and can you describe why the Securities laws prohibit those activities and how changing the prohibitions would affect investors special purpose broker dealer is capable of custying digital asset Securities under the federal Securities laws the pursuant to the federal Securities there's filings and disclosures that must be submitted to the SEC and these disclosures and filings include firm financials possession and control reports and as far as reporting as as requiring disc and it goes as far as requiring disclosures about firms Affiliates having these systems in place in order with the with the ongoing reporting the proper oversight and the for investor protections of the federal Securities laws will ensure Market participants are properly protected and are the best way to protect the American public going forward Mr Kaplan I also have concerns with what the bill refers to as provisional registration specifically I'm concerned that this gives crypto firms that are violating our Securities Law a get out of jail free card this provision seems particularly harmful because firms like binance or even FTX which have both been alleged a fraud would effectively block the SEC from continuing its investigation are you concerned by this provision of the bill uh what impact do you see this having on investors I'm very concerned by the provision of this bill as the provisional Safe Harbor would essentially present a system where the American public is still exposed to the dangers that they were previously exposed to while that Safe Harbor goes to full registration furthermore uh basically when you look at the best way forward the best way forward has to be to use the most robust system to protect the American public and the best most robust system to protect the American public is the federal Securities laws I'd like to point out the American public was the one left holding the bag when it came to FTX and when it came to the violations or the alleged violations when it comes to binance and and coinbase and essentially the best way to protect them going forward is to establish the most robust regulatory regime the SEC and finra combined have 8 000 employees the cftc and NFA combined have 1300 approximate employees with the best way forward is pretty clear and logical is the application of the federal Securities laws thank you very much I yield back ranking member yields back I recognized myself for five minutes last week the house agriculture committee heard testimony from cftc chair Benham and former SEC general counsel berkovitz who served under chairman ginsler and it was striking to see how both of those Witnesses call for congressional action to address the Gap in Federal Regulation of digital assets and this mirrored the financial stability oversight committee's report last October and this ", "morning for those of you who are not glued to C-SPAN here at the house we had secretary Yellen here for a very interesting morning and she also suggested that she stood by that fsoc report calling for a comprehensive regulatory framework for digital assets and she said and I just would quote it for this hearing we'd like to see your regulatory framework over those markets and their gaps and regulations I would point out specifically stable coins and I do believe we need a comprehensive Federal Prudential framework and would be pleased to work with you and the Congress to develop such a framework so in my view we have the cftc thinks that this is the right direction to take because there are gaps in the system notwithstanding the comments from Mr Kaplan and our treasury secretary seems to agree uh you know as well Mr Garrison I want to start with you because I think the ranking member brought this subject up she had a good interchange with Mr Kaplan about this provisional registration issue it's very important this was also discussed in the AG hearing last week it's a tricky area to get right and we want to make sure we draft it in the best way possible so um uh this is a temporary provision as I understand it meant for to bring digital asset firms into the remit of the SEC and the cftc before rules of this comprehensive framework can be stood up and this was similar to how we approached swap dealers after Dodd-Frank is that your understanding yes um so help us and we pattern this drafting based on that uh the last time the the committee worked ably with the AG committee was in Dodd-Frank on looking at Swap rules tough debate I think Mr Lucas and Mrs Waters would agree to that why is a process like this needed and how it can be structured to provide actual customer protection in the digital asset markets in the interim before those rules are written is that possible we can do that it certainly is so the provisional registration or Provisions uh you know I think it's designed to acknowledge the reality that these markets exist now that these trading platforms exist now and that uh customers consumers are using them and so until the new rules are written there are no rules of the road so by requiring them to raise their hand to Signal an indication of seeking full registration when the rules are provided by committing to certain undertakings of meeting certain standards so those standards might include books in record keeping customer disclosures segregation of customer funds right those are no one is letting somebody off the hook for those responsibilities even under provisional rules isn't that right correct do you have any suggestions on further refining provisional registration that would be best for both the regulator regulators and the market participants sure so I think there is a provision exempting uh any uh any actions against relating to fraud and it sounds like there might be some confusion on that point so I would recommend uh really drilling down and making sure that any during that provisional period obviously that that shouldn't cover any fraudulent acts that would occur during that that provisional period so to the extent there is uncertainty on that that seems like a good area to focus on good thank you last week the commission issued an enforcement action against binance for failing to register as a national Securities Exchange broker dealer or Clearinghouse more concerning was also the allegations that they were co-mingling customer assets with house assets and misrepresenting the controls to investors this absolutely cannot be allowed to happen we need clear road rules of the road to prevent that kind of thing or another another FTX you've looked at our draft you think that we have a good bill provisions on prohibiting co-mingling I think it does both under the SEC side and the cftc side and would you would it allow conflicts of interest to persist if we had the new framework in place it would not uh Mr Garrison Mr Kaplan made a very good comments about his success in becoming registered under the commission are there things that you saw that took place there that we should change in our bill about registering broker-dealers no I believe the special purpose broker dealer is limited to a certain Universe of digital a lot of times expired you can answer it by uh by in writing if you would and I'll yield to my friend from Georgia the gentleman uh Mr Scott's recognized for five minutes thank you Mr chairman um Mr Kaplan 90 years ago Congress created our Federal Security laws to protect our investors and to establish robust regulation against misrepresentation and fraud in our Securities Market however since then we have seen Decades of legal precedent established that yielded consistently " benefits to our consumers and our investors in the long run unfortunately I believe that under this misguided digital asset Market structure bill we're dealing with now the fundamental approach to security laws is effectively undermined to the detriment of the American investor and I'm particularly referencing sections of the bill which gives much of the authority over digital assets previously with the SEC and instead placing it at the cftc and the bill would exclude uh also digital Commodities and payment stable cones coins from the definition of a security under the security laws this is antithetical to current law where an asset can be both a commodity and a security so by creating an entirely new regime for so-called digital Commodities the bill eliminates the sec's ability to determine what is or is not a security so Mr Kaplan what consequences may arise from this make it plain to us this is the heart of the matter could this potentially result in less protection for our investors than is currently provided I anticipate that it would essentially as you mentioned the federal Securities laws are tried and tested over Generations there's not just case law there's follow-on legal precedent and additional regulations and basically continuing actions they are after and essentially uh the concept of creating a new regulatory regime that would make a determination whether a digital commodity will exist will create sort of a void in between what we have now and when that is fully in place it'll take maybe half a decade a decade for those laws to be flushed out such that they might be viable and in the meantime we have an existing framework that's purpose-built meant to protect investors men to ensure there's proper disclosures meant to ensure there's fair and early markets and basically that customer funds and assets are properly segregated and secured so essentially in the meantime why all of this is sort of flushed out in the legal system and basically the digital commodity is operating uh in a semi-security capacity because it's always arguably been a security the investors participating in that space will not have proper disclosures and not proper protections and also not proper oversight to ensure they're properly protected I also want to make circle back to the provisional registration the provisional registration really provides a get out of jail free card because essentially when an entity registers or provisionally registers the SEC cannot go after their previous actions So in theory if binance or if FTX was still around were registered once they became provisionally registered those who suffered at the hands of the malfeasance of those entities would not have legal recourse how is that in the best interest of the American public it's not well Mr Kaplan I agree with you 100 percent what do you think we should do about this follow the existing Federal Securities laws which have been tried and tested over generations and are literally meant to protect the retail investing public it is a clear and logical pathway forward thank you Mr Kaplan gentleman from Georgia gills back the gentleman from Oklahoma Mr Lucas is recognized for five minutes thank you chairman for holding this hearing and for your work and the full committee Chairman's work on the digital Market structure legislation both this committee and the high side committee have had many hearings many roundtables in the lead up to this draft and this hearing gives us another opportunity to examine the underlying legislation and discuss why it's important for Congress to provide a clear regulatory framework and I'll begin with this if the United States wants to be a lead in the future of digital assets it's essential to Congress Act other jurisdictions such as European Union in Japan have Frameworks for digital Assets in countries like the UK are crafting their own rules at the same time our Regulators here in the U.S are at odds we are the chairman of the SEC telling Congress that legislation is not needed while the chairman of the cftc says legislation is needed Congress should settle this by passing much needed regulatory Clarity for digital assets not jurisdictions abroad like the EU and not the SEC through a chaotic enforcement approach Mr Garrison could you discuss how it makes our job passing meaningful legislation more difficult the longer we wait so the longer that it takes time to get legislation together the more the trading public in digital assets are put at risk where there's no rules in place uh the longer that Indus industry participants don't have certainty uh the more difficult it is for them to continue to operate and the greater the risk that they move offshore Mr Aller could you further underscore the missed opportunity of allowing " "other countries to create a workable digital asset environment while here in the United States we allow the SEC to take the lead thank you for the question Congressman Lucas very specifically we are seeing governments around the world the EU the UK Japan Hong Kong Singapore and others actually defining the rules for how dollars digital dollars are issued and operate in those markets which is astounding the United States is responsible for the dollar and the United States does not yet have clear regulation for payment stable coins and digital dollar issuance and so with respect to the different uh you know need for clarity I think as recommended by secretary Yellen and the entire uh you know president's working president's working group who've also LED an effort internationally to establish stablecoin rules we need to adopt stablecoin rules so that other markets are not actually regulating the dollar many of the consumer protection concerns that we see today in the crypto Market are reminiscent of the Forex markets of the 2000s which were ripe with get rich quick schemes under an unclear regulatory framework in 2008 granting the CFT cftc jurisdiction over leveraged spot retail Forex transactions provided tangible consumer protection results Mr Sexton drawing upon your experience in tenure at the NFA how important is it for Congress to act if we truly want to protect consumers Mr Lucas thank you for the question and thank you for meeting with us yesterday as a member of the AG committee you worked with us on retail Forex issues and it's extremely important uh in light of the similar type of retail customer fraud that occurs with regard to spot digital asset Commodities at a similar framework be built we know that cncc has anti-fraud jurisdiction over these products currently it need we need to complement that with regulatory jurisdiction as we did in the retail for workspace as we've often said it is far better to prevent fraud than prosecute fraud because retail customers have been hurt after uh that's occurred section of course I understand you're still reviewing the implications of the market structure discussion draft but could you discuss broadly how the National Future Association would amend its compliance rules to account for congress creating classification for digital Commodities what would the process look like the process would be very similar to what we have done in the past when we have taken on additional responsibilities in the retail Forex and and the swaps markets the first thing that we would do is as I said we currently have a rural anti-fraud rule for digital asset Commodities that covers Bitcoin and ether dependent upon what Congress derives as far as a definition for those products we would amend our rules to cover those products we also would amend our rules to permit digital asset commodity Brokers and dealers to be members of an RFA NFA if we are participating in this and then afterwards we would adopt compliance rules in the areas that are identified in the discussion draft working closely with the cftc in doing so from customer seg to Capital disclosures you go down the line as to as to the elements of the discussion draft thank you for those insights my time is about to expire Mr chairman gentleman yields back the general woman from New York Miss Velasquez is recognized now for five minutes thank you Mr chairman Mr lalire as you know the New York Department of Financial Services has developed its own regulatory regime providing for the legal issuance of stables coins in the state of New York there have been significant conversation on this committee about whether the federal government or the states should be the primary regulatory Authority regarding stable coins issuance what is your view how do you view the role of the Federal Government vis-a-vis the states thank you for the question congresswoman Velasquez this is a critical issue and I know is Central to ultimately getting stablecoin legislation done here in the United States we believe there needs to be a strong role for both States and the federal Regulators I think that the bill as noticed as of this Friday makes very significant progress in establishing very strong Federal floors on the requirements reserve requirements reporting requirements Redemption disclosures co-minglings not allowing that and then very specifically allows the fed and the Federal Banking Regulators to deal with the rules around Capital adequacy core risk management rules safety and soundness requirements the kind of Fitness of management many of the fundamental things and that becomes the floor that any state regulator needs to meet but States would be allowed to to issue payment stablecoin licenses into supervised firms under that fed floor and I " "think that's a good compromise that allows States like New York who've really led the way in stablecoin regulation in the United States thank you for that answer Mr Kaplan what is your view how do you view the role of the Federal Government vis-a-vis uh the states when it comes to regulation as table scon coins are insurance under the draft bill I think there is potential issues when it comes to the fragmentation and the different regulatory regimes essentially a stable coin could be licensed on the state level but what happens if that stable coin is used outside the state isn't it used in interstate commerce then and therefore shouldn't there be a federal oversight I think the most appropriate way to ensure that investors and the public are properly protected particularly when it comes to Stables coins which arguably pose the largest and most systemic risk is to have proper Federal oversight that is uniform that would prevent any sort of regulatory Arbitrage where issuers would choose one State versus another because they're more friendly towards the approval process okay thank you for that answer um if you both Mr alera and Mr kotlin if you both believe Federal oversight is important do you believe it is important to have ongoing supervisory and examination Authority for the state license issuers a federal level so I believe that the FED needs to be able to continue to enhance rules over time um in particular the bill stipulates core areas around Capital adequacy risk management safety and soundness the importance of those is Paramount and and federal Regulators need to be able to look at what's evolving in the market and evolving on the whole and be able to make recommendations around that and so this isn't a static one-time thing I think that these are going to be dynamic markets and Technology changes and that will require that that we'd be able to look at those on an ongoing basis very Assurance Mr couple I think that there is specifically on the state level potential issues when it comes to the idea that the state can unilaterally expand the list of eligible Reserve assets without restriction at any time expanding the underlying assets that could basically stabilize a stable coin into include and introduce additional risks which will increase the chance of that stable coin losing its Peg thank you and Mr cap room one of the central tenants of our banking system is the separation of banking and Commercial activity the republican-led stablecoin legislation we are discussing here today seems to fail to recognize this separation for stablecoin issuers this would allow non-commercial businesses to own a stablecoin issuer can you explain the harm to both consumers and perhaps Financial stability that could arise from failing to clearly Define this separation consolidation of consumer and banking activities can lead to conflicts of interest and potential systemic risk essentially a lack of strong Frameworks were properly regulatory oversight for the entities involved particularly when they're commingling consumer and financial based activities presents additional levels of conflict and potential exposure to the underlying customers either on the consumer side thank you Mr Kevin gentlemen Thomas expired thank you gentlemen from New York and now the gentleman from Florida Mr Posey is recognized for five minutes oh thank you Mr chairman uh Mr all there you you begin your testimony today talking about China's currency do you see any uh comparison between that and the central digital currency that the president has proposed in his executive order I'm sorry I couldn't hear the last part of your question because the door opened so do you see any similarity between the Chinese program in the central currency that President Biden included in his executive order thank you for the question Congressman Posey I think what the Chinese government has uh pushed forward with is an entirely state-run and administered uh digital currency program uh it has with it significant embedded surveillance capabilities uh and it's clearly something that the Chinese government seeks to export uh around the world as part of its uh desire to grow the role of the of the on internationally um I mean I believe uh your your reference to the uh executive order from President Biden was around studying Central Bank digital currency in the United States our view is that uh a a similarly designed retail government-run and administered uh Central Bank digital currency is not needed in the United States but we do believe that there are critical improvements to be made in the core infrastructure of the dollar itself within the Federal Reserve System what sometimes people refer to as wholesale infrastructure for this and you know clearly central banks " "around the world are all exploring that but I think this separation between those institutions that are you know delivering Financial Services directly to end customers and the government is is a kind of air gap that is important to preserve for privacy security and Market competitive reasons you can understand a concern of some people that if private digital is competing with government digital guess who's going to win it's never going to be a Level Playing Field and and more levels of Regulation isn't going to help I mean we know the SEC that um the biggest fraud in history though for 10 years they were informed about it so you know more regulation is is not going to fix the fraud that we endured and there's also concern you know when when you have a central bank digital currency and like China has the government knows every penny that you spend they can slow down your flow of funding they can cut it off or they can take everything that you have and and I can understand the legitimate concern that's that some people have about that how should investors evaluate liquidity risk of digital assets compared to Banks so specifically on stable coins what this bill does is specify a very narrow base of important high quality liquid assets that must be held on a fully reserved basis the most liquid dollar instruments in the world uh and a a digital dollar that is held to those Reserve standards is dramatically safer than Bank deposits Bank deposits hold 1 12 of the deposits the remainder is Lent out we see risks from fractional reserving and the the mixing of that lending behavior and payment system Behavior has let's just say bitten the American Consumer and business many many times historically and so this bill I think helps to Define and create the safest digital Dollar in the world which is what the American government should be getting behind and making that an important export product on the Internet uh how should the regulations for stable coins compare to the capital regulations for banks and money market funds so in the stablecoin bill there are recommendations for federal Regulators to look at Capital adequacy to evaluate uh Key activities around the risks of an issuer uh and I think that's appropriate there should be Capital buffers uh to deal with it but unlike a bank which is re-hypothecating and lending and fractionally reserving these are very very narrowly held and so the liquidity requirements are and and therefore the capital buffer requirements are likely going to be significantly lower uh and so that is left to Regulators to determine as opposed to being highly prescriptive in the bill but I think it's a very important and necessary piece uh for this to ultimately go into uh into effect oh thank you Mr chairman on time to six Paradise gentleman yields back the gentleman from California Mr Sherman's recognized now for five minutes thank you this seems like the 12th hearing we've had on crypto this year I'm still waiting for a hearing on diversity equity and inclusion in this room this year but all these hearings seem to start with the idea that we're falling behind America is behind Peru in cocaine cultivation we are behind the Cayman Islands in nefarious hidden uh Financial transactions we don't always need to catch up um we're told that we now have a 160 page Bill and I'm sure a lot of work has gone into that bill but it comes down to the one sentence and the one reason why Sam bankman freed proud the halls of of this building and that was to get the SEC out and put a patina of regulation in um then there is the proposed stable coin bill that goes to the lowest State denominator and what state if they could have a billion dollars to provide health care for their own citizens who might die what state wouldn't cut that deal and just provide whatever patina of Regulation the industry wanted and if North Dakota won't do it South Dakota will so we'll have achieved Sam bankman Freed's objectives at least we could do is let them out of jail to come here and celebrate this is uh legislative success um when billionaires tell you that they're working to hurt your current your country you should believe them the head of coinbase Brian Armstrong tells us that he views crypto as a new Global Reserve currency and we see from others that this is the way of major figures in the crypto industry that we can uh a way to undermine American sanctions the role of the U.S dollar allows us to have the know your currency rules crypto says it's hidden money that's the name uh undermine our sanctions rules provide a tool for tax evaders but most importantly is what uh Mr Brian Armstrong CEO of coinbase says and that is to displace the dollar partially or completely as a reserve currency um we're told that we need Clarity