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| Sparklight supports C-SPAN as a public service, along with these other television providers, giving you a front-row seat to democracy. | ||
| And now, a Senate hearing on the regulation of digital assets, which includes cryptocurrencies. | ||
| Lawmakers and witnesses highlight the use of cryptocurrencies as a possible alternative to the U.S. dollar and oversight in the industry. | ||
| This Senate Banking, Housing, and Urban Affairs Subcommittee hearing is nearly an hour 45 minutes. | ||
| I would like to call this first meeting of the Digital Asset Subcommittee to order. | ||
| And Mr. Gallego, welcome as the ranking member. | ||
| I'm looking forward to working with you and the other members of the subcommittee. | ||
| This has been a long time coming, so I'm delighted to get started. | ||
| I'll make an opening statement and then the floor will be yours to make an opening statement. | ||
| And then we'll introduce our witnesses. | ||
| So the hearing now being in order, thank you everyone for being here at the inaugural subcommittee on digital assets hearing. | ||
| I'm really grateful to Senator Scott for creating this subcommittee. | ||
| And as I said, Senator Gallego, looking forward to working with you to pass bipartisan legislation on Bitcoin, on stablecoin and digital assets. | ||
| We want to promote responsible innovation and protect consumers. | ||
| We sure have come a long way since I first arrived in the Senate. | ||
| Many members of the Senate were still trying to wrap their heads around what is a Bitcoin, what is a digital asset, what is a stablecoin, what is a Howey test. | ||
| And so now we've arrived at the point where we can move forward. | ||
| We're on the precipice of finally creating a bipartisan legislative framework for both stablecoins and market structure. | ||
| I hope we can get both pieces of legislation to President Trump for his signature this year, including the Lummis-Gillibrand Responsible Financial Innovation Act, which is the more market structure-oriented bill that would sort of dovetail with what the House passed last year, which was FIT 21. | ||
| But we're going to start with stablecoins. | ||
| And on stablecoins, I'm optimistic the Senate Banking Committee will soon mark up Senator Haggerty's legislation. | ||
| It is called the Genius Act. | ||
| Chairman Scott and Senators Gillibrand and I are all co-sponsors. | ||
| The act makes the U.S. dollar fit for the digital age, creates additional demand for U.S. debt, and makes payments both faster and cheaper. | ||
| I'm also pleased that the legislation fully protects the dual banking system and creates parity between both states and federal stablecoin charters. | ||
| Turning to market structure, I'm excited to work with Chairman Scott, our subcommittee members, Chairman Bozeman, Chairman French Hill over in the House, and Chairman GT Thompson, | ||
| who are respectively chairs of financial services and agriculture, to clearly draw the line between a security and a non-investment contract commodity and to create a path for digital asset exchanges to register with the Commodity Futures Trading Commission. | ||
| This industry needs clear rules of the road that it can follow while simultaneously promoting both responsible innovation and protecting consumers. | ||
| So each of our witnesses today are committed to these goals, and I'm really grateful to all four of you to be here and share your expertise on these topics. | ||
| First, we have Lewis Cohen, partner at Cahill Gordon and Reindell. | ||
| Did I get that right? | ||
| Thank you. | ||
| Mr. Cohen is a learned lawyer and an expert with respect to differentiating between a security and a commodity. | ||
| Can't wait to hear from you about that. | ||
| We have been wrestling with that for months. | ||
| Second is Jonathan Yacham, Global Head of Policy at Kraken. | ||
| I am proud that Kraken calls Wyoming home today. | ||
| And Jonathan, thank you for being here and sharing your expertise. | ||
| Third, Zae Mazari, Chief Legal Officer at Leichspark. | ||
| Ms. Massari is one of the original thought leaders on stablecoin policy and understands how stablecoins operate. | ||
| And then finally, we are honored to have Tim Massad as a witness. | ||
| He was chair of the Commodity Futures Trading Commission from 2014 to 2017 and is a research fellow at the Harvard Kennedy School of Government. | ||
| I'm personally thankful to each of you for working with me and my staff over the years and providing great feedback on legislation and providing it over and over as we've tried to move this subject forward. | ||
| We're thrilled to have you here today and look forward to having an in-depth policy conversation about the intricacies of stablecoin and market structure policy. | ||
| Ranking Member Gallego, you are recognized for an opening statement. | ||
| Good ass, Chair Loomis, for hosting this hearing and for starting off our work on this committee with a bipartisan focus. | ||
| I look forward to our continued work together on these issues. | ||
| Thank you also to our witnesses for joining us today to discuss an issue of growing importance, how Congress can deliver bipartisan legislative solutions for digital assets that promote innovation and U.S. competitiveness while protecting consumers and ensuring the integrity of our financial system. | ||
| The rapid development of digital assets, blockchain technology, and the broader crypto economy presents both extraordinary opportunities and, of course, significant challenges. | ||
| These innovations have the potential to enhance financial inclusion, streamline transactions, and spur economic growth. | ||
| At the same time, they raise concerns and questions about consumer protection, financial stability, and the proper role of government in overseeing these emerging technologies. | ||
| We in Congress have the responsibility to strike the right balance, which we sometimes do, fostering safe and responsible innovation and establishing clear guardrails to prevent abuse, fraud, and systematic risk. | ||
| So, this is not about us picking winners and losers among technologies or industries. | ||
| It is about creating a stable and predictable regulatory environment that allows legitimate enterprises to thrive and grow while protecting the interests of the American people and consumer. | ||
| First, let's talk about safe and responsible innovation. | ||
| Digital assets are a fast-evolving sector, and the United States must lead in this space. | ||
| Innovation should be encouraged, and it must be safe, transparent, and accountable. | ||
| Without robust oversight, bad actors can exploit loopholes, undermining trust in the system and causing harm to consumers and investors. | ||
| We must ensure that digital assets are not used to circumvent existing laws on money laundering, tax evasion, or illicit financing. | ||
| At the same time, we must ensure that we are encouraging innovation that is productive and useful to everyday Americans. | ||
| The growth of things like meme coins on everything from Trump to Doge to Peanut the Squirrel are about flashy headlines and trending on social media, and they are not about helping traditionally and underbanked communities gaining access to the financial system. | ||
| I hope to hear from our witnesses on how we can incentivize good behavior and mitigate risk while still allowing digital assets and the economy to develop. | ||
| Second, we need to have clear rules of the road. | ||
| Today's regulatory framework for digital assets is insufficient, in my opinion. | ||
| Bipartisan legislation should provide clarity and consistency well into the future, enabling innovators to operate with confidence and ensuring regulators have the tools they need to address risks effectively. | ||
| Third, we must ensure that the rise of digital assets does not come at the expense of safety and the soundness of our traditional banking system. | ||
| Stable coins and other digital assets with links to the broader financial sector could pose risk if not properly managed. | ||
| We must ensure that the use of digital assets does not lead to risk to depositors or the government backstops for the banking system. | ||
| Finally, consumer protection must remain at the heart of our efforts. | ||
| I became interested in crypto because I heard from many of my constituents, especially young black and Latino men, that are excited about what this new technology can offer to them in terms of access and investment opportunities that largely they have been shut out of. | ||
| What they don't want, though, is to be the victims of fraud or dangerous financial loss. | ||
| Consumers need transparency, safeguards, and recourse if things go wrong. | ||
| Digital assets can and should be a place for bipartisan collaboration. | ||
| Both parties share an interest in fostering innovation, protecting consumers, and maintaining the strength of our financial system. | ||
| By working together, we can craft legislation that meets these goals and cements America's leadership in the new digital economy. | ||
| Thank you, and thank you, Chair. | ||
| I look forward to working together and look forward to hearing from our witnesses. | ||
|
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Thank you, Mr. Gallego. | |
| We will hear now from our witnesses, starting with Louis Cohen. | ||
| We are looking forward to hearing what you have to say and sharing your expertise in why there are gaps in existing securities laws with respect to digital assets. | ||
| Love to hear your views on the Howey test and how Congress should appropriately draw the line between securities, commodities, and anything else you care to share with us. | ||
| Mr. Cohen, the floor is yours. | ||
| Thank you, Chair Lomas, Ranking Member Gallego, and distinguished members of the subcommittee. | ||
| My name is Lewis Cohen, and I'm a partner at the Wall Street law firm of Cahill Gordon and Rhindell and the co-head of the firm's Cahill Next Emerging Technologies Practice. | ||
| As a practitioner, I have over 20 years of experience working in both traditional finance and the blockchain sector. | ||
| This experience has allowed me to witness firsthand both the tremendous promise as well as the regulatory challenges of this technology. | ||
| Today, I offer testimony in support of a legislative framework for activity involving the use of digital assets. | ||
| Over the past several years, innovation in the digital asset sector has raced ahead of the legal and policy frameworks designed decades ago for traditional finance, resulting in divergent regulatory approaches, inconsistent agency pronouncements, and a fragmented legal landscape, throttling American competitiveness. | ||
| Perhaps most critically, this uncertain regulatory environment has left consumers and users of digital assets at risk. | ||
| A clear, practical, and flexible federal statutory regime is urgently needed to address activity involving digital assets in both the primary and the secondary markets. | ||
| The U.S. securities laws formed in the wake of the Great Depression rely on the bedrock concept that every security has an identifiable issuer, such as a corporation, that can be held accountable for ongoing disclosures to investors. | ||
| Yet for virtually all of the digital assets that are widely traded in the U.S. today, almost none create a legal relationship with an identifiable business entity that may be considered the asset's issuer. | ||
| Unlike securities, which cease to exist if the securities issuer has been dissolved, digital assets, once created, continue to exist and circulate in perpetuity on global decentralized networks. | ||
| However, without an issuer that can be required to register and disclose information, current law struggles to address secondary trading of these assets. | ||
| This creates unnecessary confusion as to the lines between securities transactions, which are the appropriate subject of SEC oversight, and more conventional commodity-like activity. | ||
| Nevertheless, our securities laws were thoughtfully designed to address what the Supreme Court has referred to as novel, uncommon, or irregular devices. | ||
| And the Howey test you mentioned, Chair, recognized that fundraising schemes in which a person invests money to purchase an item, expecting profits from the efforts of the promoter, are securities transactions, even where the item sold is not itself a security. | ||
| Over the years, these investment contract transactions have involved all sorts of items purchased not for use, but rather for the resale at a hoped-for gain. | ||
| These ancillary assets have included beavers, chinchillas, earthworms, and even postage equipment. | ||
| I discussed these cases in my 2022 paper entitled The Intellectible Modality of Securities Law. | ||
| Many digital assets have similarly been sold as ancillary assets to raise capital to develop a blockchain-based project. | ||
| With an understanding of the distinction between fundraising activity that results in a securities transaction and a non-security ancillary asset sold in that transaction, the basis of a sensible regulatory framework is at hand. | ||
| Where the Howey test applies, fundraising transactions involving digital assets would continue to need to be registered with the SEC or exempt from registration, for example, as a private placement. | ||
| However, a change in law is needed to require sellers of ancillary assets, that is, the issuers of these securities transactions, to provide ongoing disclosures. | ||
| These disclosures would be subject to SEC oversight and securities law anti-fraud rules once the related ancillary assets initially sold become widely traded. | ||
| These required disclosures would cease when the entrepreneurial efforts of the fundraising team are no longer essential to maintaining the value of the digital asset. | ||
| This framework, set out in the Lummis-Gillibrand Responsible Financial Innovation Act, would recognize the critical role that the SEC plays in capital formation and fundraising. | ||
| It would also provide for new ongoing securities law-based disclosures from fundraising parties. | ||
| That would eliminate the potential for asymmetries while implementing a clear dividing line to end the is it or isn't it? | ||
| Debate about when securities themselves excuse me, when digital assets themselves are securities. | ||
| Thank you again for the opportunity to share these perspectives and I look forward to your questions. | ||
| Thank you, mr Cohen um. | ||
| Next, Jonathan Yachim, who is deputy general counsel and global head of policy for Kraken Digital Asset Exchange. | ||
| We look forward to hearing from you on how the lack of legal clarity is impacting businesses, digital asset trading practices and how digital asset exchanges should be regulated. | ||
| Mr. Yacham, the floor is yours. | ||
| Chairwoman Lummis, ranking member Gallego and distinguished members of the subcommittee, thank you for the opportunity to testify today. | ||
| My name is Jonathan Yaim and I serve as global head of policy and government relations at Kraken. | ||
| Prior to my past three years in this role, I spent over a decade in traditional markets based in the U.s. | ||
| And Europe. | ||
| Kraken was founded in San Francisco over 13 years ago and has grown into the world's largest, one of the world's largest and most trusted digital asset exchanges. | ||
| Today, we serve over 15 million customers around the globe. | ||
| We custody over 40 billion in assets on our platform. | ||
| We executed over 600 billion in transactions last year and we have a team of over 2,000 professionals across 60 countries. | ||
| Kraken plays a diverse role across three main areas of the markets. | ||
| First, we operate as a centralized exchange for crop for spot crypto markets, along with other intermediary services. | ||
| Second, we support traditional market investment into digital assets. | ||
| This includes the world's leading benchmark Provider, CF Benchmarks, and our novel state chartered bank, Kraken Financial, which offers institutional custody under an innovative and robust Wyoming legal framework. | ||
| Third, our on-chain business includes our wallet and our layer two blockchain called Inc., which serves as our platform for decentralized innovators. | ||
| I would like to commend and thank Senate Banking Chairman Scott for establishing this important subcommittee and subcommittee chairwoman Lummis for her many years of leadership in advancing bipartisan legislation and discussion on digital asset policy. | ||
| The first drafts of comprehensive market structure legislation were introduced in the Senate over three years ago. | ||
| A lot has happened since then. | ||
| We've seen fraud, poor risk management, and business failures. | ||
| We've experienced misguided attempts to regulate our markets through enforcement actions rather than sound policy development. | ||
| This has pushed innovation, investment, and market activity offshore. | ||
| But through these challenges, we also saw bipartisan work in Congress continue. | ||
| Last June, the House passed a market structure bill with strong bipartisan support. | ||
| Ranking Member Gallego, we thank you and your former colleagues from the 118th House for advancing that historic effort. | ||
| This collaboration across parties and across chambers has built a strong foundation to finalize and deliver market structure legislation to the President's desk for signature this year. | ||
| Bipartisan support for good crypto policy is no longer a distant goal on the horizon. | ||
| Congress should act decisively this year to establish the essential foundation for market regulation. | ||
| Today, nearly 90% of activity in the digital assets markets is executed via centralized intermediaries like Kraken. | ||
| Market structure legislation is the critical foundation to set a level playing field in areas of consumer protection, security, and market integrity. | ||
| Many other markets have already taken this important first step. | ||
| Innovation in our industry evolves rapidly. | ||
| Emerging areas in our markets will require further study, inputs, and deliberation before arriving at policy conclusions. | ||
| But solving every single policy issue should not delay building a basic regulatory foundation for centralized markets here in the United States. | ||
| This critical first step must happen here in Congress. | ||
| Effective market regulation should include spot market authority for the CFTC to register and oversee centralized intermediaries and secondary market transactions, effective disclosure rules, and clear jurisdictional cooperation between the CFTC and the SEC. | ||
| Jurisdictional lines and statute should not be overly complex. | ||
| They should be clear, effective, and durable. | ||
| We commend this administration for embracing innovation and establishing the President's Working Group on Digital Assets. | ||
| And we also commend the new leadership at the SEC and CFTC for quickly moving forward to engage in real policymaking. | ||
| We look forward to supporting this important work on our new journey ahead. | ||
| The crypto industry is diverse and includes developers, decentralized protocols, centralized intermediaries, institutional and retail customers, and many others, each playing a very important role in expanding this new era of innovation. | ||
| Our industry will continue to work hard to forge consensus and support bipartisan passage of a market structure bill this year. | ||
| Thank you again for the opportunity to testify. | ||
| I look forward to your questions and our discussion. | ||
| Thank you, Mr. Yachim. | ||
| And now, Zaee Massari, Chief Legal Officer of LightSpark, is going to share her thoughts with us. | ||
| I'm so delighted you're here. | ||
| You're knowledgeable about both stablecoins and market structure, which we're starting with in this committee. | ||
| And all of us get questions about the use case for these assets, people who don't work with them on a regular basis. | ||
| And I know you have expertise in what makes stablecoins valuable to the economy, the manner in which stablecoins operate, and all of the legislative approaches to stablecoin legislation and regulation. | ||
| So we're very much looking forward to your testimony. | ||
| And thank you very much for being here. | ||
| The floor is yours. | ||
| Thank you, Chair Lamas, for that very kind introduction. | ||
| Thank you, Ranking Member Gallago and members of the subcommittee. | ||
| I'm really happy to be here speaking on this topic today. | ||
| I'm co-founder and chief legal officer of LightSpark, a company that is building modern payments on the Bitcoin Lightning Network. | ||
| Before LightSpark, I was a partner in the financial institutions group of Davis Polk, where I advised a wide range of banks, stablecoin issuers, and crypto firms on regulatory matters. | ||
| There should be strong bipartisan support for new laws to regulate stablecoins in crypto markets. | ||
| They will provide clarity, protect American consumers and markets, and help bring the United States back to the cutting edge of innovation in financial services. | ||
| These new laws must be based on strong fundamentals that reflect our best views about the benefits and risks of stablecoins and crypto markets as they should exist, not only based on the industry as it exists today. | ||
| Today, we can email, text, or call each other instantly and for low cost, no matter what brand of phone or computer we're using. | ||
| Payments can and should work the same way. | ||
| Stablecoins can help make this a reality. | ||
| Among other uses, they enable the 24-7 transfer of dollar value to anyone online. | ||
| They are uniquely suited for online commerce when they are properly regulated. | ||
| My comments today will focus on three fundamental aspects of stablecoins with recommendations for legislation. | ||
| Some of these points are already well addressed in bills being considered by the subcommittee and should be kept at the forefront as these bills move through Congress. | ||
| The first fundamental is that the true innovation of stablecoins is in their potential to be digital cash, always on non-credit money. | ||
| Unlike bank deposits, the money value of a stablecoin is supported by full reserves, not FDIC insurance or the creditworthiness of the issuer. | ||
| This means that someone using a stablecoin to pay or accepting a stablecoin for payment should not care which stablecoins are being used. | ||
| This is not true today, with users and markets correctly distinguishing between USDC, USDP, USDT, and so on. | ||
| Stablecoins as digital cash can be achieved through the following mechanisms. | ||
| Stablecoins must be backed one-to-one with reserves of high-quality liquid assets, with carefully calibrated capital buffers and liquidity requirements. | ||
| Issuers must be available to redeem the stablecoin at face value, for example, a dollar. | ||
| And in resolution or bankruptcy of the issuer, reserve assets should be segregated and beneficially owned by stablecoin holders. | ||
| These assets should be quickly liquidated and paid out to these holders in an orderly manner. | ||
| The second fundamental is that stablecoin issuers should compete based on innovative payment use cases, not on reserve design. | ||
| Of course, this requires getting reserve design right. | ||
| Reserve requirements that are too permissive reduce incentives for stablecoin issuers to innovate or compete based on the usefulness of their stablecoin. | ||
| At the same time, overly conservative reserve requirements make stablecoin issuance attractive only to the largest market participants or for those that can subsidize stablecoin issuance with other business. | ||
| In addition to striking the right balance on reserves, stablecoin legislation should promote a diverse and competitive stablecoin issuer landscape. | ||
| It should allow for issuers of different types, banks, bank affiliates, as well as non-banks, with different kinds of business models. | ||
| It should establish minimum operational and compliance requirements for all issuer types. | ||
| It should address potential conflicts of interest or other concerns about affiliates through limits on affiliate transactions. | ||
| And should impose common enhanced standards for all issuers for access to Federal Reserve payment systems and master accounts. | ||
| This approach will create a more competitive, multi-issuer world and incentivize issuers to compete on payment solutions and utility rather than on reserve size and returns. | ||
| Third, we should use stablecoin legislation as a way to level up our approach to financial crimes and compliance and privacy. | ||
| The industry has built new compliance tools, including chain analytics and technology to freeze or block stablecoin transactions to meet BSA requirements that have long applied to stablecoin issuers and those providing money transmission services using stablecoins. | ||
| Similarly, the industry is developing new tools to address privacy considerations raised by on-chain transactions, which can reveal sensitive information about consumer and business payments and can put user privacy at risk. | ||
| These tools are a critical way to advance new and better technologies for better, more efficient, more informative, and less costly financial crimes and privacy compliance. | ||
| While these technologies are designed to benefit stablecoin use, they can also be leveraged more broadly in crypto and even in traditional financial services. | ||
| Stablecoin legislation should set strong and clear standards for illicit finance and sanctions requirements. | ||
| It should also provide for time, flexibility, and incentives to develop new and better ways to address these requirements. | ||
| Thank you again to the subcommittee, Chair Lemmis, Ranking Member Gallego, and the hardworking staff who are dedicated to getting stablecoin and crypto markets regulation right. | ||
| I'll be happy to answer questions. | ||
| Thank you, Ms. Massari. | ||
| And our last witness is Tim Massat, a research fellow at Harvard Kennedy School, and very helpfully to this discussion, former chair of the Commodity Futures Trading Commission under President Obama. | ||
| We're very much looking forward to your view on potential approaches to stablecoin and market structure legislation and your emphasis on consumer protection. | ||
| And we'd love to hear your thoughts about the Genius Act, Lemmis-Chillibrand, and FIT21. | ||
| Mr. Massat, the floor is yours. | ||
| Thank you very much, Subcommittee Chairman, Lemis, Subcommittee Ranking Member Gallego, members of the subcommittee and staff. | ||
| I'm honored to be here today. | ||
| The views I express are my own and do not represent the views of Harvard Kennedy School. | ||
| You know, it was in 2014 that the CFTC, under my leadership, declared Bitcoin a commodity. | ||
| And ever since then, for over 10 years now, I've been writing about the need to strengthen regulation in this area and bring clarity. | ||
| Everyone wants clarity. | ||
| We can all agree on that. | ||
| But you can have clarity with bad rules. | ||
| We need to create a regulatory framework that encourages responsible development of this technology, as the ranking member said, and not one that just leads to more of the speculative activity and abuses that we've seen far too much of to date. | ||
| I'm happy to focus on stablecoins, the most useful application of the technology to date, and I applaud the subcommittee for prioritizing this. | ||
| The Genius Act has many features I support, such as full reserves for tokens, conservatively invested, and limitations on the activities of an issuer. | ||
| But there are many areas where it is deficient. | ||
| It is substantially weaker in many respects than the McHenry Waters proposal that was negotiated between House Republican and Democratic members last fall, and it's substantially weaker than what Europe and other jurisdictions have put into place. | ||
| First, the basic prudential requirements need to be strengthened. | ||
| This includes how the reserves are held and invested and whether regulators have sufficient authority to establish rules regarding reserves, capital, liquidity, and other risk management standards. | ||
| In addition, the proposal limits States' authority for licensing and supervision to situations where there is a substantially similar state framework and an issuer below $10 billion in market cap. | ||
| That's a good concept, but I would lower the threshold and explicitly require States to still follow some minimal Federal standards. | ||
| Second, the legislation does not address the bankruptcy of a stablecoin issuer. | ||
| This means that the standard corporate bankruptcy process would likely apply, which would likely take a long time. | ||
| The fact that the proposal gives holder a priority claim is good, but it does not assure them a full recovery even at the end of that process. | ||
| Ideally, the legislation should create a dedicated resolution process that returns money to holders quickly and minimizes collateral damage. | ||
| Third, the Genius Act does not do enough to address the risks of financial crime and evasion of sanctions. | ||
| It's good that it says stablecoin issuers are subject to the Bank Secrecy Act, or BSA, but the BSA focuses on obligations on centralized intermediaries. | ||
| Stablecoins can be transferred and traded without going through a centralized intermediary, whether that's on a self-hosted wallet or on an automated decentralized platform, and they can be transferred through centralized platforms in jurisdictions that don't comply with BSA-type rules. | ||
| We need to extend the regulatory perimeter and be more creative in tackling the AML and CFT challenges, as I discuss in my testimony. | ||
| Fourth, the Genius Act does not have strong enough enforcement provisions. | ||
| Three of the five largest dollar-denominated stablecoin issuers are offshore, including Tether. | ||
| The legislation should have a clear enforcement mechanism, strong criminal and civil penalties, and an explicit extra-territoriality provision. | ||
| Fifth, the proposal does not address questions of competition and concentration of power, including limits on affiliate relationships and transactions, and how to ensure a level playing field among competing platforms, including potentially by giving them access to the central bank payment infrastructure. | ||
| Finally, I urge the subcommittee and the Congress to get stablecoin legislation in place first and defer for now consideration of market structure legislation for several years. | ||
| For four years, the crypto industry has called on the SEC and CFTC to develop rules and guidance and to stop regulating by enforcement. | ||
| That is now happening. | ||
| The SEC has dropped enforcement cases and launched a crypto task force to tackle these issues. | ||
| We should let these regulatory initiatives make progress before rushing to rewrite the securities laws. | ||
| Many of the market structure proposals made to date, in my mind, would create more confusion than clarity regarding when a digital asset is a security, a commodity, or neither. | ||
| And they have the potential to undermine our securities laws. | ||
| That is particularly true of proposals that focus on decentralization. | ||
| That term and DeFi are used to describe a lot of things that aren't decentralized. | ||
| There are almost always some vectors of control. | ||
| And even if a process is decentralized or automated, that does not mean it should be exempt from regulation. | ||
| As I discuss in my testimony, I think there are other ways for Congress to advance the goals of clarity and market structure without substantially rewriting our securities laws at this time. | ||
| Finally, with all due respect to the subcommittee chair, I join the many voices from across the ideological spectrum expressing opposition to a Bitcoin strategic reserve for reasons that I have discussed in my written testimony. | ||
| Thank you, and I am happy to take your questions. | ||
| Thank you to our panel. | ||
| And we will begin with questions. | ||
| The chair recognizes herself for five minutes. | ||
| Mr. Cohen, I am going to begin with you. | ||
| From a legal perspective, why are most digital assets not properly classified as securities today? | ||
| Thank you, Chair. | ||
| This is a really important question, and it has flummoxed many in the space, lawyers, judges, and regulators alike. | ||
| What characterizes a security is a legal relationship between an issuer and the investor. | ||
| So when you think about, for example, a share of stock, there is a legal relationship, not necessarily a contractual relationship, but a legal relationship that identifies who the issuer is. | ||
| A security is not the piece of paper it is printed on, the digital asset, or any other representation. | ||
| It is a relationship that the law recognizes, whether that is debt or equity. | ||
| The vast majority of digital assets that are traded right now simply do not evince that relationship with any other person. | ||
| The reason this becomes so important, Chair, from a securities law perspective is that there is no one that actually can take permanent responsibility for that asset. | ||
| This is why this has been so challenging. | ||
| Whether we think of, for example, the Ether token, there is an Ether foundation, but if that foundation wound itself up, the token would continue to exist. | ||
| This is unlike any security that is out there. | ||
| So to constitute a security, has the Howey test historically required some kind of written or verbal legal relationship after the sale of an asset? | ||
| Senator, the Howey test has focused historically prior to the advent of digital assets on transactions that purported to be commercial in nature. | ||
| I'm selling you something, chinchilla, what have you. | ||
| And it turns out that the actual activity going on that courts have recognized is really more of an investment. | ||
| I didn't want those chinchillas. | ||
| What I really wanted was to make a return based on your managerial or entrepreneurial efforts. | ||
| Many digital assets are sold in the same way. | ||
| However, in none of those cases, zero exactly, has any court stated that that kind of relationship makes some asset that is not itself a security is sort of embodiment of a securities transaction. | ||
| So the law has not recognized or placed on non-security assets some characteristic of being a security simply because they were sold in digital assets. | ||
| And in the paper I mentioned, the inelectable modality of securities law, we reviewed each and every appellate case on Howey from the Howey case onward, and you can see in our appendices analysis that reaches that conclusion. | ||
| Thank you. | ||
| Mr. Yachim, where in the United States is a relationship to other countries in setting up a framework for digital asset exchanges to register? | ||
| How do we stand? | ||
| Thank you for the question, Chairwoman. | ||
| Behind, but in a strong position to catch up quickly. | ||
| We've seen progress. | ||
| Kraken's a global company. | ||
| We've seen other jurisdictions, major jurisdictions, G10 markets, move forward with legislation, move through the regulatory phase, finalize rules. | ||
| And we've worked with policymakers in those jurisdictions to put those in place, which is why it is so critical after many, many years of hard work in Congress that we move forward with this foundational step to pass a market structure bill. | ||
| Thank you. | ||
| And Ms. Sari, why do stable coins make payments faster and cheaper? | ||
| Here again, the use case issue. | ||
| Such a good question. | ||
| It's always the first and most important question when talking about crypto. | ||
| The way I think about stable coins is they are a new fast money, right? | ||
| So they are inherently on-chain. | ||
| They can be transacted in online on-chain transactions 24-7 with anyone that can access a crypto wallet. | ||
| They also can be transacted only on chain. | ||
| No complicated clearing mechanism needs to happen to make sure that transactions are settled behind the scenes, as is the case for bank deposits and other forms of electronic money that we have today. | ||
| So this is really a new form factor for money that can work as digital cash and it can be transacted instantly 24-7 around the world. | ||
| That's something that doesn't exist today. | ||
| And how does the Genius Act put in place common sense prudential standards for stable coins? | ||
| I think the Genius Act goes a long way to providing the kind of foundational elements that will make stablecoins good money. | ||
| So prudential standards for reserves are probably the most important point. | ||
| Another is requirements for redemption of stable coins by the issuers. | ||
| That's what makes stablecoins good money. | ||
| Capital and liquidity requirements against reserve assets are a third aspect that are really important. | ||
| And then I think the Genius Act goes a long way in trying to define different types of stablecoin issuers, how they must be regulated, how they must be chartered, and how they must be registered. | ||
| And I think those are really fundamental aspects of the bill. | ||
| Thank you, panel. | ||
| I recognize Mr. Galley. | ||
| Mr. Galley, go for five minutes. | ||
| Thank you, Madam Chair. | ||
| One of the main reasons I think Congress needs to act on digital asset legislation is to ensure the U.S. remains competitive in this given space, especially the rapid pace of digital asset regulation internationally. | ||
| But it's equally important we avoid regulatory arbitrage. | ||
| Sir, Mr. Yachim, sorry if I said that incorrectly, Kraken operates globally in jurisdictions with established digital asset regulations. | ||
| What elements from these international frameworks should Congress consider incorporating into legislation to ensure U.S. competitiveness and innovation? | ||
|
unidentified
|
Thank you for the question, Ranking Member. | |
| I think there are two fundamental components here. | ||
| One is regulation of centralized intermediaries, including exchanges. | ||
| This is the most fundamental basic step. | ||
| I've been involved in market regulation most of my career. | ||
| There are very common components to how you regulate centralized markets. | ||
| There are unique risks and opportunities that digital asset markets prevent. | ||
| But when you talk about registration, disclosures, rules around market integrity, rules around operational resilience, those are all fundamental components of market regulation. | ||
| We've seen these jurisdictions put that basic first step in place. | ||
| The other component has been simplicity. | ||
| So rather than attempt to bluntly apply traditional rule books to the digital asset markets, jurisdictions have simply called this market and this new asset class crypto asset in many markets. | ||
| And I think that's fundamental to this discussion today. | ||
| When we talk about the path forward here in the United States, the jurisdictional lines, the tests, the oversight needs to be simple in order to be durable and to be on par with what the rest of the world has moved forward with. | ||
| Ms. Basari and Ms. Massad, afterwards, what other lessons can we learn from other countries to shape our approach to digital asset legislation? | ||
|
unidentified
|
Thank you for the question. | |
| I think it's really informative to look at jurisdictions that have gone before us. | ||
| I think, as I mentioned in my comments, we need to think about what the industry should look like, not only what it looks like today. | ||
| And I think perhaps some other jurisdictions who have gone very, very quickly with digital asset legislation, whether it's on stablecoins and markets, may have moved too soon and have been slightly backward-looking in how they regulate. | ||
| And I think as we think about, particularly as I focused on stablecoins, we should think about the real opportunities they present, what makes them different and unique and important for better modern payments and aim legislation in that way to be forward-looking. | ||
| And I'm not sure that that's happened in other jurisdictions. | ||
| Mr. Masid. | ||
|
unidentified
|
Thank you. | |
| I think there's also a lot we can learn. | ||
| Starting with stablecoins, I think some of the jurisdictions that have gone ahead of us have put in some very good measures. | ||
| Europe, I think, has overall a much stronger prudential and customer protection framework than is in the Genius Act or the Stable Act. | ||
| The authorities have greater discretion to specify necessary rules on a variety of requirements. | ||
| There's stress testing, diversification requirements. | ||
| And Europe has said stablecoins don't pay interest, can't pay interest, which is also something we should be thinking about. | ||
| Can't or can, I'm sorry. | ||
|
unidentified
|
Cannot. | |
| Because that turns them into more of an investment vehicle, and that raises a lot of issues. | ||
| So you don't want to allow the payment of interest and at the same time exempt them from being securities. | ||
| In the market structure area, you know, one thing I would point out that's often not noted is under the MECA framework, yes, they created this framework for crypto assets, but they made it very clear that crypto asset does not include a financial instrument. | ||
| And their financial instrument definition is very similar to our securities definition. | ||
| So they're facing these difficult jurisdictional questions as we are too. | ||
| They're just inherently hard. | ||
| So I think maybe we can learn from where they are on that. | ||
| And some bills have also proposed using a bankruptcy process to resolve user claims if a stablecoin issuer fails. | ||
| But bankruptcy can take years. | ||
| And Ms. Massari, you actually talked a little bit about this in your opening statements. | ||
| What other mechanisms should we consider so that if a stablecoin issuer fails, users can still get their money back quickly while other creditors go through the bankruptcy process. | ||
| So essentially, for that person that is holding a lot of this, they don't have the bandwidth nor the reserves to basically wait until the bankruptcy process finishes. | ||
|
unidentified
|
This is a really, really important question. | |
| Thank you for asking it. | ||
| And I think Mr. Massett also touched on it in his remarks. | ||
| This point is not only important out of a matter of fairness for stablecoin holders when or if something goes wrong with their stablecoin issuer, but instead it's fundamental sort of ex ante to make the money good money, right? | ||
| Because build confidence that if something bad happens, they will be able to get their money out, just like we do for bank resolutions by the FDIC. | ||
| The priority is to make sure that depositors can have access to their deposits as quickly as possible. | ||
| The concept is the same and really important. | ||
| I think priority over reserve assets for stablecoin issuers is part of it and it's an important part of it. | ||
| But exactly as you've said, the result of that could still be an extended process in bankruptcy. | ||
| I think a stablecoin bill should provide for clear rules under which stablecoin holders own assets from the reserve at the time of a bankruptcy or resolution of the issuer so that it's not part of the bankruptcy estate and then can be paid out very quickly. | ||
| I think a mechanism like that will serve better both to promote confidence in the value of the money up front as well as be fair to issuers on the way out. | ||
| Thank you. | ||
| Thank you, Mr. Madam Chair. | ||
|
unidentified
|
Thank you. | |
| The chair recognizes Mr. Haggerty for five minutes. | ||
| Well, thank you, Senator Lumis. | ||
| I appreciate your leadership on this subcommittee and for holding this hearing today. | ||
| And welcome to all of our witnesses here. | ||
| I'm just going to provide a sort of broad set of statements here so everybody can relax for a moment. | ||
| And let me touch on my view in terms of the need for providing a legislative framework for digital assets. | ||
| To me, it's overwhelmingly clear. | ||
| The lack of clear rules has stifled innovation and sent businesses offshore to date. | ||
| It's also weakened consumer protections by forcing activities into foreign jurisdictions that don't have the kind of standards that Americans would expect. | ||
| Solution, and this is sure to be a bipartisan solution, is to provide what innovators, consumer protection advocates, and our financial markets crave, and that's legislative clarity. | ||
| My colleagues and I have already taken concrete steps toward developing constructive policies that advance this mission. | ||
| I'm proud to have sponsored the Genius Act alongside Senator Lumis, Chairman Scott, Senator Gilbran, and Senator Also Brooks, all of this to establish a common sense framework for stablecoin issuance in the United States. | ||
| The United States can and should be a leader in payment stablecoins. | ||
| They improve transaction efficiency, expand financial inclusion, and strengthen the dollar status as a world reserve currency, all while driving demand for U.S. Treasuries. | ||
| I'm optimistic that we'll advance this legislation and demonstrate that a common sense framework for digital assets is a bipartisan priority. | ||
| This progress will build momentum in other crucial areas, such as market structure for digital assets. | ||
| The status quo of having no regulation does nothing to stymie bad actors and is pushing innovation beyond our shores. | ||
| We need regulatory clarity for digital assets to both protect consumers and to be a leader in the industry. | ||
| Thank you, Madam Chair. | ||
|
unidentified
|
The Chair recognizes Ms. Smith. | |
| Well, thank you, Madam Chair and Ranking Member Gallego, and thanks to all of our panelists for being here today. | ||
| I appreciate this very much and having an opportunity to learn about and hear your thoughts about what we need to do to provide a robust and reasonable regulatory framework, especially for stablecoin. | ||
| And I want to focus my questions on kind of better understanding how consumer protections should work for stablecoin and how they might work under the Genius Act in particular. | ||
| So, Mr. Massad, let me ask you. | ||
| So, under current law, financial institutions are subject to the Bank Secrecy Act. | ||
| So, that means that financial institutions are required to actively work to detect and prevent money laundering and terrorism financing and other illicit uses of our financial system. | ||
| So, I want to understand how this would work under the Genius Act. | ||
| So, as I understand it, the Genius Act would extend these obligations under the Bank Secrecy Act to issuers of payment stablecoins. | ||
| Is that how you understand it? | ||
|
unidentified
|
That is correct, yes. | |
| Okay. | ||
| And so, then under this legislation, what would happen once a payment stablecoin is issued on the public blockchain? | ||
| What happens to those Bank Secrecy Act obligations once the stablecoin is issued? | ||
|
unidentified
|
Thank you for the question, Senator. | |
| The challenge is that those stablecoins can then be transferred without going through a centralized intermediary. | ||
| Our entire BSA, AML, CFT framework relies on centralized intermediaries. | ||
| All transactions run through those centralized intermediaries in some way. | ||
| And so, we have imposed obligations on those intermediaries, banks and others, to do the compliance checks that we want. | ||
| Stablecoins are very different in that once they've been issued, they can be transferred, exchanged for other crypto assets without going through a centralized intermediary. | ||
| So, we have to sort of creatively rethink how we achieve these goals. | ||
| And I think that includes extending the regulatory perimeter, if you will, but also looking at a lot of other creative measures, requiring stablecoin issuers to aggressively monitor transactions and freeze stablecoins, looking at ways to design the smart code of a contract so that a transaction doesn't go through unless someone has effectively been cleared by an appropriate authority. | ||
| And there are other measures as well that I talk about in my testimony. | ||
| And so, as the bill is written right now, network participants come along after to facilitate transactions. | ||
| They wouldn't be required, as the bill is written right now, in your understanding, to meet the obligations of the Bank Secrecy Act. | ||
|
unidentified
|
Unless they are a money service business registered with Treasury, it would not be. | |
| Okay, okay. | ||
| So, let me ask you another question. | ||
| When bank regulators review applications for charters or for deposit insurance, they consider a bunch of factors, including the character and the fitness of management. | ||
| And that seems reasonable to me. | ||
| You want to make sure that if you are opening up a bank or you are safeguarding somebody's money, that management is up to the task and that boards follow basic risk management and so forth. | ||
| So, my question, my next question is this. | ||
| Stablecoin issues, they perform a similar function, I would argue. | ||
| Consumers give them their money, and in exchange they get a stablecoin and the promise that they can always come back and redeem that stablecoin for a fixed price. | ||
| Would the Genius Act or should the Genius Act or should our regulatory framework require stablecoin issues to be vetted for character and fitness as we do for other financial institutions? | ||
|
unidentified
|
Excellent question, Senator. | |
| My reading of the Genius Act is it does not require that. | ||
| I think it should require that. | ||
| It should include that as a part of the application review process that was contained in the McHenry Waters proposal that was negotiated in the House. | ||
| Similar standards are in the European legislation and in other countries' legislation. | ||
| I mean, the concern would be you could, I mean, literally, somebody like Sam Bankman-Fried could issue a payment stablecoin, and regulators wouldn't have any legal grounds to deny his application based on his history, just as sort of maybe an extreme example. | ||
| But let me just get it one more thing in the short time I have left. | ||
| There's this risk of protecting, there's a need to protect from theft and fraud. | ||
| If somebody falls victim to a hack or a scam, their assets could be gone for good, and there's no reversing that transaction. | ||
| And we've seen this, of course, happen with digital assets. | ||
| So if a consumer's bank account is hacked or their debit card, for example, is stolen, people are protected, right? | ||
| Their liability is limited. | ||
| Correct. | ||
|
unidentified
|
And what laws That's the Electronic Funds Transfer Act, which does apply in those cases. | |
| It's very murky with respect to stablecoins. | ||
| It's not clear whether stablecoins would be treated as funds, whether the accounts would be covered. | ||
| The CFPB put out a proposal a couple of weeks ago, but obviously that is not moving anywhere given the effective closing of the CFPB. | ||
| But those are very challenging issues, particularly again because these are bare instruments that can travel on a decentralized blockchain. | ||
| Certainly, though, with respect to entities that are providing accounts or entities that are interacting, intermediaries, we should have similar protections as we have under the EFTA with banks. | ||
| It seems to me that there is no specific, there is no mention anywhere of the Electronic Funds Transfer Act or CFPB. | ||
| It seems to me that that would strengthen this bill if it was clarifying that. | ||
| I thank you for your lenience, Madam Chair. | ||
| I appreciate this hearing very much. | ||
| And I want to say that I think establishing a robust framework for stablecoins is extremely important. | ||
| And I look forward to the ongoing work that we can do to make sure that these consumer protections are addressed in the bill. | ||
|
unidentified
|
Thank you very much. | |
| The chair recognizes Mr. Tillis for five minutes. | ||
| Thank you, Madam Chair. | ||
| Welcome, all of you. | ||
| I've had the belief that we do need a light regulatory regimen, but it has to be Goldilocks just right for us to really reemerge. | ||
| I think, Mr. Yoakam, you said that we are behind but poised to catch up and maybe surpass. | ||
| So I think that we have to figure out the way the markets and activities are properly regulated. | ||
| But we also have to make sure that we don't have flight to foreign jurisdictions if we get this wrong. | ||
| So I guess one question I'll have for you, Mr. Yoakum, is what country is a best practice, fill in this blank, if you agree with it, if we would only implement a regulatory regimen like BLANK, we would be the head of the pack. | ||
| Is there an answer to that question to anybody here on the panel? | ||
| I'll start with you. | ||
|
unidentified
|
Thank you for the question, Senator. | |
| Look, I think the U.S. needs to design rules and policy that are fit for the U.S. markets. | ||
| I think we can look to other jurisdictions for examples. | ||
| In doing so, how do we develop a competitive advantage, jurisdictionally speaking, with what you'd consider to be a best practice today? | ||
| What country is that and why are they a best practice today? | ||
|
unidentified
|
I think if you look to the European Union, for example, and the United Kingdom, and again, other G20 markets, they've kept it simple. | |
| And they've said, look, these are a diverse group of asset classes. | ||
| We list over 300 assets on our platform. | ||
| There's Bitcoin, there's stablecoins, and many others, and they have very diverse characteristics. | ||
| But if you start drawing complex lines and complex texts and bifurcate markets, that becomes problematic. | ||
| So I think we can look to simplicity as an example. | ||
| Ms. Mazari, you have anything to say to that? | ||
|
unidentified
|
I think this is a great question. | |
| I think maybe I'll focus a little bit on the stablecoin front. | ||
| I think proposals in the EU might make some mistakes. | ||
| Proposals in the UK might make some mistakes, either in getting the reserve requirements too restrictive, very few are too permissive. | ||
| My concern with overly restrictive reserve requirements is it really makes it difficult for new entrants to come into the markets and instead face-to-face. | ||
| Have you looked at any of the proof of reserves proposals here in Congress? | ||
|
unidentified
|
I haven't actually on the proof of reserves point. | |
| But I think if we get, to your point, the Goldilocks positioning just right, we can have better competitive markets for stablecoin issuance, which I think is what's really needed. | ||
| I don't think we have that today with our duopoly. | ||
| Mr. Cohen, where do you think the biggest gaps are for the U.S.? | ||
| If you were instructing us on prioritizing tranches of regulations, what must come in the first tranche? | ||
|
unidentified
|
Thank you, Senator. | |
| One point you asked about regarding other jurisdictions and the U.S. and what we can take away, it's important to bear in mind the U.S. has a bifurcated market regulatory structure with the CFTC and the SEC. | ||
| So right off the bat, one of the first things that needs to be done is have a clear policy around how market participants can determine, am I engaged in a securities transaction? | ||
| Am I not? | ||
| That's caused immense consternation for everyone in the space, be they centralized exchanges, people who act as broker dealers, issuers, and others. | ||
| So as a priority matter, the Lumas-Gillibrand Responsible Financial Innovation Act would provide such a clear and bright line test. | ||
| Is the asset one that's been issued by someone who is a legal issuer? | ||
| Where that's not the case, the transaction in which those assets are sold may attract securities treatment, but secondary trading between Bob and Alice are not securities transactions. | ||
| Once we put a line in the sand, the market can respond by creating appropriate frameworks for each of these two categories, those that are appropriately required disclosures of issuers and those that are more commodities-like and are treated in a similar way to Bitcoin and Ether. | ||
| Mr. Mossad, I'm really worried. | ||
| I got a briefing from DEA, a classified briefing, a couple of years ago, and just looking at the, you know, anybody that thinks that transnational criminal organizations are carrying along suitcases of money now haven't paid attention to how illicit money laundering is occurring today. | ||
| And it's mainly on these various platforms, particularly crypto platforms. | ||
|
unidentified
|
How do we you're absolutely right. | |
| Architecturally, we're not AMLBSA architecturally dealing with a centralized sort of process. | ||
| Is there any jurisdiction out there that's found the secret sauce in how to, on the one hand, make the participants in payments and settlements responsible? | ||
| On the other hand, really be able to identify any of the kinds of patterns that we use for SARS and AML activities? | ||
|
unidentified
|
It's an excellent question, Senator. | |
| I don't think any jurisdiction has found the secret sauce yet. | ||
| I think everybody is focused on this. | ||
| I think it is going to be a combination of things. | ||
| One is extending the kind of current framework to jurisdictions, to intermediaries who aren't complying. | ||
| That's a big part of the problem. | ||
| A second, though, is looking at this technology and trying to think about ways that we can sort of reach the same goals. | ||
| And these ideas of essentially being able to program smart contracts so that transactions can't go through unless someone has been properly vetted is one that at least I hear a lot of conversation about. | ||
| You can also put more obligations on the stablecoin issuers than I think the current proposals do. | ||
| We have seen Japan do that. | ||
| We have seen other countries do that where they require more aggressive monitoring and freezing of stablecoins. | ||
| That's easy for some class of stable coin issuers. | ||
| If you happen to be a bank, it's not so easy with some of the other ones. | ||
| So we look forward to the continued discussion. | ||
|
unidentified
|
Thank you. | |
| We're pleased to welcome Senator Werner. | ||
| Do you need a minute? | ||
| I'm always willing to pontificate, but could you give me a minute, Mark? | ||
|
unidentified
|
Absolutely. | |
| I'll ask one question. | ||
| Would you like another question, Mr. Gallego? | ||
| Okay, great. | ||
| Mr. Cohen, the SEC has tried to advance a legal argument that digital assets embody an underlying investment contract. | ||
| So is this supported in case law? | ||
| And what would be the effect of using that legal argument as a statutory requirement or definition? | ||
| Senator, that is a very important question. | ||
| The reality is that the SEC has developed a novel theory when they failed at other approaches in this regard. | ||
| Initially, the SEC characterized all digital assets as crypto asset securities, and they very plainly said this in their complaints and court filings. | ||
| After that approach was rejected by courts, the SEC under the prior administration attempted to adopt a new theory that a digital asset may not itself be a security, but that it embodies in some way some sort of scheme. | ||
| The problem with that theory, Senator, is that there is just how do you know just because one says so? | ||
| There is nothing about a digital asset that suggests that a third party examining that asset could make any determination, does it or does it not embody something? | ||
| I can say, you know, this bottle of water here embodies my plan to do something, but you can't examine the bottle of water and reach that conclusion. | ||
| Several courts have very clearly rejected that theory by the SEC. | ||
| Obviously, we are now in a period where some of this litigation has ceased, and I think we can all be thankful for that. | ||
| But I do believe, Senator, that if the legislation continued, that theory would have been rejected by federal courts. | ||
| Thank you, Mr. Cohen. | ||
| Mr. Gallego? | ||
| Thank you. | ||
| So the bills under consideration do have a variety of penalties for violating the provisions. | ||
| Some will be civil penalties, while others have additional criminal penalties. | ||
| Mr. Cohen, Mr. Massid, given that bankers face criminal penalties for failing to comply with certain banking laws, shouldn't we also apply somewhat of the same standard when it comes to digital assets? | ||
|
unidentified
|
I guess I will go first, Senator. | |
| Thank you. | ||
| Yes, I would agree. | ||
| Those criminal or civil penalties should be in line with equal activity when done in other markets. | ||
| So, for example, issuers can face both civil and criminal penalties if they sell securities on the basis of misleading statements. | ||
| If they are deliberate and intentional, fraudulent activity, they can face criminal as well as civil penalties. | ||
| That should not be differentiated when what the securities transaction involves digital assets. | ||
| However, we shouldn't create new penalties that are specific simply to the technological means by which those securities transactions occur. | ||
| Got it. | ||
| Mr. Massid? | ||
|
unidentified
|
Excuse me. | |
| I would agree with that. | ||
| We do need to incorporate criminal and civil penalties and have a very clear enforcement mechanism. | ||
| The Genius Act, to my mind, doesn't have that. | ||
| The Stable Act doesn't have that. | ||
| And I think that's not just important for the substance. | ||
| I think it sends a strong signal, too. | ||
| It sends the signal that we want, that we won't tolerate violations of the law. | ||
| Thank you. | ||
|
unidentified
|
Mr. Warner, you are recognized for five minutes. | |
| Thank you, Madam Chairman. | ||
| And I appreciate you and Senator Gallego. | ||
| I'm still in the catch up with these guys in terms of learning this stuff. | ||
| About four or five years ago, I had some of it in my head, but I think it's long gone. | ||
| I come to this with the notion from my role on the Intel Committee, so I think we have to make sure we get national security right. | ||
| I agree with my colleagues, we have to get consumer protection right. | ||
| And I think at the end of the day, we have to make sure we maintain the resiliency of the Treasury market, which frankly is the backbone. | ||
| And there are huge opportunities here, but I think there are challenges. | ||
| One of the things, as we think about AML and Senator Tellis' comment, AML, PSA, I do know a number of the stablecoin operators, issuers are actually doing KYC. | ||
| I think, Mr. Massad, you've mentioned that. | ||
| But I'm still trying to understand that there are even if they do KYC from their time as an issuer to they convert back to a fiat currency, in that transition there's some potential challenges. | ||
| I think you and your comments have addressed that. | ||
| Could you all address that? | ||
| I'll start with you. | ||
| Kind of like the enhanced monitoring of the blockchain during that transition. | ||
|
unidentified
|
Sure. | |
| It's a bearer instrument, Senator. | ||
| So a stablecoin issuer issues the stablecoin, although in some cases it licenses a third party to do that. | ||
| It can do KYC, but once that stablecoin has been issued, it can be transferred and locked. | ||
| Many, many times so that there is no requirement to follow that customer. | ||
| That's correct. | ||
| Because again, as you said, it's a bearer demand. | ||
|
unidentified
|
Yeah, and I can transfer it from a self-hosted wallet to another self-hosted wallet, and that can happen several times. | |
| And that's why we've seen these things be used to evade sanctions and for money laundering by Russian smugglers, by Hamas, and by others. | ||
| Will others come in? | ||
| Because listen, I want to get to a regulatory framework that works, but I have seen echoing what others have said from the classified side, oh my gosh, a whole bunch of bad stuff. | ||
| So help me figure out, and I recognize some people the anonymity and the disintermediation role that blockchain plays, but how do we put some minimum protections from issuer all the way back to conversion to fiat? | ||
|
unidentified
|
I'm happy to jump in, Senator, for a moment. | |
| I agree with you. | ||
| I think the risks to stablecoin markets, issuers, and to be honest, the use of stablecoins at all as a true means of payment is dependent on our ability to get it right when it comes to combating illicit finance and enforcing sanctions. | ||
| I think everyone must agree with that. | ||
| I think, you know, as Chair Massad was saying, when a stablecoin issuer sells stablecoins into the market, they are KYCing everybody that they're directly transacting with. | ||
| That's one place KYC happens. | ||
| You're exactly right that when transactions happen between self-custody wallets, there isn't KYC obligations on those, and so those can happen without KYC. | ||
| But there is an immutable on-chain record of those transactions that can be monitored not only by the issuer, but third parties, including law enforcement. | ||
| And I think that happens quite a bit today. | ||
| And then the But isn't there that process of the mixers where you can, you know, following it through that path? | ||
| You may still have the blockchain to follow the entity, but you may not know who really that entity is without a KYC next to it, right? | ||
|
unidentified
|
Absolutely right. | |
| I think people can use a variety of different technologies to, on purpose, obfuscate their financial transactions. | ||
| I think that's true on blockchain. | ||
| That's true in traditional financial and payment services as well. | ||
| I think it's a really important issue. | ||
| And I agree that we need to continue, as the industry has done, to continue to develop new tools to address these issues. | ||
| I think one other piece is when KYC happens is when a user transfers a stablecoin to a custodial wallet. | ||
| So in exchange, another wallet service. | ||
| That's another point of KYC, right? | ||
| So the gap, I think, is largest when you're talking about unhosted wallet transfers. | ||
| And in some sense, it's like slightly better than digital or slightly better than paper cash in this sense, right? | ||
| Because there is the on-chain history. | ||
| Is it sufficient? | ||
| Should we be satisfied? | ||
| But I think Senator said people are not walking around with bags of cash. | ||
|
unidentified
|
It's heavy, yeah, it's heavy to carry cash, right? | |
| It's not heavy to carry stable coins. | ||
| And I think that is a difference that matters, and we have to always seek to do that. | ||
| Madam Chair, can I go ahead and get the other two to make a comment? | ||
| Gentlemen? | ||
|
unidentified
|
Senator, I think it's important to distinguish in the stablecoin context between primary issuance and transacting on secondary markets. | |
| So Kraken's role in the market is as a centralized intermediary. | ||
| And we have a platform where we know who's coming in, who's coming out. | ||
| We track not only KYC, so we know everyone coming into our platform. | ||
| Anything that leaves our platform, if there's any risk of it hitting a sanctions address, it's blocked. | ||
| There's enhanced monitoring tools. | ||
| So I think, again, back to the role centralized intermediaries play, this is why we believe it's so essential for the United States to move forward with market structure legislation that would put that basic market regulation, create a level playing field for all centralized intermediaries. | ||
| 90% of transactions today, almost up to 90%, are conducted through centralized intermediaries. | ||
| And my colleague, Mr. Massett, is absolutely correct. | ||
| There is an ecosystem out there that is outside of centralized intermediaries, but the surveillance, the traceability that is available because of blockchain technology is unparalleled. | ||
| And we've seen this with hacks, right? | ||
| The ability to quickly find, track, trace financial crime is unparalleled to any technology we've seen in history. | ||
| Mr. Cohen, can you? | ||
|
unidentified
|
I'll just quickly comment to say, again, I agree with my colleagues here. | |
| You're right, these are difficult questions, but there are trade-offs involved in any new technology. | ||
| I think we briefly alluded to the ability with crypto assets to freeze and seize. | ||
| That's different from tracking, but it can mean that if a stablecoin issuer identifies that a particular amount of stablecoin is at an address controlled by an illicit actor, they can functionally turn that off at that time. | ||
| That's not a feature that we have today with paper money that once achieved or other assets. | ||
| It's important, remember, illicit finance occurs through many ways, through valuable, movable assets. | ||
| And stablecoins, in many ways, are a step change better than a lot of other assets. | ||
| Right, but if we're saying this is better than bags of cash, I would agree, I grant you that, whether this is something that we ought to fully embrace. | ||
| And I want to get the yes. | ||
| So I want to be clear. | ||
| I want to get the yes. | ||
| But in our whole financial system and trying to measure the risks, I think back about the colonial pipeline hack, where we were able to recover about a third, and I need to get from the classified sideway we couldn't get the other two-thirds. | ||
| But I need further, and I get the intermediary role, you're going in, going out. | ||
| But as you obviously lived through a lot of you, I can still remember when the Meta Boys came up with their initial plan a number of years back. | ||
| But you got to help those of us who want to get there on how we can not get rid of the innovation, not slow, and bring this back to America. | ||
| Clearly, having it onshore is better than offshore, and entities like Tether would be bring them back. | ||
| But you got to help us fill this out. | ||
| I'll keep listening, Madam Chairman. | ||
| Thank you. | ||
|
unidentified
|
Thank you. | |
| Before I recognize Mr. Marino, we have another committee member here. | ||
| So I will recognize Mr. Marino for five minutes. | ||
| Well, thank you, Mr. Chairman. | ||
| Thank you, Madam Chairman, for putting this committee together. | ||
| And I'll take off right where Senator Warner ended. | ||
| So let me see if I can help you get the yes. | ||
| And maybe the four of you can chime in for me. | ||
| I think one of the, so let's always start with the things that we agree on. | ||
| So you don't have to chime in necessarily unless you disagree. | ||
| There should be certainty, correct? | ||
| And no disagreements? | ||
| Okay, look at that. | ||
| We see progress. | ||
| We should make certain that the regulation. | ||
| How are you defining certainty? | ||
| Well, certainty means like you know what the rules are, like you know what the rules of the road are. | ||
| Does that make sense? | ||
| They're also transparent. | ||
| In other words, you don't find out through an enforcement action. | ||
| You don't find out, like, for example, I guess I would use a car analogy. | ||
| You're driving down 95. | ||
| You don't know what the speed limit is until a cop pulls you over and tells you. | ||
| That's stupid. | ||
| We can agree on that, right? | ||
| There's signs. | ||
| Tell you what the speed limit is. | ||
| So we agree on that. | ||
| We should agree that we should be fair, right? | ||
| We should have unfair agreements. | ||
| And then, most importantly, this is where I think we're having problems here. | ||
| And I honestly understand it a little bit and don't understand it, because coming from the private sector, this place is decently perplexing to me. | ||
| Because I look at this and go, okay, well, government has this total, complete desire to control things. | ||
| And it feels like if something is not perfect, the government's role is to make something perfect. | ||
| There can never be a problem, because if there's ever a problem, the government's got to stop in and solve it. | ||
| So let's go back to some other technologies. | ||
| So none of you are this old, so I'm going to ask you, like, if you were the regulator with this kind of mindset in 1900, would cars be allowed? | ||
| I mean, cars have caused hundreds, if not millions, of deaths. | ||
| So you say, my God, how do we have millions of deaths over the last hundred years? | ||
| We should have never allowed the car to exist. | ||
| That obviously today would seem like an idiotic comment. | ||
| Now, Ohio, proudly not Pennsylvania, because we always know Ohio is better, has invented the airplane. | ||
| But airplanes crash. | ||
| Lots and lots of people have died in airplanes. | ||
| And by the way, have empowered foreign countries, have empowered foreign countries to be able to fly over our airspace and the airspace of our allies and cause all kinds of damage. | ||
| But we wouldn't ban airplanes because that again would be idiotic. | ||
| Personal computers, I think pretty good invention. | ||
| I remember sitting in my dorm room in college in 1985, I'll confess to that. | ||
| And my roommate saying, what the hell is that thing? | ||
| I said, it lets me send a message to somebody anywhere on Earth. | ||
| He goes, what a dumb idea. | ||
| He's currently a roofer. | ||
|
unidentified
|
All right. | |
| So then you look at the Internet. | ||
| The Internet, we can look at and say it's amazing opportunities that it's unlocked, but man, a lot of problems. | ||
| I mean, human trafficking and sex trafficking and child trafficking existed for as long as civilization has existed. | ||
| The Internet didn't create that. | ||
| But we don't ban the Internet. | ||
| Then if you look at social media, my God, social media is a total and complete disaster in a lot of ways, but to a lot of people, it's connected people that otherwise wouldn't be connected. | ||
| And so here we are with smartphones. | ||
| You know, they've caused a lot of havoc, too. | ||
| The point I'm trying to make is why all of a sudden when we got to digital currencies, did we decide here in Washington, D.C. and say, no, no, no, we are going to decide the pace of innovation, the way technology should work. | ||
| So this isn't so much of a question as I would like each of you to quickly comment. | ||
| Make the case as to why we shouldn't create the lightest touch possible Petri dish for innovation to grow and thrive because there's no way any of us know today what's going to roll out in the next four or five years. | ||
| So it shouldn't be the mandate that says, hey, look, committee, bunch of smart people up here. | ||
| I know you have this impulse for control, but light touch is going to create innovation and things will go wrong. | ||
| And being able to know that happen, I'll start with you, Mrs. Cohen. | ||
| Mr. Cohen, what are your thoughts? | ||
| Am I crazy? | ||
| Should we ban the automobile? | ||
|
unidentified
|
Not at all. | |
| I think we need to recognize, though, what is the automobile doing? | ||
| So, for example, in 1900, the potted roads may have required automobiles to go at 20 miles an hour. | ||
| Now that we have smooth highways, you don't have automobiles still going at 20 miles an hour. | ||
| You change the rules to adapt to the situation. | ||
| And I think with digital assets, we do the same thing. | ||
| We don't need to ban them, but we need to be thoughtful about how we apply the rules to them. | ||
| When people engage in fundraising activity with digital assets, when people entrust their capital to others, it is appropriate to think of those as investment activities. | ||
| When two people exchange digital assets for whatever reason, I'd like to use some Bitcoin today to send money via LightSpark. | ||
| That's not a securities transaction. | ||
| There are many things that are not. | ||
| So we should have, I wouldn't say a light touch or a heavy touch, but a right touch set of litigation based on the actual use cases involved. | ||
| Jonathan? | ||
|
unidentified
|
Senator, I think it's important to understand what we know today and where innovation is still developing. | |
| So I think what we know today is we have centralized actors, centralized intermediaries that process most of the transactions these markets, regulators, lawmakers that know how to apply rules to centralized intermediaries, market integrity rules, operational resilience rules, customer protection rules, disclosures. | ||
| Let's get that first step done. | ||
| I think there's other areas of this market, and as a very diverse ecosystem, when you look at decentralized protocols, you cannot take centralized rule books and bluntly apply them to these centralized protocols. | ||
| And decentralization is a broad term, absolutely. | ||
| But we've seen other jurisdictions grapple with this topic, take pause, study, evaluate, and learn. | ||
| And I think let's do what we know what we can do first, which is put market structure rules in place, continue to look at the decentralized ecosystem. | ||
| It's not to say protection should not be in place, but we can't take old rule books and apply it to new innovation. | ||
| So don't let perfect get in the way of good or progress. | ||
|
unidentified
|
Precisely. | |
| Massari? | ||
|
unidentified
|
I agree with you. | |
| I think we are dealing in financial services here, obviously. | ||
| And so I think there are some baselines that we must meet, right? | ||
| Users need to trust the products they're working with. | ||
| They need to have disclosure about them. | ||
| They need to know that there are regulatory frameworks for stablecoins, for instance, that make stablecoins good money and create competition. | ||
| I think that's an appropriate role for regulation. | ||
| I think to your point, which I think you've stated really nicely, we have a tendency in financial services to try to take the new thing and cram it into the old because we understand the old and the risk there is that we kill any innovation, right? | ||
| And I think that could do more harm than good because it's happening anyway. | ||
| It's happening outside the United States if it doesn't happen here. | ||
| Perfect. | ||
| Chairman, I'll venture back to you. | ||
| My point is. | ||
| Oh, sorry. | ||
| Ohio State, we always worry about Harvard guys. | ||
|
unidentified
|
Can I speak? | |
| Go ahead. | ||
|
unidentified
|
Thank you. | |
| It's up to the Chairman. | ||
| We're way over time, but it's up to you. | ||
|
unidentified
|
You certainly may. | |
| Thank you very much. | ||
| Senator, the devil is always in the details. | ||
| But when I think of light touch, I think that's what weak countries do that are trying to pull business away from the strong countries. | ||
| That's what I saw happen with swaps. | ||
| We created basically a very good framework. | ||
| Smaller jurisdictions tried to undercut us by having weaker rules, and we basically had to work very hard to harmonize rules, which we did. | ||
| And now the swap market, I think, works pretty well. | ||
| In the case of stablecoins, look, right now Europe and Japan are ahead of us. | ||
| They've implemented some very good frameworks. | ||
| Most of the things I'm suggesting today are in those frameworks. | ||
| There may be a few things, as Ms. Massari pointed out, that we don't want to emulate in what they've done, but I think we can do a lot better than the bills currently before us that have been introduced, the Genius Act and the Stable Act. | ||
| Thank you. | ||
| The Chair recognizes Mr. McCormick for five minutes. | ||
| Thank you, Madam Chairwoman. | ||
| Thank you all for being here. | ||
| You know, innovation is a driver of economic growth, and we've all lived through waves of innovation in the United States with everything from the Internet to 5G to artificial intelligence. | ||
| Digital assets and blockchain are the next big wave. | ||
| It creates enormous opportunity for all of us, and particularly in Pennsylvania. | ||
| And it's our job as policymakers to create an environment where that innovation can thrive while at the same time protecting consumers along the way. | ||
| And I saw this firsthand as the CEO of a software company in the late 90s in Pittsburgh where it was sort of a go-go world and we didn't have that certainty. | ||
| So it's critical that Congress must pass meaningful legislation. | ||
| I appreciate the Chairwoman and Chairman Scott's commitment to this task. | ||
| I want to talk about international competitiveness because in the absence of U.S. leadership, other major jurisdictions are rushing ahead, as you've said in your testimony. | ||
| We risk having our entrepreneurs moving overseas because of those existing frameworks. | ||
| So, Mr. Yakim, I'd like to start with you. | ||
| Could you discuss how innovators in the United States, in specific terms, are disadvantaged due to the development of regulatory regimes in other jurisdictions? | ||
|
unidentified
|
Thank you for the question, Senator. | |
| The lack of regulatory certainty in the U.S. has absolutely impeded investment and growth. | ||
| And that's businesses like ours who operate as centralized intermediaries. | ||
| That's businesses like developers, project teams, protocols that have operated without clear guidelines as to the legal status of what they're building. | ||
| You cannot run a business like that. | ||
| I think what we've seen primarily in Europe, but in other major G10, G20 markets, is efforts to put step one in place, basic foundations that provide regulatory clarity for secondary market transactions and centralized markets. | ||
| There is no question that there are many other issues to explore and that we will have to continue to explore. | ||
| To my colleague, Mr. Masset's point, let's also learn lessons from our legislative past here with the SWOPS reforms. | ||
| You know, the toughest part about that was not domestic implementation, it was rationalizing the cross-border market access framework. | ||
| And we run a global business. | ||
| If we want to get this right, the U.S. needs to move forward with this market structure bill, get a seat at the table, and work with their counterparts to develop a clear international framework. | ||
| Thank you. | ||
| Mr. Cohen, we talked about the threat of litigation and how that curtails investment. | ||
| Could you say a bit more about that? | ||
| How do innovators think about that threat of litigation and what are the implications? | ||
|
unidentified
|
Thank you, Senator. | |
| As someone in private practice, that is one of the very first questions that our firm gets. | ||
| You know, if we endeavor to take this innovative technology forward, what is our litigation risk? | ||
| And it's a constant threat and concern. | ||
| It was both on the civil litigation side and also from regulators, particularly those who took overly aggressive stances. | ||
| It made it very difficult for entrepreneurs here in the United States to start businesses when they had the threat of overhang of litigation. | ||
| And I think Senator Moreno made the point: you're driving on a highway and nobody tells you what the speed limit is until after they pull you over. | ||
| And that was the feeling that many of our clients had around the risk of litigation. | ||
| They simply did not know when they were crossing a line. | ||
| And as a lawyer in private practice, it's very frustrating for us not to be able to give that advice to our clients. | ||
| Very good. | ||
| Thank you. | ||
| Ms. Mazzari, just one quick last question. | ||
| One of the benefits of stablecoins is U.S. dollar dominance because stablecoins are largely denominated in the U.S. dollar. | ||
| Can you talk about that in a little more specificity on how the evolution of stablecoins can be a real force for good in terms of dollar strength? | ||
|
unidentified
|
Thank you for the question, Senator. | |
| I think actually today, and we see this in how stablecoin issuers often talk about their products, I think they think of stablecoins as a way for those outside the United States who don't have U.S. bank accounts and so on and so forth to have access to the U.S. dollar in new ways. | ||
| And I think that's really one aspect of dollarization. | ||
| I don't think it fundamentally changes how much demand outside the United States there are going to be for dollars, but certainly stablecoins are an easy way for a lot of consumers outside the United States, whether it's businesses or individuals who want to make payments to hold and use dollar value. | ||
| Very good. | ||
| Thank you, Madam Chairman. | ||
| I yield the remaining time. | ||
|
unidentified
|
Thank you. | |
| The chair recognizes Mr. Van Holland for five minutes. | ||
| Thank you, Madam Chair. | ||
| Thank you, and the ranking members, and good to be on the subcommittee. | ||
| Thank all of you for your testimony. | ||
| Sorry, I'm running late. | ||
| It was just on the Senate floor. | ||
| There's a lot going on today, as you and my colleagues know. | ||
| And I'm coming to this with an open mind. | ||
| We're all over many years been trying to really understand these currencies and stablecoins particular. | ||
|
unidentified
|
And I know the Genius Act has been proposed as one way forward on stablecoins. | |
| Mr. Massad, just a couple questions, and you may have tread this territory a little bit, but if you could take a little deeper dive, both in terms of the vetting of stablecoin issuers under this proposal, whether it has the checks and safeguards that you think are necessary to protect consumers. | ||
| And the other issue would be if for some reason one of these issuers were to go belly up and you had to resolve claims. | ||
| My understanding is it is a bankruptcy type procedure as opposed to some of the procedures we currently have for people who need to claim lost monies from a banking loss or something. | ||
| Could you zero in on those and any other concerns you have as we approach this? | ||
|
unidentified
|
Certainly, Senator, thank you for the question. | |
| On the vetting, I think the Genius Act has some of the provisions you'd want in there for vetting, but it's not comprehensive enough. | ||
| Senator Smith asked the question about the fitness of management. | ||
| That's not in there. | ||
| I think we just need a broader framework of criteria. | ||
| The McHenry-Waters proposal, I think, has that in terms of vetting. | ||
| But the other aspect of vetting is who does it. | ||
| Is it done at the Federal level or is it done at the State level? | ||
| And that is where we are trying to strike a balance. | ||
| I think the approach in the Genius Act tries to do that by saying the State framework has to be substantially similar to the Federal one, meaning the criteria and so forth, and the issuer can't have a market cap larger than $10 billion. | ||
| I think that notion of a trigger that puts you into the Federal bucket, if you will, doesn't allow a stablecoin issuer to go to the State, is a good one, but I would strengthen it in a few ways. | ||
| I would probably lower that threshold. | ||
| Europe has a threshold for its significant e-money tokens of 5 billion euros. | ||
| And I would still insist on some minimal Federal standards that the States have to follow. | ||
| On the bankruptcy issue, you are right that today what would happen in the absence of any special provisions is a normal corporate bankruptcy would apply. | ||
| You would have the automatic stay, which would mean token holders would not get their money until the conclusion of that process. | ||
| They would also be peri-passeu with other unsecured creditors. | ||
| The Genius Act at least says they have a priority claim, but it doesn't deal with that timing issue. | ||
| And so I would prefer to see some sort of dedicated bankruptcy process or resolution process that is fast, both from the standpoint of the interests of holders, but also to prevent any sort of collateral damage. | ||
| If you have got a situation with a large stablecoin issuer and you are going through a very lengthy process before the holders get their money, you could have consequential defaults too. | ||
| We saw that even with a small terra algorithmic stablecoin. | ||
| So ideally, you would have a dedicated process. | ||
| At minimum, you would want to say you have segregation of those reserves. | ||
| They are held in trust for the benefit of the holders. | ||
| Ms. Massari argued that they should be available to be given to the holders right away. | ||
| Those sorts of concepts I think you could look at. | ||
| But truthfully, a dedicated process could work and should be much simpler than a bank because the business model of these entities is going to be fairly simple. | ||
| I appreciate that. | ||
| Just to take us off track a little bit from stablecoins, but to deal with digital assets. | ||
| Much has been said and written about meme coins. | ||
| You have been somebody who supports responsible innovation among digital assets. | ||
| Of course, the President issued a meme coin, meme coin, which I understand has gotten about $100 million worth. | ||
|
unidentified
|
Do you have concerns that that creates all sorts of conflict of interest problems? | |
| And I'm interested in other people's thoughts on that as well in closing. | ||
| Absolutely, Senator. | ||
| I've said publicly this was plainly wrong. | ||
| I think it's a black eye for crypto. | ||
| I think it's brazen corruption. | ||
| And I'm disappointed that more people in the crypto industry, as well as, frankly, members of Congress, have not said similar things. | ||
| I appreciate that. | ||
| I just ask each of the witnesses whether you share Mr. Mossad's view on that. | ||
| So taking a bigger step back, and I say this in my written testimony as well, we've seen some of the worst scams and frauds and grifts using crypto, and that is, I agree, a black eye in the industry. | ||
| It hurts those of us trying to build something that has real value and that has real utility. | ||
| I actually think legislation that clarifies the legal framework for crypto markets, for stablecoins, will help to fight against the sort of worst of the bad behavior because it will provide clear lines and will let law enforcement and regulators easily distinguish between the good and the bad, and that has to be the right answer. | ||
| Worst of the bad behavior. | ||
| Gentlemen. | ||
| Senator, with respect to the meme coin market, I think facts are important here. | ||
| So take, for example, our platform at Kraken. | ||
| We have over 300 assets listed. | ||
| Less than 10% of those are meme coins. | ||
| Meme coins are not a new phenomenon. | ||
| Dogecoin, I think, is over 10 years old, maybe around there. | ||
| So this is not a new thing. | ||
| It's trending now. | ||
| I think part of the reason there's been a focus on meme coins is because there's been regulatory uncertainty in the United States to create much of anything else. | ||
| We've had developers that are looking to build protocols and technology that have many different use cases. | ||
| It's clear that meme coins are not securities, and thus I think they're trending at the moment. | ||
| Our role as a marketplace, however, is to ensure whatever is traded on our market. | ||
| We run these assets through rigorous due diligence tests, cybersecurity tests, legal tests, and make sure everyone that is participating in our market is subject to KYC and sanctions. | ||
| So I think, again, putting this in perspective, yes, it's trending now, but there's a much bigger ecosystem here that we need to focus on. | ||
| Thank you. | ||
| Mr. Cohen? | ||
| Yeah, I would concur in that view. | ||
| This is open technology, Senator, at the end of the day, and people around the world will do with it as they will. | ||
| I think it's really important that we focus on the use cases that drive adoption around the world, and I strongly support that. | ||
| Thank you, Madam Chair. | ||
| Mr. Werner. | ||
| I'm sorry. | ||
| That's fine. | ||
| Next time. | ||
| It's unfair because I wanted to answer Senator Moreno when he left, but you can convey. | ||
| I'm all for innovation. | ||
| Thank God. | ||
| When he was looking at that computer in the mid-80s, I was already in the wireless business. | ||
| And because there was allowance to have competition in the wireless industry, I did pretty well. | ||
| I started a company called NextToe. | ||
| But I agree with certainty we need rules. | ||
| But I guess one of the things that I feel like here is one of our best assets, one of our most essential assets, is the stability of the dollar, is our financial markets. | ||
| And I candidly believe, even while there's been this innovation abroad, that if we do this right, everybody offshore is going to rush to America, because that's where they want to be. | ||
| And I would just, what I would ask to my colleagues, and Senator McCormick as well, is I think back to the SVB crisis, when I had some of my most libertarian friends say, we don't want the government touching anything until the shit hit the stuff at the fan. | ||
| And everybody said, we need the federal government to step in and bail us out. | ||
| If we're going to touch our federal markets, if we're going to do all stable coins completely divorced from the rest of the financial system, maybe light touch would work. | ||
| But if we're going to ultimately intertwine this with the financial system, which is why I think companies would want to come here to be connected to our overall financial system, we don't want to stifle innovation, but nudging our entities a little further along the line, that's the risk balance I'm trying to get to. | ||
| And I think there is a spot here, and I will really support you and the ranking member, and particularly the chairwoman, who's worked so hard and so long on this. | ||
| I think reasonable people can get there. | ||
| And I think we can get there on a way that maintains the integrity of our financial system, makes us far and away the most attractive place for the legitimate entities, finds a way to keep the bad guys out as much as possible, and still pursues innovation. | ||
| But that may not be light touch for the sake of light touch, because I would love to get my colleagues, I wish they'd been on the line when some of the biggest funders in this industry were calling around the SVB crisis and saying, gosh, we need the Fed to bail us out. | ||
| So I'll try to share that directly with the Senator Moreno later, but just I really appreciate the chance to get, and I didn't mean to cut you off, Ruben. | ||
|
unidentified
|
Thank you, Mr. Warner. | |
| I like to conclude hearings by asking our panel, is there anything that you wish you had been asked but were not? | ||
| I would like you each to respond to that question, but very briefly. | ||
| And let us begin and go the opposite direction. | ||
| Mr. Mossad. | ||
| I don't believe there is, Senator. | ||
| I think it's been a very full hearing. | ||
| I'm happy to answer any questions that come to you afterward. | ||
| I've given you a long written testimony that addresses a lot of other issues. | ||
| Ms. Massari. | ||
| First, thank you for having this hearing. | ||
| Nothing in particular. | ||
| I just really think it's important for us when we're thinking about stablecoins to really focus on the competitive landscape and think about a diverse, open, well-regulated, but competitive ecosystem for stablecoin issuance. | ||
| Stablecoin issuers are not as risky as deposit-taking banks. | ||
| We should treat them accordingly and let there be open competition. | ||
| I think we'll all benefit from that. | ||
| Thank you. | ||
| Mr. Yakov? | ||
| Chairwoman, I think Senator Tillis asked about examples abroad of who got it right. | ||
| I think we can look here in the United States to certain state frameworks. | ||
| And speaking on behalf of a special purpose depository institution, I think if you look at what Wyoming has done, they've taken old rule books and they've tailored them and they've created a bespoke product that creates and solves for the unique risks in the system, especially with respect to custody. | ||
| You cannot run a safe custody business in the crypto ecosystem the same way you do in the traditional markets. | ||
| And states have looked to examples like that. | ||
| So I think let's look internally what the states have done creatively to solve for the unique risks in the ecosystem. | ||
| Thank you. | ||
| Mr. Cohen. | ||
| Thank you so much again, Senator Ranking Member, for including me today and to all the great work that you and this subcommittee are going to be doing. | ||
| I would just quickly add, I guess, a question not directly asked, but we've alluded to the importance to the financial system in the U.S. of stablecoins, in particular Treasury-backed stablecoins. | ||
| I recently saw a chart which plotted the amount of Treasury bonds and debt held by China over the last 10 years, and it, of course, went down like this, and the amount of that same debt that's now held by Stablecoin and similar issuers backing crypto assets. | ||
| The reality of things is that one of the things this country does very well is create debt of our own government. | ||
| And the question is, if we now have one of our major offtakers of that debt no longer taking up that slack, is this a way to achieve that goal? | ||
| And I think that's something as we think about this that really is critical. | ||
| That does not exist if we don't have the crypto rails to allow that activity to take place. | ||
| This is all very interconnected. | ||
| And I also would just say quickly, we didn't talk about real-world assets, but it's a very important topic. | ||
| Real-world assets that can be tokenized run on crypto rails. | ||
| And so there are many reasons why we do need to get this right, senators, and I'm excited to be part of that process. | ||
| With special thanks to our panel and to this committee for its first hearing, I want to thank you all for your thoughtful consideration of today's topic. | ||
| We'll be consulting you again over time. | ||
| We have consulted several of you prior to today, and that's why we recognize you as the expertise we wanted to hear from today. | ||
| The committee is adjourned with our thanks. | ||
| On C-SPAN 2 at 10 a.m. Eastern, the U.S. Senate returns and will vote to advance President Trump's nomination of Linda McMahon to be U.S. Education Secretary. | ||
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