tv Hearing on Safeguarding Financial Digital Assets CSPAN February 17, 2023 8:02pm-9:38pm EST
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will come to order come apologize too the witnesses and to the observers today both in person and they committee room and those watching remote for the delay pretender scott and i had a briefing, we won't talk about any more than that on what's happened with china and what happened with the balloons. military and others have protected us from if youte will. we need to stay here for the remarks to us. what a difference a year makes. goes back to lester's super bowl they crypto currency industry not a whopping $54 million on eight ads promising americans
untold riches and the chance to make history. they did not tells about the high fees, the risk of loss, the outright theft that plagued the crypto industry. if you watch the super bowl two nights ago you did not see a single ad for crypto. crypto currency industry has imploded in 2022 they crypto market lost 1.46 trillion productive 1.46 million i am sorry thousand billion in value. hackers and fraudsters and moscow have stolen over $3 billion. crypto firms have slashed over 1600 jobs. crypto values crash last year platforms began collapsing creating more losses across the rest of the crypto ecosystem they crypto firms that are left customer withdrawals freezing people out from their ownfr mon. crypto contagion did not affect
the broader financial system, thank god. we saw glimpses of the damage it could have done if crypto migrated into the banking system for the handfulul of banks with close ties have needed liquidity lifelines after they suffered large withdrawals. this crypto nightmare is not over yet. we are still learning the full extent of the fallout from the ftx collapse for heard about the excessive risk-taking and misconduct lost money only now understanding reality the products that were sold as they filed for bankruptcy policymakers also learn out of control some of those businesses were. they are over leveraged, undercapitalized. then no internal risk controls. they were careless with customer money. they line their own pockets and now the many of millions of americans is trapped and they might never get it back but i
more in the splashy super bowl ads left out few details but a year ago i said as chair of this committee big crypto companies are looking to make a big profits are desperate to reach as many americans as they can hence the 54 million ads in super bowl parade they brought in celebrities and gimmicks to make crypto sound exciting and daring. and profitable immensely profitable. these ads left a few thingsfe ot for the job mention the fraud they did not mention the scams they did not mention the outright theft read the ads point out you could lose big in price swings they did not play but the high fees pocketed by the crypto companies they sure did not explain the crypto markets lacked basic investor protections and oversights for the results were as predictable as they were tragic. contrary to crypto and evangelist claims of democratizing finance contrary to crypto evangelist claims of democratizing finance practice not the early adopters or the big money investors left holding
the bag. when it comes to crypto fortune does not favor the brave it favors the insiders is not just a few bad actors that did not do things quite the right way. these crypto catastrophes have exposed what many of us already knew digital assets crypto currency, stable coin investment tokens are speculative products run by reckless companies, we know that's true. americans hard earned money at risk. not surprising from an industry created to skirt the rules. whether it's a facebook or the expulsion of crypto i've always been concerned about shiny new products that offer another way to profit off the backs of working americans and save time threaten the real economy. it's time now to consider how to protecto consumers and whom we want our financial system to serverv. last congress this committee examined the risk of crypto to our economy explored the mechanics behind stable coin
companies looked at how regulators and congress can protect consumers. we learned how crypto can be used to commit crimes like drug running and entered unchecked which threaten our national security it helped fund terrorists and world regimes. fraud and speculation the crypto market hurt investors and savers recent crypto meltdowns have made clear we need a comprehensivee framework to regular crypto products to protect consumers and our financialon system. today we will examine cap time-tested financial safeguards can help protect against the harm and the risk of crypto products will start by taking a closer look at these basic principles of regulation. exterior clear disclosures and transfer is essential to retail customers and investors can understand token or crypto platform can work. conflicts of interest and self-dealing by insiders is a fundamental. maour markets only work when thy
work for everyone for protecting consumer funds by separate event from company assets, investor dollars cannot be a slush fund for the executives benefit. internal governments to make sure if a platform takes customer funds it acts imprudently. strong consumer and investor rights and protections are the foundation of trust in any essential to functioning market. money laundering and fraud prevention to make sure malign actors and evil nationstates cannot fund themselves and evade law enforcement. oversight and supervision to hold companies accountable access to financial markets is a privilege, not a right that can be abused. these are basic common sense principles developed over centuries of financial system regulation the wildcat money of the 1800s the banking panics the savings-and-loan crisis in our lifetime the.com bubble of the
great financial crisis for these crises of the story of speculative bubbles fueled by investor euphoria and the promise this time it's different. even though it really never is. the lessons learned of the product of hard earned experience, experience born of real people using real money in a real dream shattered. christian crypto isn't special we can start the common sense principles as we consider regulatory framework for digital assets that puts consumers first and above all keeps our financial system safe. trust this committee the ranking member often says can find common ground work together to protect investors from crypto risk-free thank you. >> thank you mr. chairman for before i dig into my opening comments i want to address the elephant in the room. mr. chairman going to take enforcement action and congress needs to hear from him very soon. the chairman has lots of time two rounds the morning talk shows he has time for that. he should be here testifying with us this morning.
i hope that we see him here very soon. thank you chairman brown the wheat market economies formed by financial innovation. it is continues to drive our economy today. in order to advance as a country we must continue to grow and innovate. but we must do so in a safe and sound manner. innovation can increase access to traditional financial services and fostering emerging technologygy that promotes financial independence, access to credit and capitol formation. we all know and understand how technology can improve our daily livess from using our iphones or phones to open bank accounts, to opening a digital marketplace. if we foreclose financial innovation we limit future generations from growth and opportunity. that said, financial innovation must be done so in a safe manner which unfortunately is not been the case with a number of actors in the digital assets space bar for example for some time
considered the darling of the crypto industry. unfortunately instead of protecting customers interests and using customer funds in the matter intended, same ftx owner stole millions of dollars customers funds and use them to finance risky bets to pay for luxury pet houses in the bahamas. i consider this massive failure whether our regulators when they were supposedly already had the authorityy. where the using thoe authorities. the regulators the scc specifically have noted is the responsibility of crypto firms to comply with the existing regulations. it is also the responsibility of regulators to enforcing regulation and to conduct appropriate effective supervision. the american people deserve to know why no action was taken prior to the collapse and help millions of dollars of americans
hard h earned money just vanishd into nothing. it is not just ftx but the scc have provided even the slightest bit of guidance, i wonder if they would've been able to protect investors celsius in june, voyager in july and in november for this isic particularly alarming when we see the reports 44% of americans who own and trade digital assets are new investors are people of color. whichh means there's a $2 trillion draw and market cap are most vulnerable citizens air the most significant blunted. hold companies that harm consumers but to empower consumers to financial education so they can more accurately understand the risk posed by different asset classes. whether it starts in the classroom or in the boardroom, financial literacy provides an
avenue for individuals to make better decisions to climb the economic ladder. nonetheless regulators have put their misplaced focus on pprogressive social issues. we have to ask ourselves, were to be go from here? toas date the sec has failed to take any meaningful preemptive action to ensure this type of catastrophic failure does not happen n again. if they have the tools they need where they just asleep at the wheel? i' they don't, why aren't they here details what they need? we would be happy to have chairman cancel or testify sooner, much sooner than later. moving forward we must take a thoughtful bipartisan balanced approach and promotes innovation and opportunity for a forward to hearing our witnesses perspective on how we can continue to drive innovation ani opportunity while ensuring consumers are protected. thank you chairman. >> you center scotto introduced his three witnesses.
when hear firm policy director at the duke. financial economics sent lecturing fellow duke university of law, welcome. professors achieve global regulatory officer of the crypto consul for innovation for it is also the visiting scholar and financial technology adjunct professorci of law institute for national economic law and a senior lecturing fellow also at duke law school. professor is the chair professor of law associate dean at vanderbilt law school professor, welcome. >> chairman brown, ranking member scott and members of the committee. thank you for inviting me too testify at today's hearing. i am the policy director of the duke financial economic center duke i teach courses in crypto
currency law and financial regulation. prior to entering academia i spent five years examining important financial institutions at the federal reserve bank of new york. the first bit coin to the world in a nine page white paper posted on halloween 2008. the first bit coin transaction occurred in general 2009. fourteen years, thousands of crypto currencies and trillions of investor later crypto scarcely resembles the. too. conversion. by technology standards crypto is not new. for comparison the iphone's interest in 2007. anyone who held a smart phone in their hand for the first time immediately recognizes transformative potential. more recently opened ai made artificial intelligence cap bots available to the public last november. two months later check gdp at
one third million active users making it the fastest growing consumer application and history. after 14 years and countless claims crypto represents a future of money, finance wasfu something else we have yet to see crypto skillet use case. in fact my 16% of u.s. adults have invested in, traded or used crypto the data is clear most people invested in crypto simply because they thought they could sell it to someone else at a higher price in the future. sadly, these people were wrong. fourteen years have provided ample evidence of the dire harm crypto currency inflicts throughout our society. can the billions of investor lawsuits frauds, hacks, scans, reptile undermines national security by facilitating terrorist financing, and undermines our economic security by feeling a surge in ransom or attack set american businesses, healthcare systems and municipal governments. it jeopardizes our climate goals by needlessly consuming massive amounts of energy that
contribute to carbon emissions and electronic waste. i asked, what benefits do we have to show for these? even as we stand in the ashes of the ftx implosion crypto industries make new narratives to reflect the damage they have wrought. one such line goes is sam bank been freed was just a bad apple. the problem is with intermediaries. ftx was not an isolated incident. celsius, voyager, acxiom imported a comet genesis, mangled market. how many more must fail before we conclude the entire barrel is rotenberg another line is that policymakers must embrace innovation with a crypto industry will migrate to other jurisdictions with a more favorable regulatory climate for this in place innovation is an unmitigated good. the truth is innovation is value neutral commutes for good or
bad. instagram for kids is technically innovative to sin and think it's a good idea? looking at crypto it's clear the costs outweigh the benefits. so why would we want to embrace it? minds of americans and invested in crypto only to see the hard earned money evaporate do not care whether crypto is classified as a commodity or security. they do not care for the industries regulated by the scc, cftc or some other agency. they only care about having the same basic safeguards that have come to know and expect from traditional financial e system. unfortunately, we have let them down. the time has come for action part action that only congress can provide. while i agree with scc chairman that most crypto currencies are securities, subject to sec registration and disclosure requirements, some crypto currencies like a bit coin are c commodities. while the cftc regulates commodity derivatives they do not regulate spot markets. the effectiveness that crypto
currency exchanges in the u.s. are presently not regulated the federal level. in my written testimony at detailed roadmap how congress and close the gap. i urgeco congress to carve out crypto currency from the definition of commodity in the commodity exchange act and recognize crypto currency as securities or special definition of the securities laws. this would give the scc exclusive authority to regulate all aspects of the crypto industry. the scc is simply more expertise, more resources more appetite for enforcement in crypto rome. most importantly unlike the cftc the scc is a statutory mandate to protect investors. whatever congress decides to do the status quo is simply untenable. i look forward to discussing the way forward with you, thank you pickwick thank you professor, welcome. cooks chairman brown, ranking member scott and members of the committee. it is a pleasure to be here with
you today. thank you for the opportunity to testify. the banking committees were cut my teeth on financial policy working on the response of the global crisis. i have been impressed by him and thankful for the bipartisanship this committee has long embraced. today's hearing is yet another example of leadership. with inflationary pressures not seen since the 1970s, market volatility and changes to the long-standing policies, i've been asked to discuss how best to strategically think about the regulatory future of our digital economy. as a former regulator myself, i am vertically concerned about this area of our shared digital future. andbe how we can all ensure the best outcomes for american consumers while promoting p innovation. in this light i am testifying in my personal capacity as an academic andca researcher. i'm a visiting scholar of financial technology adjunct
professor at the institute of economic law in georgetown. any senior lecturing fellow at duke law. in addition on the chief global regular trade officer and global industry alliance of companies offering digital asset ecosystem. technological innovation enhances people's lives in meaningful ways. as someone who is spent years working on financial regulation and a number of roles, i know in the financial sector policy should focus on a number of key areas. empowering consumers, ensuring global markets, increasing efficiency and lowering costs for consumers. in short, technological innovation should be harnessed anto improve access, efficiency, and equity for digital consumers. to facilitate the growth of the resilient and sustainable digital future, policymakers should be intentional in their choice of the building blocks my experience these blocks must
address a range of issues including consumer investor protection. digital money, digital identity, decentralize finance, private commercial law, bankruptcy, accounting, tax, technology standards, energy, illicit finance and national security. the development of a flourishing ecosystem ultimately relies upon innovators as well as laws of regulation and policies. in businesses to facilitate long-termm value. currently, companies operating digital excess space are subject to a patchwork of state and federal regulatory requirements. transition license or obtain a license and tailored regime such as the new york department of financial services bit license. and partly at the federal level companies are required to
register many service businesses of the u.s. treasury and comply with rules. the absence of a transparent and consistent regulatory framework coupled with successful state regulatory regimes causes uncertainty for businesses and innovators while often failing to protect consumers and investors. in thest past year we have seen legitimate projects fail an outright fraud committing its customers transacting digital assets. both have cost significant harm. these losses underscore the urgent need to establish formal federal regulation oversight and demonstrate the adequacy of array getting solely by enforcement. toto date and for the purposes f this jurisdiction the ftc has not initiated any formal rulemaking process that are decades old to account for the unique attributes and digital assets determined to be
securities. given this unusual departure from the normal and well-established process of public rulemaking congress urgently needs to pass thoughtful comprehensive legislation that establishes a tfederal regulatory framework with digital assets addressing the securities and non-et securities. this complex andpl nuanced spac, the details matter. failure to enact rules, even through rulemaking or legislation that protect investors and allow digital assets to develop in the u.s. what risk off shoring innovation and putting american businesses, consumers at a competitive disadvantage with our foreign peers. it could also jeopardize an important national security lover of the u.s. t government. the preeminence of our financial system. thank you again for the opportunity to testify today look forward to answering your questions pickwick thank you professor. welcome.
>> chairman brown, ranking member scott, distinguished memberss of this committee. thank you so very much for the opportunity to be here today it is an extraordinary honor and privilege for me. i hope my testimony today can get some help to this committee as you progress your review and think about the causes of the crypto crash and the steps we need to take to shore up the financial system as well as most importantly to protect those who usee it. we've been asked today to consider why financial safeguards are needed for the crypto currencyy market. i think the evidence hasth becoe clear for all of us. the digital asset market is a big it. is becoming popular. it is sophisticated it's become increasingly financial eyes. the cost of neglect toit regulation is coming to all of us for as we have seen in the case of ftx example a case i imagine we will talk about extensively during this hearing, the bankruptcy court in delaware is having to deal the consequences. we are t talking about approxime
9 million estimate creditors, 134 entities, everyday customers both retail as well as institutional that are all clamoring to get their money outside of the bankruptcy system. at the same time legal processes are extremely expensive. they are long and the outcomes are extremely unclear. what is becoming straightforward here is the customers and very likely to be last in line to be paid out when they do come. now senators, this entire episode cast an enormous in doubt the distrust and confidence in the currency exchanges as well as the crypto currency industry. it also casts a lot of doubt on the trust and confidence of the regulatory system. it isre unfortunate that expert technical determination about very important matters such as how assets and crypto currency
assets how those in custody arrangements should work upright and now having to be taken getting to be taken not by our extreme experts they are extremely talented regulatory agencies but instead the bankruptcy court. now the bankruptcy court is a court extremely talented and extremely expert. but as an expert in disturbing scarce assets across hurt distrust creditors. now senators what i would like to propose to you today is to create a solution that can help to get a regulatory up and running quickly. one that is useful and able to integrate quickly into the larger comprehensive federal oversight system we havee today. what i'm proposing is the creation of self regulatory regime crypto currency exchanges are tasked with oversight of the market as a whole. to bring crypto currency exchanges in line with traditional commodities and
securities exchanges or self regulation by exchange has been the norm essentially for centuries. with this proposal would do is essentially task crypto currency exchanges with rules of monitoring the market and with this up and played the goal of this is threefold is 16 and crypto currency exchanges within a framework for federal oversight. our agencies would be tasked with inventing and carefully operate these exchanges to make sure that during the job. they would have to make sure these exchanges have the organizational capacity that they need to do theirey job. second of all who seek to make crypto currency exchanges accountable. but that would mean is if they followed their ability to do oversight than they would have to pay. they have to pay financial penalties in addition they would suffer loss of damages. now it would make sure crypto currency exchanges are in fact paying to look after their
market. thiss, means using their resources, using their expertise, using their knowledge and proximity to technology to make their marketplace as well as themselves more honest much more stable and much more driven to protecting customers. now senators, be very, very clear with you. this is not in any way a substitute for public regulation. rather is designed too be a compliment. the solution that supposed integrate seamlessly into eight larger federal oversight framework and it is one we've seen working in the traditional market for very long time indeed. senators, this is ultimately a proposal that is without its faults. now certainly in the traditional marketplace, we have seen exchangeav oversight suffer from various conflict of interest. this is really a proposal which is designed to get eight market up and running quickly. seeks to make agencies respond makes them responsible. it makes them accountable and forced exchanges that are anchor
piecee essential parts of the entire ecosystem responsible much more formally or bring stability and consumer protection to the heart of the crypto currency market. senators, the adage goes wish and of the crisis go to waste and out urge you to not that happen here. we are not left wondering how we could prevent ftx from happening. thank you so very much i look forward to your questions pickwick thank you professor. we'll start with you, some of the crypto industry have complained about recent sec enforcement actions againstin crypto firms for offering unregistered investment products. some of these entice consumers to put their crypto to work to earn doublet digit returns. shouldn't the financial product thatld takes in billions of dollars in retail consumer money operative basic consumer protections? >> yes it should centered i would point out the crypto industry is very fond of criticizing scc for enforcement it's a catch phrase is to deflect from the fact they
willingly chosen to operate outside the regulatory perimeter. the sec has been quite clear going back to the chairmanship of jake clayton most securities need to be registered with the commission print scc fist fell over 125 enforcement actions and have not lost a single case related to crypto currency. the judges think it's quite clear as well by the only people who seem to be confused about this is a crypto industry. click thank you professor. your testimony discussed health stock exchanges are regulated hard to extend the safeguards to crypto. what are the established safeguards that can benefit consumers increase market transparency and prohibit conflict? quick centered thank you so much for that question. exchanges have been providing self regulation in this market for a long time. i thinks it's important to consider these extremely powerful,em extremely essential extremely important parts of the institution what happens if they're not required to do so?
we have here is essentially a marketplace french we are using the private self interest of thesean exchanges for public god for the context of the exchanges themselves what they do provide viis having extremely expertise within the marketplace, surveilled trading from a standpoint they are responsible for enforcing under section six of the securities and exchange act standards preventing fraud, manipulation in a fair and equitable marketplace. certainly this oversight is not perfect, senator. but at the same time it's better than what we would have if we didn't have it. in this context there been various steps taken to prevent the context of interest. in the separation in these exchanges the organization to prevent potential conflicts. overall the system that is a compliment toe public oversight rather than necessarily being a substitute for pickwick thank you. again the collapse of ftx is
focused intense on basic protections like safeguarding customer money so companies cannot use it for their own personal benefit. explain briefly the urgency to us. the urgency to develop better standards for the custody of consumer assets? >> yes senator. unfortunate millions of americans i found out if these the crypto exchange that exchange has failed they are now unsecured creditors in that state they do not haveol control or access to those assets for that is very different than the situation we have with banks which are fdic insured or the church on broker/dealers have specific insurance of this one change out recommend congress focus on is required so if these firms do get into trouble customers will still have access to the funds. >> thank you print last question i would ask all three of you to answer. there are many m ways to protect consumers and the crypto market but one thing is clear customers
deserve to understand better the investment they are making but my question for the panel without debating crypto currencies are different from stocks or bonds, is it reasonable to start the conversation with investment disclosures that we are familiar with. so professor, let's start with you. let's go down the line how do you briefly explain how we can use existing disclosure for crypto? what sense are like you asked that question but that's an essential part of the process which is to have disclosures reveal insight about what exactly the governance of the issue is that are providing technology in addition to the change in the underlying technologies that are animating these. but we have here today is a disclosure system that needs to work. as ranking member scott discussed earlier this is technology that's been popularized and being used increasingly younger people it's extremely important making sure these disclosures work.
make sure the disclosures are readable, making sure disclosures are usable encouraging people in different ways to engage with the actualth information they are seeing. otherwise there's no good whatsoever if it's not something able to communicate effectively pickwick thank you. >> is a very important question. one of their interesting is that it is transparent andrk code, right? as a former regular that worked with engineers and i do not code, i need the engineers to explain to me how the product was actually designed. so white papers do not clearly explain how it's designed, what the risks are, who holds the private keys, the governments, the voting rights and then more importantly where are the funds held? these are the important issues that need to be included in the disclosure. >> thank you. >> irv had a basic bargain capitol market since the 1930s.
companies want to raise money from the public have to disclose the risk involved in that. and then investors are free to choose what risk they want to take. i see no reason why that principle should not apply to crypto. although iai will agree may be e specifics of what this disclosed could be debated i think they have the authority and i think the authority to customize this disclosure. for certain decentralized crypto products the eu is looking inea that direction. but disclosure is necessary. >> thank you. $4 million of super bowl ads a ago and zero ads this you will certainly underscore that. ranking member scott pickwick thank you, mr. chairman. let me finish professors point on disclosures having sold mutual funds in the past life to be very helpful. truth of the matter disclosure sounds great and to try with the perspective you cannot figure out what it says. plain english be very helpful
for the vasten majority of our folks who are first-time investors to understand what they are investing in. this is an area that's really important due to the complexity of the underlying asset itself. right now the united states has a strong enviable capitol markets in the world the reason for this is very simple reason. the sun never sets on american innovation c. over decades we have foster the financial environment that has decreased poverty, increased homeownership and made the american dream a reality for more and more of our citizens. our goal should not be any different when it comes to digital assets. our aim should be to provide rules of the road that are clear, consistent, most importantly fostering an environment that rewards opportunity while ensuring consumers are informed and protected against fraud and deception. as we speak here, several
countries across the globe are framework town address the rise of crypto currency. unfortunately, our regulators have muddied theru waters. we've been told everything from we need legislation to more recently regulators have the tools they need to supervise this industry. that is quite a flip-flop. onceun again it is really y important we have chairs here before september. it is far too far in the future for us to wait that long before we hear from chairman gensler. the regulators have permitted activity in the space without providing clear rules of the road which is unfortunately led to the multiple failures that brings us here today. let's be clear had the sec provided anything besides hostility to the crypto industry we may have been able to save investors from losing billions of dollars on ftx, and the list goes on. so my question what should
congress keep in mind when it considers developing an approach to the crypto industry? how do we strike a balance between appropriate and thoughtful regulation? and a of innovation that could be. >> thank you centers for that very important question. we are at a pivotal moment in history were the decisions that you all make as policymakers will affect how our economy grows in the future. currently we are becoming a data-driven digital economy. what is that mean? our activities are increasingly based uponat data. and on watching technologies. these kind of guardrail she put in place now will affect generations to come. many of the issues you need to think about will include certainly consumerr protection but also consumer rights and consumer empowerment. currently there countries around the world who are alsoo looking
at how to take advantage of crypto technologies. china being a good example. but in that situation it is the government that wants to control personal data. here is an opportunity for you all to create the framework for consumer empowerment or consumer data rights that serve as a foundation for digital economy. >> in my opening statement innovation can be a positive driver and expanding access to financial services and can foster new additional technologies that promote financial independence, access to credit, and capitol formation. it is astounding that financial innovation can do for people in their given the ability to make their own choices and allow the flexibility to innovates. we have talked about crypto currency a lot. innovation in the technology space is not limited to crypto. syntax is another classic example of things moving in a positive direction for the whole panel can you speak to the
benefits you see for everyday americans in the digital asset space and the y need to ensure regulation does not stifle innovation? >> great too. thank you so muchon senator scot for that question. innovation hear something move extremely fast in terms of trying to improve the efficiency for example the payment system. one thing is very clear in the u.s. despite having state-of-the-art financial system our payment system is lagging behind. but we have seen is the ability to try and make payments much more usable. think smart phone technology. fr example trying to have contact with payments for the world that we had 10 years ago in terms of payments out the world we inhabit today. and yet there still some problems with for example these are things you've heard on this committee before it takes time, days and facts for payments to settle checks take days in order to move precondition offices are enormous costs involved in this. this obviously leaves out folks who do not miss a have a bank
account and don't have access to the financial services. the question is how do we make it work for people we are able tot bring everyone into the fold in a much more inclusive and cheap and efficient way question but certainly some of the technologies being proposed and digital assets are trying to do that. it's a potential use case that can be worth exploring provided is properly regulated. >> thank you. >> thank you, senator scott. >> i'm sorry. >> thank you for the opportunity. one very important issue to take into account is consumer rights and property rights. we need a clear set of rules. what do i mean by that? my husband is from ireland. when i was in ireland i have to drive on the left side of the road. if i'm not told that i would get into a car crash. similarly here is a professor looking at the system there is an urgent need regulatory
framework that clearly states what are the consumer rights. what are the responsibilities of crypto participants. >> thank you ranking matters.common center from new jersey is recognized for. >> less while the financial stability oversight council released 2022 report on digital assetci financial stability and regulation. one of the recommendations was that congress passed legislation providing rulemaking authority to financial regulators over the spot market for nonsecurity digital assets. why is it important congress address this gap? and how would you propose we do it? >> entered menendez for the past 10 years or so the big debate what comes to cryptoy regulatin is are these things commodities? or are they securities? correct of course the how we
test as was used to determine whether a given token is an investment contract and therefore a security. i happen to growth chair gensler most crypto currencies are securities saving the test. there are some crypto currencies i was in bitcoin as an example that are decentralized enough they are commodities. cftc regulates commodity sparkrk markets. they don't regulate commodity spot markets only derivative markets their fraud manipulation enforcement and commodity spot market. so that is the gap that needs to be addressed. so it i recommend and i have this in my testimony is that congress carved out crypto currency from commodity and crypto currency as a new category of security on a securities law so it's clear to everyone to the market and everyone else the scc has exclusive rulemaking authority andes jurisdiction over crypto currency m.
>> professor yang? any views on this? >> thank you so much senator menendez. i think one of the main things you have to thinkwi about how to view, at least in make the private industry accountable and make private industry responsible for it i set out to my written testimony ultimately the most important institution in the economy are the exchanges. we have to find a way to make them play their part in making sure this market become safer and much more consumer protective market. in this concept what i propose a framework for a great organization very clearly under a framework of oversight that can be administered by agencies jointly. think this is a gap here. other words we are allowing exchanges to become very big. but allowing them become sophisticated, we are allowing them to inhabit governor structures that externally centralize and subject to conflict of interest need to bring that under control because
exchanges into the crypto currency. the vast swaths of the population. >> are many different types of digital assets. some of which s are bitcoin cryo currencies others are like stable coins which will act as digital money. for example if i give you a green paper dollar bill, you know when you take it from me nobody has an interest or title to that dollar bill that's white asked so well as a medium of exchange. to ensure we have a digital economy that can run on digital money we need to make sure the outback stable coins and other types of digital money that could include as well. are also going to be free of interest or title and hence why putting it under the scc
framework isre problematic. because again i cannot pay you with the security. >> well, we are trying to figure this out for the key element i will be lookingng for digit asst is a clear priority of transparency and investor protectionth. which is also providing for stability c and innovation for these are values and make our current financial system strong and effective and should equally apply to the digital assets. let me just ask f you professor for decades the united states has been the leader in the global financial system which has had it in measurable asset to american consumers and in my role as a foreign policy goals as well. we should look to continue that leadership as we work to develop digitald assets regulation.
can each of you talk about some and global trends we're seeing on crypto regulation? is the u.s. ahead or behind the curve? >> senator menendez unfortunately the u.s. is externally behind the curve at this point bring one think we have done as you mentioned extraordinarily over the last 10 years is have leadership in standard testing. we have been incredibly powerful exporters of our financial market regulation abroad this is so importantdi it means other countries have adopted key principles that we used in our markets to make our markets work and make our market safer in one example be the leverage example we is in her banking system it is now become an export being used more broadly abroad. in the case of visual exit regulation however we really do not have anything to export at present. fortunately other companies have taken u a lead they have very comprehensive framework in the market in the crypto asset regulation. this will come in forcece in apl
or later this year this is very comprehensive framework that is set the stage for the u.s. to essentially become a potential second there in terms of coming up with a plan and an agenda for regulation. it does not feel like we are leading it feels like it's potentiallyy falling when they have taken a and are setting the standard using their framework to say what rules or go to what rules are bad. to add to remarks, it's not just other countries are adopting regulations. other countries are pursuing very thoughtful national digital strategies. you look at the eu that has in place not just about gdp are and other regulations like the digital market facts. it's all part of a comprehensive strategy that they are pursuing.
the uk is in the process of consulting its proposal on regulating crypto assets. australia has been pursuing a long-term national data strategy and has just come up with a proposal on taxonomy of crypto assets. hong kong is about to come out of the institution singapore just finishh it in december. as you can see the list goes on and on. not to mention china but has been pursuing multitier crypto strategy. >> senator menendez. >> outsider real quick. >> i don't think the u.s. is falling behind. i think the important thingth we get regulation right now that would be the first break many of the other jurisdictions they are embracing crypto because essentially they are gambling it can help juice their economy.
look at the situation and the bahamas. they rolled out the reded carpe. and obviously it did not turn out sodn well. as i said in my opening testimony crypto's doing more harm than good to our society as you mentioned it is undermining u.s. national security by facilitating asianth the dollar for clearing is an instrument of foreign policy and crypto undermines all of that. we should not be embracing something that is undermining our sovereignty. think the important thing is getting a financial regulation right inac this space. what i call dual mandate. one of protecting investors and to preserving financial stability. there isth an upside to the rect crypto winners it is not spilt into the traditional financial system. as long as he did the actions of the sec and the federal banking agencies have clear rules in place for the better part of a year that basically say if you are a regulated banking want to engage in crypto you need to get
permission from us first for that really prevented a lot of banks from engaging more heavily in crypto activity. this to be very different if we had banks engage in crypto activity.. >> thank you, senator in ohio wasty recognized. >> thank you, mr. chairman thank you to the witnesses here. going too post m the first question to all three of you but may be giving some background where i'm coming from. i'mba probably one of the few members of the committee that actually owns crypto currency i've been fascinated by it for a longcr time. i also recognize there are downsides to it. there are risks that come along with it. my basic bias here is that we don't really know what it is yet. not just crypto currency but a lot of the other underlying web three technologies. and our regulatory approach should basically be too could protect consumers or make sure we don't destroy the dynamic upside of this. here's what i mean by the dynamic upside. it is fascinating to me, i can
tell you're sort of skeptical of the role crypto is playing in society right now but after what happened with sam embankment freed there's obviously a lot of calls foru' skepticism. what i wonder is how would people describe the incident in the 1970s and 1980s before it was commercially available for is a major part of the way we do commerce. and if we have taken an overbearing approach and then we might have destroyed allll the upside that have come over the last three decades. i'm going to put this question to each of you. going from left to right. aboutt regulating crypto not jut in a way that protects consumers and also protects the upside of technology right now in february of 2023. but ensures the innovation is going to happen on this platform which is really how i think of itry actually happens in a way that is relatively free,
relatively fair and preserves the fact this could become a tool in america's foreign policy and arsenal. thank you for that question senator. >> i would respond by saying crypto is not new for the first bit coin transaction wasn't too thousand nine. we have a 14 year track record to look back and assess this but did not take the internet 14 years to do its work pretty look at crypto currencies what is the fundamental value? why are they worth anything you must financial asset for someone else's liability. there is an issue otherwise where were the returns come from? there's no reason to think crypto currencies going to generate returns and definitely into the future but it's clear people are buying at the think they can sell to someone else at a higher price in the future. there are no fundamentals for that is not made necessary block chain does not have value. i think there is a way regulate the risk associateme with crypto and the r consumer protection point that you raise will still
allowing traditional financial services to y experiment as they are. i think our existing regular soy framework is more than capable ofi keeping up with the financl system using block chain. unlocks crypto assets there's plenty of history to prove it. >> thank you, senator. ila would like very much your analogy to the internet. i spoke with a colleague of mine who had to get his legal career and he told me at that time i am dating his age really clearly, one of the big fights the scc was whether to license internet charters but i do not even know what that means. but the question was should internet providers have to register with the scc with the page providers et cetera. if they had decided yes i think the internet will be very different today we may not even
have technologies. why am i bringing this up? it is extremely important we have open interoperable t'standards. that is the spirit of this technology. the idea of the technologies produce facts that are compostable almost like legos. with the iphone you can build apps on top, gps locators. and be able to use uber on top of that. and make theirto finances, why e need for pushing open interoperable standards is to prevent monopolies of the future. said digital identity is going to be the cornerstone of the digital economy. right now there are some companies i'm not going to name them right now. they are digitizing our drivers licenses include wallet solutions. that means these companies you
can probably guess whon they ae going to have damage over who are using their wallets when ever they are trying to transact and required to share their personal data including their driver's license. down the road you'll end up with digital transactions that are viewable by these companies. other companies are not allowed to build on top of the digital identities. we have to set the guardrails and the right balance to allow for innovation. but not have companies take advantage of that openness. >> thank you so much for that question. we have innovation for as long as we can remember in this economy. from the atm to all the financial engineering we saw precrisis. we've had a time of innovation it's constantly can be applied
to the american financial system. the way in which we tackled it is by having a dialogue amongst regulators in a smart way that includes contributions from the industry. certainly as professor mentioned bitcoin's been there for 144 years but what we have seen the crypt of it economy is real uptick in activity particularly in the last three years. for example transactions have increased almost ninear 100% in 2021 routine extraordinary transaction volumes and crypto exchanges almost 689% gains i fm 2020 -- 2021 producing more people coming in's economy to try out new products and so forth for that is obviously created risks and we need to understand that. we need to use the tried and tested of rules, to understand and regulate innovation for you to think about it in innovation encourage innovation to look at disclosure as we discussed earlier. in addition to making sure the entities that are engaging innovation are doing so safely. for example keeping minimum
spread for example making sure those people are providing products and taking money from other people are doing so in a way that has proper internal controls. these are things we have used before. we have tried before we've encourage innovation before praising the need for this now is urgent given the expansion and specification of the e crypo framework. lai think we can continue to balance the market integrity and personal protection as well as making sure that we can do innovation. provided we can get on board as well as industry contributes to the dialogue in a systematic way. >> great thank you. >> thank you mr chairman and thank all of you for your testimony here today mr reiners in your testimony you argue that bank regulators should learn from previous incidents uh where crypto failures impacted the banks that >> that we heard from professor allen and she made a
case for glass-steagall two.zero model separating banking entirely from cryptoasset activities. from your testimony you indicate that is beyond that agencies power and authority even if they wanted to. and you urge that we look at other alternatives to develop a comprehensive framework to clarify, and i'm quoting from your testimony that clarifies that type of cryptoasset activity and requirements required to engage in such activity. canti you expand on that? >> iam and admirer of the work in a agree with the sentiment we should do everything we can to restrict cryptofrom entering the banking system
but if it is legal then these firms are entitled to banking services. so where do you draw the line? what specific activity can be done in a safe and sound manner so they have guidance in place they all have guidance in place if you're regulated being anyone to engage in one —- activity you have to let us know first. that more is needed. so what i recommend is these agencies do a horizontal exercise for all of the ways that things are exposed to cryptoand then release information to the public for they are aware of the risk —- of the risk. the regulators are more exposed to cryptothan previously realized.
over 90 percent of deposits were cryptorelated firms inrm the fourth quartert last year. they have over 8 billion in deposits. that wasas over 60 percent of the deposit base and it look like the they would have failed if they did not get emergency liquidity from the federal homeland bank of san francisco which is not the reason why we have the federal home loan banks it's for home ownership not to bail out banks not crypto. so the basel committee finalize their and the us has the history of goldplating because if cryptowas more integrated in the banking system it would have been much worse. >> that's an important point and i guess to ask you to
expand a little more do you think banking regulators are taking all the steps they are authorized to do under current law to t try to prevent cryptofrom making its way into the banking system? additional measures they should be taken and if they exhausted their authorities to support legislation along the lines professor allen suggested? >> i do think they can do more and be more prescriptive of what is that related activities can and cannot be done in a safe and solid manner. there is no reason why banks should hold that cryptoon theirre balance sheet now it alludes to the fact that
agencies look at those that wanted to do that but clear guidance says you cannot do this is why. >> participating in the financial system and market informed off the decisions that they make and choose what they want to pursue. whether stocks and bonds or mutual funds or traditional savings accounts. when congress has a responsibility to act to ensure robust transparency and protection. however we have seen this past year alone the consequences of
a happen when congress fails to do that. and then they must ensure appropriate guardrails are in place to have transparency in the digital asset space. we heard you talk about the common sense guardrails. and from what congress needs to keepp in mind while developing these guardrails? >> you thank you for the k opportunity to expound upon the key foundational building blocks that congress needs to consider with tied to customer protection is crucial. and clear rights in the property that they purchased.
the bankruptcy court had nothing to work with. that when consumers purchase digital assets that they have a property right in a digital asset. and the other important kconcern this type of technology is democratizing financial services and when i example with back to the us from europe i had to pay $4000 from european bank to move my own savings back to the us and then no profit from the spread from the bank made from the spread. this is the type of opportunity that launching technology can help with.
and then with people contrasts one —- cross money across the border to myself and make profit on the spread in that type of equitable interest in financial services is what makes different from web to so think about how can we empower consumers with the data rights while also protecting through disclosures and legal protections in bankruptcy. >> with that same line of thought i was struck in your p testimony about who the actual purchasers are and 44 percent of cryptotraders.
if we putting guidelines and guard right fails there is an opportunity for more people to achieve the american dream through the use of digital assets. >> 4 percent are on bank and 14 percent are under bankeden and that is a huge amount for a country as rich and advanced as ours. they feel they are excluded from the traditional financial system. there is opportunity where we can lower the cost and improve access to financial services. >> there is a lot of talk about overregulation to isolate the market and offshore to places like china. and with thoses moved to regulation to do just that quick. >> regulatory uncertainty
causes market uncertainty. in the market is in certain they will go to where there is regulatoryis clarity if there are clear frameworks that is where they will head or they will go into the shadow bank sector where the regulators have very little oversight so regardless either way we will bifurcate the financial system in ways that have unintended consequences a bifurcated system would be traditional banking and one part in the shadows if that is where cryptois going. i don't think that would help with her leadership in digital innovation it would just drive
our innovation to other countries but i very much want to be the leadership in this space and jealous of our ability coming up at the most innovative products and services in a crypto. >> senator smith is recognized online. >> . >> thank you for being with us today. some people mistake cryptofour andor niche enthusiasm driven market now it's important to realizee that a $2 trillion in market value was lost in that demonstrates how mainstream this has been and is also a reason to be wary about the risks that growth poses to consumers and toec our economy this is why senator warren and
i question fidelity in the 401(k) plans. and we have been press seeing regulators. and that includes cryptobut i am concerned of the potential and highly volatile and risky assets to get into the financial system and the impact if there is a collapse for future cryptocollapses. the failure of cryptoto fruitfully integrate into mainstream finances aof combination by a handful of regulatory agencies. just how luckyd were we and what we do as policymakers to avoid as we look at a future crisis? >> . >> withuc that financial
inclusion element there is no evidence whatsoever to suggest that with financial inclusion and overwhelming evidence ton. suggest the exact opposite is happening most people who have invested in cryptocurrency have lost money of those people the plurality are minorities in low income americans. so this is an example of okpredatory inclusion we saw the same thing with subprime loans leading up to the 2008 financial crisis were low incomeve and minority communities are specifically targeted with very risky products and they have lost in many cases everything now to your point senator smith about the meeting those connections libetween cryptoand the financial system we did luck out and then the cryptomarket could be systemically risky
given two things one is size the bigger the market the bigger the risk and then the connections between that sector and the tradition on —- system.nal financial so thehe two are essentially given that the whole premise was to bypass banks and traditional financial systems. and then to make themselves seem as if they are legitimate using the same terminology we are accustomed to a broker and exchange but they are not these things have meaning and using these words intentionally because they want you to think they are regulated just to see if these traditional institutions. voyager was lying about the
fact they were fdic insured. so then just to run through the list. with fidelity that coin into 401(k). we think it's okay if powerball tickets and up in the 401(k)? cryptois just gambling said it's letter forut plan administrators to offer of what they think it would be and that stops them from allowing them to invest in crypto. ftx had an activeg proposal to allow them to offer retail traders 24/7 access to cryptoderivatives on margin directly without having to go through a broker but if they had granted that proposal as itt appears likely they would have, this situation would have been very very different. multiple attempts to list the
etf to track that coin and grayscale has sued the sec for not granting them that permission. just think of how the investors would have lostor more money if therere had been a bit coin etf on the market. so we lucked out a little bit because we had agencies that were willing too do the right thing even out wasn't popular. in my written testimony they will continue to try and they will not stop for the very typical financial term the people are familiar with.
but it's not clear to me if these assets that going back to this for one minute there is no underlying value then you are just betting if it goes up or down if you win or lose. and that is my great concern and iet appreciate your comments on how it does seem to me in this field there are people those that are losing money and being taken advantage of land they should be that basic consumer protections. >> welcome to all of you for being here so look at this
congress every congress is a little bit different. hoping to look at something things i am really wanting to get down to singles and doubles. and not like the joker that we could overreach it was a good regulatory construct so i tend to be more on the singles and doubles approach addressing the problems over time now we
have a hearing downstairs right now about protecting our children on the internet and there's a lot of work to do in that space so one of the things we have looked at is the approved fourgo reserves. and then to avoid some of that. what is your thought if we can be quick. what about proofr of reserves that congress connect on and mr. gensler he thinks he has full authority to implement i think he's going to little too fast and expensive on rulemaking that's why i congress will act.
>> those are not worth the paper they are written on. but then they pulled it off for thedo website stopped doing any work for crypto. >> is proof of reserves. >> i think audits are a worthwhile pursuit shortly that something congress a look at that the cryptointermediaries. >> weo were talking about the independent third-party reporting to the treasury that may address thehe point you are making worth the paper they were written on. >> and one other single requires the platforms to segregate. >> that can be defined in a number of ways.
but those supervisory exams so whatever method is chosen it is about verifying on chain and off chain. >> by the way maybe we need to get your opinion but on the proof of reserves still we are trying to deal with the commingling of funds. >> and and then to see that methodology is clear and robust does that mean the liabilities are fullyno disclosed?
and those thatli are comprehensive so that ability to have third-party audits and in addition wee need to make sure we have the internal controls that underlie the proof of reserves is not enough simply to disclose it's important the actual exchange has internal controls to make sure the assets are segregated and it's up to market on a regular basis and that proof of disclosure is done regularly the snapshot once every three months is not enough and they are changing every day. in addition not just proof of reserves but solvency many of the balance sheets are made up of these coined that they are minting and in the case of ftx nsthe token is called in value
so making sure we don't just have that disclosure but that assets that are held that are tradable but that is the market trading is extremely then so the ability to cash out is limited by the fact of the actual exit with the proof of the reserve might suggest it's important to take into consideration. >> big-time financial criminals love cryptojust last year and one year it was the payment method of choice for international drug traffickers bringing in $1 billion. and one.7 billion in final that and then ransomware attackers who pull almost $500 million in the
cryptomarketea took and 20 million for illicit transactions and that's only the part that we know about. that's a lot of fentanyl from iran and russia and a lot of money leaking out to terrorists and thatan is precisely what any money laundering rules are designed to stop. and then you work as a regulator why do druglords and human traffickers in countries like north korea and iran use cryptoinstead of banks and credit unions or western union quick. >> it makes it ideally suited men coupled with the fact they are not subject anti-
laundering money and that terrorisman statutes that they are subject to makes it ideally suited for those who want to do bad things. >> so cryptohelps those drug traffickers launder money nearly instantaneously. >> correct. >> if they could it would ransomware even exist? >> no. >> ransomware is the exclusive payment method of choice i'm sorry cryptois the exclusive payment method of choice for ransomware hack. >> so stockbrokers and even western union but the current rules don't cover the cryptoindustry.
and then to apply any money laundering to the whole cryptoindustry is not only unnecessary but is all but impossible. >> and it's time for financial institutions so then it passes the bank secrecy act. the banking industry objective claiming that complying would be a tremendous expense as well as a pain in the neck. and then after the law went into effect they made it work. >> we cannot with the same anti- money —- anti- laundering money rules
everybody else's follow divide the argument that cryptois simply to special any money laundering rules? >> i do not. >> some in the cryptoindustry say any money laundering rules can work as long as they exempt the decentralized entities. and then they want a giant loophole for a d5 written into the last of they can launder money whenever they are paid to do so. and with that shape shifted when it a deliberately restructured itself as a d5 platform and this is what it holdscu the platform we are 'making the shift to remove
itself from regulated activity. translation wanting are many here. so should congress be in the business to create goals for money laundering? >> they should not. >> it should be simple the same kind of transaction and risk with the same kind of rules andnd that's why the senator and i are reintroducing the anti- money laundering bill to crack down on crime and then to stop that for drug traffickers with north korea and iran. >> i want to thank our witnesses for being here today.
>> in order to maintain the immense competitive advantage we have to stay abreast this involves embracing technological advancements as unusual as they may seem an enforcer on the global stage. and then rather than incentivize offshore we should walk across a safe environment to flourish in the united states. >> and to highlight the importance of payment tokens. and we agree that characterization and then to advance the role of the us dollar abroad.
and interest in the assets backing such tokens is crucial. leisure confident the adoption is a very constrained. that's why introduce a straightforward bill last year to set the standard for assets backingg stable coins for issues to have reports of the reserves. do you believe like many of those who are hostile to technology that only the central bank digital currency issued by the first serve the function of the payment tokens? thank you senator for this question because there are different types of ways to transfer value. >> what types of legal purity would be necessary to encouragewh the adoption other
than what we just spoke about quick. >> it's important we have a clear regulatory frameworkrk that utilizes public feedback for what we have been missing is rulemaking through theat public process and we need public input and regulators need to understand the technology and gather the best ideas on how to oversee the industry. >> is only then to activities other been 30 retroactive litigation cases from the cftc that's not the way to run things in a piecemeal basis so what has concerned me the past few weeks a coordinated course of regulators suffering from
the financial system this is the chokepoint to exercise under the obamama administration i strongly disagreed with and operation chokepoint the legal they were cutes off from banking services some at the same time i've heard from some colleagues on the other side of the aisle they are fine without regulating cryptojust like overseas and not legitimize it that to that i say what happens to the hundreds of thousands of users that are already transacting and cryptowill we not create safeguards for these consumers and where do innovators go? congress needs to write legislation to properly regulate the industry to protect consumers and remain at that cutting-edge of a rapidly evolving space it is increasingly apparent the sec will not do its job so now to
make sure we have proper safeguards in place to make certain other event i get ftx never happens again so what effect does it have on industry here in the united states and globally quick. >> please be brief in your answers. >> that's our fault not yours. >> the cryptoindustry is an industry that needs access to banking services that does not have access to banking it will go offshore were into shadow banking bifurcated in the us s financial system to which the regulators will not be able to see or monitor or regulate that part of the system that they have fled to nsa are optionalal hundred the night's leadership and digital
innovation. >> thank you senator those senators who wish to submit questions they are do one week from today witnesses will have 45 days to respond to any questions hearing is adjourned. [inaudiblee conversations] l has for any court to respond to any questions thank you again the hearing is adjourned.