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tv   Commodity Futures Trading Commission Chair Testifies on Regulating...  CSPAN  February 9, 2022 11:36pm-2:01am EST

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iacom supports c-span as a service along with these other television providers, giving you a front row seat to democracy. >> next, the commodities futures trading commission chair testifies before a senate committee on digital assets like bitcoin and block chain. this runs two hours and 20 minutes.
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>> the committee will come to order and good morning. come to today's hearing on digital assets. this is an important hearing today. thank you to ranking member boseman and his staff are working so closely with us for this bipartisan hearing. we welcome chairman behnam and our witnesses. we are looking forward to today's discussion.
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13 years ago, bitcoin was introduced to the world as a new form of digital money that people could exchange online without going through a bank. this novel technology aims to democratize our financial system and offer new tools for those who do not have access to traditional banks and reliable currencies. since then, thousands of digital assets, sometimes called cryptocurrencies, have spun out. unlike traditional fiat currencies, cryptocurrencies are not backed by the full faced credit of the central bank. while swings in value can make digital assets a risky form of payment and unreliable store of value. given the instability, you can't rely -- reliably use on digital
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assets to play -- pay your everyday purchases. this is not to say that digital assets are without promise. every american, whether or not they have a bank account, should be able to send money to their loved ones quickly and easily. our financial markets should be acceptable to the average investor, not just the wealthy. it has worked for talk knowledge eat that makes the financial system work for everyone, but to truly work for everyone we need to ensure appropriate protections. americans are buying and selling digital assets using online exchanges, many of which are unregulated or not held to the same standards as traditional financial institutions. this poses unacceptable risk to consumers and could lead to instability in our financial markets.
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some have already stolen billions of dollars in assets, leaving customers with no recourse. some platforms failed to prohibit abusive activities like insider trading. last month we saw the value of digital assets plummet, leaving out more than $1 trillion in volume. one third of americans who have traded digital assets letter -- earn less than 60 housing dollars a year. -- $60,000 a year. this ease of access and backfire when the assets drop in value overnight. we cannot overlook the outsized climate impacts of bitcoin and other digital assets. astonishing amounts of energy are currently being used to mine certain digital assets. when those sources of energy are
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fossil fuels, digital assets threaten our progress in fighting the climate crisis. the carbon footprint of this technology must be addressed. digital assets may have been designed to democratize the transfer of money but that does not mean they should operate without rules. history has shown us time and again that this is a mistake. the good news, regulation and innovation are not mutually exclusive. if they were, our financial markets would not be the strongest in the world. we can't afford to wait until the next crisis. congress must work with regulators and the biden administration to design a framework that protects zoomers -- consumers and our environment and keep our market fair, transparent, and competitive. the cftc will play a key role in
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that effort. it currently decreases fraud in the stock market. i look forward to hearing from chairman behnam about the work his agency is doing in this area , the challenges it presents, and what we can do to make these markets safer for everyone. i would like to turn to my friend and ranking member. >> thank you, madam chair. it is great to be here. thank you to the panels for participating. i want to be particularly nice to senator tuberville today. he is grouchy. arkansas got out of the auburn number one basketball team yesterday, so i am happy he is the thing around, but he will get over it. i am pleased to join chairwoman stevan out today as we look at the ways in which block chain
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technology are impacting financial markets. questions remain for the proper role the federal government and regulators should play in encouraging further innovation in this space while ensuring market integrity and customer protection. digital assets and block chain technology have already and will continue to change the way global markets function. currently digital asset cash markets are subject to a patchwork of regulations of the state and federal level. it is critically important we think carefully about how we move forward. last month i was pleased to join the chairwoman along with the chairman and ranking member of the house agricultural committee in sending letter to chairman behnam. that letter inquired about the scope and size of digital asset markets and whether the cftc is currently working with other
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federal financial regulators to support and police this strong financial ecosystem. it is true. bipartisan collaboration can still exist and we are demonstrating that within the agricultural committees despite what is going on in washington. the way we address issues with markets going forward because they are complicated and they touch so many of us whether we appreciate it or not. i hope today's hearings provide an opportunity for chairman behnam an hour estate industry stakeholders that are present with us to weigh in on the questions we posed in our letter. i also believe this hearing is important because it begins addressing the growing calls for congress and regulators to work together to provide market participant certainty over
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digital assets and securities versus commodities. we need to assess whether we are spending the cftc regulating over the markets is approved. i challenge the cftc to be the right fit for the challenge to monitor these stock markets. legislative options we make certain that it includes exchanges, consumer protection advocates, and other market participants in the discussion to ensure that the rules and regulations work for all stakeholders. the digital asset market has grown to nearly $2 trillion worth of global market. that is a staggering number and one to which demands careful consideration. it is unquestionable that digital assets will continue to play a role in the global economy.
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for years and decades to come. i believe it is imperative in both congress and regulators work with the industry and academia to further educate ourselves around these markets. as we developed laws and regulation to establish rules of the road for market participants, we do so in a transparent manner so everyone knows what those rules are. thank you, madam chair. i look forward to today's discussion. >> thank you very much. welcome back, chairman behnam. congratulations on your unanimous confirmation. you are no stranger to the agricultural committee. chairman behnam has experience with financial and global markets. he has tenure as the cftc chair and he has been at the forefront of issues critical to global
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market stability. he was one of the first financial regulators to ring the alarm on the climate crisis. he has created a dedicated climate unit at the agency, addressing the significant risk climate change poses to the financial system. the cftc also has experience regulating asset derivatives and prosecuting for abuse. given the increasing size and scope of the market for digital assets, many of which are commodities, we are looking to the cftc to advise us on how to protect consumers in markets. i look forward to getting your perspective on the benefits and risks provided by these emerging technologies and helping the commission to regulate these markets. i will turn it over to you for opening comments and we will
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look forward to questions. chair behnam: thank you and good morning. i am honored to appear before you today for the first time as the chairman of the commodities futures trading commission. i look forward to working with this committee as we collectively address the issues related to this emerging technology. the derivatives markets have played an integral roles in the u.s. economy, contributing to financial stability and predictability of prices that impact the daily lives of all americans. the cftc role of ensuring the integrity of these technology markets, we understand the importance of digital cash markets, manufacturers, institutional investors, directly exchange agricultural
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commodities, energy products, precious metals, and digital assets. while we do not have direct statutory authority to direct the market, but does have fraud manipulation authority. when the cftc becomes aware of fraud either through surveillance programs or oversight or other means like a whistleblower tip, we address them as misconduct through our enforcement authority. this is not to diminish the fact that many cash commodity markets benefit from federal oversight. however the digital asset market , which at present is most monitored through services, is unique and provides issues for the cftc given the limit for our authority to police these markets. there is no agency to fully
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police deceptive trading practices that directly impact retailers. the cftc's core responsibility is -- it distinguishes it from other cash commodity markets, suggesting it would benefit greatly from more oversight. a few examples. unlike most cash commodity markets, the cash market for digital assets is currently characterized by high number of retail investors mostly engaged in cross speculation. many investors take on high levels of leverage when trading, reading to high price volatility exacerbated white cascading liquidations. most investors in the cash market and trust the digital platforms, failing to distinguish the custody
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regulations offered by traditional banking institutions. potential future financial security risks associated with the cash market, this does need a proactive regulatory approach to ensure that the standard that american investors have come to expect from our financial markets are equally present in digital markets. if the future global economy holds a place for digital markets, block chain technology, decentralized finance, and other elements of the tech ecosystem, it needs to uphold stewardship of this technology and it is clear. the digital asset industry in the u.s. does not follow a single comprehensive regulatory regime. instead other federal agencies have all been responsible for collectively establishing the existing and incomplete regulatory requirement.
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since 2014, the cftc has been aggressive in using its limited fraud authority in the space. it has brought 60 enforcement actions, and established dedicated internal functions to stay abreast of the technical innovations viewing the market. many challenges remain in the digital sector and it now demands more of the attention of the cftc, which i do not believe has the complete resources to address this. the cftc plays a central role and is a market regulator that ensures -- aimed at financial stability.
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we now stand ready to do the same within the digital ready -- digital commodity market. we continue to use our enforcement authority to its fullest ascent -- extent to protect customers from fraud and manipulation. this impacts more than financial markets. we are seeing several government agencies see how it affects government agencies -- policies related to payments, national security, and a host of other issues. we have reports around energy usage from mining and there staggering. on the snow i believe that any regulatory response on digital aspects needs measures to bring additional transparency to the conduct of this technology that makes it possible. i direct the cftc to inspect the acclimatization of digital assets.
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we have also been a forceful and disciplined cop on the beat. the continued emergence of digital asset technologies presents risks and opportunities and the cftc stands ready to use experience to confront it. thank you for your time and i look forward to your questions. sen. stabenow: thank you. we will begin a five minute round of questions from the committee. we have members joining us virtually as well. we look forward to everyone's questions. let me thank you about your response to the letter that we sent as chairs and ranking members of the house and senate agriculture committee. it is important because senator boseman said this was a significant sign that we have all four corners signing the letter to you and expecting --
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expressing interest in having more discussion with you on what the goal is for the cftc. i would like to have unanimous consent to enter your letter into the record. i was struck by your statement that it is time to estimate -- hard to estimate how many people are trading digital assets because the agency has limited visibility into this market. perhaps he can talk more and describe the cftc's ability to surveilled the spot market for fraud and manipulation. and what implications this has right now for the agency. chair behnam: thank you senator. you are absolutely right that it is limited to fraud and manipulation. this is a product of the relationship between derivative
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markets and capital markets. we have a number of exchange riveters on crypto assets on several registered cftc exchanges, but the visibility into the underlying market is limited at most. we use our existing surveillance tools to work through some of the futures product and see if we can see participants, volumes, volatility. this is on unregulated market and we rely on state transmitter license markets -- state transmitter market licenses. i would point out the fact that the enforcement actions we brought since going back to 2015 have largely relied on tips and whistleblowers. we are relying on retail customers who are prodded through ponzi schemes to bring information to us. we do not have the regular tools that we as a market regulator have in terms of pretrade transparency and post-trade
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transparency. surveillance tools, market intelligence, we do not have any of these advanced tools to monitor markets. it is giving us a narrow lens into what is actually happening in the market. this is why i think, as you contemplate more regulatory authority for the cftc, bringing this market into the light and more transparency will only allow us to see what is going on underneath the hood. sen. stabenow: i could not agree more. this is concerning at the moment, the lack of transparency and ability to see what is happening. we are seeing an explosion also of advertisements, marketing crypto assets to retail investors. it is getting easier to buy and sell digital assets through apps on our phones. i'm concerned we are not doing enough to educate people about the risk of trading ripped out
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assets, particularly -- trading crypto assets. what should congress considered in terms of customer protections as these technologies reach more people? chair behnam: thank you. beyond this, we are doing what we can with what we have. in terms of customer texans, we are using arc -- customer protections, we are using our consumer protections department to educate people, but the steps that congress can take to bring customer protections is bringing regulatory stakes to the market. market structure tends to be singular in scope in the sense that as i mentioned earlier, if we can embed free trade transparency, post-trade
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transparency, having this concentrated order above her -- order buffer and having roads for execution and settlement, these are the main foundations and pillars of a well-functioning transparent market. the repercussions and consequences of this are customer protections and information flow so investors know how they are allocating their capital and they can feel confident that as a regulator we have enforcement authority and the rule of law backing this up if there is continued fraud or manipulation. seco step now -- sen. stabenow: thank you. everyone involved in the market, but looking at what needs to be done to create the protections paid does the cftc have the
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resources necessary to take on an additional responsibility with respect to the digital asset market? chair behnam: the short answer is no. i cannot precisely put a number on it, but i have thought about this quite a bit. the best sort of benchmark to think about is what the cftc went through the past 10 years after the financial crisis. this committee gave the cftc to cap the derivatives markets. we have brought that onto exchanges with a theory of -- series of regulatory changes that have brought transparency to the swap market. in 2011, our budget appropriation was about $2 million and now we are slightly over $300 million. depending on the size of the register on pool if you were to authorize a galatian of digital asset commodities, it would be a
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minimum of the $100 million mark would be a starting point as a reference. sen. stabenow: thank you very much. senator boseman? sen. boozman: thank you. we decide that the cftc would welcome expanded authority over the asset spot markets. what are current state-based regulations and why do you believe the cftc is in a position to regular the markets? chair behnam: as a former investigator at the new jersey attorney general's office, i will be the biggest advocate of state regulators in the financial market. they serve as invaluable tools for customers at the state level , whether it is customer protections, education, or enforcement. from a market regulatory
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standpoint, i think it is important that we have as few regulators as possible, that we have as little fragmentation as possible and single points of entry into the market. fragmentation will likely create price dislocations, different sets of rulebooks, which could create risk for investors. as we think about the role and coordination between state and federal, there is a strong place for that. we play a key role in protecting customers. from a market standpoint, i think it is important given that the minimum of the national scope of these markets that we have single regulators at the federal level to be that single point of entry for market oversight, surveillance, and a level playing field so everyone is playing from the same rules. sen. boozman: should the cftc begin an expanded role in spot
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markets, how would you respond to concern that this might open the door for future -- created by the cftc in traditional commodity markets, which i do not think are appropriate or welcomed by myself or stakeholders? chair behnam: i agree with you. i do not mean to suggest that all of this should be the start of the cftc's role in a larger pool of markets. many cash commodities including in the agricultural space and energy space have been existing in federal regulatory oversight to some extent. his market is so really -- so unique because of the retail space and the fact there's no oversight currently. from a congressional standpoint, as we think about this going forward, there is a way to legislatively limit the expensive -- expansion of the
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cftc and make it clear that the direction you're giving us is limited to digital commodity assets and no other commodities. sen. boozman: cybersecurity for customer assets continues to play a large role in conversations focusing on the digital asset markets. if the cftc is given more regulatory authority under spot markets, what cybersecurity and customer protection measures could help combat vulnerabilities in this space? chair behnam: one of the things i have been most impressed about as commissioner and chairman is the role we play collectively within the government in terms of cyber risk. we take cues from agencies across the federal government, most nobly -- notably dhs. we work together and have partnerships to make sure we are
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using the same tools to the extent we can root out cyber threat. i do not think this would be generally different if you are to give us more authority over the digital asset space than terms of our coordinating efforts. one of the things that does concern me in terms of a current authority, there seems to be frequent steps and cyber attacks that are causing coins moving around in significant numbers. we would have to think about the relationship of the cftc to third parties and the relationship between the registrar and whoever it relates to or enters into a contract with. this is synonymous to a third party vendor. as we think about potential legislation ensuring that we have the right amount of authority to look through just through the direct registrar and not necessarily only skim through what cyber protections
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or principles that registrar might be using. those are risks that we have to be cognizant of addressing given the nature of the technology and its international nature as well. sen. boozman: thank you. sen. stabenow: thank you very much. we will now turn to senator puffer bill. >> thank you very much. good to see you back. congratulations on your confirmation pair -- confirmation. i appreciate your reply to my letter on the need to increase state securities in the digital assets working group. i also appreciate you taking time to meet with the leadership of alabama's securities commission. as you know, state regulators have valuable insights to offer. we have got to make sure that the dollar remains the world's
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world reserve currency. that we need the dollar to do that. chair behnam: i would not want to jump to conclusions about whether that is a solution to maintaining the dollar in the reserve currency, but i do think that what i am hearing from the colleagues across the government and the federal reserve is that we are in a process of thinking about how we would implement that. this is no simple task. with all of this technology, we will need to be deliberate and cautious as we implement this technology into the traditional financial system. i support the efforts that are being made and i think the approach strategy is correct, but i do not think we should rush to anything at this time. depending on where this technology takes us, we have to be prepared for it being a part of our larger macro and micro economy. if it is going to be that weight
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in 5, 10 years, or longer, we need to prepare now. the steps my colleagues are taking at the federal reserve are appropriate. i would be mindful at which the speed we are doing it and not getting into a race where we feel we have to catch up with other countries. as we have done in the past, we have been deliberate and that has proven to be a successful strategy for the united states. sen. tuberville: i believe that businesses should have access to banking services. regardless of the type of business they are in. for example, no oil or gas community should be discriminated against if they are trying to open a bank account. there is pressure on banks to cut off services to legitimate crypto businesses. when you agree that this is wrong this is happening? chair behnam: the short answer
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is that i am not aware of this. however i do agree with you that we should not be cutting off certain services from the traditional banking system. however, i firmly believe this, i think the record is clear that we need to address the climate crisis as soon as possible and that is a collective action problem. as much as we shouldn't cut off companies or institutions from the traditional banking services, we need to make individuals aware of what is coming and what we need to do to manage the transition risk of moving away from carbon intensive energy resources. sen. tuberville: adversaries like china, iran, and russia are using crypto services for threats, and what is your commission doing to address these threats? chair behnam: you may be aware
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about the justice apartment overseeing -- that just seized billions of dollars worth of bitcoin yesterday. the announcement from the justice department are that this technology is traceable and we can work through the web of sources in the movement of these funds, but it takes time and that the technology is going to be incrementally improving over the next few years. with that said, as we fade -- face adversaries across the globe who will use this technology to move money around and take action that will negatively affect the united states, i believe that reading transparency through a regulatory structure the financial -- to financial markets will be a positive step in shedding light for our prosecutors for the justice department more access to information of individuals and
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institutions and the flow of this digital commodity so we can root out fraud and find individuals who are trying to harm the united states. sen. tuberville: i understand the white house is working on digital asset executive work. have you and your staff and your staff in part of these discussions? chair behnam: they have been part of the discussions and they have been working with the white house frequently over the past several months. i am not aware of the exact timing of the issuance of a potential executive order, but we have been participating and working with the white house. sen. tuberville: thank you. sen. stabenow: thank you very much. i believe we have senator smith virtually. senator smith.
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we shall see. senator smith, are you with us? speaking of digital technology. we will come back to her and at this point we will go to senator marshall. sen. marshall: thank you. this morning i was between an robert iger and in arkansas tiger back, and i want to celebrate the thrill of victory and the agony of defeat and what a blessing it is to have college sports. congratulations to both of those teams, a great team -- game last night. if i could publicly request that we get secretary kneels back into the summertime. we have questions that i want to ask him about come, the price of fertilizer is certainly an issue. we would like to ask secretary
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bill sec's opinion on that. we would love to have him in front of us sometime. sen. stabenow: would be happy to have that. we will work on that. sen. marshall: back to the committee as well. i have been able to travel and meek -- meet folks from other countries. everyone in the business at some point talks about their concerns for cryptocurrencies, specifically how it is being used in human trafficking and drug running. that is the bad news. the good news is that we have been meeting with companies like coin base who are purchasing cftc regulated exchanges to voluntarily regulate it. a bit of background on the banking industry, i always wonder who is our customer? what is the cftc role of helping
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to regulate a company like coin base, and how do we ensure that we know who our customers are right now and what does that look like going forward to you? chair behnam: thank you, senator marshall. with respect to that particular acquisition, my understanding is that they will use that entity that has the cftc license to trade derivatives. i do not know if that will evolve, but we have a number of onboarding processes and requirements in our law and the rules that we implement on the law to ensure that there are appropriate anti-money laundering, know your customer environments, proper capital requirements, and these have developed over decades that you can imagine that individuals know your customer from an individual retailer and institutional standpoint from the exchanges and how they are
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declaring depositories. i am confident we have a robust system in place and we work closely with the exchanges. we work to ensure we are doing our best to identify individuals who might be bad actors or are participating in illicit activity. sen. marshall: when you agree that if they are not in an exchange of sort, if they do not know who they are -- their customer is right now, would you agree that there is concern that this is being used for human trafficking and drug smuggling? chair behnam: i do agree. sen. marshall: would you put the meat on the bones to ensure that we are able to control that? what could you do if you were given more authority? chair behnam: it is bringing this market into the regulatory fold. it is like what i was saying earlier to senator tuberville
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about what i was saying about the department of justice case yesterday. if this ecosystem exists outside of the regulatory fold, all of these processes that we built over decades protect investors from illicit activity are unregulated. to some extent these institutions do these things but it is not enough. need the full power of the rule of law and our enforcement authority to send a message to deter this activity and rooted out if it occurs. i do not think it will require anything different with what we do with our regulatory entities. we need to bring it into our regulatory fold. sen. marshall: my grandparents' farm, they used cftc to use a risk management. do see opportunities for these cryptocurrencies to do off with
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a risk management tool? chair behnam: some of the coins are stores of value. bitcoin has been compared to gold as a store of value. we have seen a direct or election -- direct correlation with bitcoin movement for assets as opposed to a traditional asset. i can see depending on the development of the coin that some of these tools can be used as a risk management tool with certain movements in currency or other commodities. we would need more time to see the movement of the coins relative to other commodities or currencies to see how it might be a risk management tool. sen. marshall: bitcoin smells like a commodity, looks like a commodity, tastes like a commodity. his bitcoin -- is bitcoin a commodity? chair behnam: per new york district ruling, it is a come already.
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sen. marshall: thank you very much. sen. stabenow: thank you very much. we have senator hoban with us virtually and senator klobuchar is here. >> hello, chairwoman. i understand that the cryptocurrency exchange markets differ from any other commodity markets in that unlike other markets like grain and oil, the cryptocurrency exchange market offers individual retail investors. i'm glad it is open to everyone, but given the fact that many everyday americans to be involved in the financial market, i want cybersecurity to remain a priority. cyber attacks have become a major attack throughout -- a major threat throughout the world. this would bring significant market disruptions through
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attacks. how will you prevent cyber attacks? chair behnam: thank you, senator. we do not have enough authority to oversee the cash commodity digital asset marketplace. both regulators and customers with -- would benefit from a traditional market structure, when we have implemented on the derivatives markets and that is not dissimilar to what we see on the security side. more important than the marketplace, the institutions and technologies would benefit from it too. transparency would be brought into the marketplace and individuals who wanted to allocate capital towards digital assets would benefit from the security, safety, and comfort of knowing that these are regulated markets with enforcement authority behind it. if there are bad actions,
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individuals or institutions will be held accountable for their actions. >> i hear you saying that you do not have the authority to do this. if you did have the authority, can you elaborate on whether the cftc has the authority to manage that information, and what is the government doing to protect against cyber attacks if he did have the authority? chair behnam: it is no different to what we have right now than what we do with derivatives markets. we take confidential information very carefully and we handle it carefully. it is a critical element of our surveillance tools as we overlook a broad market. we interact with market participants and registrars regularly to ensure that the steps where taking to protect information is held confidential and in a safe place. i think this technology poses
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new challenges and risks given the nature of it against traditional markets, but these are questions i would welcome the opportunity to talk to you about so we can see a reduction in the cyber attacks and theft which unfortunately happen all too often. we need to bring this technology into a regulatory fold at a minimum start reducing some of these risks that exist and take progressive steps forward to ensure that we are moving with the marketplace. sen. gillibrand: i appreciate your answers, but you're not answering the fundamental question of whether you have the authority to deal with cyber attacks in this sector given the differences between your current regulatory framework. it is a specific question. you have the ability and the competency to manage the markets and prevent cyber attacks?
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if your answer is that you do not know, it is fine. i just want to know if you have the technical expertise to guard the cyber markets. i sit on the intelligence and arms committee. preventing cyber attacks is difficult for every industry. i am pushing down on do you have the technical capability to do this if we gave you the authority? chair behnam: the answer is no. sen. gillibrand: that is what i want to know. thank you. given the energy drain that current crypto mining practices are, this goes against our goal of limiting climate change. -- the company has connected it to a natural gas pipeline and bringing it to historical capacity to generate electricity for the cryptocurrency mining
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operation. how can we make sure that the correct regular are in place so we can support the growth of this new technology without sacrificing the important work we are doing to stem climate change? chair behnam: i have asked the climate risk unit, which is a group of staff i informed last year, to look into this issue to see if we can come up with ideas for you to consider as well as the agency. i have also asked staff within the -- to think about this issue. have been engaging with stakeholders and asking them to bring us ideas. my gut reaction without having a conclusive set of ideas is that something that would serve markets well our disclosures. disclosures in the securities markets and all other financial markets. if we can continue to raise awareness about this staggering issue and let consumers know
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what is happening in that disproportionate demand for energy as it relates to mining bitcoin or other coins, that type of information and disclosure will hopefully create incentives to move market participants and stakeholders away from that method of mining and towards renewable energy sources and away from carbon intensive energy sources. sen. gillibrand: thank you very much. sen. stabenow: senator polin is with us digitally, i believe. sen. paul: and -- monitoring securities and why? chair behnam: there are hundreds of thousands of digital assets and cryptocurrencies, so i would not want to identify them collectively. there are certainly a large
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number of coins that are commodities, including bitcoin and ether, but given that number there are also security coins. this is a big issue and one i think we should collectively work on as we think about a regulatory environment. it is to draw clear and distinctive rules of the road about what might constitute a come already versus what might constitute a security. >> should there be a different agency for regulating cryptocurrency? chair behnam: from a market perspective, i do not think the issue we are facing is different from what the cftc and ftc has faced for the past 40 years. there are features that are regulated by the ftc and others regulated by the cftc, and dodd frank was passed. we need to create a line between traditional swaps and security
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based swaps. i do not think this is any different. i certainly think we could end up than a place where both regulators have your stiction over cash markets, the cftc having it over commodities and the ftc having it over securities. >> so all of this should all be regulating cryptocurrency in different ways as they do for the financial markets. chair behnam: from a markets perspective, the only market regulators we have are the commodities futures trading commission and the federal trade commission. naturally, given the vast number of issues, where it is national security issues, trade issues, and other issues if this technology continues to take
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root, will require all hands on deck effort from the government because it requires expertise from different agencies. >> what should congress be doing with legislation to make sure that the right regulatory oversight structure is in place? chair behnam: given our limited authority, it is narrow to fraud manipulation in cash markets. i recommendation to you and your colleagues is that we need authorization and a regulatory structure over cash and digital assets. that will not be structurally much different than the current markets that we oversee. there will be novel issues and questions we have to ask around custody and settlement given the digital nature of these assets, but in terms of general market structure, we need to embed core principles like pretrade
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transparency, centralized and concentrated order books, post-trade transparency, and clear rules around custody settlement, clearing, and other elements of the trading process. >> given the complexity of cryptocurrency, is there an understanding in terms of how that should be done and what it should entail? chair behnam: there is a general understanding and that goes to my previous answer, and i say this with a bit of caution, but markets are markets. what we have observed to the extent that we can is that regardless of the fact that they are so unique from traditional derivatives or securities, they function in trade just like any other asset would on a marketplace. i do think the decades of experience we have within the united states going back over 100 years will inform us in
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terms of what market structure we need to start with, in terms of what the framework would look like. however, time will pressure us and force all of us collectively to ask difficult questions about the technology, about the traceability, about the-- but ae identifying as a recordable transaction? what information do we need? and ensuring that it is similar and consistent globally above all else. these are questions you are welcome to ask and discuss. >> you think that this is going to continue to grow and be a very pervasive source of executing financial transactions? >> i would be hard-pressed to say no to that question. i'm very cautious in what i say about what the future may hold.
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as the chairman of the cftc, i think my responsibility is to assume that it will continue to take root and that this technology will continue to emerge and wind itself into traditional finance. if we don't approach the technology that way, we run the risk of stability issues even in a few years, let alone 10 or 20 years. i think we have to work under the assumption that it will. whether or not it does, whether it's part or the whole concept of digital assets, is irrelevant. the important thing is to focus on the assumption that it does and start to build the building blocks of a regulatory structure now so that we don't run into continued problems and risks, whether it is cyber, theft, illicit activity, or financial stability risk in the future.
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>> thank you very much for having this important hearing. everyone said it but i haven't. i appreciate your answers. as you noted, there's no regulator with sufficient visibility and authority into digital asset trading to fully go after some of the conflicts or deceptive trade practices impacting retail customers carry it -- customers. the you have recommendations how to bridge that?
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what authorities do you need to do that? >> in terms of gaps, the most notable so -- noticeable glop -- gap is what constitutes a commodity. i think that the securities exchange commission has more authority than we do in terms of cash market regulation. the question in terms of defining what and which of these digital assets are securities becomes the hardest question for both the agency and market participants. for us, the biggest challenge, in addition to finding out which points count as commodities, is this cast mark -- cash market. we are a derivatives market regulator. we do not regulate cash markets. we need more authority to regulate cash markets. i believe we are well-suited to do this. we have a long history of
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looking into, examining, working with the digital asset marketplace. we are a market regulator. the core principles of a market are similar across all assets and we are well-suited, we have great expertise, we would build up expertise to the extent we needed in certain places. i do think we are well-suited to do it and we are prepared as well. >> are there parallels between how dodd frank established ace -- a resume for swap instruments and the need for regulation of digital assets today? >> absolutely. it's a perfect example and a perfect analogy. this was a point of friction 15 years ago. we figured it out. congress helped us figure it out. you gave us clear directives. the two agencies did that over a number of years. i can say confidently that the market is well-functioning and each of the agencies have relative jurisdiction over
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different types of swaps and we can do the same thing here. >> we've been in discussions about this. we've seen exponential growth arising from a market capitalization and cryptocurrency from 1.6 billion in 2013 to nearly 2 trillion today. the popularity of these assets has been attributed to their ability to diversify investment portfolios. but with the growing popularity of spot market trading, how does the cftc go about disseminating information to the general public about scams and things and getting it out there? this is a brand-new frontier for many people. my past experience as a prosecutor, when there are new frontiers, the skimmers are there. >> they are. we are seeing that traditional
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methods used, whether it's ponzi scheme's, plump and dumbs. we even put out a notice earlier this week about dating apps and scams happening through dating apps. it's no different than what we've seen. they are just using it as a tool to prey on vulnerable individuals. we are using our office of consumer education to do as much as we can with what we have to let the public know about the risks associated with assets but also the scams that are happening. as you would know as well as anyone, we have to rely on tips and whistleblowers to bring these fraud and manipulation cases, which is externally helpful but it is so limited. i fear that there is a well of fraud administered -- manipulation happening that we are just not aware of because the market is very opaque. >> thank you. >> thank you. >> thank you so much.
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i believe we have senator booker with us virtually. senator booker? >> yes you have me. we very much. this is a really exciting hearing. i believe that there's urgency that we act. i think that we can create a more sensible regulatory framework. i've always been concerned about technology moving, the lack of government ability to move at the speed of technology undermines the ability for americans to apply the technology. i remember the faa was regulating drones in such a horrible way that other countries like france were using drones for dangerous missions. from fixing poles and wires to doing mining work. in the united states, we were seeing death rates i could have been avoided with technology but the faa was so overrated -- regulating this new technology. i said to the chairperson, we
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would have never gotten off of the ground. this is one of those cases where we were already seeing some of the hopeful optimistic possibilities in cryptocurrency. it has had a democratizing effect. minorities are overrepresented in using that and -- for me, this intermediation possibilities offers a lot of hope. i think this committee has a bit of urgency to act in this space and create some frameworks and guardrails to protect against the things my colleagues have brought up like fraud. i would like to as the chairman right away, what makes you hopeful and optimistic in this space? can you state clearly why this is the best agency to provide
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that needed framework in the right regulation to allow the space to potentially thrive and achieve the vision that you might have about the possibilities of this area? >> thank you. answering your first question about my optimism or what the technology holds. i don't view this any differently than the series of milestones we have seen over the past 100 years in terms of technological development. this is creating a potential avenue for quicker, better, more efficient access to capital and the transfer of value between individuals at a peer-to-peer level. we have to be very careful and cautious and deliberative as we approach is technology. both from a regulatory to -- standpoint and a market standpoint. there are shifts in terms of
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market structure and how folks assess capital and how they transfer capital. it intermediates the guardrails that have been built up over decades to protect customers, whether it's aml money-laundering portal your customer. other very beneficial attributes of our financial system and the guardrails that have been built up over time. i think this is naturally the next app. it provides a lot of opportunity for our country to take a leading role. we have to be deliberate and cautious as we approach it and be patient so that we do it right and we don't have any unintended consequences. regarding your second question. i will lean on the fact that, we are a market regulator. we've been doing this for many years. regardless of the fact that we oversee derivative assets, we know market structure. we know surveillance, we know enforcement, we know the core
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components and foundations and pillars of what makes markets work. what makes markets transparent. most important leak, what protects customer money. we will continue to use that as the foundation to push forward on a potential marketplace for this technology. the second element of that question is, we have been uniquely exposed to digital assets for over six years which doesn't seem like a lot of time relative to other agencies, it's quite long. it is because of our role as a commodity regulator, because of the emergence of regulated futures products that reference digital assets, it's the creation of our lab many years ago. as senator marshall -- marshall mentioned, it's what we are seeing in the marketplace and digital asset companies starting to purchase traditional cftc entities. i think we are well-positioned.
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we have a lot of experience and great enforcement lawyers and attorneys, market intelligence experts. i think we are a few steps ahead and ready to run with this if the committee and congress desires that. >> i appreciate those wise words from another bald new jersey in. i do want to say, thank you again to the chairwoman. i believe we need to move quickly to control some of the worries that we have but also to seize upon a regulatory framework that will help this. if you just look at the demographics, and it's already having an effect. 60% of all americans are involved in crypto and it's growing. 18% of african-americans, when percent of latinos. the majority of crypto owners don't have college degrees and they are engaging in the space. i think this is the time for us to act and quickly. i'm excited to do that in a
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bipartisan way through this committee that i believe has real jurisdiction in the space. thank you. >> thank you. we do have a real bipartisan opportunity to do something that i think is important and urgent at this time. thanks very much. i'm going to say thank you to the chairman. i know we have other members that will be submitting questions to you in writing as usual. there are multiple hearings going on today at the same time. much interest in working with you and getting your thoughts. it's an area that needs a lot of thoughtfulness and careful discussion about how to move forward. thank you very much. look forward to working with you. i will call forward our next panel. we have four witnesses who we are anxious to hear from. i am going to also indicate that as usual, we are going to be running up against some votes
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that are scheduled to start at 11:32. we will just be flexible here on how we move forward. as you come to sit down, i will begin introductions in the interest of time. i want to welcome the four members of our second panel. all four of you are leaders and educators in the digital asset marketplace. a frequent university guest lecturer and educates lawmakers, businesses, in the media on blockade technology. an appointee to the new york state digital currency tax force -- task force and serves on various councils including the world economic forum's digital
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currencies governments consortium. she led the exchanges work on developing a bitcoin futures contract. she filed the first crypto derivatives pedal. sandbank men is the cofounder and ceo of ftx, one of the world's largest digital asset trading platforms. he cofounded the company in 20 and formed ftx u.s. in 2020 to service u.s. customers. it's affiliate is one of the first crypto based exchanges to be registered with the cftc to offer digital asset derivatives. prior to his involvement in the digital asset space, he was a quantitative trader at jane street capital. kevin orbach is a professor of the wharton school and the director of the wharton block train and digital asset process.
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he's the author of a book. as an educator, he focuses on the business, legal, and public policy implications of emerging technologies including digital assets. he participated in the development of technology and policy initiatives as part of the obama administration's presidential transition team. he served as counsel for a new technology policy at the federal communications commission. i'm going to turn to the ranking member for fourth witness introduction. >> thank you. it's a pleasure to introduce -- the founder and chief executive officer of the chamber of digital commerce, the world's largest ranger so -- trade association, representing the block chain industry. the mission is to promote the use of digital assets and block
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chain based technologies, working with policymakers, regulatory agencies, and the industry. it advocates for a program -- progrowth environment that fosters innovation and investment. named one of america's top 50 women in tech by forbes. one of the 10 most influential people in block chain by coin desk. she appears in the financial media to share insights on digital assets and block chain innovations and is an active participant in public policy discussions. she served as a television anchor for an international finance program that ran in more than 100 countries and reached over 650 million viewers. she began her career as a legislative analyst in the u.s. house of representatives,
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supervising on finance, economics, tax, and health care policy. thank you again for joining us today. >> thank you again. you clearly have tremendous amounts of experience and knowledge in the space. we will ask each of you to give five minutes of opening testimony and then we will go to questions and we will start with ms. roth. >> thank you. thank you. thank you for inviting me to testify. i'm the ceo of the global? -- block chain business council. the leading not-for-profit block chain ecosystem representing nearly 400 institutional members. i began my career as a financial engineer at deutsche bank and morgan stanley. subsequently, i led cma groups digitization team where we pioneered some of the earliest
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regulated cryptocurrency products. for example, the cme bitcoin futures today on which u.s. etf's trade. my team worked together closely with the cftc. these close relationships were critical to our ability to innovate effectively and responsibly. today, i will share three block chain use cases. they are moving our society in a more secure, transparent, and equitable direction. but first, as requested by the committee, i will start with some basics. the bitcoin white paper, published in 2008, outlined a peer to peer electronic cash system using a consensus mechanism known as proof of work. on the bitcoin ledger, transactions are arranged in
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consecutive blocks. simply put, proof of work requires members of a network, known as minors, to solve a mathematical puzzle. once they solve and confirm the transaction, it's assigned to a block. the block is time stamped and added linearly to the block chain. for this work, the minor that first solve the puzzle receives compensation in the form of a blocker word. since bitcoin's creation, a variety of other consensus mechanisms have been created. most popular among them is something called proof of steak. proof of steak is a consensus mechanism where users offer their digital assets as
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collateral for a chance to validate a transaction. it's estimated that the energy required to participate in a proof of steak network is roughly equivalent to the energy required to operate a home computer. each consensus mechanism has benefits and drawbacks. regardless of the consensus mechanism, most block chains share the following attributes. block chains help us move data as value in a secure, low cost, peer to peer model. block chains necessitate collaboration. block chains facilitate permanent records. that makes cooking the books or tampering with records extremely difficult. finally, block chain transactions are traceable. most ledgers are anonymous.
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making it possible to track the flow of funds. what does this look like in practice? the first national bank of omaha is working with the consortium of partners to create a catalog. a system that uses block chain to create unique digital identifiers for cattle and enable ranchers to add health and treatment records to each animal. another company is tokenized and metals to track their journey from mines to factories to recycling. these materials are essential to the technology and automotive industries. enhanced tracking and tracing of these materials could increase accountability and reduce the exploitation of people and planet. finally, the interwork alliance
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is working to create transparent and functional voluntary carbon credit markets by creating common standards to help markets reduce fraud, improve discovery, and create more accurate calculations of carbon offset. harnessing this technology to solve global problems and expand economic opportunities will be a generational effort. it's not too late for the u.s. to lead. i look forward to answering your questions today. >> thank you very much. next, sam bank men. welcome. >> hi. thank you to the members of the committee. ng's for having me here today. we are a global digital asset exchange. we were founded in 2019 and we have roughly $15 billion a volume that trey daly on the platform. one of the things i want to
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point to in the digital asset industry is the equitable access that it provides to users. that is somewhat unique to the industry. traditionally, in order to get access to market data, you need to pay millions or tens of millions of dollars per year, separately to each venue. only these largest and most sophisticated trading firms are even allowed to see the order that they are sending their orders to. intermediaries secure the data, obscures the transparency. in the cryptocurrency industry, all of our market data is 100% free for everyone. it's available on our website for users, regulators, press, any other interested parties. we don't charge licensing or registration fees. it's all available for free. in addition to that, and traditional market structures,
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most consumers do not have the same access to liquidity. that's the most sophisticated investors do. the largest trading firms can go straight to an exchange, sending orders directly into the best price matching engine. most consumers are forced to go through many different intermediaries, each of which increase fees, reduce transparency, reduce the flexibility of the orders that they consent, and result in a very different market structure and a less favorable market structure. on an fts and in general, everyone who is registered is allowed to send orders directly to our exchange in the same way they'll have the same access directly to our matching engine and every user gets equitable
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access to our liquidity. talking a little bit about what our u.s. business looks like today. we have a spot or cash market that offers digital asset commodity transactions, for instance a bitcoin versus u.s. dollar spot marketplace. we also had a cftc license. that has numerous licenses from the cftc to offer futures and options on digital assets and follows the same general model as the rest of our systems do with equitable access and premarket data. what was mentioned here today is not overseen by a federal market regulator. cftc does have an amount of anti-fraud investigative authority.
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instead, overseen by a patchwork of state money transmitters and money service business organizations. looking at the regulatory landscape today for digital assets, there are some holes. one that i want to point to in particular which has been brought up earlier today is around spot commodity transactions. with commodity futures, the cftc has regulatory or cash oversight and security. the sec clearly has authority and security markets. with cash commodity markets, it's less clear. those are the markets that spot bitcoin straight on today in the united states, without federal regulators. this leads to all the standard risks with having not enough federal oversight, arrestor consumers, financial systemic risk, and a lack of clarity for the industry. this has led to the state where despite the majority of the intellectual property for the
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digital asset industry originating from the united states, 95% of volume occurs offshore. the majority of assets are not accessible at all from the united states. it would be great to be able to move that liquidity and business back on shore and provide federal oversight and clarity would be great for that. i think that the cftc is in a very strong position to do this. the cftc has expensive -- extensive experience. they have markets regulatory activity. they understand the cash markets and they have extensive experience monitoring the cybersecurity of registrants. we go through very extensive protocols by them to ensure the safeguarding of assets. i would love to see that jurisdiction expand to be able to provide federal oversight for the cash markets similar to how they do for derivative markets today. both to provide consumer
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protection and to provide a consistent framework for the industry to be able to bring this back on shore. thanks and i'm excited to answer any questions that you have for me today. >> thank you very much. >> thank you for inviting me to participate in today's hearing. i just learned about bitcoin right here when i was working as a congressional staffer and 2011. after seeing the financial crisis rock my community, i left florida to work on public policy for a more sound and inclusive financial and monetary system. i'm convinced that this technology is our best hope for achieving that. bitcoin, other digital assets, and block chain technology represents american values like democratization at its core. its distributed nature should be
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embraced. not feared. these technologies will play a key role in the financial services industry and will soon be considered critical infrastructure as we move towards a digital economy. many nations around the world understand this and they are competing to be leaders of exponential technologies like block chain. as we look across the global stage, we see many nations, most notably the communist party of china, who have main block chain technology a national priority. we find ourselves in a new space race. it's the cyberspace race of controlling the systems and the governance that will power the digital economy. i fear that we are so far behind that we haven't even acknowledged that there's a race underway. as the world's largest economy, the stakes could not be higher.
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with that said, our nation has experienced these challenges before, whether it was the space race or internet innovation and our experiences show us that we do best when we recognize the private sector is our greatest strength. as the first and the largest brought -- block chain policy organization, we have over eight years of experience in understanding the nuances of digital policy frameworks. i urge the committee to consider two key issues. regulatory clarity and regulatory cohesion. digital asset innovators have been operating in an unclear regulatory environment for far too long. in order for american businesses to be able to compete on the global stage, they need to know what the rules of the road are. today, our regulatory structure is fragmented. there are regulators that police fraud and market integrity such as the cftc and the ftc.
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there are consumer protection regulators including the ftc. there's credential and monetary bank policy regulators such as the fed, the occ, and the fdic. there's another category of regulator site consists of financial policy and anti-crime orcs. on top of all of this, there's a number of state-level regulators that have a purview over digital assets as well. this fragmentation has led to a lack of regulatory clip -- clarity and is hampering innovation and impacting american global competitiveness. we have members who have been waiting for action by the regulators for over five years only to take their products elsewhere. it's time for the u.s. and for the committee to begin putting in place policies that create clarity and spur innovation and block chain and economic growth and opportunity for all. we urge the committee to work with other policymakers to first
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adopt the chambers 2019 national action plans for block chain which proposes that u.s. block chain policy should take a holistic government approach with clearly articulated support for the private sector development of innovation required to grow emerging interest race. provide regulatory clarity by identifying elite regulator. we believe the cftc is well-positioned to assume that role. the cftc is a market regulator that has a long history of taking on the regulatory of new and innovative products with a strong track record of enforcing cases of fraud, market manipulation, and other illegal activity. the cftc already regulates bitcoin which accounts for 62% of the market today. it has anti-fraud and manipulation enforcement authority and it has a history of betting and improving new types of innovative products.
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the cftc's principal base regime has a mandate to promote responsible innovation. a principal base model is effective in the regulation of new asset classes because it allows the regulator to set desired outcomes and give the market the flexibility to innovate on how those outcomes are achieved. i'm confident a similar policy framework will achieve the same results for block chain and our country. thank you. i look forward to your questions. >> thank you very much. last but not least, mr. warnock. >> thank you for the opportunity to testify before you. i will discuss four issues which are addressed at greater length in my written statement. what are digital assets? how should we think about regulating them? what are some of the major risks? what can we learn from the development of internet regulation? digital assets have the
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potential to increase efficiency , improve equity, promote privacy and individual freedoms, and create more competitive markets. i emphasize the word potential. the vision of a decentralized web three replacing centralized platforms is a beautiful dream that many are passionately working towards. we must separate dreams from reality. while the technical foundations are complex and important, the basic concept are straightforward. most people don't understand how the internet works either. digital assets are simply things of value, represented through digital tokens used in valid transactions on a block chain letter. block chain diffuses the trust that previously resided in central entities. this doesn't mean trust goes away. having confidence that a digital representation on a public ledger is actually worth something, potentially millions of dollars in the cases of certain and fts, is fundamentally an exercise in trust.
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moreover, the absence of centralized trust creates burdens as well. if you lose the cryptographic keys associated with your assets, they are gone. platforms such as coin base generally take custody of user assets similar to traditional exchanges because they have efficiencies. decentralized finance removes these custodial relationships. it raises its own challenges. we must examine carefully where risks and opportunities for abuse arises. too much of the conversation around digital assets starts with the assumption that they are currently unregulated. just because something is a new kind of derivative or security doesn't mean that frameworks no longer apply. addressing digital assets won't be a task for anyone regulator anymore than internet policy is. the cftc should be given authority where the market activity involved is something it is well-suited suited to address. even more important, the divide between agencies shouldn't be a
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reason for gaps in the regulatory regime. someone needs authority over spot markets and digital assets that are not considered securities over exchanges that are now among the most valuable and prominent firms and financial services including some that are nominally offshore and stable coins that claim reserves in the tens of billions. the only way over the long run to promote trust in legitimate firms is to distinguish and take down the bad actors. according to chain analysis, cryptocurrency crime reached an all-time high in 2021. $14 billion sent to known illicit addresses. it's worth noting this represented only 0.15 percent of transaction volume. $14 billion is not a small number. hacks training hundreds of millions of dollars are distressingly common. practices that are banned for other asset classes are
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widespread. a stable coin continues to play an outsized role in the digital asset world despite having been found to have lied about backing and engaging in other illegitimate practices. there is something wrong when sizable attacks and fraud are so common yet investors and major firms appear to shrug them off entirely. failing to lose trust in untrustworthy platforms suggests investors may not rationally be assessing risks. that could be a recipe for disaster. i helped develop the u.s. approach to internet and the clinton administration. the policy then was to avoid unnecessary restrictions on innovation while critically addressing the policy issues that arose. most internet activity does not involve regulated activities.
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when it did, regulators took action to avoid situations where quirks and technology would undermine legitimate public policy goals. many times, i've heard that regulatory hurdles of digital assets would cause the u.s. to fall behind. here we are, 2022 and the u.s. is home to a large and growing industry of digital asset and block chain and investors. thanks to the dynamism of our economy and to the trust in our markets. that said, the sooner the gaps in legal authority can be addressed, the better. this is already a $2 trillion market. this committee should insert the cftc has a legal authority and resources to engage in active fact-finding, rulemaking, and enforcement in the digital asset space in concert with other regulators at the federal and state level. i look forward to your questions. >> thank you very much. we appreciate your testimony. let me start with questions.
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you have supported increased regulation for the digital asset market. one of the concerns that i have is that without additional resources, this will put the cftc in a situation where they are being pulled away from its traditional areas of responsibility, regulating the derivative markets including the markets critical for agricultural producers. i wonder if you might to speak -- might speak to how congress should ensure that the cftc has adequate resources to continue to oversee the markets at their core of their jurisdictions while expanding their responsibilities. >> thank you. i completely agree. i would love to see the cftc play a more active role. that will involve increasing skills and resources.
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there's a lot of ways to attract that. appropriations and other means. i think one way could be contributions from the digital asset industry as well. if that were the preferred approach, i know we would be complete the comfortable participating in that so long as it was a reasonable framework. we don't wanted to be a blank check of infinite size. you know, it's a well thought out and reasonable framework for supporting the activity of the cftc and the digital asset ecosystem. i think that would be healthy and we would be happy to play a part. other members of the digital asset industry would as well. >> thank you very much. this is going to be important. there are fees or something that folks are contributing.
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i think that's going to be important to give the cftc the additional resources to do what you and others are suggesting. i would appreciate that. bitcoin mining is extremely energy intensive. the united states is now home to one third of the world bitcoin mining. much of which is powered by fossil fuels. i'm concerned this is going to threaten our ability to combat the existential threat of climate change. and strain our electrical grid. can mining become more sustainable? if so, what can congress do to encourage the stern titian? >> absolutely. thank you very much for that question. firstly, if we go back six years , we had a different challenge in the crypto mining sector.
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most of crypto mining occurred in places like china and russia. where we had very little visibility over what was going on in the mining sector. also, not good energy sources, dirty energy sources. what we have today is actually an opportunity. most of the mining has shifted to the u.s., to canada, to the nordic countries. why? because people will go where they can find energy at the cheapest level possible. when you think about the bands that have occurred in china and in russia and various other places, that's actually a net positive, especially for the u.s.. what we should do is encourage the crypto mining firms to set up in an observed and obviously over site where we champion the
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move towards increasing renewable usage. we bring this industry to the u.s., canada, and other peers. why? because we need that oversight and visibility of what's going on in such an incredibly important sector. there are a few things that are going on right now. the private sector is already looking to adopt more renewables. the private sector is agreeing with states on caps. meaning that there is a peak load occurring in any state, minds shut down. they no longer mine and they wait until the peak load has come down. these are creative and very sensible, practical ways of transitioning to a place where we are mostly renewable. i really encourage a re-think around how we embrace the sector and encourage the positive use of renewable energy.
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>> thank you very much. what is the chambers's view of this issue? >> first and foremost, all industries and all technologies use energy. we have very good visibility into the energy uses of bitcoin. today, bitcoin mining consumes about 0.12% of the world's energy production. if this went away, we would still have very significant conversations and issues to work out as it relates to climate change and energy uses. two differences between bitcoin mining and other energy producers are one, we have very strong visibility into the energy and the cost and the resources based on the transparency of the block chain. and second, this energy, the sector of bitcoin mining is leading the transition to renewable energy sources. today, the industry is powered
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59% by renewable. it's one of the most sustainable if not the most sustainable industries in the world today. >> thank you very much. i see my time is up. senator boseman has gone to vote. we are taking turns back and forth so i will turn to the senator who has multiple hats including chairing their urban affairs committee. >> thank you. i appreciate your question about the environment. saying, we don't do it in china anymore. that's what makes it environmentally conscious -- that doesn't really take us where we need to. thanks for raising the issue. we hear a lot about innovation. i'm concerned that digital assets create big risks for consumers. our committee, we have been looking at cryptocurrency for years.
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we will continue to make sure consumers are protected in these markets. next week, they will testify about the working group report on stable coin. i look forward to correlating with the chair staff. senator booker is very interested in this. we have work to do. digital assets make it easier to conduct transactions outside of the regulations that keep criminals and terrorists from using our financial system. the justice department announced an investigation into two individuals that tried to launder more than $3 billion of stolen bitcoin. how do we approach bringing digital assets within an anti-money laundering framework? >> thank you it. it's a very important question. there are all sorts of illicit
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activities that happen using digital assets. there is a need to bring this whole ecosystem within the frameworks that we've established for illicit finance and to figure out new technological means to do that. much of this involves finding mechanisms for entities to know their customers and to communicate that information, to provide surveillance capabilities for regulators. the exact way that this happens may be different for digital assets. in recent years, there's been movement in this direction. the financial action task force has adopted something called the travel role for communicating information between virtual asset exchanges. the industry has started to work with coming up with the technological means to implement that. ultimately, it comes back to the fundamental issue that regulators need to have oversight. these need to be exchanges that are subject to market regulators
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like the cftc and the sec that can figure out how to implement those kinds of requirements. there's no question, there is far too much financial crime going on. there's financial crime outside of crypto of course as well. there's far too much going on using these assets. >> thank you. if we turn on the tv these days, there are ads for crypto everywhere. i understand ftx will have an ad at the super bowl. i heard they are not cheap. there's no question that crypto companies want working people to put money on the line. that's who you are reaching out to. hackers stole $320 million from a crypto platform wormhole. investors got lucky and the trading from behind it came to the rescue. we can't always count on those trading firms. there isn't that much money. is the one we see if you watch college football. you see matt damon on just about
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every college football broadcast , lost $30 million last month this games and hacks. -- to scams and hacks. is it reckless for crypto companies to get rich why selling americans such a dangerous project -- product? >> thank you for the question. this highlights the need for federal oversight of the cryptocurrency industry. as you pointed out, there has been a number of scams historically. most of this has happened on unregulated venues. there are sophisticated tools that the ftc and other agencies have to help mitigate this risk. the stc has a really extensive cybersecurity and anti-hacking department and program that all of their registrants go through and there has been a very good track record of those companies.
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digital asset exchanges seem subject to that level of oversight. it would help to mitigate the risk that you are pointing to. i think that when you look -- another instance of this that you brought up which is scams on the asset side, the individual assets. moving towards a world where there's a federal registration regime for digital assets that involves the same level of disclosure and anti-fraud protection that we see for securities today would be entirely appropriate. it would help at -- to protect and give these scams -- it would have to be different than any registration form that currently exists because there are some nuance differences between digital assets and current assets. many of the same principles apply in the same way. i think that having a federal oversight through that system
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could help address that a bit as well. >> thank you. >> thank you very much. look forward to working with you on this. senator boseman? >> thank you. there are over 17,000 digital assets. can you briefly explain what digital assets are generally used for and how are they regulated? where is the real-world application of digital assets, particularly bitcoin? that represents about six to percent of the digital market. we are hearing a lot about the potential for fraud, the fraud that's going on, this and that. there are so many people that are confused as to what this represents. we are digging a little bit deeper today. for a lot of our colleagues, this is something that they've heard about but they don't really understand. what is the real life purpose of getting into these things? >> to really understand the
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purpose of the technology, you have to understand the problem that it solves an internet architecture. the internet was supposed to be a place for peer to peer transfers. it works for communication. it works for media. it does not work for things of value. if i take a picture on my cell phone and i go to send it to you, peer-to-peer. we are not using intermediary for me to deliver that to you. when i send it, there will be a copy of that picture on your device and there will still be a copy of that picture on my device. that works for photos but that does not work for money. if i'm sending you money, it's really important that when i send it to you, it leaves my control and is only in your custody. that is the innovation that bitcoin solves. that problem is called the double spending problem. it wasn't until 2009 with the launch of bitcoin that we knew how to do that. previously, financial were being
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retrofitted to fit on top of the internet. you can think about this in a way of taking a picture of the front page of the washington post. just hosting that picture on a website. is the news online? technically. are we using that infrastructure to transform the way that we are sharing that information? no. financial services is just now starting to see that technological boom in peer to peer direct transfers. what is this used for today? there's many of -- different group of currencies. bitcoin has the largest market cap out of all of them and its use is a digital store of value. the chairman of the federal power has testified in congress comparing it to a digital gold. but this main purpose. other cryptocurrencies like ether and crystal state networks are smart contracts application. those are very different things.
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>> this is a question for all of you. you've only got about 30 seconds to answer it or the chairwoman will yell at me which is not a good thing. i guess the question is, the heart of the matter is, do you believe it's necessary for congress to provide market participants greater certainty when it comes to regulation of digital assets, stock markets? if so, what should be considered as a framework is developed? we will start with you. >> >> thank you very much for that question. in terms of what we've talked about today, i think the urgent first step is to provide the cftc with the authorization and the resources needed to oversee
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certain parts of the market. it's pretty clear that derivatives and crypto derivatives fall into that. the next question is, the spot markets in relation to what is identified and defined as commodity within the digital assets. on to emphasize that again. not all digital assets would be commodities. it would be a subset. making very clear what that is and that demarcation will be very important to the market. that first step alone will do wonders to really help move forward under the clarity point. >> i think it would be great to have corrective action here. providing clarity on the regulatory framework would be appropriate for the industry and oversight. i think there are some actions that could be taken without a new bill passing. you look at retail commodities and spot transactions with financing, that's an example of an area where the cftc already
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has regulatory authority. for cash and markets more generally, it would be great to get congressional action and clarity on that point. >> go ahead. >> ok. our ask in terms of what this committee can do, and the biggest issues impacting our space, as i stated in my oral, regulatory clarity and cohesion. to start, a good first start would be to create a joint working group between the cftc, the sec, and the industry. we are pleased to see that there has been bipartisan support for that and we would further encourage that here on the senate side as well. i mentioned the national action plan for block chain. we have eight regulatory principles that we outline in the national action plan. we would be happy to collaborate
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with that further. we also think that the cftc is well-positioned to be an upbeat regulator in the space. >> good. go ahead sir. >> i would agree. spot market authority for crypto commodities is essential. more broadly, congress needs to look to where there are gaps in the regulatory structure. not all of them are within the purview of the committee. stable coins are one that have been identified. central-bank digital currencies. some of the energy and climate related issues where tax policy might provide incentives. more broadly, tax issues around digital assets are situations where it's become clear that existing legal frameworks need some updating. over the long-term, this is the future of financial services. there is certainly an urgency to make these kinds of modifications. i think congress needs to start the process of thinking about how we might restructure our
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financial regulatory systems, given the kinds of innovations and changes that these technologies herald. >> thank you >> thank you very much. senator booker. >> thank you chairwoman. i agree with so much of what is being set on both sides of the aisle. about the concerns and the worries. about the urgent need for a clear regulatory framework. i want to try to highlight right now some of the things that i think are important to drive home. could you both comment on why america right now, if we are unfurling our patriotism, is losing out on a lot of opportunity that this industry right now is mostly overseeing? and not here at the center of the global markets. what is the opportunities we are missing out on and the dangers
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of not creating a clear regulatory framework that would have these transactions being done here in >> american and global competitiveness as huge concern of mine. digital technology does not see national borders. it is global by its nature. companies are going to operate in areas where they have legal certainty. we have members today that are not comfortable operating here because they don't understand the rules of the road and they are going overseas. having legal and regulatory certainty is absolutely essential, and this committee has a key role to play. we have the issue of regulatory fragmentation, it is not the lack of regulation, it is that you have so many cooks in the kitchen and stakeholders all pulling to have purview over
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different players of this asset class, and it adds a lot of red tape to running a business here, particularly a small to medium-sized business. so regulatory clarity, and having a cohesive strategy is essential for promoting economic growth. >> i agree, thank you for the question, senator. 95% of volume is exclusively offshore because of a lack of clarity today. that is a real threat, i would love to see that come on shore. the majority of digital transactions are conducted by u.s. dollar backed assets, stablecoin's that could change to a different currency if the united states does not take a lead on providing a clear pathway. you could see the center of the
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digital economy go somewhere other than the united states, unlike the center of most other marketplaces. in terms of the promises, there is a time, you will get the on bank and under banked. it is not shocking that minorities disproportionately used digital assets. those who don't have equitable access to our current financial and for structure disproportionately use digital assets. for the first time people have direct assets to their own finances, they are not forced to wait five days for a transfer to clear, getting overdraft charges every day along the way. it is one of the first times people can get clarity without having to hire an accountant to keep track of their own ledger. it exemplifies hope for other areas of our economy, i think you will get social media. one thing that's become clear are the dangers of having any
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approaches to central social media control and censorship. there are no right answers sometimes. one thing i would be excited to see would be launching technology providing an agnostic messaging protocol which would allow interoperability between social media platforms, breaking down some of the network effects, and allow competition and different types of moderation to play on the same messaging protocol without holding captive users and the content. that's another area where we could see -- >> going to interrupt you because i have only got 30 seconds left. and you have a much more glorious afro than i once had. i got into politics because as a city councilman in a neighborhood i still live in, low income black and brown community, and i was appalled at
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the banking industry. when i was mayor we did a lot to diss intermediate the banks. we brought kiva into newark, we had better repayment on kiva, we bought with the local banks to get them to eliminate fees. you are right that black and brown people are overrepresented in this space. i have concerns whenever you have a large money and industry getting into something, could you close me out by saying to me how this could really empower the communities that all of us on this committee are focused on, and that i got into politics to make sure i serve. mr. bankman-fried: i completely agree, senator. it could provide direct, equitable access to financial services for the under banked. it could help them without
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getting his commission from the underlying technology, and also where they just have clear transparency on what their finances and assets are. they are not beholden to institutions charging them fees, and i think that i am really excited by that feature. >> i hear rumors that you had a great afro back in your day, too. >> thank you, chairman. i assume that all of you are going to be the life of the super bowl party because when matt damon comes on and says fortune favors the brave, you can start riffing about cryptocurrencies. you know it is mainstream when professional athletes some of whom will be participating in this weekends super bowl are getting part of their
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compensation in the form of crypto. i'm interested as most of my colleagues are in what is the best approach to make sure that we are not stifling innovation, but that we're regulating digital asset technology in a way that appropriately reflects the risk. mr. warnock, -- werbach what would a risk-based approach to digital asset regulation look like? >> that's a healthy way to look at this, any entity involved needs to think about what are the different kinds of risk. there was a question before about the banking system and the way that certain banks have been unwilling to take on cryptocurrency clients. fundamentally, that should be a risk-based process in terms of assessing what are the concerns, and what are the mechanisms for addressing those concerns.
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it's easier to do all of that within an overarching structure where regulators provide some level of general guidance and oversight and surveillance of markets, but then allow entities to devise the rest-based structures that make the most sense for them. this is a very diverse market with different kinds of assets and exchanges changing very fast. so a very specific prescriptive approach requiring one set of requirements may not work, but there needs to be some encouragement and guidance about what a risk-based approach would look like. that is starting to happen bottom up in certain areas where regulators are pushing, but it needs to start with that requirement that we will get participants in the industry to move forward. >> mr. bankman-fried and ms. ro, you both make it sound like the united states is not very competitive when it comes to attracting the digital asset
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industry which begs the question about what other countries are doing and how the u.s. regulatory framework compares with that of other countries. so could you talk about why other countries are more attractive, and why the united states is not particularly competitive. and does it have to do with a regulatory framework in those countries? mr. bankman-fried: thank you for a question. there are a lot of countries in the world, each has a different approach and many other countries are noncompetitive on this. but many of them are. the big differences that we see are not on whether regulation is stringent or lax, it is on whether regulation is clear or unclear. the biggest thing we have seen with countries that have done a good job at attracting the digital asset industry is having clarity from the regulators about what licenses one should be pursuing and what the oversight is, who the overseeing
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body is, how one registers things that need to be registered, providing a pathway forward with oversight is the hallmark of the countries that have done very well. the biggest problem in the united states, i think patchwork is a word that has been used a few times. we have a patchwork of regulation that is simultaneously too many cooks in the kitchen, and yet not enough oversight because there is a diffusion of responsibility. i think that having a clear plan mark with clearly communicated -- whether it is prescriptive or more appropriately served by principles-based guidelines, but a clear regulator in charge of those or cooperation between regulators, clear licensing and registration pathways that are not lax but are fair is the single biggest thing that is missing.
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ms. ro: if i may add to that. there are two countries i want to highlight that we may borrow -- might want to borrow part of their playbook. switzerland. they are very clear about how things are defined, whether something is a utility token or a security token, or whatever it is. they have made very clear definitions. further they have come out in front in how they deem different classifications of activities. they were also one of the first to come out as a licensing regime for these crypto funds. this is what happens when you do that. there is a little town called zouk, "crypto valley" no one ever heard of zug, but it is now
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home to hundreds if not thousands of crypto companies. these people do not all live there, but they have set up shop there, and that is something we should think about. estonia, i will leave you with estonia. they have an e-resident program, and they have digitized a large chunk of their government services. what is interesting about being an entrepreneur, i don't need to go there either. i need to prove my identity, i need to have the requisite capital to invest, but everything else i can do digitally. i can even have encrypted signatures for legal documents. it's a very interesting model. and so we should be looking at those types of things to encourage business to come here. they don't physically have to come here, but to set up shop and create jobs here. >> mr. chairman, if i could just have ms. boring take this one for the record because my time has expired.
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you mentioned examples of blockchain technology. i appreciate you pointing out applications in agriculture. you mentioned a live stock ownership record-keeping use, and if you could for the record tell us more about that and how it affects american farmers and ranchers. ms. boring: happy to. blockchain technology is providing security and transparency to supply chains, and is arming our farmers and consumers with better information and data about agriculture products. one example is a company called beefchain, they are based in wyoming and are a pioneer of this technology. cattle is tagged with an rfid and given a unique digital identifier, that unique id, as well as other information collected from the supply chain such as where it was born, has it been fed hormones are not,
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when it was sold, all that information is collected, secured, and stored using blockchain technology. supply chains -- blockchain technology is bringing other benefits to supply chains such as making them more efficient. is helping them increase trust in different brands, especially small farmers and ranchers throughout the u.s. it's helping with sustainability goals, food freshness, safety, it help prevent fraud as well as food waste. >> thank you. >> center dot ivanka -- senator braun. >> as an entrepreneur and business owner, probably most fresh off the street here in the senate, this is an interesting area for me. you talk a lot about of that
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stuff, including our budget, which is more than it has ever been in our history, giving a lot of fuel for nonsovereign currencies, and this is something to be worried about when we have been the reserve currency for so long. i won't get into inflation, but i have got a question about the new technology. i'll start with ms. boring, when it comes to elon musk who loves the idea of all of this, but could not accept crypto currency due to the environmental impact. is there something down the road that could through the economy of scale make the energy use less. for all the benefits, it looks like it may get us someday
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because it looks like that will be an increasingly significant issue. what is your take on that, and do you believe elon musk had something there in deciding how energy can establish blockchain? ms. boring: it's been interesting to see elon musk's stance on digital assets, while they stopped accepting certain assets, they still own it and it is on teslas balance sheet. actions speak as a part of the approach as well. specific to energy concerns, we have seen a number of groups and members of congress expressed concerns about the energy usage of certain digital assets, specifically those that use proof of work. the point that i made earlier is what is important in what we are seeing in the bitcoin mining
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industry and other proof of work blockchain's is that this industry is leading the transition to renewables. we represent companies that are publicly listed here in the united states that are partnered with renewable plants like solar and wind throughout the u.s. these partnerships between the renewable industry and the bitcoin mining industry is bringing new investment and an invasion into renewables, and that needs to be an incredibly important part of the conversation as we look at policy responses to the concern. >> as you look at what up percentage it is -- small percentage it is of transactions, and with an emphasis on the cleanest and least expensive fuel, down the road hopefully most of those converge on in the right direction. i think there'll be plenty of demand for something in addition to sovereign currencies that look a little shaky and risky
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for what dependability was there in the past. question for mr. werbach, when it comes to this emerging technology kind of analogous to the internet, and we didn't know where that was going to go. and look where it has come. now it's biggest susceptibility is from cyber thieves. and i think many would wonder about using blockchain and cryptocurrencies when it is in that realm of can it be hacked? is it something that can give you peace of mind and security for all the reasons i have mentioned. how do you draw a comparison between this and the internet in terms of concerns, fledgling industry, and what about its long-term safety and security when it is based upon a technology many of us don't know much about?
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>> that's a very important question. we forget that back in the 1990's, people said how do you buy something on the internet, you either type your credit card number into a computer and it is going to go somewhere into the either and you believe somebody is not going to steal your credit card. americans were worried about e-commerce for exactly that reason. what happened was technology evolved, there were various technical mechanisms to ensure your credit card is protected. part of it is regulation. if in fact, your credit card is stolen, your entire balance is not at risk. it is kept by the issuer's. and part of it had to do with regulation oversight of industries. ultimately, people got confident. i focus on the idea of trust, the title of my book, that's the similarity, people learned to
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trust the internet. the same thing as possible here. the ironic thing is the blockchain technology itself is incredibly secure, it is cryptographically secure. no one has successfully been able to hack that ledger because it is so secure based on the underlying cryptographic structures. the problem is that you holding keys at the edge of the network, you have to secure your own keys. you can't rely on the bank or intermediary providing security, and that is what has opened up the opportunity for those hacks. we need to move forward with identifying technologies and best practices, as well as having oversight and regulatory mechanisms to ensure there are basic standards. >> new horizons i'd say. >> senator tuberville. >> thanks for being here today.
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i think you all agree it is critical for the united states to be the undisputed leader in the digital asset game. we have led the world in financial innovation. under the previous administration, regulators understood the importance of encouraging innovation and took a light touch approach to the digital assets industry. we have seen a dramatic shift over the course of the past year, and i'm concerned about the regulation of enforcement mentality that is starting to take hold. if this keeps up, innovators are going to leave the u.s. and move overseas to places like the u.k. and singapore. we can't let that happen. we certainly can't allow china to get ahead of us in financial innovation. sam, you have had great success. i am a free-market guy who
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happens to think that is a good thing. what do regulators and those of us serving in congress need to do to keep companies like yours operating in the united states and how can we encourage more innovation here? mr. bankman-fried: thank you for your question and if the kind words. it is imperative that we -- allow hopefully much of the offshore industry to move into the united states as well. 95% of volume is offshore today, and it would be great to see a lot of that move back to the united states. the biggest thing we need is regulatory clarity. it is not a matter of our regulations and stringent or lax, it is a question of are they clear and is there are regulatory pathway forward for registration and licensing. getting clarity on the cash and spot markets would be great for the industry. many institutions are sitting on
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the sidelines waiting for that. the cftc would be an appropriate regulator for spot digital commodity transactions. the second thing is on the token registration. a lot of activities taking place outside the united states right now because there is not a clear registration process for tokens in the united states. i think it's appropriate to have a registration process, to have antifraud controls and similar things that louisiana mother marketplaces -- we see in other marketplaces. there are some differences even if many of the same principles do still apply. a similar principles-based system, but one that can provide the same clarity and allows them
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to register in the united states and be offered on u.s.-based platforms would be important for bringing industry back on shore. there is no clear registration pathway today. those are two of the biggest things to address, and i think addressing those plus a regulatory framework for stablecoin's would do under norma's amount to provide clarity so people could get registered here and conduct business activity here rather than going to jurisdictions who have developed frameworks for it. >> out of the digital assets out there, what percentage would each of you say are commodities versus securities, i'd like everybody to give an estimate. ms. ro?
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ms. ro: there are so many that are out there. i think the digital asset definition is any asset that is digitized. we take a subset of the different classifications, you have to put aside all the central bank currencies, that is another category. you've got your tokenized physicals things as i like to call them, when you tokenized or digitize real estate or gold, or actual physicals things, that is its own subcategory and they have their own demarcation depending on what physicals things they are. some of the rest could probably fall under the commodities bucket, and that's where it gets complicated. i can't give an exact percentage, but i would start classifying things into sub buckets, and then we can parse out how much of that is actually
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commodities. mr. bankman-fried: by volume or market cap, the vast majority is commodities. i think some of them are unclear and have some properties of a number of different asset classes and don't fit into any bucket. you will get a number of tokens. ms. boring: i agree with mr. beckman. ankman-fried, if you go by market cap, bitcoin and ether composed 60% of the entire market cap of the crypto ecosystem and they have been defined as a commodity by the cftc today. another category as intentional digital asset securities, that's a nascent emerging piece of the digital ecosystem that has yet to be fully revised -- realized
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because of the lack of clarity from policymakers. >> the question is how they are used. if the vast majority of digital assets are used as a form of fundraising, there are situations that are in the middle. ether is a commodity today, but may well have been a security when it was originally issued back in 2014, 2015. bitcoin, because there is no entity issuing it that is raising money, it makes sense to think about it as a commodity, you are not countrymen into the investment schemes of others, it is a decentralized network. i agree with the speakers who said if you look at the market today, the important question is what is going on. what is the nature of the activity involved that is going to change and develop, and the
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same asset may in different circumstances be in more than one category. >> thank you, it is a complex issue we are all heading towards. and for your expertise today. senator bozeman. >> thank you, and a special thanks to all our witnesses and committee members and staff for a very important hearing that has helped us as we move forward. on behalf of senator stabenow and myself, as you can see there are no shortage of questions on this issue. we appreciate your testimony which will help us get a better grasp on the potential and risk of digital assets. there is a gap in the oversight of digital assets, this poses a danger to the american consumer and confirmed the resiliency of our financial markets if left unchecked. regulation and innovation are
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not mutually exclusive, that's what we're all working to achieve. we have an opportunity to broaden participation in our financial markets, but this must be prepared with consistent rules of the road that protect investors and markets. we look forward to further discussions in this committee, and with that, that concludes our hearing today. the record will remain open until tomorrow at 5:00 p.m. for members to submit additional questions or statements. with that, the hearing is adjourned. [gavels] [indistinct conversation]
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