Crypto CEOs Testify Before House Financial Services Hearing

Madam Chair: (00:00)
Earlier this year, I created a digital assets working group of democratic members to meet with leading regulators, advocates, and other experts on how these novel products and services are reshaping our financial system. This hearing, subsequent hearings on this topic will help this committee consider how to support responsible innovation that protects consumers and investors, safeguards our financial system from systemic risk, promotes financial inclusion, addresses environmental contents, as well as to consider a potential central bank digital currency. We have also held several subcommittee and task force hearings earlier this year to better understand the landscape of this industry. At today’s hearing, which I worked with a ranking member McHenry to organize, I look forward to engaging directly with this panel of cryptocurrency CEOs, whose company’s issue stable coins and provide an exchange to buy and sell digital assets, to understand where they think their products, services, and technologies are heading.

Americans are increasingly making financial decisions using digital assets every day. Even some pension funds are beginning to invest in cryptocurrencies on behalf of retirees, despite the track record of volatility of cryptocurrencies as investments. The pandemic has also continued to contribute to working families looking for alternatives to rebuild their nest egg by investing in cryptocurrency. The rapid growth of this industry has also become more visible with celebrity endorsements and ATMs that exchange cash for cryptocurrency. However, several questions remain as to how traditional rules apply and whether regulators have sufficient authority to protect investors and consumers while maintaining market integrity and encouraging innovation. Currently cryptocurrency markets have no overarching or centralized regulatory framework, leaving investments in the digital aspect space vulnerable to fraud, manipulation, and abuse. Some cryptocurrency market exchanges and stable coin issuers have obtained state money transmitter and sale of checks, licenses from multiple states, and at least three cryptocurrency companies have obtained conditional approval for national trust bank charters from the Office of the Comptroller of the Currency.

Meanwhile, the federal reserve is conducting research on central bank digital currencies and other federal agencies like the FDIC and NCUA have announced requests for information from the digital assets industry, the SEC also actively utilizing its existing authorities to carry out enforcement actions against market participants. As the prevalence of cryptocurrency grows, it has also raised environmental concerns tied to the computing power needed to mine some of the coins, which can rival the energy needs of entire countries like Sweden or Argentina. At the same time, the promise of digital assets and providing faster payments, instantaneous settlements, and lower transaction fees for remittances or areas that our committee is exploring as more and more people invest in and use cryptocurrencies. The committee will continue its efforts to look at how they are affecting many aspects of our lives and our financial system. So with that, I now recognize the ranking member of the committee, the gentleman from North Carolina, Mr. McHenry for five minutes.

Mr. McHenry: (04:10)
Thank you, madam chair. 2021 was the year of the cryptocurrency. More Americans than ever are taking notice of this transformational technology. DeFi, DOWs, NFTs, Web 3, jargon that was really once just used on crypto Twitter, they’re quickly becoming part of the lexicon. Technology and its adoption are moving fast. Entrepreneurs and innovators are building and deploying the next generation of the internet, and firms like the ones before us are the on-ramp for many Americans to participate in the digital asset ecosystem, but this panel’s only a bit of that broad ecosystem. And this is the first time Congress is having a hearing about cryptocurrencies in its fullness. But as with any new and fast growing industry, there are questions that need to be answered.

I want to be clear though, this technology is already regulated. Now, the regulations may be clunky, they may not be up to date. I ask my friends, my policy maker friends here on the Hill this question: do you know enough about this technology to have a serious debate? Now, if the answer’s no, then we need to first seek to understand, to build up that understanding of this new technology so we can have a serious debate on how we appropriately respond and update regulations and perhaps laws. But I should be clear, the goal today is to listen, learn, and ask questions. This technology is new and exciting. It promises a new direction for financial economies, services, and products.

I further ask this question though, how do we make sure as American policy makers that this cryptocurrency revolution, this technology revolution happens in the US and not overseas? There are a lot of we have to answer, but of course we need reasonable rules of the road. We know that. We don’t need kneejerk reactions by lawmakers to regulate out of fear of the unknown rather than seeking to understand. And that fear of the unknown and the move to regulate before understanding will only stifle America in ingenuity and put us at a competitive disadvantage. Throughout history, we’ve seen examples, countless harmful examples of overregulation around the world by governments. In the late 1800s, England reacted to the rise of cars with laws that required three people to operate vehicles at all times, one to drive, a second to fuel up the vehicle, and a third to stand in front of the car and wave a red flag.

Now, Congress should not be dumb enough to raise a red flag around this technology revolution. We should embrace it, we should understand it, and we should be the international leaders in this space. Further example I would tell you is Skype, the video conferencing platform that may still be a little clunky, but was vital during the COVID shutdowns that we just experienced. And it was vital for some of our kids to even go to school, or even have hearings on this massive screen here. Skype was illegal in most of the world when it was launched. There wasn’t a regulatory infrastructure in place that allowed this novel technology, this new technology. And finally, when an invention called the internet began to boom, US lawmakers and regulators struggled to fully grasp the immense possibilities of this innovation out the gate. Now that was the early nineties, and I think we’re in a similar state with Web 3 30 years later, for Congress first to understand before we would seek to legislate. Now, it would be nearly impossible to go a day without using the internet to communicate. We know that. Or move from point A to point B. We know that. Or purchase necessities for our families. We know that. I would argue that the nascent technology we’re discussing today will have just as much impact on our daily lives, perhaps more. And that’s why we must get this right. My fear, however, is that we’ll have a partisan divide here. Well, my fear is that some of my Democrat colleagues have already made up their minds and they have regulatory bills that they’re going to file in order to stifle this innovation or to kill it before it fully grows and blossoms.

I hope we can work together in a bipartisan way and I hope this hearing is first of many for us to understand and get clarity from innovators and entrepreneurs about what is needed, which I think should allow us to have these markets thrive and grow while protecting our consumers and giving clear rules of the road to prevent fraud manipulation. Forcing the private sector to navigate unclear public statements and regulation by enforcement is the wrong approach. So is demonizing an entire industry based off the headlines guarded by a few bad actors. Understandably, there are concerns with the use of cryptocurrencies for nefarious activities. Let me address that. You know what else is used for nefarious activities? Cash. So let’s dispel the rumor now that digital asset technology’s a looming threat to our financial system. Instead, we should work to fully understand the opportunities the next generation of the internet could provide to Americans. I look forward to hearing from our witnesses. I look forward to having a deeper understanding as a policymaker about the ramifications for action by Congress before we understand this new technology that is now actually a decade old. So with that, madam chair, thank you for having the hearing. Thank you for working with us on a bipartisan panel. And I hope members will take the same spirit of bipartisan cooperation in their questioning and their seeking to understand. Without I yield back.

Thank you very much, Mr. McHenry. I believe that this hearing itself and the witnesses that we have here today have answered all of your questions about whether or not you think we are seeking information to arm ourselves with the ability to make the right decisions. First, we have Mr. Jeremy Allaire, co-founder, chairman, and CEO of circle. Next we have Mr. Samuel Bankman-Fried, founder and CEO of FTX. Next we have Mr. Brian P. Brooks, CEO of Bitfury Group. Next we have Mr. Charles Cascarilla, CEO and founder of Paxos Trust company. Next we have Ms. Danielle Dixon, the CEO and executive director of Stellar Development Foundation. And last we have Ms. Alesia Jean Haas, the CEO of Coinbase Incorporated, and CFO of Coinbase Global Incorporated.

Without objection, your written statements will be made part of the record. You will have five minutes to summarize your testimony. You should be able to see a timer that will indicate how much time you have left. I would ask you to be mindful of the timer and quickly wrap up your testimony when your time has expired. Mr. Allaire, you are now recognized for five minutes to present your oral testimony.

Jeremy Allaire: (11:42)
Good morning Chairman Waters, ranking member McHenry, and members of the House Financial Services Committee. Thank you for the opportunity to share my testimony with you today. My name is Jeremy Allaire and I’m the co-founder, chairman, and CEO of Circle Internet Financial, a now eight year old company that has operated at the cutting edge of the digital assets market and digital currency technology innovation. Today, we’re at a pivotal moment in the development of the next major infrastructure layer of the internet, extending from an internet of data, content, and communications to an internet of value exchange and economic coordination. In a world where money becomes a core feature of the internet, the United States should be aggressively promoting the use of the dollar as the primary currency of the internet and leverage that as a source of national economic competitiveness. Circle’s mission is to raise global economic prosperity through the frictionless exchange of financial value, creating a world where financial inclusion, responsible financial services innovation, and protecting the integrity of the global financial system are not conflicting objectives.

Today I’d like to address some of the key policy issues facing the United States around the rapid growth and use of dollar digital currencies, also known as stablecoins. Circle is the sole issuer of USD Coin or USDC, an innovation that brings the benefits of digital currency: fast, inexpensive, highly secure, global, and interoperable value exchange over the internet, without the downside of extreme volatility that has plagued most cryptocurrencies. USDC is helping to pave the way for digital dollars to be the leading currency of the internet. While stablecoins got started as a dollar settlement layer for digital asset trading markets, their use in everyday payments is expanding rapidly. Just in the past several weeks, Circle has signed on institutional customers who are using these services for small business payments, international remittances, and efficient payments for remote workers.

Soon, we believe that dollars on the internet will be as efficient and widely available as text messages and email. As the recent president’s working group report on stablecoins highlighted, not all of these payment instruments are created equal, but by the same token, not all of them are part of an unregulated wild west as has often been portrayed. In our case, we have prioritized building, designing, and guarding the prudential standards for USDC inside of and conforming with prevailing US regulatory standards that apply to leading FinTech and payments firms. This approach has helped USDC to reach over 40 billion in circulation and has powered more than $1 trillion in on-chain transactions.

The reserves back in USDC are held in the care, custody, and control of the US regulated banking system. These are strictly held in cash and short duration US government treasuries, and we have consistently reported on the status of these reserves and their sufficiency to meet demands for USDC outstanding with third party out of stations from a leading global accounting firm. With this growth comes in increasing responsibility to foster financial inclusion. To that end, we aim to deploy cash deposits across the country where we will allocate a share of USDC reserves, hopefully accruing to billions of dollars over time to minority depository institutions and community banks as a way of improving their balance sheets, but also ensuring that the future of payments and banking is more inclusive than the past. The president’s working group report on stablecoins has put forward a set of recommendations for establishing national regulatory supervision of firms, such as Circle.

We support this effort and believe there can be strong nonpartisan support for the appropriate federal supervision of this highly strategic payments infrastructure. Well prior to the president’s working group report, we announced our plans to pursue a national banking charter from the OCC, and we continue prioritizing active engagement with all of the relevant federal and state banking regulators. There’s much work to do in defining the critical statutory requirements for stablecoins. At the same time, the technology of blockchains and digital assets are not standing still, and whatever the ultimate policy and regulatory outcomes, it is crucial that policy embraces and enables the United States to be global leaders in the development of the internet of value. As the committee works in earnest on these issues, we welcome active engagement and believe this to be one of the most important areas for economic infrastructure and growth in the coming decade. Thank you again, Chairwoman Waters and ranking member McHenry for the opportunity to present to you today. I look forward to the committee’s questions.

Thank you, Mr. Allaire. Mr. Bankman-Fried, you are now recognized for five minutes to present your oral testimony.

Samuel Bankman-Fried: (17:03)
Thank you, Chair Waters, ranking member McHenry, and all the members of the committee for having me here today to testify. It’s an honor to be here. A little bit about my background first. I grew up in Stanford, California, went to MIT where I majored in physics, and I spent three and a half years as a quantitative trader after college. My goal has been to find ways to have a positive impact on the world and to maximize that, and to do so by supporting some really fantastic organizations. In 2017, I felt like it was time to try starting up my own thing, so I left my job and I moved out west and ultimately got involved in the [inaudible 00:17:50] and cryptocurrency ecosystem. I spent about a year trading and I, in late 2018, began with my co-founders, building out FTX.

FTX is a global cryptocurrency exchange. We are the second or third largest exchange globally, depending on what metrics you use, processing about $15 billion per day of trading volume on the platform. About a year and a half ago, we started up FTX US, our United States based in servicing operations. A few points on FTX in the broader cryptocurrency industry. The first is that I think that the industry has the potential to improve a lot of people’s lives. There are a lot of ways that this can happen. I think that the payments side of this gets a lot of attention, and rightfully so. Every time that a common consumer goes to a market to purchase goods, they pay multiple percent in fees to intermediaries. And that’s if they’re lucky.

When you look globally, trying to send money back to your loved ones at home is extremely difficult. It can cost tens of percents in fees. It can take weeks to arrive. It can get embezzled by various third party scams in the middle. And in general, the global financial ecosystem is not one where sending assets to those who are important to you is easy to do. And this hits the people who are least off the hardest, who have the least access to the financial ecosystem as it exists today. When you look at the number of people who are underbanked or unbanked, both in the United States and globally, it’s indicative of a system that does not work for everyone. And this is a product of the intermediation involved, it’s a product of how the larger institutions have evolved, and it’s a product of payments infrastructure that is difficult and clunky enough to use that it just does not work for most people.

Cryptocurrencies do provide a potential way to address a number of these issues, making it easier, cheaper, faster, and more equitable for people to do what they need to do to manage their financial lives. A little bit about FTX, we are a cryptocurrency exchange. We have a different structure than the traditional exchanges do, as do many digital asset venues. We provide open and free market data to all of our users. On a traditional venue, you pay 10 of millions of dollars per year if you want access to the data of the market that you are expected to be placing orders in. You have minimal access to the same tools and order types that sophisticated trading firms have if you’re accessing it through the normal set of intermediaries. On FTX, all of our users have full access to the platform. They have full access to the same sets of tools that institutions do, and they have full access to all of our market day, which we make publicly available for free. This is true whether you’re accessing it via API as a sophisticated institution, via our website, or via our mobile app.

We’ve also put a lot of work into the risk controls on our platform. This is true from the financial crime side, where we conduct sophisticated know your customer diligence on all of our users in order to identify any illicit activity. We monitor via multiple solutions all blockchain transfers into and out of our exchange. It’s true of our risk engine, which is a 24/7 risk engine that is unlike the traditional financial ecosystem, where risk builds up overnight, where there needs to be separate miss risk models for we weekends and overnight activity and holidays, where hours or days can go by with no ability to mitigate risk to the system. We have a transparent system where all of our data is all of our public market data is openly available and free where risk parameters are transparent.

And we are already regulated and licensed. We have many licenses globally. Here in the United States, we are regulated by states under the money service business and money transmitting regime. And we are regulated nationally by the CFTC where we have a DCO, a DCM, a SWAP execution facility, and other licensure. We strive to conduct all of our business in a transparent and regulated manner. I think that it is coming, and I think it is important, and I think that it is healthy that the industry will be regulated. I think it is also already regulated in a number of ways. I think that there are points that need to be addressed to give oversight of various aspects of the industry that do not have sufficient oversight right now. And I also think that it is important to do so in a reasonable and common sense way that understands the industry. I’m happy to answer any of your questions.

Thank you very much, Mr. Bankman-Fried. Mr. Brooks, you are now recognized for five minutes to present your oral testimony.

Brian P. Brooks: (23:13)
Thank you, Chairman Waters and ranking member McHenry and members of the committee. Thank you very much for having me here today to talk about digital assets and the future of finance. The topic is an important one for anyone who cares about American competitiveness in the financial services sector, a financial ecosystem that empowers users over bank CEOs and other powerful central decision makers, and the next iteration of the internet in which individuals are able not only to read information and write content, but also to own a piece of the networks themselves. I am CEO of Bitfury Group, a company that provides a suite of infrastructure products and services that support various aspects of the cryptocurrency ecosystem, an ecosystem many of us today refer to as Web 3, since crypto assets generally represent either the rewards paid to participants for maintaining a particular decentralized network or an app that operates on such a network. Since 2011, Bitfury has designed and produced eight successive generations of ASIC chips and related equipment for conducting transaction validation activity on the Bitcoin blockchain, a process known informally as Bitcoin mining.

Along the way, Bitfury developed a series of adjacent businesses to make crypto assets safe, sustainable, and useful. Our various businesses include Liquid Stack, one of the world’s largest immersion cooling systems, focused on reducing the energy used in Bitcoin mining and other high performance data centers by as much as 90%, Crystal, a blockchain analytics company that provides transaction monitoring and related compliance tools to more than 150 law enforcement agencies, crypto exchanges, and financial services companies in Europe, Asia and North America, Axelera, a producer of cutting edge artificial intelligence ASIC chips, and others. I believe the committee’s topic today requires an understanding of three important threshold issues. First, a national policy agenda that takes crypto compliance seriously should assess whether it makes more sense to continue to keep crypto activities largely out of the regulated financial system or whether it makes more sense to bring them inside the system precisely so that they can be supervised and operated with appropriate levels of risk management.

For example, is it consistent to take the position that only banks should be allowed to issue stablecoins, but then fail to grant bank charters to the largest issuers of stablecoins? That would, after all, bring stablecoin activity within the ambit of an existing national bank supervision system with which we’re all familiar. Or does it make sense to bring enforcement actions challenging certain crypto assets as unregistered securities, but then fail to allow those assets to be registered and trade on a national securities exchange subject to supervision by FINRA and the SCC? Second, Americans deserve to know what our national policy is for a decentralized Web 3 powered by crypto assets. Treating crypto as a single unitary activity whose main feature is a need for financial regulation would be like treating the original internet in the 1990s as primarily a tax policy issue. We didn’t do that then.

What we had in the 1990s with respect to Web 1 that we lack today with respect to crypto is a comprehensive national policy predicated first on the notion of do no harm to the emerging network. Today, instead of focusing only on micro questions, such as whether a particular token is a security or whether a particular exchange traded fund may be offered, it would be worthwhile for the elected branches of government to grapple with the bigger questions, such as do we believe a user controlled decentralized internet is better than an internet largely controlled by five big companies? Do we believe that the financial services sector is any less subject to network effects than information and commerce were in earlier iterations of the internet? Do we trust big banks more or open source software more as a tool for maintaining ledges of account and allocating credit and capital?

Can we recognize the difference between crypto projects failing for lack of demand, just as many publicly traded companies fail, and the difference between individual crypto projects actually being scams unworthy of being presented to the fair, but sometimes harsh judgment of markets? Third, crypto policy should take into account not only any new risks introduced into the system, but also the risk in the present system that are solved by decentralization. Having issued almost a billion dollars in civil money penalties against banks and bank executives during my tenure leading the Office of the Comptroller of the Currency, it is clear to me that the present financial system has plenty of examples of risks and costs and safety and soundness problems that are being addressed in the current system. Shouldn’t we take seriously the possibility that algorithms and open source software that take a measure of human error, greed, negligence, fraud, and bias out of the system might actually make the system better on net, even if there are some new risks being presented that need to be understood and regulated?

Apart from those three overarching considerations, I’d like to very quickly make two points specific to my current perspective on the crypto economy. One relates to the effect of US crypto regulation on American competitiveness in both the technology and capital market sectors. There are a number of examples of US regulatory decisions that have driven legitimate activity offshore in ways that harm US investors, innovators, and workers. Can anyone explain, for example, why Fidelity Investments, one of America’s best known investment advisors, had to go to Canada to offer a Bitcoin ETF, or why physically settled crypto ETFs are safe and legal in Germany, Brazil, Singapore, and elsewhere, but somehow not in the United States?

Can anyone explain why crypto exchanges, stablecoin issuers, and others can receive e-money licenses to access the payment system in the United Kingdom, but in the United States are reserved exclusively for chartered banks with the result that the GDP cost of the payment system in the US is roughly four times the cost in the UK? For that matter, why is there no clear path for crypto focused insured depositories chartered in the state of Wyoming to access federal reserve payment services like other insured depositories? These are the big questions that I hope to address today. Thank you, Madam Chairman, ranking member McHenry.

Thank you, Mr. Brooks. Mr. Cascarilla, you are now recognized for five minutes to present your oral testimony.

Charles Cascarilla: (29:24)
Chairman Waters, ranking member McHenry, and members of the committee, thank you for this opportunity. My name is Charles Cascarilla. I’m the CEO and co-founder of Paxos. During my 22 year career in financial services as an analyst, investor, and entrepreneur, I have witnessed the shortcomings and systemic risk for financial market infrastructure firsthand. Paxos is a regulated financial institution and blockchain infrastructure platform. Paxos’ customers include Bank of America, PayPal, MasterCard, Interactive Brokers, Credit Suite, and many others. We help financial institutions provide their clients with reliable, regulated access to digital assets. Paxos also offers a uniquely structured and regulated stablecoin, the Pax dollar. Each Pax dollar is fully backed by one US dollar. As a result, it is not volatile like other types of digital assets. However, it retains the same properties that make digital assets so appealing. It can be transferred nearly instantly overnight and on weekends, and it is programmable, secure, and traceable.

Digital assets and blockchain technologies can create a more efficient, secure, and innovative financial system, and a more exclusive and equitable global economy. In the existing financial system, a person needs a bank account to safely store money, establish credit, earn interest, and borrow, yet according to the federal reserve, 18% of all Americans and 40% of black adults and 50% of adults without a high school degree are unbanked or underbanked. The current system is expensive and slow. International and even domestic money transfers can take days. At any given time, there are trillions of dollars worth of capital held up in transactions that have not yet settled. Digital assets are vastly more accessible. Anyone with a smartphone can download a wallet app to send and receive assets. No bank account is required.

Transferring digital assets is instantaneous and convenient. They can be sent or received 24/7. There’s no waiting around for wire transfers or money orders to arrive, or for banks and stock exchanges to open, and transfers are often very inexpensive, in some cases costing just a penny per transfer. Digital assets can also reduce bias in finance. At its heart, blockchain is just a math equation. It is agnostic to a user’s race, gender, nationality, or income. And blockchain permanently and publicly records transactions, reducing errors, fraud, and systemic risk. A blockchain based financial architecture could settle trades on the same day, thus mitigating counterparty risk and eliminating the need for costly central clearinghouse. For our part, Paxos recently completed a successful pilot to offer same day security settlement in support of SEC chair Gensler’s goal of reducing settlement –

Security settlement in support of SEC chair Gensler’s goal of reducing settlement times. Paxos believes regulation is essential for increasing public trust and digital assets and ensuring adoption. That’s why we sought oversight by a primary prudential regulator, even though we were not required to do so. Paxos became the first regulated trust for digital assets in the country, when it was approved by the New York state department of financial services in 2015. We adhere to the same anti money laundering and know your customer rules as banks. We are subject to regular examinations of our operations, procedures and capital levels. Our products are also regulated. Of the world’s three regulated dollar backed stablecoins, two are issued by Paxos. Unfortunately, the uncertain state of digital asset regulation is hampering the industry’s development. The solution is not to shoehorn digital assets into a regulatory system designed for earlier generations of financial assets.

We have an opportunity to build a more efficient and effective financial system. We believe a primary prudential state or federal regulator should regulate digital asset companies and their products. Compliance standards need to be enforced. Regulation must ensure that customer assets are held segregated from the company’s balance sheet. For stablecoins, independent auditors should regularly attest that assets back in the token are always held in reserve. Those reserves should be held in bankruptcy remote accounts, and available to the issuer and not available to the issuer general creditors.

If the federal government instead stifles the adoption of digital assets, issuers, talent and capital will flee for more welcoming jurisdictions. That would be a disaster for Americans, both consumers and workers, and our economy as a whole. Without regulated US dollar back stablecoins or a central bank digital currency and the infrastructure to support them, it’ll become increasingly less viable for other countries and companies to continue using the US dollar as the global reserve currency. We need the government’s support to create a new, more secure, more competitive financial system. The benefits of getting this right are enormous, but so are the consequences of getting it wrong. Thank you for the opportunity to provide my testimony. And I look forward to your questions.

Chairman Waters: (34:13)
Thank you very much, Ms. Dixon, you are now recognized for five minutes to present your oral testimony.

Denelle Dixon : (34:22)
Good morning, Chairman Waters, Ranking Member McHenry, and members of the committee. Thank you for inviting me to be here today.

Could you move your microphone a little bit closer? Thank you.

Sure. Thank you for inviting me to testify today. I’m honored to be here. My name is Denelle Dixon and I am the CEO and executive director of the Stellar Development Foundation. I took this role and joined the blockchain more than two and a half years ago. Prior to that, I was the chief operating officer of the Mozilla corporation, where I spent a lot of my time advocating, among other things, openness and interoperability in web technologies. It’s those same policy priorities that drew me to blockchain. An industry that I believe can learn from past mistakes made in other areas of web development. Stellar is an open, permissionless, decentralized network, that is optimized for payments. There is no single entity, including SDF, that controls the code base of the network or its growth. You don’t need permission to use this technology, just like the underpinnings of the internet, it is ready and available for use to anyone.

Importantly, and especially in the context of this hearing, Stellar was designed for asset issuance, making it possible to create, send and trade digital assets backed by nearly any form of value. And also is designed with compliance tools built in to help those asset issuers meet their own compliance obligations. The Stellar platform is a pioneer of tokenization, optimized for Fiat backed asset issuance before stablecoin was even in a word. And over the last few years, an ecosystem of businesses and users have built use cases around Stellar based stablecoins due to their incredible utility to solve many of the problems we see in today’s payment landscape. Despite the headlines, what’s happening in the world with blockchain, with cryptocurrency and stablecoins is not just lending, trading and borrowing. Other use cases are active and focused on solving real world challenges using the technology.

So, let me start with MoneyGram international MoneyGram is building a solution on Stellar that enables seamless conversion between cash and digital assets. MoneyGram’s network integrates with the Stellar blockchain to able cash funding of digital accounts and payout in different currencies of the consumer’s choice, using stablecoins. It’s using Circle’s USDC coin. In real terms, consumers will be able to send value in the stablecoin and easily convert to local Fiat currency for instant pickup for thousands of participating MoneyGram locations globally. This is in pilot phase right now in the US, and is expected to be widely available in 2022. Another example, Leaf Global FinTech has built the solution for refugees and cross-border goods traders who are vulnerable to theft while carrying across borders. So, with Leaf’s wallet, these users can save their money in multiple currencies, benefit from cross-border transfers and pay for goods and services.

That functionality is only possible because they leverage Stellar’s ability to issue assets, to issue stablecoins and exchange value with low transaction fees and high speeds. This use case is live and operational today. The last use case I’d like to touch on is one that is in development. Tala is best known for its mobile lending app, which enables its customers to apply for a loan and receive an instant decision, regardless of their credit history. Tala is now working to expand their offering by using Stellar assets and stablecoins, to help their current customers with credit, by allowing borrowing, spending, saving, investing, and sending and receiving. There are many more valuable use cases in the Stellar ecosystem that I would love to be able to share with you today. But I would just briefly like to mention that in a recent report from the G20 and IFC, there were five Stellar ecosystem companies named for their innovative solutions in digital finance, supporting MSMEs. Use cases like these are in varying states of maturity, but their current and potential value is undeniable.

And none of these use cases would be possible without stablecoins. Stablecoins are a core technological component. And by extension, that means stablecoin are essential on delivering on financial inclusion. So, that brings me to the PWG report on stablecoins. The PWG report raises legitimate risks, but it’s recommended solutions that go too far. Specifically to limit stablecoin issuance to insured depository institutions is not narrowly tailored to the actual risk of stablecoin arrangements for the simple reason that although there are outliers, most stablecoins, unlike bank deposits, are fully reserved. Instead, we advocate for a reg approach that it focuses more on stablecoin reserves by requiring stablecoin arrangements be fully reserved by appropriate assets, requiring reserves to be held as insured depository institutions, creating clear standards for regular audit and public disclosure of stablecoin reserves and key contractual terms regarding redemption, and by making it clear that payment stablecoins are not securities.

Of course, regulators must be empowered to oversee these requirements. The framework should allow oversight through state banking supervision, or a narrowly tailored charter of the OCC. In our view, this would promote the safety and soundness of stablecoin arrangements. We’ve started to see how in innovation can be hampered in other parts of the world when regulators and lawmakers react prematurely. In Nigeria, stablecoins and blockchain technology were eliminating costly foreign exchange and transaction fees and slow processing times until the Central Bank of Nigeria abruptly ended that business model. And many innovators had consequently been stopped in their tracks. As we walk away from this hearing, I urge you to look at the industry and technology beyond the narrow lens of applications that often dominate the news. Thank you for having me here today. And I look forward to your questions.

Thank you, Ms. Dixon. Ms. Haas, you are now recognized for five minutes to present your oral testimony.

Alicia Haas: (40:40)
Chairwoman Waters, Ranking Member McHenry, and members of this committee, good morning, and thank you so much for this opportunity to testify on digital assets in the future of finance. My name is Alicia Haas, and I serve as the chief financial officer of Coinbase global. I also serve as the chief executive officer of Coinbase Inc, our US subsidiary. I joined Coinbase in 2018. Formerly was chief financial officer of Sculptor Capital and OneWest Bank and spent 20 years in the financial services industry. Today, I’m here to introduce Coinbase, talk about the evolution of crypto and highlight today’s regulations and how they could be changed to advance bipartisan goals of protecting consumers and promoting innovation.

Coinbase’s mission is to increase economic freedom in the world. We were founded in 2012 with the idea that anyone, anywhere should be able to easily and securely send and receive Bitcoin. Over the last nine years, our products and services have expanded to meet our customers’ needs in the rapidly evolving crypto industry. We have customers in every state, except the state of Hawaii. And as a remote-first company, we have employees in 45 states and in the district of Columbia, including 24 of the 25 states represented by this committee. We now securely store 12% of the world’s crypto on our platform. This is across over 150 asset types, and we offer customers the opportunity to learn, to sell, to resend, to receive and buy more than 100 assets on our platform. Additionally, we offer customers the opportunity to spend, to borrow, to earn, to stake and transact on select assets.

We serve more than 73 million customers globally, including 10,000 institutions and 185,000 application developers. Importantly, nearly 50% of our transacting customers are doing something other than buying and selling crypto, which indicates to us that crypto has moved past its initial investment phase and we are now in the long expected utility phase of this ecosystem. Since our founding, Coinbase has strived to be the most secure, trusted, and legally compliant bridge to the crypto economy. Coinbase is federally registered as a money services business with FinCEN, licensed as a money transmitter in 42 states, holds a BitLicense and trust charter from the New York Department of Financial Services. And we are authorized to engage in consumer lending in 15 states. We have a robust AML BSA program, and we are one of only two digital asset members of the Department of Treasury’s Bank Secrecy Act Advisory Group. In addition to the various state regulatory regimes, we are subject to federal oversight from treasury, the CFTC, SEC, FTC and CFPB.

Much like the adoption curve of the internet in the 1990s, we are seeing dramatic advancements in crypto participation. There are more than 220 million crypto holders globally. And around 16% of Americans have invested in, traded or used cryptocurrency. Total crypto market capitalization at the end of the third quarter was over $2 trillion, up from 800 billion, as of the end of 2020 Coinbase’s platform is powering the crypto economy, a new financial system for the internet age, which we believe is a critical infrastructure layer to web 3.0. Technologies like non-fungible tokens, which we call NFTs, and decentralized application platforms will lead the away to web 3.0, which will revolutionize the internet, much like the industry was revolutionized when it went from static content to the dynamic engagement content we have today. We believe sound regulation is central to fueling crypto innovation and adoption. That is why we introduced our Digital Asset Policy Proposal, which we refer to as dApp. The dApp Assessed the challenges of the existing regulatory framework and proposed a four pillar solution. First, we believe the government should recognize digital assets under a new comprehensive framework that recognizes the unique technological innovations underpinning digital assets. Second, the responsibility for this new framework should be assigned to a single federal regulator. This regulator would be charged with establishing a registration process for intermediaries, which we refer to as marketplaces for digital assets. Third, this new framework should have three goals to ensure holders of digital assets are empowered and protected. A, we believe in enhanced transparency through robust and appropriate disclosure requirements. B, we want to protect against fraud and market manipulation. And C, we want to promote efficiency and strengthen our market resiliency. Our fourth and final pillar is to ensure that regulatory solutions promote interoperability and fair competition.

In conclusion, Coinbase placed crypto will drive transformational change across society in positive ways. This is why our mission is to promote economic freedom around the world. Disruption always challenges the status quo, but we believe sound policies can improve the system for everyone. We applaud Chairwoman Waters, Ranking Member McHenry, and the members of this committee for holding this important hearing. Thank you for the opportunity to discuss these important issues, and I look forward to answering your questions.

Thank you very much. I now recognize myself for five minutes for questions. Mr. Cascarilla, I’m a bit concerned about company, Paxo’s partnership with Facebook, which is now calling itself Meta. As you know, Facebook has attempted several times to enter the cryptocurrency market starting in 2019, they founded the Libra Association, based in Switzerland, with the goal of creating a stablecoin, but suspended its activities after this committee held hearings. And I, along with other members, and US regulators, raised significant concerns leading to a number of Libra association members pulling out. Now in partnership with Paxos and Coinbase, Facebook has launched a pilot project with this digital wallet, Novi, for a limited number of individuals in the United States and Guatemala to send and receive money using your stablecoin known as USDP, or Pax Dollar. As you know, one of the recommendations in the recent president’s working group report focuses on mitigating systemic risk posed by stablecoins, as well as concentration of economic power concerns.

The report among other things recommends legislation that stablecoin users must comply with activity restrictions that limit affiliation with commercial entities, similar to restrictions most banks face to promote the separation of banking and commerce. While your partnership with Facebook is reportedly a pilot, limited to a number of users in Guatemala and the United States, what is stopping Facebook from the future allowing its nearly 3 billion, monthly active users to make payments and save funds with the Pax Dollar, or other previously issued stablecoin through a Novi wallet? If this were allowed at such a scale, how not undermine the US dollar and the world’s reserve currency? Mr. Cascarilla, are you still muted? Can you hear me?

There we go. Sorry about that. Thank you for the question, Chairwoman. So, I think it’s important to note in the case of Novi, that they are a customer Paxos just like any other customer of Paxos. We have an open product, they could use that product in the open market, they decided to come to Paxos. And I think they did that because we have the most regulated stablecoin product. And I think that was an important decision for them, that they wanted to use a well regulated product. And I think another important point here is, Novi is our customer, that’s a subsidiary of Facebook Meta. But Novi itself is a regulated money services business.

They are regulated to operate in almost all states in the United States and we have done extensive due diligence on their controls and the regulatory oversight that they have. And we feel very confident that they’re following those. And so, in terms of the Novi usage of our product, it’s just like anybody else, just like if they had a bank account, which they do, and they were using. And so, in that way, the services they’re getting from us are no different than services they get from any other financial institution that they have a relationship with.

And so, this is supposedly a pilot that’s limited to a number of users in Guatemala and the US? What is stopping Facebook, again, from in the future, allowing its nearly 3 billion monthly active users to make payments and save funds with the Pax Dollar or other privately issued stablecoin through a Novi wallet? How long is this pilot? Can you describe it?

Yes. The pilot’s limited and controlled. It’s something that we work together with our regulator on and they have reviewed our program. Novi would be best a position to talk about their plans to expand it. But right now they’re in pilot phase. It’s just the US and Guatemala, it’s quite limited in scope and size.

I now recognize the gentleman from North Carolina, Mr. McHenry-

Well, thank you-

[crosstalk 00:51:07] Ranking Member of the committee. You are now recognized for five minutes.

Thank you. Mr. Brooks, let’s step back from digital assets and blockchain for a moment. Let’s talk about where the internet was, where it’s come to, where it’s going, right? We’re trying to level set here for policymakers. So, originally the internet was a read-only format, in essence, we’re consuming information. And then there’s additional layers that we place on. It became much more interactive. But counterintuitively, much more interactive, but much more centralized, in web 1.0 and web 2.0. What we’re hearing now is web 3.0. Policy makers need to understand the nature of web 3.0. This is a hearing about a component of web 3.0. Now, along those lines, what are the characteristics that defined web 1.0 and web 2.0?

Mr. Brooks: (52:06)
Mr. McHenry, thank you very much for that question. I think that’s critical to understanding what we’re all trying to build here. So, the characteristic of web 1.0, if people remember their original AOL account, was an ability to look in a curated walled garden at a set of content that was not interactive, but was presented to you on AOL the way that TIME magazine used to show you the articles they wanted you to see inside of their magazine, just you could see it on a screen. The innovation of web 2.0 was that suddenly you could not only read content, but you could also write content. This is when the blogosphere became a big thing. People remember this from the late 90’s, the early 2000’s. The reason for the centralization of the internet of course, was that all of that activity was being monetized by a very small number of companies.

Mr. Brooks: (52:51)
Facebook, as the Chairwoman mentions, Google and then two or three other companies. What makes web 3.0 different is the ability to own the actual network. And that’s what crypto assets themselves represent, is an ownership stake in an underlying network. So, when you hear people talk about, for example, layer-1 tokens, what they mean is, this is your reward for providing the ledger maintenance services, the computing power to the network, that on web 1.0 and two was done by Google, right? So, now people in my hometown of Pueblo, Colorado can actually own the Ethereum network, but they can’t own the internet, that’s owned by Google and a few other companies. That’s what the project of crypto is all about, is allowing people to directly own the networks that have native assets that are supporting it. And that’s the nature of decentralization where the token holders are the people who control the asset, not Google.

Okay. So, token holders, for our language here on the hill, those are digital assets, which are the keys to open up the ledger, for you to participate, right?

Mr. Brooks: (53:53)
Correct.

So, describe to us how those digital assets fit into this internet revolution, web 3.0.

Mr. Brooks: (54:00)
So, the concept is that you have application layer tokens, and you have protocol layer tokens. So, if I’m an owner of Bitcoin, let’s say that I’m a miner of Bitcoin, somebody who actually creates Bitcoin. The Bitcoin is the reward I receive for doing the work to keep the network operational. And that allows me to own a piece of the Bitcoin blockchain. Or take Ethereum, which is easier to understand, the Ether token represents an ownership stake in the network. But on top of that network are all kinds of apps that get built on the network, much like the apps on your phone depend on the underlying network existing that lets the phone operate.

Mr. Brooks: (54:39)
And so, people will make judgements about which network is likely to win, and they will invest in the tokens in that network much the same way you might invest in Google stock because you think Google is going to scale access to the original internet. The difference being here, you can vote on what happens in the future of a proof-of-stake network, for example, you can get rewarded through a proof-of-work token for maintaining a ledger on something like Bitcoin, but the real message here is that what happens on the decentralized internet is decided by the investors, versus what happens on the main internet is decided by Twitter, Facebook, Google, and a small number of other companies.

Okay. So, getting this, this layer on digital assets right, for Congress to understand this, everything is built upon that on ramp to this new internet. So, very important for us to be sensitive to how this develops and any actions we take in terms of laws and updating laws to incorporate these new technologies?

Mr. Brooks: (55:40)
Yeah, Mr. McHenry, couldn’t agree more. And I think when you hear about all of the problems of different big tech companies, the importance of an owner controlled network becomes clearer.

Okay. Owner controlled network rather than a cooperative, right?

Mr. Brooks: (55:53)
Yes.

And thinking in those terms.

Mr. Brooks: (55:55)
Absolutely.

So, if you’re not a part of management, you’re not making a decision in web 2.0. If you are a participant in the network, you’re cooperating in the making of those decisions.

Mr. Brooks: (56:06)
Exactly right.

So, I ask this not to be insulting to the panel, but to have a level set here so we have an understanding of what we’re talking about. This is not simply about you on this panel. It is about trillions of dollars of assets that did not exist before Satoshi wrote his whitepaper 13 years ago. It’s about $3 trillion in notional value at this stage, around the development of a whole new range, a whole new suite of technology that will be developed across the globe, whether or not United States embraces it and wants to compete, or if it’s pushed off shore. So, as policy makers, we need to understand what we’re talking about here. This is a small panel, important as you may be, a small panel about the discussion about web 3.0. And so, with that, Madam chair, thank you for having this hearing, and I hope that we can have more understanding by policy makers about these important concepts. Thank you, Mr. Brooks.

[crosstalk 00:57:01] Thank you very much. The gentlewoman from New York, Mrs. Maloney, who is also the chair of the House Committee on Oversight and Reform is now recognized for five minutes.

Carolyn Maloney: (57:12)
Thank you, Chair Waters for having today’s hearing. Our financial system has been built up over time with us learning from each financial crisis, fixing and adjusting as new financial risks come forward from the Great Depression and the creation of the FDIC and Deposit Insurance to the Dodd-Frank reforms after the 2008 financial crisis, we may not all agree on every aspect of those laws, but they’ve made our financial system and our entire economy more resilient. And consumers and investors more protected when things do go wrong. In 2018, the New York attorney general released a report from its Virtual Markets Integrity Initiative, which detailed a few key findings regarding crypto trading platforms on potential conflicts of risk and interest, lack of serious efforts to stop abusive trading activity and limited protections for customer funds.

Carolyn Maloney: (58:15)
The report stated, and I quote, “Customers are highly exposed in the event of a hack or unauthorized withdrawal, while domestic or foreign deposit insurance may compensate customer for certain losses of stolen or misappropriate Fiat currency, no similar compensation is available for virtual currency losses.” This is not a theoretical concern. In fact, Coinbase was reportedly the subject of a hack earlier this year impacting at least 6,000 Coinbase customers. Ms. Haas, what happens today for a Coinbase customer in the event of a hack of Coinbase or a Coinbase wallet, or in the event of unauthorized withdrawal? What protections does a customer currently have, FDI insurance, commercial in insurance? Could you answer that question, please? Thank you.

Yes. Thank you so much for the question. So, Coinbase does secure 12% of the world’s cryptos, I shared with you earlier, and we have extensive controls to protect our customer assets. We bifurcate our assets into two different storage systems. We call one the hot wallet and we call one cold storage and less than 2% of our assets are held in a hot wallet, which is subject of a cyber attack. Specifically, the incident you mentioned was not a hack of the Coinbase systems, but in that event where customers did lose funds due to other losses, we did reimburse customers for that event. We do protect our customers for any hack of the Coinbase hot wallet, and we have third party insurance, plus we use our own balance sheet to protect our customers for the event of loss on our platform. Please.

Pull the microphone closer to you and speak into it so all members can hear you.

Thank you so much for the clarification. With regards to what losses we typically see though in press, we typically see these are account takeovers at the endpoint, where a customer has lost their credentials and then has had a hack of their own phone, their own personal device. And that is unfortunate at this point in time because that loss is not well protected for within the broader crypto economy. That is something that Coinbase continues to study and would look to over time, do more to support our users for those loses.

Carolyn Maloney: (01:00:25)
Reclaiming my time, reclaiming my time. My time’s very limited. Is that uniform the protections you talked about for all crypto exchanges and wallets, or just for yours?

Alicia Haas: (01:00:36)
I’m speaking specifically about the Coinbase protections we offer.

Okay, so it’s not available to others. So, do you think customers could benefit from some uniformity and standardized minimum protections if and when customers lose their funds through no fault of their own?

I do believe there’s opportunity there.

Richie … in addition to this committee, I have the honor of chairing the Oversight Committee and we recently held a hearing on the rise of ransomware and strategies for disrupting criminal hackers, as detailed by a recent FinCEN report, $590 million in suspected ransomware payments were reported by financial institutions in the first six months of 2021, and it’s getting worse. So, it’s no surprise to me that these criminals frequently seek payment for ransomware attacks through cryptocurrencies. And FinCEN identified several money laundering typologies for these actors.

Mr. [Lair 01:01:42] and Ms. Haas, our anti-money laundering requirements are paramount to prevent fraud, sanctions invasions, and the financing of terrorism and you and your companies have highlighted your firm’s compliance programs, stating that these standards are important to protect the financial system and to drive trust and adoption. But not everyone in this industry believes that, and many have rejected or avoided compliance standards. Some actively promote themselves on not complying with Know Your Customer requirements. This is an entire financial services ecosystem. And one weak link exposes the entire system to money laundering risk as highlighted by the FinCEN data. I just mentioned, could you share why your firms have taken your anti- money laundering compliance approach and the benefits of doing so across your firm’s products and services? And what steps can we take to bolster our anti-money laundering efforts and ensure all crypto marketplaces comply?

Chairman Waters: (01:02:47)
The gentlewoman’s time has expired. The gentlewoman from Missouri, Ms. Wagner is now recognized for five minutes.

Ms. Wagner: (01:02:53)
I thank you, Madam Chairwoman. Ms. Haas, let’s continue. SEC chairman, Gensler, has indicated on multiple occasions that, and I quote, “The test to determine whether a crypto asset is a security is clear,” however, commissioners Peirce and Roisman noted that they believe there to be an obvious lack of clarity for market participants around the application of securities laws, to digital assets and their trading. The lack of clarity is clear through the numerous requests that the SEC receives for these no-action letters. In your view, is additional guidance defining clear rules of the road for investors and market participants needed at this time?

Thank you for the question. We believe this is a very important area focus for the SEC and this committee. We do agree that the laws are clear, however, existing laws, regulation, and legal precedent, make it clear that blockchain tokens are not securities. So, we believe that the law clearly shows that blockchain based digital assets are one of two things, either a new form-

Ms. Haas: (01:04:03)
… clearly shows that blockchain based digital assets are one of two things, either a new form of digital property or a new way to record ownership, as Brian Brooks spoke earlier about. We do believe that clarity is needed because these are new assets. It’s a new way of transacting with these new protocols that we spoke about. And I think it would benefit all of us in the ecosystem to have agreed upon definitions.

Ms. Wagner: (01:04:24)
I couldn’t agree more and I would hope that Chairman Gensler would be listening to his commissioners and some of the feedback that you all giving him. We talk a lot about financial inclusion in this committee and digital assets have the potential to provide fair access to financial services to all Americans. And I believe that Mr. Bankman-Fried brought that up. And many of you did in your written testimony. I’d like to start and I’ve got limited time with Ms. Dixon. And then I think Mr. Allaire, how would digital assets and blockchain technology facilitate financial institutions or financial inclusion and benefit the 1.7 billion unbanked people throughout the world, and particularly the millions here in the US? Ms. Dixon?

Ms. Dixon: (01:05:18)
Thank you for the question. This is a really important area. Understanding your time is limited, I’ll just say that blockchain allows value and money to flow just like email. So it’s very simple in terms of how it can get from one point to another. And it does so very, very quickly. The importance of that is it actually can cross borders much more simply than anything else that’s out there today. So the value of blockchain is the ability to send from the United States, for example, and send to another country without having to reconcile with all the different software and intermediaries that exist today. So it eliminates intermediaries. It creates less friction in the marketplace, and it allows users who don’t have bank accounts today, or who choose not to get bank accounts or have been de-risked by banks from being able to, to be able to access this technology very cleanly because they can do so with a wallet.

Ms. Wagner: (01:06:04)
Thank you very, very much for that input. And Mr. Allaire?

Mr. Allaire: (01:06:09)
Thank you, Congresswoman. I think financial inclusion is a critical design goal for many of us. And certainly as we think about USDC. Today, USDC as a payment technology for dollars on the internet enables users to transfer dollars in a fraction of a second with a transaction cost that can be as low as a 20th of a penny. And with the throughput of the Visa network, that’s a benefit that can be brought to individuals. And I’d like to really emphasize something for the committee, which is one of the most powerful things about this technology is that it is the open internet. Just like anyone can have an email account or a text message or access the internet, this is an open financial system. And when you combine those kinds of access efficiency and that openness, it creates an opportunity for anyone with a mobile device anywhere in the world to seamlessly exchange value with one another.

Ms. Wagner: (01:07:01)
Thank you. Mr. Brooks, in your-

Ms. Wagner: (01:07:04)
(silence).

Mr. Allaire: (01:09:45)
… open financial system. And when you combine those kinds of access efficiency and that openness, it creates an opportunity for anyone with a mobile device anywhere in the world to seamlessly exchange value with another.

Ms. Wagner: (01:09:57)
Thank you Mr. Brooks, in your-

Ms. Wagner: (01:09:59)
(silence).

Ms. Velazquez: (01:13:06)
Bankman-Fried, digital asset trading platforms like yours play an important role in the current functioning of stable coins. And therefore also raise broader question about digital market regulation, supervision, and enforcement. Can each of you describe the method, your platforms used to determine the price for exchanging digital currency for Fiat currency? I see that my time has expired. Thank you. I yield back.

Ms. Wagner: (01:13:45)
Time?

Okay. Ms. Haas?

Ms. Haas: (01:13:51)
Coinbase is an agency only platform. We do not engage in proprietary trading on our platform. All prices established on our platform are due to market makers. So we offer a platform for customers to come together, to offer bids and asks on a variety of currencies that we offer on our platform. So the market price is determined by the market participants.

And at what stage of the transaction do you provide an assurance of or lock in of an execution price?

Ms. Haas: (01:14:20)
So we have two products. We have a consumer product and we have what we call our pro product for our institutions or more advanced traders. It’s important that any customer can choose either platform, but we tend to see consumers choose our easy to use consumer platform. The price displayed on the screen to the consumer is the price that’s locked in and that we guarantee to the customer.

Thank you.

Madam Chair Waters: (01:14:43)
Thank you. The gentle woman’s time has expired. The gentleman from Oklahoma, Mr. Lucas is now recognized for five minutes.

Mr. Lucas: (01:14:49)
Thank you, Madam Chair. Ms. Haas, you discussed in your written testimony how the future of blockchain might include new areas of tokenization, such as property titles, even people’s time. Could you discuss further what trends you currently see and how new asset classes could arise through blockchain technology?

Ms. Haas: (01:15:09)
Thank you.

Mr. Lucas: (01:15:09)
Where are we going?

Ms. Haas: (01:15:10)
Thank you for the question. So I think it’s important to share that anything can be tokenized, any item of value. And this is the internet of value that we’re talking about with web 3.0, so the early things that we’re talking about are the protocol layer. Over the protocol layer, we see infrastructure being built and then we see applications being built as the next layer. So Bitcoin, Ethereum, Stellar, Solana. These are all important protocol layers that we’re talking about. And on top of these, we see applications.

Ms. Haas: (01:15:36)
So an interesting article was published yesterday, that gaming platforms. So video games that many of you may play, your children may play, gaming where NFTs, non-fungible tokens, which means they’re different. Every token is different. Think about a shield or a sword or something of value are being most accurately traded. And it was a significant percent of the assets in defi, decentralized finance in November were traded in apps. And so, we’re seeing all types of things. We’ve had early conversations with real estate developers to get broader global liquidity, more liquid markets for tokens. We’ve seen a lot of innovation in the payment space and a lot of innovation in NFTs with digital art. But this is just the tip. And I think just like back in the early 90s, when we were thinking about the internet and we couldn’t envision Uber, we don’t know what the future is. And there’s so much ahead of us.

Mr. Lucas: (01:16:24)
Fascinating. Mr. Brooks, it’s good to see before the committee again. Could you discuss what key fundamental differences between banks and stable coin issuers are important for Congress and regulators to understand when looking at regulatory proposals?

Mr. Brooks: (01:16:39)
Sure. Well, Congressman Lucas, thank you so much. And it’s nice to see you again as well. One of the historical differences between banks and stable coin issuers is that banks in this country historically have been engaged in multiple different kinds of financial intermediation and risk taking functions. Banks typically engage in three different things, deposit taking, lending, and payments. The core feature of stable coins is they’re a new payments technology and payments are one of the core things that banks do, right? So banks historically innovated in payments by first having check clearing, then later having travelers checks, then later being prepaid cards and things like that.

Mr. Brooks: (01:17:15)
Stable coin is just the faster, most modern way of transmitting those values. Stable coin issuers, of course, don’t present all of the risks that banking presents. They don’t typically engage in lending or anything else. And this is one of the reasons why at the OCC, we look very carefully at the possibility that payment companies like American Express in a different generation, circle today might possibly qualify for bank charters. They’re engaged in a core banking function, but not in the other banking functions. It’s to my point earlier that sometimes crypto is reducing risk, not increasing risk.

Mr. Lucas: (01:17:47)
Ms. Dixon, could you also discuss this for a moment?

Ms. Dixon: (01:17:53)
I think that there’s a really big opportunity with respect to blockchain. I think when you mentioned before about tokenized assets, there already are tokenized interest in real estate that exist on Stellar, for example, or in fractionalized interest in US stock. So there’s opportunity for growth there. With respect to what we have with blockchain and what can be accessible, that banks already have available out there, but when they de-risk populations and they de-risk individuals out of the banking infrastructure, they can actually access accounts, hold assets, hold their assets into a digital framework, and then do a lot of the same things that you can do at banking institutions. But these individuals couldn’t get access to it before. So I think blockchain create that financial inclusion that we’re all talking about and that we all want to get to. And it does show I think with, as Ms. Haas indicated with the different layers, the infrastructure layer and the application layers, there’s so much creativity that’s happening now. So I think we have a long road ahead of us with respect to this technology.

Mr. Lucas: (01:18:53)
Mr. Bankman-Fried, could you respond to the criticism that stable coins would be ripe for illicit financial activity? And could you compare this risk with other payment rails?

Samuel Bankman-Fried: (01:19:04)
Thank you, Congressman. We as do most market participants in the digital asset ecosystem have advanced surveillance techniques to prevent financial crimes for all digital assets, including stable coins, conducting know your customer policies and blockchain surveillance on all users and deposits and withdrawals through our platform. And all legitimate stable coin issuers in addition to that conduct sophisticated no your customer policies on all issuances and redemptions of those stable coins. If you compare that to, for instance, physical cash, where no transactions effectively have know your customer or anti-money laundering or anti financial crimes surveillance on them, already I think that the digital asset industry has set a pretty strong standard on that front.

Mr. Lucas: (01:19:58)
Thank you. Madam Chair, I yield back.

The gentleman from Texas, Mr. Green, who is the chair of the subcommittee on oversight and investigations is now recognized for five minutes.

Mr. Green: (01:20:15)
Thank you, Madam Chair. And I thank the witnesses for appearing as well. I trust that my volume is such that I’m being heard. If you can verify, I would greatly appreciate it.

Mr. Brooks: (01:20:26)
We can hear you very well, Mr. Green.

Mr. Green: (01:20:29)
Thank you very much, Madam Chair. In the last year, the digital asset has exploded from about $500 billion to $3 trillion, and there’s still extreme volatility it seems in this marketplace. Bitcoin, for example, lost half of this value over two days in March. And it rebounded of course later on, but there are many problems leading up to the global financial crisis that seem to be manifesting themselves in the market currently. Easy credit, via margin investing, lack of transparency, the lack of transparency that I’d like to see, and adequate financial disclosure is not readily available. With the explosive growth in cryptocurrencies, at what point should we become concerned about the possibility of a bubble? At what point should we become concerned about the possibility of a bubble? Let’s start if we may with Mr. Brian Brooks.

Mr. Brooks: (01:21:42)
Well, thank you, Congressman Green. It’s terrific to see you again. And I always find your questions extremely perceptive. What I would say about that question is a lot of the price volatility of cryptocurrency has to do with the early stage of the market and the thinly traded nature of the asset compared to, for example, US real estate, global equities, or anything like that. I think the message I’d land with this committee in response to your question, however, is some of the things that make US equity and debt markets more stable and less volatile have to do with the fact that there’s a lot more price discovery in those areas. And what I mean by that is in the US, we have regulated equity mutual funds. We have derivatives products and futures products that allow the free trading on a 24/7 basis that provides the market with forecasts of what’s happening in the ecosystem.

Mr. Brooks: (01:22:31)
In the world of crypto, the US hasn’t responded by developing those tools for price discovery yet. And so the result in a relatively new, relatively thinly traded market is that one person unwinding their position can have a massive effect on the price. The last point I would just make very quickly is something like 80% of Bitcoin holders have never sold a Bitcoin. And so when you hear about a day when there was a giant price drop in Bitcoin, often it turns out that there was one or two large traders who were unwinding a leveraged position, and the vast majority of holders have enough confidence in it that they’ve literally never sold a unit of it. So I would argue we need more liquidity and more price discovery to a tamp down volatility, not less.

Mr. Green: (01:23:14)
Thank you. Let’s go to Ms. Dixon, please.

Ms. Dixon: (01:23:23)
Thank you for the question. I think from the standpoint of what’s available in the market today, one of the things that we need to do better in this industry, and I think we’re working in that direction is much like the early days of the web, we need to focus on consumer oriented products that have a lot of information about the challenges, and also brings the person through from a literacy standpoint. So they understand you look at user experience, you look at UX design, all of these things are really, really important. And as we saw in the early days of the web, it happened, it came together. We became better at educating the audience about what’s available and what’s out there. The nice thing about blockchain is you have immutability, you have records that are out there that can’t be changed. This information is already leveraged by chain analysis, for example, in Elliptic, to demonstrate the different things that are happening on chain. And I think it allows us the opportunity to create a lot more foundational efforts with respect to user experience and focus on these consumer protection issues that you’re talking about.

Mr. Green: (01:24:22)
Mr. Samuel Bankman, if you would please, like to hear from you.

Thank you for the question. One of the really innovative properties of cryptocurrency markets are 24/7 risk monitoring and engines. We do not have overnight risk or weekend risk or holiday risk in the same way traditional assets do, which allow risk monitoring and de-risking of positions in real time to help mitigate volatility. We’ve been operating for a number of years with billions of dollars of open interest. We’ve never had customer losses, clawbacks, or anything like that.

Even going through periods of large movements in both directions, we store collateral from our users in a way which is not always to on in nutritional financial ecosystem to backstop positions. And the last thing that I’ll say is, if you look at what precipitated some of the 2008 financial crisis, you saw a number of bilateral bespoke non-reported transactions happening between financial counterparties, which then got repackaged and re leveraged again and again and again, such that no one knew how much risk was in that system until it all fell apart. If you compare that to what happens on FTX or other major cryptocurrency venues today, there is complete transparency about the full open interest. There is complete transparency about the positions that are held. There is a robust, consistent risk framework applied, and we’re excited to work with the CFT, see on our US licensed and regulated venue to bring a lot of this to US customers as well.

Mr. Green: (01:25:55)
Thank you. My time has expired. Thank you, Madam Chair. I yield back.

You’re welcome. The gentleman from Texas, Mr. Sessions, is now recognized for five minutes.

Mr. Sessions: (01:26:06)
Madam Chair, thank you very much. And to of the panel, we appreciate this opportunity to hear from you. I think it’s very important for us to hear from you. You’re not the inventors necessarily, but you’re the people that are going to make this work. I am tremendously impressed that from what I see, a lot of the ingenuity, a lot of entrepreneurial spirit, and lots of advice about the future, about where this can grow is I think very important for us to listen to.

I’m in favor of what you do. I’m not sure I want to go as far as you do on robustness of how much oversight you really want. Because I think that in your perhaps infancy, perhaps in your modeling, what makes you better is what you are. And I respect that. The question I would ask, and I don’t know which one of you to ask this. So I would just say we’re always interested in a traditional financial model of identifying risk. What is a risk? We get very little into value, but a lot into risk. And so I would ask you that the value of much of this could be compared to stocks.

IPOs when they first come out, they might come out and be worth this amount of money. And one year later they’re worth a lesser amount of money. I’m more concerned with the term fraud, of the value that we’re selling of all these different positions that could be held. What do you do to try and look at what might be fraud? I know there’s been openness about a lot of discussion about how you allow information to be freely gleamed. You do these things, but is there investigation or an understanding about what might be risky even though you accepted or fraud? Anyone?

Ms. Haas: (01:28:14)
I’m happy to take that one, congressman.

Thank you very much.

Ms. Haas: (01:28:17)
So I want to share a little bit, this is specific to the Coinbase platform. So on the Coinbase platform, we have various tools. One in onboarding, as we’ve talked about, we do KYC, but also in when we onboard our assets. So we offer, as I mentioned, over 100 assets for trading on our platform. We have a robust assessment of each of those assets. We’re looking at it for legal risks. Do we think it has the contours of a federal security? We do not list securities on our platform. Two, we’re looking at it for compliance reasons. Is this a scam? Are there real people behind those? Behind them on the OFAC list, we don’t want to list that token. So we’re doing a full compliance review of the founders of the coin, the developers on the project. And then we’re looking at it from a security risk.

Ms. Haas: (01:28:56)
Can we safely secure and store this on our platform? Or is there underlying technology risk that would be rising to a hack? So one way we look at fraud is when we list an asset to make sure it’s not a fraudulent asset. Two, through our market rules, we do have traditional exchange rules for looking for spoofing, for wash trading, for all sorts of market manipulation on our platform that we have third party tools, as well as employees that came from former regulators or from traditional financial services that do 24/7 monitoring much like Mr. Bankman-Fried responded to the risk models. We do compliance monitoring on a 24/7 basis. We also then monitor the blockchains. One of the wonderful things about this technology is the transparency. And so we can look for transaction activity, look for patterns on the blockchain. And then we partner with law enforcement. We file SARs and we have traditional approaches much like you would see in finance, but the transparency really changes what we can do here.

Mr. Green: (01:29:51)
I think that that’s a key, at least to me, if you knew anything about the Medicare system. You have Medicare providers and we have probably 18% fraud in that system. That is a federal system that’s been well understood. Wherever you open up your door, whatever your storefront is, there’s somebody there that’s going to try and find a way to take you, to spook you, to take advantage of this. And it seems like to me, that that is something that if you have accepted this as part of the duty that you have to make sure for the integrity of your system, it seems like to me, that I have satisfied myself, that what you have not just have ongoing, but where you think you want to go, we need to be supportive of you. We need to look at you as less of as something that we ought to get in and understand and tackle you and hold you back, and more to what we believe the future should look like for people around the world and people in the United States. I would simply say to you, I encourage your integrity. I encourage you to avoid the pitfalls that come from there being some fraud that was hidden for a long period of time. And the industry knew it. We’ve seen this happen in companies. I don’t need to go through that, where fully vetted market individuals still did something wrong. So Madam Chairman, I want to thank you for doing this today. I think it’s good for all of our members. And I in particular want to thank my ranking member for his proactive viewpoint of Republican members that I hope would be supportive of what you’re saying today. Thank you very much.

You’re certainly welcome. Thank you. The gentleman from New York, Mr. Meeks, who is the chair of the House Committee on Foreign Affairs is now recognized for five minutes.

Mr. Meeks: (01:31:51)
Thank you, Madam Chair. And I want to thank you too for putting together this very, very important hearing. Look, the future is an innovation in financial industries is just unavoidable and to get ahead of it. So your foresight along with the ranking member to do this is really important.

Mr. Meeks: (01:32:17)
Let me first ask my question to Mr. Allaire. As you may be aware, communities of color often rely on minority depository institutions or community development financial institutions to safely do business and get access to crucial banking needs. And given an important role as well as the challenges that they face, I’ve been a long advocate for robust partnerships whereby MDIs and CDFIs can leverage new technologies to better serve their communities, as well as deploy Circle actually for using and exploring such partnerships and creating an initiative to deploy and share USD coin reserves into these MDIs and CDFIs, enhancing financial inclusion. So my question really to you is can you provide us a status update on where Circle is in implementing this program and what sorts of systems will be developed to ensure the long term success of the program?

Mr. Allaire: (01:33:27)
Thank you, Congressman Meeks. I appreciate the question very much. For those on the committee that are not familiar, we recently announced a new broad based company initiative called Circle Impact. It includes several key initiatives. First and foremost, something I did reference in my testimony as well is an initiative to take what we hope will be billions of dollars of the deposits that are held behind USDC and actually place those with minority deposits institutions and community banks throughout the United States. I think one thing that’s important to understand is that unlike a bank that wants to maybe hoard its deposits for its own lending business. As a full reserve model, we’re not in the business of lending. And so it’s a tremendous opportunity for us to work closely with banking institutions that could benefit from strengthened balance sheets, that could benefit from what that in turn can do to open up credit and lending and other opportunities in these underserved communities.

Mr. Allaire: (01:34:37)
So this particular initiative is one that we’ve just began. We expect to have the first wave of that in place by the end of the first quarter. We are also looking to coordinate with federal banking regulators who have their own initiatives that are focused on supporting MDIs and community banks. And we view this as a really critical and strategic part of what we can do to foster a more inclusive financial system. Final comment is simply that we believe that the technology of digital currency, the frictionlessness, the way in which individuals with mobile devices can actively participate. And not just domestically, but interacting with family members around the world and safely exchanging value, that these can also bring significant benefits to these communities. And we will certainly keep the committee up to date on progress with this initiative.

Mr. Meeks: (01:35:34)
Well, thank you very much for that. And let me go to Ms. Haas real quick. You talked about technology enhancements, and I know that crypto and digital currencies can bring to our financial markets, that they’re really impressive. For example, I know a lot of communities rely on these new modes of payment systems to send money to their families in their home countries. And this type of activities, of course, extremely useful to our global economy, which is really-

Gregory Meeks: (01:36:03)
To our global economy, which is really important, but there are also bad actors out there that could use crypto or digital currencies to hide cash from illicit activity. Also, people can hide cash not to pay their support payments and other things. So my question is how can we and what is being put in place to keep the bad actors out there?

Gregory Meeks: (01:36:35)
And so in your testimony Ms. Hass, you mentioned that there’s a small amount of non-compliance foreign exchanges where criminal actors benefit financial from illicit activity. So what’s your assessment of our global coordination on stamping out such activity? And what more can the United States policy makers do to better coordinate with regulators across yours to prevent this arbitrage that you referred to?

Ms. Hass: (01:37:00)
Thank you so much for the question. So, as I shared on the Coinbase platform, we do have KYC of DSA A&L program, and we ensure that we know who our customers are and then have clarity on those transactions. I know other US regulated exchanges that we speak to have similar controls and everybody on this panel here today, I think shares those views. There are players who do not follow these and I think that that is where regulations should be focused to make sure that there’s an expectation on what it is to perform as a digital asset marketplace. And that was part of our policy proposal.

The gentleman’s time has expired, thank you. The gentleman from Missouri, Mr. Luetkemeyer is now recognized for five minutes.

Mr. Luetkemeyer: (01:37:43)
Thank you of Madam Chair. In 2019, the average daily turnover value of the US dollar constituted 88% of foreign exchange market transactions globally. This dominance by the dollar in global marketplace is a key reason why the dollar remains a reserve currency of the world. Mr. Brooks, welcome back to the committee, it’s good to see you again. I think actually talked about this subject before in the past, but as digital asset’s become more common in the global market place with the total digital asset market reaching almost $3 trillion as ranking member McKinley just said, how do we ensure the US dollar remains the reserve currency?

Mr. Brooks: (01:38:19)
Well, Mr. Luetkemeyer, it’s terrific to see you again. And I’d give you a couple of thoughts on that important written question. One is if we start with Stablecoins, before we talk about other crypto assets, I’ve said for a long time that the secular reduction in dollar holdings as a percentage of global central bank holdings is alarming. And this has been going on for more than 10 years at this point. So dollars is a share of the European Central Bank, the Japanese Central Bank, et cetera, has shrunk from 80 plus percent to more like 60 plus percent in a short amount of time. What that tells me is that in the future with the rise of China and other major economies, the US dollar can’t take its primacy for granted. And we need to start thinking about competing on utility, on features, not just based on a post World War II monetary system that we could take for granted for the last two generations.

Mr. Brooks: (01:39:07)
And that’s one of the reasons that I’ve been such a supporter of internet enabled dollars, which allow us to compete on features not only on history, I think that’s really critically important. The second thing I would tell you, as we enter year 11 or 12 of a highly inflationary environment, after all, we’ve been printing enormous numbers of new dollars since the financial crisis, there will come a time gradually then suddenly when the attractiveness of the dollar relative to other currencies could change. One of the benefits of the crypto economy is that it creates some counter incentives on the part of the Fed to do that kind of policy because people will flee to other kinds of assets. And that sort of market competition is something that I think will ultimately shore up our monetary policy and keep the dollar where it rightfully ought to be, which is as the dominant reserve currency it’s been for all of our lives.

Yeah, it’s very concerning to me that it, if we lose that position where our economy, our whole country, our way of life is at risk. Mr. [Olair 01:40:05], you made a comment in your testimony with regards to promoting the dollar as a primary currency. I assume you’ve got a thought on this as well.

Mr. Olair: (01:40:15)
Thank you, Congressman. Absolutely. I think as I introduced in my initial remarks, we’re at a really interesting moment in time. We’re seeing this infrastructure layer, these Blockchains proliferate globally at incredible speed. It seems likely to us that the ability to access and interact with these Blockchain networks will reach billions of users over the next two to three years. And the question is in that timeframe, will the United States support the dollar and digital dollars in the form of Stablecoins because they’re in the market and operational today to help the United States dollar be the competitive currency of the internet?

Mr. Olair: (01:40:57)
I think that’s the opportunity. I think it’s in front of us right now and it’s one of the reasons why we’re so focused on this as a national economic… And not just a national economic priority, a national security priority because clearly if this is the new economic infrastructure of the internet, we want the dollar to play a critical and strategic role and partnering closely with private companies and using open internet technologies becomes a way for the United States to compete versus states that are seeking to nationalize that infrastructure, operate it themselves in a surveillance oriented model.

Well, it’s interesting that you were talking about a while ago. I think Ms. [Valesca 01:41:41] has asked the questions of about reserves and I think you were talking about basically a one to one amount of backing of your coin, of your asset with US treasuries. So you’re looking, I think AT the value of your… That you’re backing up your digital coin with is, basically the full faith and trust the United States Government. Right, would that be correct?

Mr. Olair: (01:42:07)
That is exactly correct. And I think in many respects, the assets that back these dollar digital currencies are in many ways far safer than the dollars in a bank account because dollars in a bank account, as we know, are fractionally reserved and lent out. [crosstalk 01:42:23].

I got one quick question from Mr. Brooks, with regards to you talked about a minute ago, of owner controls the network. We had Mr. Zuckerberg in here when he was trying to talk about his Libra and the control of the value of it was going to be with a commission. My concern is who controls the internet? We’ve seen Twitter, we’ve seen Instagram, we’ve seen Facebook control people on their platforms. How concerned are you about outside forces, controlling the platform on which the digital dollar is traded?

Mr. Brooks: (01:42:57)
Well, Mr. Luetkemeyer, I’ll do you one better on your hypothetical, which is we’ve now seen major banks, deplatforming, both industries and individual customers for not sharing the right point of view, so these are scary ideas. The point of crypto is to have true decentralization and the projects that succeed will be the projects that achieve that. Bitcoins succeeded, because there are literally millions of participants in the node network. And so there is no CEO of Twitter to deplatform you, or there’s no CEO of JP Morgan to take away your credit card. It’s user control. Some of these won’t achieve that, they’ll be consigned to the ash heap of history, I predict.

Thank you very much. I yield back, Madam Chair.

Thank you. The gentleman for Colorado, Mr. Perlmutter, who is also the chair of the subcommittee on consumer protection and financial institutions, is now recognized for five minutes.

Mr. Perlmutter: (01:43:46)
Thanks Madam Chair. Mr. Brooks, good to see another Coloradan on the panel. But I want to start with a couple questions for you, Mr. Bankman-Fried in Ms. Hass mentioned knowing your customer, they avoid getting into the securities transaction business as to the best of their ability. That’s one of the things they look for. So Mike, I’ve got several questions for you and then one of them will be from completely left field. All right, so get ready for that one.

Cryptocurrency market exchanges, such as yours are regulated through a patchwork of different state and federal agencies. For instance, some exchanges register as money services business with FinCEN at the Federal level and may also receive money transmitter licenses. And you talked a little bit about that in your opening, how is your company registered in this context?

Yeah, thanks for the questions. And looking forward to the left field question at the end, in addition to a bunch of international licenses, in the United States we are participating in that system you referenced with the money transmitter and money service businesses licenses. In addition to that, however, we are also licensed by the CFTC. We have a DCO, a DCM and other licensure from through FTX US derivatives. And we look forward to continuing to work with them, to build out our product suite. We just submitted a 800 page, I believe, proposal to them a few days ago. Which we’re excited to discuss, and we’re also happy to talk with other regulators about potential products in the United States.

All right. Well, let’s talk about another regulator that may touch on what you do. You talked a little bit about derivatives and the fact that derivatives were sort of a key component in the failure of the financial markets back in 08 and 09, is FTX registered with the SEC?

So the core derivatives regulator is the CFTC and FTX US derivatives is registered with the CFTC. With the SEC, we have begun discussions that are excited to continue discussions there. We do not list securities on our platform as of now, although we would be excited to explore listing digital asset securities in the future under the guidance of the SEC. I will also say briefly that I would be excited to see a unified joint regime with both CFTC and SEC involvement to create sort of harmonious markets regulations between spot derivatives contracts and other things.

All right, now the left field question. So our role here, I mean, there’s nothing new under the sun. The technology may change, it may speed things up, it may make it more transparent, but a deal’s a deal/ who’s taken on the risk? Who’s getting rid of the risk? Who’s the middle man? So one of the things we hear about Blockchain is that it’s invulnerable, it’s impenetrable, it’s something that’s super secure. And our responsibility is to make sure that things are generally safe, generally honest, that people aren’t swindled. So I also sit on the science committee with Mr. Luetkemeyer and the ranking member was talking about we’re at W3, all right. In the science committee, we’re doing a lot on quantum computing. And so my question to you is what threats or benefits to a Blockchain system will come from quantum computing?

Well, thank you for the question. In terms of the threats, some cryptographic algorithms are not… At least theoretically might not be secure under quantum computing. Obviously this is going to depend on the exact details of what comes and it’s important that if and when that comes, that Blockchain security algorithms are resistant to that. On the same front, I think it has the potential to create basically new cryptographic algorithms that are faster, that are more secure and that are more efficient from a number of different perspectives. So we’ll see what happens there.

All right. I have a million other questions, but I don’t have enough time to ask him I’ll yield back.

Thank you very much, Mr. Perlmutter. The gentleman from Kentucky, Mr. Barr, is now recognized for five minutes.

Mr. Barr: (01:48:22)
Thank you, Madam Chair. And thank you for holding this important hearing. Mr. Brooks, good to see you back in front of our committee and to all of our witnesses, thank you for your testimony. Mr. Brooks, I will start with you is a bit of a follow up to Ms. Wagner’s question, but do you think Congress needs to introduce legislation to provide more definitional clarity with respect to digital assets? And if so, do you have any specific suggestions?

Mr. Brooks: (01:48:47)
Well, I really appreciate that question. That is the most important issue in the short term for the industry. And so let me just pick up where Mrs. Wagner left off. If the question is, is the current test clear, it’s clear in the sense that we know what it is. It’s not clear in that it’s a four factor balancing test. So I often think about what, the US trucking industry would be like, if the truckers didn’t know that the speed limit was 75 miles an hour, they just had a four factor test of general safety having to do with how much sleep they got the night before, the overall size of their payload and other factors. People need to know what the speed limit is.

Mr. Brooks: (01:49:21)
In my old agency, the OCC, what would happen is a bank would come to us with a new activity proposal and we would give them an answer. We would either give them a nonobjection or we would not give them a nonobjection and it was very clear whether they would be allowed to access that. What happens in the United States is you have a new crypto project and you walk into the SEC and you describe it in great detail, and you ask for guidance and they say, “We can’t tell you, and you list it at your own peril.” So whether this comes from legislation that defines what is a security and what isn’t a security, or whether it comes from Congress in the form of legislative discretion to an agency to say, what is a security, I would argue that a four factor balancing test is no better here than it is as truckers drive down the highway, guessing what safe is.

Mr. Barr: (01:50:04)
Yeah. And Chairman [Gensler 01:50:06] has been quoted as saying the test to determine whether crypto asset is a security is clear. Mr. Brooks, do you agree that that test is clear? I take it from your previous answer to the answer is no, but could you walk me through the process that exists today to determine if a digital asset is a security?

Mr. Brooks: (01:50:23)
Yeah. Well, thank you for that. The best test that is out there is a test that several of us on this panel actually helped to develop about three years ago, as part of an industry organization called the Crypto Rating Council. When I came to see several of you several years ago, in connection with the Crypto Rating Council, the way I described it to you was it’s sort of like motion picture ratings for crypto. We don’t know authoritatively what’s a security and what isn’t, because no authority will tell us. But what we can do at least is we can tell you the difference between an R rated asset and a PG rated asset, and people can make their risk tolerance judgements. So the way that process works is it’s an objective quantitatively based process that asks several dozen questions about the asset across each of the dimensions of the Howey Test. It gives you a number and that number tells you how close you might be to danger and how far away you-

Mr. Barr: (01:51:10)
Let me interrupt and just say, I recognize that some rules or federal regulation of both digital assets and cryptocurrency trading platforms might be supportive of bringing clarity, but I’d never underestimate the ability of the Federal government and regulators to stifle innovation. Can you give me an example of an over reach that would stifle innovation?

Mr. Brooks: (01:51:33)
Well, the idea would be to say, to let travelers checks exist inside the banking system and not bring a Stablecoin issue or inside the banking system when they’ve applied.

Mr. Barr: (01:51:41)
Okay. Mr. Olair, for, to you, can you talk about the difference between a Stablecoin versus a central bank digital currency, and what advantages does a Stablecoin offer that a digital dollar say at the Fed would not be able to offer?

Mr. Olair: (01:52:00)
Thank you, Congressman Barr, I’m happy too. I think the first difference is that Stablecoins are operational and growing in the market today and they’re built on an open internet technology model. So when we think about all of the things that we’ve seen built on the open internet on these open protocols and networks, whether it’s ubiquitous information exchange, communications, interaction around the world, that same open internet model is the foundation for Stablecoins and so I think that’s a fundamental difference. A CBDC, which is a concept right now, it’s not operational would very likely be a very closed loop technology that’s tightly administered and run by the government and would unlikely be accessible in the same way that these open networks are accessible. And so I think that’s a critical difference, but I would come back to the most important, which is that most payment system innovations in the world have been driven by the private sector and I think what’s taking place today with digital currency is no different-

Mr. Barr: (01:53:06)
Could Stablecoin and your product, could it address some of the concerns about China’s advances in terms of… And the threat that China’s advances posed to sanctions enforcement and protecting the dollars as the world’s reserve currency?

Mr. Olair: (01:53:24)
I think so, yes. I mean, coming back to this and I’ll try and make this point concisely. The United States and the US dollar is winning the digital currency space race today. Dollar Stablecoins are doing trillions of dollars of transactions, the experimental beta of a Chinese yuan, which is government controlled, and China has done $10 billion of transactions. So the United States is winning. This has potential to grow at a very significant speed around the world and benefit the US dollar and benefit American businesses and households. And so I think that’s one really, really critical thing to understand and I think the primacy of this infrastructure and the development of this infrastructure, it is a strategic national security and national economic priority for the United States. And we need to get going on it right now.

Mr. Barr: (01:54:11)
Thank You. I have many other questions as well, but my time has expired. Thank you, Madam Chair.

Thank You very much. The gentleman from California, Mr. Vargas is now recognized for five minutes.

Juan Vargas: (01:54:23)
Thank you very much, Madam Chair. I appreciate very much you bringing this to our attention, appreciate the ranking member, everyone participating today, especially the witnesses. And one of the things that’s been interesting. I’ve heard a lot of very high and noble motives today. I think, I don’t want to misquote people that… But I’ve heard that the digital asset world, the open internet model it’s for all people in the world, it’s easier, cheaper, open free market data, it’s transparent, reduces risk, not increases risk, there’s less friction in the marketplace. These things are all great, but it’s interesting that most of the people that I know that have invested in cryptocurrencies, not because of that, it’s because they think they can get rich quick. And the appreciation of Bitcoin is something that they want a part of. It’s not because of all these other wonderful things that the internet can do.

It’s not the reason at all. Secondly, it’s interesting when I ask them, well, do you know what cryptocurrency and digital assets and Bitcoin, what it actually is? Most of them say no. I just know that, make a lot of money and I want invest and I want part of it. I want to be able to invest because I know that, that’s appreciated. We’ve seen this before, unfortunately, and it led to, I think the financial crisis around the world when you were investing in derivatives and other things that people didn’t know what the hell they were investing in, then it became very problematic.

So I do see the risk in this. Now, I have to say when this was a B problem or a B issue, a billion dollar problem, it didn’t seem as such a big deal, but now that it’s become a trillion dollar issue and I do think it’s challenging, really the supremacy of the dollar around the world. I do think it’s potentially a big problem. I do have concerns I want to follow on to what Mr. Barr said, the issue of the dollar being the reserve currency, this seems it does challenge it. Does someone want to comment on that?

If not, I’ll pick on somebody-

Mr. Olair: (01:56:36)
I’m happy to comment Congressman. I want to respond to a couple things in your comments. I would agree with the fact that there are passer buys and then there are people who are actively building and who are very close to the technical innovation and I think like investments in technology companies, or in other businesses that we see in the stock market, you have people who are investing, because they think it’s a business or a product that might go up, they may not understand the details of a given pharmaceutical company’s science, but they believe that perhaps it’s an area of innovation and they want to invest in it. And so I do agree that there is that distinction, but I think, it’s certainly incumbent in all of the industry participants to ensure that there’s great amount of disclosure, financial literacy around these products.

Mr. Olair: (01:57:28)
But more importantly, coming back to the comment about the dollar. I think there is this growth in digital assets as a new kind of asset class. And I think what’s important to note is understanding those in contrast to Fiat currencies, many of the digital assets. In fact, I think the overwhelming majority of the digital assets are commodities that are, have utility that are used to power, some kind of technology network or protocol, more thought of like an oil or gas than a Fiat currency. So they exhibit those properties and I don’t think those will ever rival the dollar. I think they’ll grow in value because they’re utilized to help facilitate all kinds of activity on these web three applications and networks. And I do believe that with innovations like Stablecoins and dollar digital currencies, we could actually see a dramatic amount of growth in the use of the dollar globally-

Sir, I’m going to reclaim my time just for a second, because one of the things that I see is that we have the digital dollar already. I mean, the digital dollar can do all the things that you guys were talking about today with the exception that it is a Fiat currency, that wouldn’t be as easily manipulated by some nefarious group, because it would be controlled by the Fed and the United States of America. I mean, I do have great apprehension that you have these cryptocurrencies that are used by drug traffickers are used by people trafficking other human beings, and there’s no good way to control it. So I’m all for digital currency, but why not the dollar? Why can’t the dollar be the digital currency? Why can’t we once again, dominate in that 60, 80%, but maybe even higher with a digital dollar? That to me makes much more sense and it’s much more protected and people won’t have the risk, but anyway, I yield back my time, but I did find its very interesting discussion. Thank you.

Thank you very much. The gentleman from Texas, Mr. Williams is now recognized for five minutes.

Mr. Williams: (01:59:39)
Thank you, Madam Chair. And for those of you who don’t know me, I’m a small business owner in Texas and still own those businesses, I’m a car dealer and a former professional baseball player. And when I’m trying to wrap my head around a new topic like cryptocurrencies, I try to relate it back to something I understand like baseball or business. Now some of you may know this, but modern day baseball can really be attributed to Babe Ruth. He brought in the live ball era of the time and introduced power to the baseball diamond. And before this teams would play small ball, that was very conservative where teams would literally play for one, run a game. The entire objective was simply to get the ball in play so they could try to steal their way around the bass pass. And there was nothing wrong with this old way of playing.

But when the White Sox won the world series in 1906, the entire team had a total of six home runs all year. But Babe Ruth came along, Babe Ruth came along and totally changed everything in 1920, he set the American league record of home runs with 54 to put that into perspective how fantastic this feet was at the time the previous mark that had been set was by Socks Seybold in 1902 with just 16, this introduced an entire generation of new baseball fans and for the first time ever, the New York Yankees over 1 million fans came to see them in a single season. Now with that being said, many of you are becoming the Babe Ruth in the financial services space. You’re introducing a Blockchain technology to the financial services industry and working to upend the tradition and the traditional way of doing business.

And while many economists and so-called experts have been calling on the downfall of cryptocurrency and discounting the future of Blockchain technologies, all of you we’re working tirelessly to create something new in order to bring this new technology to the masses. Unfortunately, it would only take a few misguided curve balls, we’ll say, from Washington to undo some of the progress you’ve all put into this motion. So my first question to you, Mr. Brooks, can you talk about some of the negative consequences that could happen if we take a heavy handed approach to regulating this developing technology?

Mr. Brooks: (02:01:47)
Well, Mr. Williams, as a long suffering Dodgers fan, I share a lot of the things you’re talking about. And I think the era you’re talking about was an era when baseball went from focusing on not losing to an era where it focused on winning. And winning and not losing or not the same thing. So I come back to Mr. Vargas’s question a second ago, which I think is the right way to answer your question. Mr. Vargas asked the question of people have the potential to lose a lot of money, these things are volatile, they’re risky, how do we protect them from those kinds of issues? There are two ways of answering that. One is to prevent as many people as possible from accessing this amazing technology. For example, the way the current legal regime works is certain kinds of assets can only be purchased by accredited investors, meaning rich people.

Mr. Brooks: (02:02:32)
So the only people who can get rich on this are people who are already rich. That’d be one way of protecting people from losing money is to make sure that only the richest can access it another way of addressing it would be to make it safer. The way that we made equities safer 40 years ago. We created mutual funds, diversification, sector funds, and other things that make it easier for regular Americans from places like my hometown in Colorado to buy equities, without having to be stock experts. Strangely in the US, we’ve refused to do that out so far, so we don’t allow crypto mutual funds. We don’t allow people to diversify the way that they do in Canada, Germany, Singapore, the United Arab Emirates in a series of other regulated economies around the world. So I would argue the way to win is to bring more people into the system more safely, not to keep them out at their own peril.

Great. Second question, we often hear that crypto industry is the wild, wild west. Where there is no regulation guiding the industry, but as all of you are aware that simply is not true. The SEC and the CFTC are the primary federal regulators and our states also have strict regulations that all of you must be abiding by. So Mr. Bankman-Fried, can you discuss the different layers of regulation that FTX must abide by as an exchange and also in order to uphold customers deposits in your digital wallets?

Yeah, thank you for the question Congressman and putting aside the 190 other regulatory jurisdictions that we take part in and the dozens of licenses that we are acquiring each month and all of those. In the United States, there is the sort of state level money transmitting license of regime with money service business, and MTLS which we, and many others are part of, for any margined or financed or derivatives transactions in the United States, there is a CFTC regime where there’s licensure required to offer those products. For any products that might be security as a digital asset one would… There doesn’t exist a current very clear pathway for it, but that would be a SEC registered regime for it, obviously, there’s been lots of discussions about additional registered regimes for Stablecoin and other assets as well.

Thank you. I think my time is up Madam Chairman. I yield back.

Thank you very much. The gentleman from Illinois, Mr. Casten, who is also the vice chair of the subcommittee on investor protection, entrepreneurship and capital markets is now recognized for five minutes.

Mr. Casten: (02:05:10)
Thank you, Madam Chair. And I came up vastly before I thought I was going to, which means that you’ll have to humor me for my ill formed thoughts. I really appreciate our witnesses coming here and I also feel terrible for you because we could have an entire hearing on Stablecoin, we could have an entire hearing on Blockchain, we could have an entire hearing on oh, CBDCs, I suppose. And we could probably have an entire hearing on whether or not things that have forced scarcity or inherent stores of value, except that I think we resolved that a hundred years ago, but yet we still sort of need to debate it periodically.

Mr. Casten: (02:05:43)
All that said I wanted start just focusing on Stablecoins if I could. And Mr. Olair, I want to start with you and I’m sure you’ve seen the Presidential Working Groups report raising all sorts of issues with Stablecoins primarily around, do they really look like money? Do they have sufficient reserve assets behind them? What are the redemption rules? Is there transparency around permission Blockchains? The custody of reserve assets, you’ve read the report, I’m sure. I see you nodding, could go on. First question is really simple, do you support the recommendations of that report for Stablecoins?

Mr. Olair: (02:06:21)
So I support a number of things, but not uniformly. I think there are a number of challenges with the report. I think the first maybe to discuss is really this question of what form of federal charter ought to be in place around a large scale dollar Stablecoin issuer? I think the report recommends that it would be an insured depository institution, but I think one of the really critical things to discuss there is an FDIC insured bank, is FDIC insured because the bank is taking risk with deposits? And so-

Mr. Casten: (02:06:59)
And I apologies to cut you off, I want to just narrow sort of specifically to the issue of if I deposit something in a bank that is indexed to a dollar, and I perceive as a customer that this is… I’ve eliminated the FX risk, but now I’m left saying, is it actually there when I want it? And other sufficient [inaudible 02:07:18]. But setting aside how we get it done, broadly speaking, are you supportive of the idea that if this is going to look and feel and attract investors with the expectations that this has all the risk and liquidity profiles of a dollar that we should make sure that it actually has those features?

Mr. Olair: (02:07:31)
Absolutely. So full reserve, disclosures, transparency, I think definitions around what those reserves are and the liquidity mandate on it, those are all really critical features that need to come in place. If it’s full reserve, is it an FDIC insured product or is it a statutory set of constraints around what the reserves are? So those are some of the things that I think have to be worked through.

Mr. Casten: (02:07:55)
So, and I want to get to two more questions, so apologize. I being quick, but in the absence of those protections being in place, it seems to me that somebody who is-

Mr. Casten: (02:08:03)
… of those protections being in place. It seems to me that somebody who is currently holding a stablecoin perceives that they are holding a currency, but in reality is holding something that is subject to a lot of exogenous risks beyond their control, which feels a lot more like a commodity.

Mr. Casten: (02:08:15)
So if we agree that as of right now it’s not really a currency, would you also be supportive of saying, well, we should regulate it as a commodity until such time as we have the protections in place to give it the robustness of a currency that the market is expecting of it?

Mr. Olair: (02:08:31)
I don’t agree with that, but I think it raises a couple of key points. The first is, and I can only really speak on behalf of Circle here, USDC for example, operates under the same stored value electronic money and electronic money transmission statutes that govern Square and Stripe and PayPal and the balances there.

Mr. Olair: (02:08:53)
So today there are consumer protections. There are reserve requirements around holding of those assets, one for one redeemability, anti-money laundering requirements, surety bonds that need to be posted to protect consumers, segregation of client funds and for benefit of customer accounts. So there’s a great deal that’s there. And we have operated under such statutes really since 2014. We’re the first company to go and get all those licenses.

Mr. Olair: (02:09:21)
So there is a framework today. I think, as these get larger and, and are operating at a global scale, I think really it’s, does there need to be something more that’s more bespoke to this?

Mr. Casten: (02:09:33)
If I could, because I’m just nervous watching the time here, let me sort of get to the last question, leave it to the whole panel. And if we’re out of time, we’ll follow up separately. The concern I have is that a stablecoin at some level is an ETF. And we could imagine a stablecoin indexed to all sorts of different currencies and some kind of baskets of currencies that are behind there. And we regulate those in certain ways with expectations of who is bearing the risk to [inaudible 02:09:56] question.

Mr. Casten: (02:09:59)
We have this emerging world of central bank digital currencies, and I’m satisfied that no central bank wants to allow counterfeiting. They all want to protect the integrity of their currency. And som they’ll put those rules in place. On the other hand, different countries are going to have very different ideas about what kind of data they would like to track when we trade a central bank digital currency.

Mr. Casten: (02:10:18)
And so, a question for any of you who feel technically competent to answer this, if you have a stablecoin that includes some portion of central bank digital currencies that are tracking things that we as Americans would not like to track, can we design the stablecoin to insulate the contamination of that system so that somebody who believes that they are buying something that looks like a dollar is not actually being tracked by our adversaries? Anybody like to comment on that?

Mr. Olair: (02:10:45)
I’ll make one quick comment, which is one of the benefits of this technology is these stablecoins, all of the code that they provide and how they interact is all public and open source. And so, everything that functions inside of that is visible to everyone that interacts with it. And so, there is the ability to have, I think, greater transparency into how are these things functioning, including a foreign issued coin.

Mr. Casten: (02:11:09)
I’m out of time, but I think there’s-

Madam Chairwoman: (02:11:11)
Gentleman’s time has expired.

Mr. Casten: (02:11:11)
… some concerns about roles as well. Thank you. If anyone like to follow up, I’d love to [crosstalk 02:11:15].

The gentleman from Ohio, Mr. Davidson, is now recognized for five minutes.

Mr. Davidson: (02:11:20)
Thank you, Madam Chairwoman. And thanks to the Ranking Member, thanks to our witnesses, and frankly, many people who’ve worked literally years to get to this point, to have a hearing. The market has been way ahead of this. And frankly, it’s been painful to watch. In 2017 and since when you see the ICO market, ripe with people committing fraud or just regulatory arbitrage, taking advantage of the fact that our regulators haven’t paid attention to bad actors.

And it’s been especially frustrating to watch some of our regulators take aim at people that are working very hard and very aggressively to be legitimate businesses to come into compliance with every kind of licensure and regulatory regime that our country currently offers. It’s been woefully inadequate. And so, it’s so good to get to this point for the hearing. So thank you.

And thanks to my colleagues. I’ve been very encouraged by the amount of preparation many colleagues have done to close the gap in any knowledge they’ve had. And over the past you years, the number of members of Congress that really understand this space has certainly increased. Three years ago, we had a hearing, not really a hearing because as a junior member, I can’t hold those or pick them.

So in exasperation we just held a meeting over at the library of Congress, and some of folks in this room were there or representatives from your companies were there. We came up with the most essential thing was to establish a bright line test, not just for the players in the industry, not just for the investors, but also for the regulators, so that if somebody at the SCC, for example says, this looks like a security, it’s not form of interpretive art to say, does it really fit this test?

We came up with four part tests that said it’s already created, it exists, that it is recorded on a distributed secure and immutable ledger, that is not controlled by a central authority, that permissionless peer-to-peer to peer transactions can be done without an intermediary, and it does not represent a financial interest in any entity.

More important than that particular test is the fact that there is, as Mr. Brooks, you highlighted, a speed limit, there’s some clear thing, not just as they say for the investors, not just for the participants in the market, but for the regulators themselves so that we have continuity. If only there were such a body that could provide this clarity. My hope is that the next time we have a hearing, we’ll notice some bills and we’ll be able to talk about particular text towards that.

Mr. Brooks, when you look at stablecoins, which maybe is the lowest hanging fruit, some of those are established well in long-standing things like New York trusts. Some of those aren’t traded in anything. They’re just US dollars stored in a vault for every token. Some have US dollars in components of M2, like US treasuries. Some have other things.

When you were at the OCC, you provided some clarity there. And you also dealt importantly with self custody. [Mr. Allaire 02:14:27], you mentioned that the code is literally online. Any of us right now during the hearing could download code and could begin to self-custody a digital asset. So as you look at that, how important is it to provide this clarity, Mr. Brooks?

Mr. Brooks: (02:14:43)
Specifically, on the issue of custody and self-custody, this is a way that crypto tries to make an advance over the current system. So the issue with custodial assets, we’ve seen in this committee’s looked at many, many times. Think about the financial crisis when there was an issue of foreclosures, and it was difficult for custodians to produce the original note that proved whoever was entitled to enforce that transaction and foreclose on a property because the piece of paper had gone missing or the custodian had merged with another custody company or whatever.

Mr. Brooks: (02:15:11)
One of the things crypto is trying to do is to use technology so that you can safekeep your own assets for free versus have going to pay somebody else to custody it. That also provides a layer of financial privacy, something that this committee usually favors but sometimes strangely doesn’t favor. So self-custody is one of the key things along with self- ownership and self-determination on this Internet of Value that’s really critical to the nature of the network.

Yeah, thank you. And as we’ve digitized information, it’s frankly amazing that we’ve finally digitized money in a way that we can move, not just a store of value, but a means of exchange. The use case for digital assets has partially been that, that it’s this stable store of value. Certainly stablecoins solved that. Some have pointed out that Bitcoin, for example, doesn’t.

And Mr. Bankman-Fried, one of the ways that people have speculated that the volatility is created in the market isn’t by holders of the asset or HODLers, hold on for dear lifers as has become known in the space, but by the other big group that owns these assets, which are traders. Many of them trade on leverage. And so, when you look at leverage, you made a lot of news by saying, we’re capping people at 20 times leverage. That’s a lot of leverage, but you also pointed out that the average leverage on FTX was around 2X. So could you talk about the importance of leverage in volatility?

Thank you for the question, Congressman. The first thing that I’ll say is in cryptocurrencies, in digital assets, as like essentially every other financial asset in the world, more volume trades through futures contracts than through the spot asset. The reason for this is basically it’s more economically efficient. It’s much more capital efficient. The lack of an immediate delivery requirement on the physical creates a much easier ability for people to hedge exposure for people to express opinions.

And so, for all those reasons, I think that they are an important part of the digital asset ecosystem as they are of every other ecosystem. I’ll just briefly say it’s important to have robust risk engines that monitor the positions on these assets. We’ve gone through multiple, very large up and down moves and been able to manage positions both times.

Thank you. And thanks again for the hearing. I feel like I’ve spoken to Steve Case in like 1990. Thanks for the vision that you guys have. And thanks for the hearing, Madam Chairwoman.

You’re welcome. The gentleman from New York, Mr. Torres, is now recognized for five minutes.

Mr. Torres: (02:17:46)
Thank you, Madam Chair. I represent the South Bronx, which is often said to be the poorest congressional district in America. And of greatest concern to me are the use cases of crypto that would improve the lives of the people of the South Bronx. I represent every population of immigrants who often pay predatory fees in order to send remittances to their loved ones abroad.

Mr. Torres: (02:18:07)
So what can crypto, blockchain, Web3 do for that Dominican immigrant in the south Bronx, who is burdened by remittance fees that she cannot afford? How much more affordably and quickly can the crypto economy facilitate remittances? Mr. Cascarilla, if you could take that question, and please be specific.

Charles Cascarilla: (02:18:28)
Yes. Thank you for the question. I think this is a really important element of the technology, which again, is that it’s open to anybody. You don’t need to have a bank account. You don’t need to, in fact, rely on any intermediary. So somebody who’s an immigrant and wants to send a remittance to a family member in another country is able to do that. And there’s ways to do it with both crypto and to do it with a stablecoin. All you need to do is download a wallet, and then you can send it to somebody else anywhere in the world.

And so, this is a really powerful tool for democratization of access, especially for those who have difficulty getting bank accounts. There’s no minimum fees, there’s no minimum balances, there’s no check cashing fees that are part of this technology. And you can do it in some cases for a penny or less.

Mr. Torres: (02:19:18)
And how much quicker?

Well, this is an important point. Blockchains, part of the beauty of them is that they’re operating 24 hours, seven days a week, 365 days a year. So it can be sent just about instantaneously. There’s no multi-day lags that you have right now. And that change in the speed is just crucial because usually it’s these lags that really are very costly.

Mr. Torres: (02:19:45)
I’m going to interject. Mr. Brooks, I have a question about the challenge of enforcing laws in a world of decentralization, whether it be law enforcement relating to financial crimes or SEC disclosure. How exactly do you enforce the law when there is no central entity against which to enforce the law? How do we grapple with that challenge?

Mr. Brooks: (02:20:03)
That is a great question, Mr. Torres. I really appreciate you asking it. I’d say a couple things about it. First of all, to the extent that some of the activity we’re talking about is parallel to activity that happens in the supervised system, my question is why don’t we allow it in the supervised system? Again, you’ve heard me say it before this morning, but you have on this panel, a big stablecoin issuer who has applied for a bank charter. Doesn’t look like they’re going to get it. Easiest way to supervise that would be let them in the banking system and have the OCC have authority over them. So I’d start with that.

Mr. Brooks: (02:20:29)
The second point is lots of these decentralization protocols are designed to solve the exact problems that create the need for enforcement in the first place, because most enforcement in the securities and banking system is about some combination of human error, human negligence, human greed, or human bias. And the point of some of these decentralized systems is to take that out and have an open source piece of software everybody can look at and do those things algorithmically.

Mr. Brooks: (02:20:54)
As an example, I used to sit on a bank credit committee. We would decide who got credit and who didn’t. And I think we had a really good system for it, but we were human beings. We might have been indulging an implicit bias. We might have made mistakes. Algorithms don’t do that. So some of the need for what you’re talking about goes away in a decentralized system.

Mr. Torres: (02:21:13)
I know there are critics who have said that the blockchain might not be as secure and as unhackable as advertised. But for me, the proper question is not whether the blockchain is perfectly secure and hackable. The question is whether it’s better than everything else. Like Winston Churchill famously said, “Democracy is the worst form of government with the exception of everything else.” Is there a computer network that is more secure than the blockchain?

Mr. Brooks: (02:21:38)
Well, I think the beauty of the blockchain is not that it’s perfectly secure. It’s that it’s perfectly transparent, so you can see when somebody has screwed around with it.

Mr. Torres: (02:21:47)
I want to specifically address security. Is there a computer network to your knowledge that is more secure than the blockchain?

Mr. Brooks: (02:21:52)
I don’t know of one, but we have a PhD in physics sitting right next to me, so we’ll let him answer.

If you’re talking about any major globally used blockchain, I don’t know of one. There are small blockchains that are less secure. All the major ones are incredibly secure.

Mr. Torres: (02:22:06)
One of my concerns about crypto is that it would present a challenge to the supremacy of the US dollars, the world’s reserve currency. But what I have found striking is that the leading stablecoin issuers have actually chosen to peg their stablecoins to the dollar, which strikes me as a vote of confidence that reinforces rather than challenges the status of the dollar as the world’s reserve currency. What are your thoughts on the relationship between the dollar and crypto? Is it as contradictory as many have feared or could it be actually complimentary?

I’ll answer that. I actually don’t think that it’s contradictory at all. What people want is a US dollar bank account. Everywhere in the world people want to be able to have US dollars. And actually that’s the hardest thing to get. And crypto is a tool for a lot of different things, including bringing communities together. But what people want in order for their everyday spending, it’s dollars.

If you’re in Argentina, you want dollars. If you’re somebody anywhere in the world, you want to have access to dollars. That’s the hardest thing to get access to right now. That’s why tokenized dollars is so valuable because you don’t need to have a bank account, yet you can have access to the dollar based system, a very, very important tool for inclusion.

The gentleman’s time has expired. The gentleman from Michigan, Mr. Huizenga, is now recognized for five minutes.

Mr. Huizenga: (02:23:31)
Thank you, Madam Chair. And my apologies to the panel. I had to leave to manage a bill on the house floor dealing with a very exciting issue of LIBOR. I will not-

Thank you.

You’re welcome. We’re getting there, Madam Chair. But to my colleague from New York, I do want to point out that this isn’t quite the same, but the same idea exists. Committee Republicans released a CBDC, a central bank digital currency principles recently. And of those, we had said in this as one of those principles, is we need to make sure that the private sector leads the way, but we need to ensure that the US dollar remains the preeminent currency. And so, that is a common goal, certainly, and we’ve been very aggressive in trying to lay that out.

I’ve got a short amount of time. I’m going to try and go through as quickly as possible. And I’m going to peek around my colleague from West Virginia here, trying to get to Mr. Bankman-Fried real quickly. And again, I apologize. I’m not trying to re-plow ground that has already been gone over, but how many various levels and types of regular do you currently engage with? Because I know you are worldwide, you’ve indicated that you have multiple regulators that you currently work with. I’m curious if you can even peg that number.

Yeah. I mean, there are dozens, probably soon hundreds worldwide that we’re engaging with. That includes all across Europe, all across Asia. And then within the United States, we’re engaging with state money, transparent money, service business licensure. We have a CFTC license for derivatives. We are engaging with the SEC. And I anticipate more agencies getting involved soon as well.

Well, yes. And I want to make sure that we are not overregulating that. One, I’m sure it has cost you an untold amount of money so far, and I’m sure everyone that has been dealing with that. No offense to any of you, I want to make sure that there are others who are going to be able to enter that space and that they are not being blocked out. And that there is an artificial barrier to entry that is going to allow others to do, frankly, what you all did, which was be innovative and supply a product to people who are looking for that product.

I’m going to have to move really quickly. I’m going to go to Mr. Brooks on a couple of things. Would you describe why establishing these clear rules of the road is an important step before we add additional regulation and consider that regulation?

Mr. Brooks: (02:26:20)
Well, Mr. Huizenga, it’s good to see you again. I think the most important reason of many is international competitiveness. Other countries make this easier. Let me just make clear. Other companies make this easier, other countries. I just came yesterday from the Middle East, where in Dubai and Abu Dhabi, they have super clear derivatives regulations, super clear ETF regulation. They’re trying to lure Americans over there to build these products, and they’re moving there.

So how are they viewing these crypto assets differently than traditional assets? I mean, what Rubicon have they crossed that we haven’t? And why is it important to think about digital assets differently?

Mr. Brooks: (02:27:02)
Well, I think one of the things that they’ve figured out is that crypto actually is less fundamentally different than equities and debt than you think it is. It’s a risk on asset that people want to invest in. They want to invest in it in Canada, so Canada builds a regime for it. They want to do it in Germany, Germany [inaudible 02:27:18]. We’re the last country standing that hasn’t figured that out. It’s a risk on asset that people want exposure to as part of asset diversification.

As opposed to traditional assets?

Mr. Brooks: (02:27:27)
Correct.

Okay. I’ve got minute left here. Ms. Haas, you indicated in your testimony that quote, “Every asset listed on Coinbase platform is subject to rigorous legal compliance and security review,” close quote. Could you provide us specific details on what Coinbase’s process has been to be able to make that type of statement?

Ms. Haas: (02:27:54)
Thank you for the question. Yes. Specifically for the legal review, we assess each asset under the Howey Test where, as Brian Brooks spoke about earlier through the Crypto Rating Council, have established a framework where we look at the risk factors and we determine whether or not it meets characteristics of the Howey Test.

Ms. Haas: (02:28:11)
It’s a risk-based assessment. It is not a black and white test, but based on our assessment, we believe it’s lower risk that these are securities before we list them on our platform. We separately do a compliance review. Our compliance review includes looking at the developers of the token, ensuring they’re not on an OFAC sanctions list. We look at to make sure it’s not a scam, that there’s actual people using this coin, that it was developed in sound manners.

Ms. Haas: (02:28:32)
And then we look at a security review view to understand the underlying code, to say, can we provide custody for this? Is this at heightened risk of an attack or someone pulling the value from these assets? So it’s security, legal and compliance before we list an asset.

Okay. I’m hoping that the Chair will grant me leave for my LIBOR work. Just going to end with a closing statement as my time is up here. A number of you have brought up the unbanked and underbanked. And despite rhetoric that gets thrown around, all of us on this committee are very concerned about it. I happen to represent the second poorest county in the state of Michigan, which is in the top 100 poorest counties in the nation. And I understand what it means for these unbanked and underbanked folks to be involved in the process.

What I want to make sure is what we do, not just here today, but in the future, we tend to be lag indicators and at the government level and with regulators rather than on that front end, and I’m hoping that we do nothing to harm their opportunity to engage in the process. With that, I yield back.

Thank you very much. And thank you for LIBOR. The gentleman from Florida, Mr. Lawson, is now recognized for five minutes.

Mr. Lawson: (02:29:46)
Thank you, Madam Chair and Ranking Member Henry. This is a very extraordinary meeting, and I would like to, again, as everyone else, welcome all our people who are testifying today to this committee, which is very important. I’m not sure, probably would take me a long time to understand what all we mean about cryptocurrency. And I just heard some testimony stating that how we behind all other countries in making changes.

Mr. Lawson: (02:30:18)
And this is to everyone, my colleagues, Representative Soto and myself and eight other members of Congress led a letter to leadership addressing the digital assets provisions that expand the definition of broker on the section 6045(c)(1) of the Internal Revenue Code in 1986 to include any person who for consideration or responsible for the regular provision and service of effectively transfer of digital assets on behalf of another person.

Mr. Lawson: (02:30:50)
As drafted, the provision would include miners and other validated as well as software and hardware wallet makers who do not engage in trading activity and beyond the scope of broker services. What are your thoughts on this provision? Do you think this is a good tax policy require non-brokers to report on transaction for people who are not even their customer? Why or why not? And this is to the whole committee.

Mr. Brooks: (02:31:18)
Well, maybe I can jump in there, Congressman. It’s Brian Brooks speaking here just for a moment. I’ve said many times that that language would be sort of like requiring YouTube to get an FCC broadcast license because they’re a person engaged in distributing television content. I think what we need to recognize is there’s a difference between centralized exchanges.

Mr. Brooks: (02:31:39)
You have two of the biggest ones represented here, who all agree that they should be engaged in tax reporting, and they do that, versus decentralized algorithms where there is no company involved in the transactions at all, and there’s no one well situated to provide that kind of tax reporting. So that distinction is, I think, super clear. The technology has enabled people to transact peer- to-peer with no intermediary. So who is it that we’re asking to do the tax reporting in that context?

Mr. Lawson: (02:32:06)
Anyone else would like to speak on that?

Denelle Dixon: (02:32:08)
Yeah, just one. This is Denelle Dixon from the Stellar Development Foundation. One of the issues that I think that is a problem with this is that it may seek to require these entities that actually don’t have access to any personal information at all. Because as the validators, they’re actually just validating transaction and don’t know who those individuals are that are on the other side of it, it might require them to gain access to that information, which is exactly what I think many of you and us do not want.

Mr. Lawson: (02:32:36)
Anyone else before I go to the next question? Well, this question is for Miss, I hope I pronounce this right, but Haas. Does Coinbase have multiple lines of business, have multiple lines of business, have each line of business segregated and ringfence from one another to a confidential information not improperly used?

Ms. Haas: (02:33:07)
Thank you for the question. Coinbase does have multiple products. In many cases, we consider our products a product family where we’re serving one customer, and the customer benefits by having those products within one application. For example, we provide custodial services, which is for all intents and purposes, a wallet where they can hold their crypto assets, but then integrated with that is the ability to trade out of that account, and then to settle new assets back into that account. Those are different products to be able to store versus be able to buy or sell, but they’re integrated products.

Ms. Haas: (02:33:40)
Those we have within one legal entity, as an example. They are offered as one product family. That is different from when we offer products such as our Coinbase cloud offering, where we’re using our technology to allow others to build in the crypto economy. That data is 100% ringfenced, not allowed through any of our other products. And we do segregate data. We have different engineers, we have different legal entities, and we provide a lot of protection. So it depends on the product that you’re speaking about, Congressman. And some we share and some are very much ringfenced.

Mr. Lawson: (02:34:11)
Okay. Real quick, another question. Do withdrawal fees apply to taking crypto off the platform? What fees apply? How are these fees calculated?

Ms. Haas: (02:34:20)
No, we do not charge any fees to withdraw crypto from our platform.

Mr. Lawson: (02:34:26)
Okay. With that, Madam Chair, I yield back.

Thank you. The gentleman from Arkansas, Mr. Hill, is recognized for five minutes.

Mr. Hill: (02:34:37)
Thank you, Madam Chair. Appreciate this good, productive hearing and the good questions from both sides of the aisle, and appreciate the panel being here.

Mr. Hill: (02:34:45)
Let me start with Mr. Brooks. You’ve had some good comments about the presidential working group on whether stablecoins should be banks or not. But on the issue of the wallet, what should members of Congress be concerned about in sort of that regulatory umbrella of any individual’s wallet. Do you anticipate really tens of thousands of wallet providers or hundreds? I know in the working group, they suggested it too should be a bank or I assume connected to a bank. Is that really necessary? And talk to me about wallets for our consumers to have access.

Mr. Brooks: (02:35:30)
Yeah. Well, Congressman Hill, thank you for that question. That is an important one. And I think, as I said earlier, the ability of people to self-custody their own assets, and to send them directly without using an intermediary is at the core of what we’re trying to build. So if we made it so that wallets had to be hosted by a bank or some other regular institution, we already have that. We already have banks, and that’ll take time.

Mr. Lawson: (02:35:51)
Dan, I’m in committee. How things going? I said, “I’m in committee. How things are going?”

Mr. Lawson. Please mute. You’re unmuted. Please mute. Please mute. Mr. Lawson, please mute. Thank you.

Mr. Brooks: (02:36:13)
Okay, so just to finish the thought-

Mr. Hill: (02:36:14)
Meanwhile, back at the ranch.

Mr. Brooks: (02:36:16)
Exactly. The ability to self-custody is really, really important. My point about the role of the banking system is simply that again, to my point of parody, an asset or a transaction that’s allowed to be done inside of a bank shouldn’t be technology specific. It should be technology agnostic. If your agent payments are lending, you should be able to do that however, but wallets are critical.

Mr. Brooks: (02:36:36)
What’s missing from this, which technologists are building today, are crypto native identification protocols that will allow us, without getting the name and the taxpayer ID number of the person on the other side, to know that it’s a safe wallet, not a blocked wallet. That is in development today by [crosstalk 02:36:54].

Mr. Hill: (02:36:54)
Yeah, I think that’s critical because we like the concept of not being spied upon by the actions in our wallet. And yet, we all want to comply with the rules around AML, BSA. And so, anonymously securing that the wallet is in compliance is sort of an important feature of it.

Mr. Brooks: (02:37:13)
Absolutely.

Mr. Hill: (02:37:16)
Ms. Haas, community banks have been the backbone, of course, of our local markets and critical. And in September, it was announced that you partnered with Vast Bank, with your institution to provide crypto banking services. Maybe others can comment, but let’s start with you. For aiding a normal community bank customer out there in my district or someone who wants to innovate in a bank and using crypto products, are we in a good position regulatorily or are there changes we need to make?

Ms. Haas: (02:37:50)
I’m going to speak about two things. One, I’m going to talk about how they can do it, and separate we can talk about the regulatory environment. Coinbase has tools to allow any bank to be able to provide crypto to their customers where we want to make our backend services, our nine years of experience of safely custodying crypto assets and being able to integrate with blockchains available to all global users.

Ms. Haas: (02:38:09)
One way we do this is by letting banks partner with us and white label our tooling so that they can offer this directly to their customers. There does need to be continued innovation and clarity for on behalf of many banks about out what is permissible activities for them. And banks that we partner with and speak about their ability to offer crypto to their end customers are working with their various state and federal regulators to gain clarity about what would be permissible for them to offer to their end consumers.

Mr. Hill: (02:38:34)
Thank you. This is a big deal because having spent almost four decades in and out of that business, banks are gun shy about their regulatory burden as Mr. Brooks certainly knows. And being cleared for that IT exam or their new product review exam at their board level is really not a something that bank boards want to be surprised about in this arena. Mr. Cascarilla, on Paxos you have a view on that, on partnering with banks.

Yeah. As maybe some members know, we have a number of partnerships with banks, and they work with us today. I think we’re an infrastructure provider. So for us, banks are important customer set. I think that they’re trying to upgrade their infrastructure to be able to adapt to this new technology. There’s a recognition that the way the current financial system is working today, it’s not really adapting to the 21st century needs of a digital economy.

And so, I think that there are important ways in which the current financial system can upgrade itself. Traditional assets can now move on blockchains, dollars, gold, securities. And it’s not just about crypto, which as exciting as it is, is only one piece of this broader transformation that’s happening.

Mr. Hill: (02:39:51)
Thanks. What one regulatory issue would be important to you at that community bank level? And if you would, respond to me in writing. Thank you. I yield back.

Thank you. The gentleman from Illinois, Mr. Foster.

Chairwoman Waters: (02:40:03)
Thank you. The gentleman from Illinois, Mr. Foster, who is also the Chair of the Task Force on Artificial Intelligence, is now recognized for five minutes.

Mr. Foster: (02:40:10)
Thank you, Madam Chair, and to our witnesses. I’d like to focus on what I think is the crucial importance of having a secure digital identity for crypto asset transactions. First, regarding controlled anonymity for a prevention of criminal activities. And it seems to me that if we wish to prevent crypto assets from being used, for example, for ransomware or other criminal payments, that there is no logical alternative to having all crypto transactions associated with a legally traceable identity, some one who can be extradited if they do something criminal. And which these can be pseudonymous to market participants and to the public, but then must be capable of being de-anonymized pursuant to the action of a court in a trusted jurisdiction. Do any of you disagree with that conclusion that this is a necessary condition for prevent, for example, ransomware? So let the record show that they no one raised objection to that statement.

Mr. Foster: (02:41:08)
So I think that’s very significant. So we have to start planning for a system, where in a court, in a suitable jurisdiction can actually de-anonymize any legitimate crypto asset. Okay. And now that is relevant to crypto assets such as stable coins or CBCs that have stable valuations, but still could be used for criminal activities. But for crypto assets which are speculatively traded, then we also have an additional worry, which is abusive trading practices. In that case, we need to know not only the beneficial owner behind a trade, but there has to be a uniquely identified beneficial owner. There has to be a regulator that can see, “Oh, this is a wash trade, because even though they look like separate pseudonymous IDs, they are in fact the same person.” And so that, historically, in trading that has required to have a regulator that can see the true beneficial owners. We spent a decade trying to get the beneficial owner onto the consolidated audit trail, which probably you’re aware of. So do you think that is also a logically necessary condition to prevent wash trades and similar abuses? Yeah. Mr. Bankman-Fried

Yeah, I’ll say, I do think that it is. And we conduct know your customer diligence on all of our users, so that we do know who the participants are. We’re responsive to governmental inquiries about that. We’re overseen by the CFTC on that with FTX US derivatives. I also think that this is a powerful argument in favor of having harmonized regulatory and market frameworks, in particular, between different asset classes. Where if you end up with a different regulatory framework for the market’s regulation of Bitcoin, Bitcoin derivatives, stable coin, stable coin derivatives, Ethereum, Ethereum derivatives, and other assets, you end up making it not just riskier and harder and more annoying for the user to access and more overhead for the industry, but you make it hard to have consistent regulatory oversight of a fractured regime.

Mr. Foster: (02:43:16)
No, I agree completely. Look it, I have been lurking in the deep weeds for over a decade and trying to get this split inside Congress, and between the SEC and CFTC. This is not something anyone would’ve created, but a number of you expressed enthusiasm for having a single unified national regulator, have you run that the Ag committee?

Mr. Foster: (02:43:45)
Look it, I know the answer to that. I mean, this is one of the original sins of Congress as it’s constituted, and financial services had been suffering from it for a while. Now, in terms of tax payments. It seems to me that if there was simply the requirement for any digitally traded asset to be associated with pseudonymized, basically, a tax ID that you have an API provided by the government that says, “Give me a pseudonymous tax ID,” and that be put publicly on the blockchain, and that that blockchain be listed with the tax authorities, that then that tax authorities could just run a piece of software and calculate how much tax everyone owed. It seems like that’s a very lightweight requirement, even on a startup in this business. Is there anything wrong with that concept?

Mr. Allaire: (02:44:33)
Congressman Foster, I think you’ve raised a number of really critical issues here around identity and the importance of that for law enforcement and transparency and auditability. I think it’s a critical area. I think there’s some critical things that have to be balanced, of course. I think most of us would agree, I hope, that privacy, security, limiting the leakage of, of personal identifiable information and data breaches, these are real challenges. Blockchains provide a very powerful way to have assured data. They also provide auditability and transparency. And so there’s actually a risk of, if you connect too much personal identifiable information to these, that that could be abused. And so I think-

Mr. Foster: (02:45:20)
I think the only personal identify is a pseudonymous, you can cryptographically inspect it, make sure it’s valid issued by a whatever government you claim to be domiciled in, has issued this, and then that’s all you need to know.

Mr. Allaire: (02:45:34)
Sir, I would agree with that. I think really a critical next step for this industry are digital identity standards that allow using cryptographic proofs using crypto technology itself to prove that someone has been KYC’d prove that someone has-

Mr. Foster: (02:45:49)
Oh, sure.

Mr. Allaire: (02:45:49)
… an [crosstalk 02:45:50]-

Mr. Foster: (02:45:49)
I agree. And, yeah, we have legislation on that subject and thank you, and I –

Mr. Allaire: (02:45:54)
Of course.

Mr. Foster: (02:45:55)
… yield back.

Thank you. The gentleman from Minnesota, Mr. Emmer, is now recognized for five minutes.

Mr. Emmer: (02:46:04)
Thank you, Chairwoman Waters, and thanks to our witnesses for joining us today. Congress really needs to better understand the great opportunities that your businesses are bringing to this country. Mr. Bankman-Fried, I have several questions for you and would appreciate as much as you can, quick answers, so we can make the most of the time that we have. FTX US offers crypto commodity derivatives products, such as futures and options contracts. To provide these products in the United States is my understanding that FTX US has obtained at least four licenses from the CFTC, which you listed in your testimony.

That’s correct.

Mr. Emmer: (02:46:45)
Do you know, are there any additional licenses separate from those four listed in your testimony that are required by the CFTC for FTX US derivatives to be fully compliant with US derivative regulation?

I do not believe so.

Mr. Emmer: (02:47:01)
I think that’s correct. And where does the price discovery, sir, for your CFTC regulated crypto commodity derivatives contracts primarily come from?

So there’s a very large number of market participants that participate. In those, there are hundreds of billions of dollars per day, globally, a volume in similar products, and like other markets we don’t choose that pricing. It’s a market-based pricing that comes from a variety of liquidity buyers, market making firms, individual users, and other people.

Mr. Emmer: (02:47:33)
Right, and, I mean, I’ll note that for Bitcoin futures contracts that trade on the CME, which is a CFTC regulated exchange, 100% of that pricing comes from five US crypto spot exchanges, Bitstamp, Coinbase, Gemini, itBit, and Kraken. We have seen disapproval letters from the SEC on multiple Bitcoin spot ETF applications. I don’t know if you’re aware of that. Chair Gensler’s justification for not allowing Bitcoin spot ETFs to trade is his belief that Bitcoin spot markets are “vulnerable to fraud and manipulation.”

Mr. Emmer: (02:48:21)
Now, it’s my understanding that FTX uses surveillance trade technology, akin to the technology national securities exchanges use to protect investors and ensure sound spot markets. What does this technology and any other tools FTX uses to protect the spot market from fraud and manipulation look like?

Like other exchanges, we do have these technologies. In addition to the know your customer policies that we can identify individuals associated with trades, we have surveillance for unusual trading activity. We have manual inspections of anything that gets flagged, either by the automated surveillance or by manual inspection. And we do this with the trading activity, with the deposits, the withdrawals, and everything else.

Mr. Emmer: (02:49:07)
Sounds like you’re doing a lot to make sure there is no fraud or other manipulation. I thank you, Mr. Bankman-Fried-

Thank you.

Mr. Emmer: (02:49:14)
… again, for helping us understand the extensive guardrails a cryptocurrency exchange like FTX has in place to ensure sound crypto spot markets for investors. The SEC has approved several Bitcoin futures ETFs that get 100% of their pricing from US crypto spot markets. So I guess I’m left incredibly confused by how the SEC’s concern over spot market vulnerability applies to Bitcoin spot ETFs, when it doesn’t apply to Bitcoin futures ETFs.

Mr. Emmer: (02:49:49)
And by the way, this is not a partisan issue, I’ve been working closely with Darren Soto on our blockchain caucus co-chair on this very issue. Why? Because the bottom line is that Americans deserve access to a wide, diverse range of investment products. They deserve to choose what investment vehicle they want to put their hard earned money into. But the SEC is not providing Americans this choice when it comes to crypto commodity ETFs, for reasons, again, that just don’t make a lot of sense. Especially after highlighting the extensive measures crypto exchanges take to protect their spot markets.

Mr. Emmer: (02:50:31)
Our strong crypto and web3 markets in the United States have been giving the United States incredible capital market success. These markets are also teeing Americans up for incredible capital formation opportunities, but our regulators simply aren’t capitalizing on the opportunity here. And it’s my constituents and all your constituents who are taking the hit because of this, and it must change.

Mr. Emmer: (02:51:01)
Again, I want to thank the witnesses for being here. I hope this is the first of many of these discussions we have as Congress tries to put together a thoughtful, light touch guide framework for the industry. Thank you. I yield back.

Thank you very much. We’ve been joined by Mr. Sherman from California, who’s been on the floor working on his beloved bill on LIBOR. And I understand it’s been put up for a vote, and we’re all looking forward to voting for this bipartisan legislation. So this gentleman from California, who is also the Chair of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Market is now recognized for five minutes.

Mr. Sherman: (02:51:41)
Crypto is many different things. Cryptocurrency is an incredibly volatile investment that aspires to be a currency that might displace or at least compete with the dollar. A stable coin aspires to be incredibly stable and is tied to the dollar. What they share is a culture, a vibe, a stick it to the man moniker, a belief that somehow this is new and hip and a attack on the powers of society. But the fact is that the advocates of crypto represent the powers in our society.

Mr. Sherman: (02:52:35)
The powers in our society on Wall Street and in Washington have spent millions and are trying to make billions or trillions in the crypto world. These include Goldman Sachs, JP Morgan, Visa, BlackRock, Citadel, Musk, and Zuckerberg. Not to mention the CEOs that are before us here today. Everyone before us today is a crypto advocate. We will, at some point, hear from the crypto critics. We won’t hear from CEOs, we’ll hear from academics with their pencils and pens. Today, we hear from the CEOs with their lobbyists, their packs, and their power. And we wonder why we won’t be able to protect investors.

Mr. Sherman: (02:53:22)
The regulators need to listen to this hearing very carefully. With all the money and power on one side, we will not be able to pass meaningful legislation. Don’t cop out and say, well, you’re not going to do anything into we pass meaningful legislation. And if you wonder about where the power is, Zuckerberg had to come here himself and sit there. Brian Armstrong sent his number two, and tether doesn’t bother to show up at all. Zuckerberg did not have a day in the park. He did not enjoy it, but he had to come. Armstrong didn’t and Tether ain’t here at all.

Mr. Sherman: (02:54:01)
Now the number one threat to crypto currency is crypto. Bitcoin could be displaced by ether, which could be displaced by DOGE, which should be placed by Hamster Coin, and then there’s COBRA coin. And what could Mongoose coin do to crypto coin?

Mr. Sherman: (02:54:20)
In the area of fiat currency, the dollar will always be more important than the Uruguanyan peso, and the Uruguanyan peso is not a joke. There will always be an Uruguay, and the Uruguanyan peso will always have some value. Will Mongoose coin always have a value? I don’t know. I just made it up. It’s a joke. Although I said that about Hamster Coin, and then I found out there really was a Hamster Coin.

Mr. Sherman: (02:54:43)
It’s not fair to compare fiat currencies current system to what cryptocurrencies aspire to be. It is true, you try to use a credit card or debit card to buy a sandwich today, the system takes a percent, half a percent, 50 cents away from the merchant. You try to use crypto to buy a sandwich today, I don’t know where you can go in Washington to use a Bitcoin to buy a sandwich, can’t be done at all, but someday.

Mr. Sherman: (02:55:13)
So compared to what we hope crypto can do to the problems that we face with fiat currencies now, that’s not a fair comparison. Now, looking at Ms. Haas from Coinbase, if I take a hundred bucks on your exchange, buy some Bitcoin, and then couple days later say Bitcoin happens to be selling at the exact same price, I sell it, it is my understanding that I get $94.02 back, am I wrong?

Ms. Haas: (02:55:48)
We have multiple products and it would depend on the product.

Mr. Sherman: (02:55:51)
Yes or no. Would I get in that exact transaction $94.02 back? Am I wrong?

Ms. Haas: (02:55:58)
I can’t answer the question, it depends on the product.

Mr. Sherman: (02:56:01)
Okay. Are there products where I’d be right?

Ms. Haas: (02:56:04)
There is a product where you’d be right.

Mr. Sherman: (02:56:05)
Okay. So I could lose six bucks in two days. What about Tether? Buy a hundred bucks worth of Tether, two days later, sell a hundred bucks worth of Tether or sell the Tether, could I lose six bucks?

Ms. Haas: (02:56:18)
Yes.

Mr. Sherman: (02:56:21)
Okay. Let’s turn to Mr-

Ms. Haas: (02:56:25)
[crosstalk 02:56:25] four.

Mr. Sherman: (02:56:25)
What?

Ms. Haas: (02:56:26)
It’s a two percent charge.

Mr. Sherman: (02:56:28)
A two percent charge, I thought it would be a three percent charge. It’s $2.99 last time I was on your site.

Ms. Haas: (02:56:37)
No.

Mr. Sherman: (02:56:37)
Okay. I’m looking at Coinbase fee $2.99 on USTD, we’ll put this in the record. In any case, to lose even two percently let own three percent, and then another two or three percent on the way out, in scarcely a couple of days, that’s well over a 1000% interest lost in that period of time.

Mr. Sherman: (02:57:05)
Mr. Allaire, is your reserves all in instruments that yield less than one tenth of one percent.

Mr. Allaire: (02:57:16)
That is correct. Yes.

Mr. Sherman: (02:57:18)
Then how do you pay one percent interest on some deposits?

Mr. Allaire: (02:57:21)
We don’t pay interest on deposits.

Mr. Sherman: (02:57:24)
And yet you have a deal with… Oh, my time has expired.

Thank you very much. The gentleman for Georgia, Mr. Loudermilk is recognized for five minutes.

Mr. Loudermilk: (02:57:38)
Well thank you, Madam Chair. And thank you for having this hearing. I think it’s very intriguing and very timely with where we are with the progression of technology. I go back and I think about my 30 years I spent in the IT field, had the government got in the way of the internet, we would still be using dial-up today to do a lot of what we’re doing. So I think we have to proceed very cautiously. One thing I’ve learned in the 30 years in the IT sector, especially 10 years that I spent intelligence realm in the Air force, is the most important aspect from an IT perspective is data security, cybersecurity. It’s something we have to be focused on all the time. In fact, in my business, 20 years in the private sector, that was the number one issue for most of my customers.

And really got to the point when I ran for Congress, of course, I couldn’t continue that business, I sold it, primarily because I knew that the way things were, the question wasn’t if someone was going to be hacked and lose date, it was when. And so, one of the things that I learned when I was in the military is, one principle is, you don’t have to secure what you don’t have. So if you don’t need data, don’t keep it. But then you have the aspect of, yes, we have to secure the data that we do need to keep.

Now, this is one thing that the federal government has yet to learn is you don’t need to acquire a whole lot of data and keep that data, especially if you’re the federal government, which is the riskiest stuff, anyone out there of letting data get out. And then you see more proposals, like the one that we’ve heard recently, with the craziest proposal is, the banks have to report every transaction by Americans and their banks to the federal government.

This is the type of thing that we don’t need to be doing. However, there is data that is important that we do have, whether you’re in the private sector, whether you’re in public sector. And that’s where I see the value of the underlying technology of cryptocurrency, particularly blockchain, is a solution to our cybersecurity problems because the distributed ledger aspect of it, is the data is available, but is not centrally located to where it could be taken. Mr. Brooks, can you discuss how blockchain and distributed ledger technology can enhance our cybersecurity posture?

Mr. Brooks: (03:00:01)
Well, Mr. Loudermilk is good to see you, and I appreciate the question. The simplest answer, as I said earlier today, is that blockchains are as much about transparency. They are about security. So one of the biggest problems, when you think about the biggest cyberhacks we’ve ever had in the United States, is how long it took for us to figure out that they occurred. The case of Target, the case of Equifax, some of these things, we found out days and weeks later by accident that they occurred.

Mr. Brooks: (03:00:27)
And if you think about the Equifax hack, in particular, initially, we thought it was a small problem. Weeks later, we learned it was a medium size problem. And only months later, did we learn it was a gigantic problem that involved all of our data, because there was no transparency.

Mr. Brooks: (03:00:41)
The thing about blockchains is every single block as it is validated is publicly visible to the network. The other thing about blockchain is it’s based on a consensus mechanism. So before you can have a change to the ledger, you have to have a significant majority of all of the validators agree that that’s the correct change. And so unlike normal networks where one bad guy can defeat the entire system, here you have to have thousands of computers agreeing at the same time that the change can be made. And even then, everyone sees it. That hiding in plain side aspect is the safest thing about blockchain, that’s why it’s so critical to our security infrastructure.

And I think that’s one of the most key values of this emerging technology is bringing us into a new era where we can do some of the things that we need to do without amassing this data.

Another area I’ve been interested in is really with payments and I’ve done some work on a related issue with the CFPB regulation of remittance transfer. So Ms. Dixon, understand that your organization is active in that space. Can you describe how blockchain and DLT are being used to facilitate payments?

Ms. Dixon: (03:01:48)
Thank you for the question. This is one of my favorite topics, because it’s something that actually is defining the use case that’s happening today. I think that there are businesses that transact on the network, the interoperability with the traditional financial system is remarkable, you can actually take money from a bank account, put it into digital asset, transfer that value to wherever it’s being sent, and then it can convert right back into a bank account. The fact that you have such complete interoperability with the existing financial infrastructure, should give us all the ability to take excitement about elevating that technology to the right level, so that we continue to innovate there.

Ms. Dixon: (03:02:25)
So payments are something that are constantly being leveraged on the Stellar network. They’re done with business payments. They’re also done with remittances from the personal standpoint, when you live in California, for example, and you want to send money to your family in another country, you can do so in three to five seconds, and a 100,000 transactions for less than a penny, on the Stellar network. It’s a remarkable use of this technology,

And this is what can happen if government doesn’t get in the way of the development of technologies that benefit the individual. And so there are several other questions I have, but I see my time has expired, and I want to be respectful of everyone. So with that Madam Chair, I yield back the balance of-

Thank you.

… my time.

The gentlewoman from Iowa, Ms. Axne, who is also the Vice Chair of the Subcommittee on Housing, Community Development, Insurance is now recognized for five minutes.

Ms. Axne: (03:03:18)
Thank you, Madam Chair, and thank you all for being here. Mr. Bankman-Fried, I’d like to start by asking you the first question. FTX US has a derivatives platform and recently bought LedgerX as part of that, is that correct?

Yes.

Ms. Axne: (03:03:33)
Okay. Thank you. And that platform is registered with the CFTC, is that correct?

Yep.

Ms. Axne: (03:03:39)
Okay, perfect. So I just want to clarify something and this isn’t to say anybody’s doing any wrong, it’s just to get the lay of the land. You also have an exchange for Bitcoin and other tokens, but that is not registered with either the CFTC or the SEC. Is that correct?

That’s correct. Currently, neither of them are primary markets regulators for spot Bitcoin USD markets.

Ms. Axne: (03:04:02)
Okay. Thank you. And I know you’re register as a money transmitter, but that’s not the same kind of oversight that we’ll see from a federal market regulator. I also sit on the Agriculture Committee, which oversees the CFTC, so a gap like this is especially concerning to me. And the big problem that I see here from what I understand is that the CFTC doesn’t have regulatory authority for spot trading of commodities, just their derivatives. So that leaves consumers with inconsistent protections, which is a concern that I have. So Mr. Bankman-Fried you and both Ms. Haas run exchanges, but the investor protections, basically, can be whatever the company separately come up with and they won’t necessarily be the same. Is that correct?

I completely agree with your worry. We do in fact have much the same investor protections on our spot markets as on our derivatives markets. But I would be very much supportive of a similar regime for spot commodities markets like Bitcoin USD markets, as we see for the derivatives markets.

Ms. Axne: (03:05:05)
Very good.

Ms. Haas: (03:05:07)
Permission to [crosstalk 03:05:08]-

Ms. Axne: (03:05:08)
I’d like to [inaudible 03:05:08], thank you. Okay. So when it comes to oversight a couple more questions here, do you report your full order history publicly either you Mr. Bankman-Fried or Ms. Haas? And are there public standards for that to make sure it’s accurate?

We do report all of our public market data. It’s available on our websites available via our API. We do not charge anyone, anything for it, and never intend to. I would be supportive of that becoming more than just a norm, but a regulatory standard as well.

Ms. Haas: (03:05:36)
We also make all of our data-

Ms. Axne: (03:05:37)
Okay, Ms. Haas?

Ms. Haas: (03:05:38)
We also make all of our data available, and we do not charge for our data. It’s available to our customers.

Ms. Axne: (03:05:43)
Okay. And is that order history public as well?

Ms. Haas: (03:05:48)
Yes, it is.

Ms. Axne: (03:05:48)
Okay. Thank you. So I just want to make sure I’m clear on this, Bitcoin, which has almost a trillion dollars invested in it has CFTC oversight for people who are trading futures and options, but not for people who are trading the currency itself. Is that right?

That is, essentially, correct.

Ms. Axne: (03:06:09)
Okay. Okay. So that kind of difference in protections is really what I want to focus on here. I’m not here to tell anyone what they should or shouldn’t buy, that they should have crypto or not have crypto. I think there’s pros and cons, and certainly I’ve had plenty of conversations with my own son who wants to get into crypto. But I’ll tell you what, what I care about is that when folks do, I want to make sure that they’re protected, and they’ve got the same investor protections that they would for other forms of currency. So I’m asking, can you as an industry, and it sounds like, it seems like you can, benefit long-term from having more regulation that sets better standards to protect investors in this area?

Yeah, I absolutely think so. And I’m not concerned about more regulation. I think getting consumer protection in areas where there is not currently enough, can be extremely helpful for a robust ecosystem. I think it’s just important to do so in a way that fits the product, and in a way that fits the regulators as they are.

Ms. Axne: (03:07:08)
Okay. Thank you for that. And listen, I agree. I think it’s something that we absolutely need to look at, and I would certainly ask all of you to think about the steps that you can take within your own organizations to make crypto more safe and trustworthy for investors. But I completely agree with you that we’ve got to be doing something to make sure that we’re protecting investors.

Ms. Axne: (03:07:29)
There are things that you as exchanges have that you have to help the industry long-term. You mentioned that you think we could do some of these regulations and they’d be good for the long-term growth. What do you think that could do to help you build trust and trust for folks in general for cryptocurrency?

And I will say that we’ve had conversations with a very large number of institutional players, everyone for banks, investment banks, pension funds, and this is the number one thing that comes up is, what is the regulatory for framework for the industry? How can we feel that we are protected both from a commercial standpoint, but also from a regulatory standpoint in pursuing these options for our investors? And I think it could be extremely helpful to clarify the regulatory frameworks, to build them out where they are missing, and to make sure that we have streamlined and uniform standards that are clearly communicated.

Ms. Axne: (03:08:30)
Thank you so much for that. I’d love to make sure that crypto is safer and more trustworthy for investors. I yield back.

Thank you very much. The gentleman from West Virginia, Mr. Mooney, is now recognized for five minutes.

Mr. Mooney: (03:08:43)
Thank you, Madam Chair, certainly, thankful to witnesses for being here. Appreciate your expertise, as we all learn more about the growing digital currency issue. Back in August of this year, the Cuban government announced their central bank would work on rules to officially recognize digital currencies. So I’m wondering whether the country’s recent embrace of crypto could be a way for the communist regime to evade tough US sanctions. So let’s start with Mr. Bankman-Fried. What process does FTX US to ensure that rogue and, frankly, murderous autocratic regimes like Cuba cannot use and exchange to evade United States sanctions.

We run sanctions checks on all of our users. We conduct know your customer surveillance on them. In addition, that we can conduct surveillance on the blockchain and fiat assets that transfer into and out of our system.

Mr. Mooney: (03:09:38)
Okay. Thank you. Wanted ask to Ms. Haas the same question, proposed the same question you, as it relates to Coinbase.

Ms. Haas: (03:09:46)
Largely the same answer. We similarly run OFAC tests on all of our customers, both on onboarding and then ongoing. We believe that sanctions are an effective tool of the US government and combating illegal activity. In addition to our onboarding controls, we do transaction monitor. We do surveillance on all of our transactions on our platform, but also have tools that are looking across the industry looking, and we partner with law enforcement on investigations.

Mr. Mooney: (03:10:08)
Okay. So second question, let me set it up for you. One of the ways that bad actors or rogue states could try to fool exchanges is by using technology like VPN that spoof IP addresses, fooling others into thinking that they’re in a different location. So let’s go with Mr. Brooks on this one. Can you speak to the importance of moving away from IP addresses to verified location? And follow-up to that, what is an alternative way of verifying location?

Mr. Brooks: (03:10:37)
Well, a couple of quick answers. So on the compliance side, I think the use of VPNs to avoid geolocation and to avoid sort of geofencing is something that three years ago was effective and useful. And the industry has developed lots of technologies that make that much, much harder today. So some of these decentralized tools, several of the companies have been mentioned already Chainalysis, Elliptic, and some others, have an ability to actually trace IP addresses based on probabilistic sort of network information.

Mr. Brooks: (03:11:08)
So it’s not just that that IP address might have been issued by an ISP in a given jurisdiction, it’s also that that IP address is associated with lots of other transactions that could only be Cuba or could only be Libya or whatever. And the probability assessment is one of the things that makes us much easier, that’s why the network is so important.

Mr. Mooney: (03:11:26)
Okay. Well thank you. I referenced Cuba. The Cuban government’s continued tyranny is personal for me and my family. My mother fled communist Cuba when she was 20 years old to come to the United States. She even recently wrote a book about the horrific experiences and the aftermath of the revolution there, including her time as a political prisoner in the Castro regime. And the Marxist Cuban government cannot be allowed to continue to oppress the Cuban people. Former President Trump’s tough sanctions restrict access to resources for Cuba’s rogue government. And I want to work with the members of this panel to ensure that the digital marketplace does not enable-

Mr. Mooney: (03:12:03)
… panel, to ensure that the digital marketplace does not enable the communist Cuban regime or other bad countries around the world who hate us and kill their own people and are tyrannical, I’m sure we all share that goal. I know there are those who think that that’s a role for the federal government to come in and issue a whole set of regulations, because you can’t do it yourselves, but I think it’s better if we work with you and if you can do it yourselves better than the federal government. That might be the answer. So thank you madam chair, and I yield back the balance of my time.

Ms. Waters: (03:12:32)
Thank you. The gentleman from New York, Mr. Gottheimer, who is also the vice chair of the Subcommittee on National Security, International Development and Monetary Policy is now recognized for five minutes.

Josh Gottheimer: (03:12:46)
Thank you madam chairwoman, and thank you for all our panels for being here today. Very grateful. If I can start with Mr. Bankman-Fried first please. From my role on the National Security Subcommittee on Financial Services, I’m committed to ensuring bad actor is like terrorists or drug dealers cannot access the financial services sector for purposes contrary to US interests. And while obviously I support cryptocurrency and its potential benefits in the digital payment space, one area remains particularly concerning for me, the theft of cryptocurrency and its potential use and illicit or terrorist financing. These issues are also related in so far as stolen funds may be used for nefarious purposes.

I introduced my bill H.R.3685, the Hamas International Financing Prevention Act in part because of the increased reporting around the use of cryptocurrency donations to support Hamas. Two questions if you don’t mind. First, what are exchanges doing today to both ensure that consumers are protected from hacking and theft and to prevent bad actors such as Hamas and other terrorist organizations from accessing cryptocurrency markets? And in what context would you flag a transaction to law enforcement, and have you ever flagged transactions to law enforcement agencies?

Yeah. So I guess I’ll first briefly talk about the security aspect of this, about stopping breaches to accounts where we mandate that all users have two factor authentication for all of their accounts. We have a very broad suite of security practices that all users can access on the site, in addition to all the newer customer policies.

On the bad actor side, we conduct KYC surveillance on all users of the exchange. We do that on all deposits and withdrawals using multiple tools on the blockchain and for Fiat currencies. And to address your question about law enforcement, we work cooperatively with law enforcement here in the United States and globally on tracking down any bad actors. We are in constant communication. We strive to be as helpful as we can be. The combination of the [inaudible 03:14:47] customer surveillance that we do, plus the transparency of the public ledgers of blockchains actually can make it a really powerful tool for tracking down any funds from illicit activity. We’ve used that. We have been participating in freezing a substantial amount of assets on our platform in cooperation with law enforcement and look forward to continuing to work with them globally.

Thank you so much. Mr. Allaire, the President’s Working Group’s recent paper on stablecoins included a recommendation that all stablecoin issuers be required to become insured depositary institutions such as banks. I understand that Circle has stated that it intends to become a bank, but currently backs the USTC in circulation one-to-one with reserves held at partner banks. I’m working on a bill that could potentially implement a number of these recommendations. If I can ask, do you think it is necessary for safety and soundness for stable coin issuers to themselves be insured depositary institutions, or is partnering with insured depositary institutions sufficient and what are the pros and cons of each model? Please.

Mr. Olair: (03:15:51)
Thank you for the question, Congressman. I think it’s a very important issue as noted. We have decided to pursue a national bank charter and are open to being an FDIC insured bank as well. However, there’s some subtlety in this topic and I think it’s important for the committee to consider it. A full reserve digital currency model such as USDC, where a 100% of the assets are fully in high quality liquid assets such as cash and short duration US treasuries, is not the same as a bank deposit where the bank is in turn taking the deposit and rehypothecating it and lending it. And really the purpose of FDIC insurance is for that fractional reserve lending that takes place.

Mr. Olair: (03:16:41)
And so I think the real question in our minds is, I think it can be really powerful for a stablecoin issuer to have a federal bank charter, to be able to access the fed and hold cash at the fed in terms of the ultimate form of safety and soundness for those cash assets, but not necessarily being lending banks that are a rehypothecating capital. The form of insurance perhaps could be investigated.

Mr. Olair: (03:17:06)
I know that the FDIC itself has been thinking about what are potential appropriate forms of insurance on stablecoin issuers, and so I think it’s a live issue. But just applying the kind of apples to apples model on a full reserve banking model, I think does raise some questions. So I think ultimately coming back to your question, I think that statutes in the United States should support stablecoin issuers that are operating at a state level, at a federal level and support money services businesses as well as banks, being active participants in the stablecoin ecosystem. And I think it’s important that the barrier to entry in the stablecoin space not be so high, that startups that are innovating as money services businesses can’t participate in this innovation.

Thank you so much. And I yield back.

Ms. Waters: (03:17:57)
Thank you. The gentleman from North Carolina, Mr. Budd, is now recognized for five…

Mr. Budd: (03:18:04)
I thank the chair. United States has a huge opportunity with crypto, but my fear is that this regulatory state is going to crack down on an industry that the regulators really don’t understand yet, and it’s going to force the next generation of financial tech to be created outside of our country. Well, we can’t let that happen. So Mr. Brooks, it’s good to see you again, where do companies draw the line and say that enough is enough with this anti-innovation “regulation by enforcement”, and then just decide to take their industry elsewhere to another country? Where’s the line?

Mr. Brooks: (03:18:47)
Well, Mr. Budd, it’s good to see you and thank you for that question. What I would say is in some aspects of the industry, the line is super clear. There are some products that are legal in other countries and are just not legal here. So I take some of the investment products we’ve talked about earlier today, for example exchange traded funds. One of the things that makes crypto risky is that consumers may not understand the difference between one token and another token. And so they may want to diversify much as I own an S&P 500 mutual fund. We don’t allow that in the United States, we do allow it in Canada. We allow it in Germany, Singapore, Portugal, and a number of other places. So if you’re a developer of those products, there’s no fuzzy line, it’s super clear. You can’t do that here. So you have to go abroad. Okay? There are some other places-

Mr. Budd: (03:19:29)
Can you say why we can’t do that here?

Mr. Brooks: (03:19:31)
Sure. It’s because the Securities and Exchange Commission has consistently refused to approve products that other G20 nations have approved.

Mr. Budd: (03:19:37)
So we’re behind the curve?

Mr. Brooks: (03:19:39)
Unquestionably.

Mr. Budd: (03:19:42)
So given your previous experience running the OCC, I’d love to hear your perspective on where a regulator’s authority begins and ends. And remember the joke earlier this year that everything’s infrastructure? Well, it seems like Chairman Gensler thinks that everything is a digital asset that he can regulate. He cites the Howey and the Reeves Test without providing any other explanations. So Mr. Brooks, what are we missing, because Chairman Gensler clearly doesn’t see a limit to his regulatory authority in this area?

Mr. Brooks: (03:20:13)
Well Congressman, one thing I learned running my little agency is that the US, and this is not specific to crypto, the US is sort of unique among the developed countries in our fragmented approach to regulation. So when I hear people talk about the idea that we need one regulator for crypto, I would say we should first have one regulator for banks, but we have three of them, or if you’re an investment bank, five of them. So that’s inherent in the system that we’ve got. What I say to that is the last thing we need to do is add another regulator to a system that’s already got dozens of regulators. What we need to do instead is have parity for crypto activity along with traditional finance. If I’m a crypto lending platform, I should probably be regulated by the FDIC.

Mr. Brooks: (03:20:56)
If I’m a crypto trading platform, I should probably be regulated by the CFTC and SEC. But somehow we treat crypto because it’s new as different from everything else. And I’m going to argue that crypto is just a step function improvement in the system. We already have a regulatory system, the laws are super clear how it works, but there’s something about crypto that scares people. I don’t know what it is. Maybe it’s just because it’s new. But I remember in my banking law class, when banks were first allowed to use computers to keep ledgers, people sued over that at the time I remember when I was a second year lawyer and we got email, and the ABA said lawyers couldn’t use email because it would travel over this mysterious network of computers. These all seem ridiculous today, but it seems like we haven’t really learned the underlying lesson which is technology usually advances human flourishing. We have a regulatory system. Let’s use it.

Mr. Budd: (03:21:47)
Thank you for that. Ms. Haas, as you’re aware, the Infrastructure Bill was signed into law last month and had lots of problems for digital assets. So I was very vocal about a need for a fix for this, and I was proudly supporting ranking member McHenry’s bill to make those fixes. So would you please address some of your concerns and why those flaws would be so bad for the crypto community?

Ms. Haas: (03:22:10)
Thank you, and thank you for your support on this important bill. So, first of all, I want to make it clear that Coinbase supports tax payments in crypto. We think that everybody should be paying their taxes, and we think that centralized entities like Coinbase should be reporting, no different than a Schwab, no different than a Fidelity, it’s important value added service for our customers. But what concerned us about the drafting of the infrastructure bill specifically to the tax provisions was that these are complex issues. Crypto taxation is complex. The technology has new players in this space and that we didn’t have the public comment period that we would typically have for something so complex. And so what happened was the risk of an unattended consequence. And I think that we can still solve this.

Ms. Haas: (03:22:47)
I think that we are not to the place that it could be scary, but the definition of a broker was potentially overly wide and could be interpreted to include players such as minors, such as the hardware wallets that do not have enough consistence information that have no ability to comply with reporting regimes. And then could be consequence. There could be penalties, there could be federal risk to them. So, we thought it was overly broad. And then separately in 605 OI, we thought that there was additional reporting risk that was privacy, and also could be deemed overly broad, and pull in parties that were not necessarily deemed to be covered by this rule.

Mr. Budd: (03:23:23)
Thank you very much. Chair, I yield back.

Ms. Waters: (03:23:25)
Thank you very much. I think you need to make a correction. You refer to Mr. Brooks as having been at SEC, and he been saying all along he was at OCC.

Mr. Budd: (03:23:42)
Okay. I never made that reference, but thank you.

Ms. Waters: (03:23:44)
Well, all right. Thank you very much. We appreciate your presence here today and your expertise in banking law. Thank you. The gentleman from Massachusetts, Mr. Lynch, who is also the chair of the Task Force on Financial Technology is now recognized for five minutes.

Stephen Lynch: (03:24:02)
Thank you madam chair. Great hearing. I want to thank all of our witnesses as well. Prior to the creation of the subcommittee on financial services, we had a terrorist financing task force that I chaired for about eight years. So I’m keenly sensitive to the issues around know your customer and AML. And I worked a lot with FinCEN, the Financial Crimes Enforcement Network, on traditional banking protections with regard to terrorist financing and money laundering. And I know that at the end of last year, FinCEN actually issued a rule making proposal to require banks and money service businesses to submit reports and verify the identity of customers involved with wallets for virtual currency. So this particular rule making focused on those wallets that were hosted in low compliance jurisdictions and were identified by FinCEN as wallets which were not hosted by a financial institution called unhosted wallets.

And the requirements that FinCEN came up with are sort of similar to what we use now for money transmitters. So Mr. Armstrong and Mr. Allaire, your firms in particular were vocally opposed to that rulemaking, and I heard your responses to Mr. Foster and to others regarding identity. And I want to try to understand, can you share why the transactions involving virtual assets and payments involving those wallets that are quite similar to Western Union transmissions or Moneygrams, why you objected to what looks like a fairly similar regulatory approach? Mr. Allaire if you might take a crack at it.

Mr. Olair: (03:26:23)
Thank you. Congressman Lynch for the question. It’s a very important question. First I would simply start by saying, I think FinCEN has done an excellent job at looking at the issues of money laundering, terrorist financing in the context of virtual assets, virtual currencies. They led the way as the first federal regulator, to in fact put in place rules around that back in 2013, that led firms like Circle, Coinbase and many others here to put in place licensing supervision around bank secrecy act, anti-money laundering provisions, and the like.

Mr. Olair: (03:26:56)
I think the specific issue at hand, which you are correct, we had some significant objections to was really two-fold. One was there was a introduction of an 11th hour rule making that did not have a significant public comment. And I think at the bottom of that issue is there are some really significant things about the way digital assets and blockchains work that we want to make sure if we’re going to be introducing rules around reporting, that they take account of the unique things with public blockchain infrastructures in particular. Notably, public blockchain infrastructures are in some ways like the public internet or the worldwide web or email. They’re open networks that anyone can connect to join and use.

Mr. Olair: (03:27:47)
And it’s one of the really powerful things that has made information exchange free. And I think it’s one of the things that we believe with digital assets on blockchains can make value exchange much more frictionless for people around the world. And then part of that is that there are the ability for an individual to self-custody assets with a piece of hardware or piece of software. That piece of software could be downloaded from an app store. And they’re self-custodying a stablecoin like USDC or a Bitcoin. And the software maker itself is not involved in facilitating a customer transaction. They’re really just a software developer providing technology that end users can use. And I think the rule as it was outlined would kind of be a square peg-round hole or a bit of a blunt force instrument.

Mr. Olair: (03:28:36)
And what we argued, and I think is hopefully going to bear fruit significantly over the next year, is that what we really need are ways to provide proof of digital identities. A firm like Circle or a firm like FTX or Coinbase or Paxos or other folks testifying here could provide a cryptographic proof that someone has been KYC-ed, and that proof could actually be carried around with them in a hardware wallet or a software wallet. And then you’d have the ability to know that you’ve got legitimate actors to be able to have the right information about users without having essentially more PII or personal identifiable information being broadcasted really broadly. And so I think our view was give the industry more time to develop technology that can allow these forms of transactions to happen, but still preserve privacy and take advantage of the really significant security benefits that come from cryptography.

Okay. That’s fair. I know my time has expired, so thank you madam chair. I yield back.

Ms. Waters: (03:29:42)
Thank you. The gentleman from Tennessee, Mr. Kustoff is now recognized for five minutes.

Mr. Kustoff: (03:29:49)
Thank you madam chair, and thank you also for convening today’s hearing. Thank you to the witnesses. I know we’ve been here for some time, but it’s been very informative and, and I appreciate it, and I know we all do. Ms. Haas, if I could with you, could we talk about the Crypto Rating Council, that I believe Coinbase and other industry players created to determine what digital assets look more like securities and which ones don’t? If you could, could you talk to me about how the council makes its determination and who’s involved in the process.

Ms. Haas: (03:30:27)
Thank you for the question. So the Crypto Rating Council is an independent entity that works to serve industry participants such as Coinbase with an assessment of digital assets underneath the Howey Test. So it’s looking at the white papers that new asset projects put forth and making a determination under the Howey Test or not that new project is more likely than not to meet the definition of a security under US federal securities laws. Independent law firms are the ones who are doing this assessment, who are US securities laws experts, and looking at facts and circumstances to make an assessment.

Mr. Kustoff: (03:31:07)
Thank you. If I could ask you, you talked about securities, can you talk about what degree, if any, the SEC and other stakeholders have been involved in, what the discussions have been in terms of the framework?

Ms. Haas: (03:31:24)
Thank you for the opportunity to address this. So at this point in time, the SEC has not provided a clear definition about what is or is not a security. They’ve asked us to rely on the Howey and Reeves Test, and we companies like Coinbase companies like FTX and others, pay careful attention to ongoing litigation that is existing in the space news that we see, but we are left to interpret based on our interpretation of law for what is and is not a security at this time.

Mr. Kustoff: (03:31:56)
Thank you, Ms. Haas. Mr. Brooks, if I could, to you, thank you also for being here. If I could, I think obviously there are people who believe that cryptocurrency is difficult, maybe even impossible to track. Can you talk about that as it relates to the blockchain? And we talk about illicit activities, alleged illicit activities, oftentimes will be investigated by federal authorities. Could you explain maybe the fallacy in that as if you were talking to our local police chiefs or local sheriffs?

Mr. Brooks: (03:32:37)
Sure. Well, thank you for the question, Mr. Kustoff. I actually do this talk at local rotary clubs and things around the country all the time. So I think I can do that pretty well. I think the easiest way to understand it is let’s contrast blockchain transactions with normal banking transactions to see how much easier it is to trace them on a blockchain than it is in a banking transaction. So let’s imagine for a moment that… I would never do this because this would be flagrantly illegal, but let’s say I bought you lunch. Okay? And let’s say that afterwards you wanted to Venmo me your payment back, right? So you hit your Venmo button on your iPhone and you sent me money. What many people don’t understand is that there’s seven or eight different steps in the Venmo transaction.

Mr. Brooks: (03:33:17)
So all Venmo does is send an instruction to your bank. Your bank then receives that instruction, they write it down in their books and records, and then they then send an instruction to an underlying transfer network. It could be the automated clearing house, it could be the Fedwire system or something else. That system then contacts my bank. It inquires whether my bank has enough money to pay you. Once that’s been done, then there’s a debit from my account. It’s very complicated. And in any one of those steps, information could be lost. There could be a breach, something bad could happen.

Mr. Brooks: (03:33:46)
Versus in a blockchain, there are no intermediaries. I’m not sending instructions to a third party to send instructions to another third party, to eventually send you money. I’ve sent you money. And when the block is validated, I can see that my wallet address transferred that value to your wallet address, simple as that. The easiest way for people to understand how easy this is, because we’ve had a lot of talk of hacking and cyber security issues, the reason that we found the bad guys in the Colonial Pipeline hack, was because they asked for Bitcoin. If they had asked for diamonds, if they had asked for cash, if they’d asked for almost any other thing, we’d never have caught the bad guys. We caught the bad guys because, not in spite of, because they used Bitcoin and we could tell exactly where the money went.

Mr. Kustoff: (03:34:31)
So, because the blockchain was used, it was traceable?

Mr. Brooks: (03:34:36)
Correct.

Mr. Kustoff: (03:34:37)
And just briefly, because my time is expiring. Again as you’re talking to rotary clubs, you could give specific examples where the FBI and other federal law enforcement agencies used the blockchain in fact, to help trace and help determine.

Mr. Brooks: (03:34:54)
When I used to work at Coinbase, I ran a group that facilitated those customers. They were our clients. We did work for them.

Mr. Kustoff: (03:35:02)
Thank you very much. I yield back.

Ms. Waters: (03:35:06)
Thank you. The gentlewoman from North Carolina, Ms. Adams is now recognized for five minutes.

Ms. Adams: (03:35:14)
Thank you Chairwoman Waters, to Ranking Member McHenry, both of you for hosting the hearing. Mr. Cascarilla, I want to touch briefly on the risk that stablecoins might pose to our broader financial system. The President’s Working Group’s report which we spent plenty of time talking about today, expressed concern that any perceived instability could trigger a run-on, on that stablecoin. In 2008, we saw the dangers of instability in fraud money market funds, and now rating agencies are saying that. So how do you respond to the assertion by the President’s Working Group that allowing stablecoins could cause systemic instability?

Thank you for the question. I think this is a crucial topic when it comes to stablecoins. I think the key point here is to define stablecoin. And depending on how you define it, creates different risks. If a stable coin is backed by only cash equivalents, essentially money that’s sitting in an FDIC insured bank account, or sitting in T-Bills that mature in three months, there is no risk of a run. It’s liquid cash. You’ve taken simply a dollar and you’ve tokenized it. And there’s very good uses for that, and there’s really good reasons to set it up that way.

Of course you could decide to back your stablecoin with other assets, and certain issuers do. It could be loans, it could be CDs, it also could be other types of securities. And in that case, you start to have not really a stablecoin, but you have something that looks more like maybe a bank deposit. And in that case it would make a lot of sense, I think, for a banking regulatory regime to oversee it. And also it could be that it looks more like a money market fund because it’s backed by certain types of securities, and it would make sense for the SEC to oversee it. [crosstalk 03:37:12]We are a trust company.

Ms. Adams: (03:37:13)
Okay. I was going to ask how stablecoins are not similar to money market funds, but I think you’ve made some clarification there. So Ms. Haas, in October of this year, Coinbase base released an operational framework of the Digital Asset Policy Proposal which you advocate for the creation of a new self-regulatory organization. You indicate that incorporating an SRO into the regulatory supervision of marketplaces will speed the development and enforcement of an appropriately tailored digital asset industry rule. So in your view, how can Congress and industry best come together to begin laying the foundation for a successful regulatory framework with digital asset trading platform such as yours?

Ms. Haas: (03:38:05)
Thank you so much for this question. So I want to clarify that first on our proposal, we are seeking one single federal regulator. It could be an existing federal regulator. We’re not asking for the creation of a new federal regulator. And the value that we think of having an SRO would be… This is complex. There is new innovation happening in crypto every single day. We haven’t even touched on NFTs or Dows in this committee hearing today. And we think it’s important that there’s a nimble group that is constantly looking at the changes in crypto. And so that’s why we recommended having an SRO in addition to a single federal regulator.

Ms. Haas: (03:38:37)
The way that we would love to work with you all, is we think this is an important step in the process, we think that this hearing is important, but we really believe that having policy makers deeply understand the technology, getting input from the industry, understanding the use cases, will help craft prudent regulation here. We believe that we agree with you all on first principles of regulation, but the how we get there is going to look very different in crypto than it has in our traditional financial markets that relied on intermediaries. I think many of the testimonies on this panel have spoken very similarly about the challenges we see and we’d love to work with you in partnership.

Ms. Adams: (03:39:12)
Thank you, ma’am. This is to all the witnesses and it can be a yes or no. Would you commit to… As a two-time HBCU graduate, I care deeply about making sure that your companies reflect the diversity of our country. So yes or no. Would you commit to sharing data about the racial and gender makeup of your companies? I want everyone, if you can, to answer it quickly. Yes or no. Are you committed to doing that? All right?

Ms. Haas: (03:39:42)
Yes.

Yes.

Yes.

Ms. Haas: (03:39:44)
We’d be happy follow up with your office.

Ms. Adams: (03:39:47)
Well, great. We would appreciate that very much. It is a concern of not only this committee, but certainly of one of our co-chairs Joyce Bailey and myself and some others. So thank you very much, and thank you for your responses. And madam chair, I’m going to yield back.

Ms. Waters: (03:40:04)
Thank you. The gentleman from Indiana, Mr. Hollingsworth is now recognized for five minutes.

Mr. Hollingsworth: (03:40:12)
Well, good afternoon. I appreciate everyone being here and certainly appreciate the dialogue that has been engendered thus far. I will admit to you my erudition on such matters is very, very low and so I’m on a genuine fact-finding mission, not on a confirmation of my preconceived notions about how this could be used, or alternatively how it should be treated by regulators. I think specifically to Mr. Allaire to start with, would you define stablecoin for me?

Mr. Olair: (03:40:42)
Sure. Thank you for the question Congressman. There are many types of stablecoins. Stable coins are called stablecoins because they are intended to hold a stable value. I think the name-

Can you clarify and be more specific, a stable value relative to what?

Mr. Olair: (03:40:59)
Well, relative to some underlying reference asset.

Right. But that reference asset in and of itself may in fact be volatile, right? If I said this had a 100% correlation with one ounce of gold, right? That would be stable relative to a gold, but not stable relative in an absolute sense, I should say.

Mr. Olair: (03:41:16)
That’s exactly right. Okay. So say the purchasing power of a dollar is changing rapidly with inflation or in other countries hyperinflation or there’s deflationary assets and so on. So the reference asset obviously has a huge impact.

So you brought this up and I wanted to delve further into that and I appreciate that. So a lot, not a lot, maybe not even the majority, some non-trivial portion of stablecoins are backed by US dollars and are transferable to and from dollars, right? So in essence, explain to me the value proposition to me, owning a stablecoin that I can convert into dollars as opposed to owning the dollars themselves. What’s the value proposition to a consumer.

Mr. Olair: (03:41:59)
Yeah. It’s a really great question. And I think it’s good to use analogies sometimes on this.

Right.

Mr. Olair: (03:42:05)
It’s sort of like the difference between having a postal letter versus an email, a digital version of a letter can move at the speed of the internet to anyone for free. That’s really an upgrade to the functionality of a letter, for example. With digital music, the same kind of attribute. So digital currency dollars inherit the kind of superpowers of the internet, the speed, the reach, the interoperability and so forth.

Yeah. Net summary of that is it is no different as a store of value than owning dollars, because it is convertible to and from dollars, but is different in its transaction characteristics. It can move faster and presumably at a cheaper cost of transaction than perhaps transacting in dollars. Is that a fair way to say that?

Mr. Olair: (03:42:45)
I think that’s basically correct. Although I’d say well designed stable coins are safer than bank deposits because bank deposits, you’re taking a risk on the lending book of the underlying bank. And so you have run risk, you have default risks of all of the deposits and loans that might sit in a bank. A full reserve form of money, which is what a dollar digital currency such as USDC represents, is actually a safer form to not just store value, but as a transactional medium as well.

Assuming that you hold your dollars in a bank account, right?

Mr. Olair: (03:43:16)
That’s right.

Yeah. There is some level of counterparty risk. We have worked hard frankly in this country and through a regulatory environment of minimizing that and through federal government guarantees, but that remains non-zero if trivial. So walk me through the transaction value of owning a stablecoin. And here’s my view just outside of this. I understand the notion that if I go to a retailer that accepts that stable coin, then I can transact with them, presumably the lower cost of that retailer, hopefully my prices are lower on account of that and I can transact faster with them. But there is a non-zero transaction cost associated with getting into that stablecoin. So I’ve kind of traded this notion of accelerating my pace of transaction, lowering the cost once I get into the system, but there are costs to get into the system. I have to buy…

… once I get into the system, but there are costs to get into the system. Right? I have to buy whatever that stablecoin is from dollars, right?

Mr. Olair: (03:44:07)
Yeah. I can speak in the case of USDC.

Please.

Mr. Olair: (03:44:11)
So if an institution wants to transfer dollars into USDC, we don’t charge a fee for that.

But I have to get set up to do so, right?

Mr. Olair: (03:44:20)
You need an account.

I can’t just go and use my debit card out of my bank account it. I have to set up an account, right? Presumably you have some process by which I do that. Once I get over that hurdle, then I can transact inside that.

Mr. Olair: (03:44:31)
That’s correct. And I think many users of stablecoins keep their value in stablecoins because they are now able to use a very, very efficient payment and settlement medium. The high growth that you’ve seen is partially attributed to that.

So is the value proposition that this network of those that accept this is going to expand so more people are going to keep that in stablecoins? And then my second question’s going to be, why can’t the same technology that runs stablecoins eventually run the payment system in dollars? Right? Won’t we eventually cut out the middle step of having to convert to a stablecoin and then transact in this frictionless and speedier environment? Won’t we eventually have to figure out how run that through the existing payment system?

Mr. Olair: (03:45:14)
I think there’s two points here. So one is dollar digital currencies, like USDC are both kind of protocol and are a representation, a form factor, for a dollar. There are network effects there just like there are network effects in other internet protocols that we use for things. And I think that’s significant.

Mr. Olair: (03:45:34)
To the second question. I think in some ways, it’s a question of semantics. When I use the IOU settlement system of a Visa card, I’m not actually spending dollars per se. There’s a bunch of IUOs on a centralized ledger that are keeping track of things. And then ultimately underneath there’s a fed wire that goes from one bank to another. Yeah. We experience it as well, that’s just this card and there’s a whole elaborate system underneath that charges fees. I think what we see well regulated stablecoins are an upgrade to those kinds of payment systems to be ready for the internet era.

I appreciate the [inaudible 03:46:15].

Thank you. The gentleman’s time has expired. The gentlewoman from New York, Miss Ocasio-Cortez is now recognized for five minutes.

Ms. Ocasio-Cortez: (03:46:24)
Thank you, Madam Chair and thank you to all of our witnesses who are here today at this hearing. Before I get into the heart of my questions today, there was a slight discrepancy in some of the testimony in questioning from earlier today I just wanted Ms. Haas to clarify very quickly. Earlier today in the hearing, Representative Velasquez asked about proprietary trading on the Coinbase platform. And in that moment, I believe you had told her quote that, “Coinbase does not engage in proprietary trading on our platform. All prices are established,” et cetera. However, in looking at the Coinbase rules under section 3.21 under Coinbase corporate ops, it says, “Coinbase Inc, which owns and operates Coinbase Pro and Exchange also its own corporate funds on Coinbase Pro and Exchange.” And I just wanted to give you briefly the opportunity to clarify.

Ms. Haas: (03:47:26)
Thank you so much for the opportunity to clarify. There’s a few things that we do in our business. So one is we do have a corporate investment portfolio that every month we make an investment of crypto and add to our balance sheet. We have not sold that. We don’t trade it actively, but we do increase the investment on a monthly basis on pre-established investment protocols. We do buy those on our Exchange.

Got it. Understood. Thank you very much. So to the heart of the matter. Crypto as we know is a growing industry, it’s rising in market value from 500 billion last year to more than 3 trillion as of November of this year 2021. There are a lot of advocates, proponents of the cryptocurrency industry that discuss the creation of new digital currencies, I should say, and building safer, more inclusive system outside of the traditional financial sector. But I kind of want to explore this assertion a little bit more. Mr. Allaire, a substantial portion of the buying and selling of cryptocurrencies is done with stablecoins, correct?

Mr. Olair: (03:48:32)
A significant amount is traded with stablecoins. Yes.

It’s about 75%. Does that sound about right to you?

Mr. Olair: (03:48:39)
I don’t have the data in front of me, but it does sound roughly correct.

And these stablecoins are designed to be backed by certain reserve assets, whether they are primarily USD or safe highly liquid cash substitutes. Essentially a coin to be stable in value so that people can kind of use it in a larger world of crypto where other coins could perhaps be a little bit more volatile on their value.

Mr. Olair: (03:49:07)
I can certainly speak to the design of USDC. I can’t really speak to others. So yes, USDC is designed as a payment instrument under electronic money law in the United States. So it’s cash and short duration US government treasuries, which is the underlying instruments for the stored value.

In fact, your firm recently announced a transition to one-to-one backing in dollars of USD coin after it was found that only 60% of the coin was backed by cash or cash substitutes. So if the cryptocurrency industry hypothetically lost its ability to use stablecoins as a bridge to trade in and out of dollars at tomorrow, would that cause a significant shift? It seems as though it would not be able to work the way that it does currently. Correct?

Mr. Olair: (03:50:01)
Well, I think a primary reason why stablecoins are so powerful is that they’re a superior form of settlement. So the existing banking system moves slowly. Funds take several days for them to move and there are significant fees and the access to that can be limited. Whereas blockchains operate continuously and settlement happens at the speed of the internet. So I think it is important that payments and settlement in these new forms of internet financial products and services can operate at the speed of the internet. So I think it’s essential in fact.

I see. Thank you. So lastly, what would you say to some of the folks who are listening to what some folks are saying, not just here on this panel, but in the larger world to the folks that say… What do you say to the folks that say basically this doesn’t seem like a new financial system per se, but really an extension or perhaps expansion of our present one?

Mr. Olair: (03:51:04)
Well, I would disagree with that. I think what I believe we’re seeing is a new open infrastructure layer on the internet, a missing infrastructure layer of the internet that is designed around value exchange and economic coordination that is rooted in immutable data. The ability to interact with counterparties in a very, very safe way that hasn’t existed before on the internet. And really, many of the efficiencies that the internet brings in terms of moving information, brought into moving value, but also with greater degrees of security than are often offered to the existing financial system. I really do believe we’re building a new global economic infrastructure layer and we’re certainly-

And you would say that that’s not distinct. You would argue that that is distinct, not an expansion or an increase in the sophistication of our current financial system?

Mr. Olair: (03:52:00)
I believe for this to take hold, it needs to be well integrated with our existing financial system. And we’ve long believed in a kind of hybrid model that does that.

Thank you very much.

Thank you. The gentle ladies’ time has expired. The gentleman from Ohio, Mr. Gonzalez is now recognized for five minutes.

Mr. Gonzalez: (03:52:20)
Thank you, Madam Chair. I truly appreciate this hearing. This is a great hearing. I want to start with Mr. Brooks, and I’m going to attempt to respond to some of the objections, which I believe demonstrate a complete and utter misunderstanding of what we’re even doing here today. One contention is that the vibe of crypto is a stick it to the man vibe, but in actuality, it’s dominated and controlled by big tech and Wall Street. While the culture may be somewhat accurately described, the notion that a handful of big tech leaders and Wall Street banks somehow created and now control crypto is absurd on its face. And frankly, anyone who would make such a claim I believe should be ignored on this topic.

My contention is that Web 3 crypto blockchain, et cetera, by its very structure, has the ability to solve some of the most difficult and frustrating problems that the current version of the internet and the financial system have where a narrow set of platforms control what we see, how we interact and what we buy while millions of Americans remain completely disconnected from the financial system. Web 3 can turn this entire thing on its head in a very empowering way. So my question’s simple. How specifically could you see Web 3 solving some of these bigger challenges associated with the current version of the internet and the financial system?

Mr. Brooks: (03:53:30)
Look, Congressman Gonzalez, thanks for the question. When I go back to the criticisms that you just were counting, the only part of that I heard was hip. I’m going with hip. The rest of it we can come to. But in terms of the problems being solved, I think the first issue is the biggest critics of cryptocurrency have been the biggest banks. Those are the people who are the most concerned about the entry of stablecoins into the payment system, about the ability of crypto assets to build networks that are away from the clearinghouse. Those are the biggest critics. So I think that tells you a lot of what you need to know.

Mr. Brooks: (03:54:01)
And the reason is because the way that Web 3 solves a lot of problems, it’s really twofold. First of all, it eliminates the toll collector role of traditional banks and traditional broker dealers. The main thing that they do is they employ large numbers of human beings, maintaining ledgers of account and allocating credit for a fee. Bitcoin and other cryptocurrencies do that without human beings and with no fee and the elimination of minimum account balance fees, the $25 wire transfer fee that your bank charges to give you three days to send money. Those are gone.

Thank you.

Mr. Brooks: (03:54:34)
That’s what’s important. But the last part is it a unlocks value that traditional economic structures don’t unlock the creator economy play to earn in the gaming system. Those don’t exist.

So I want to go to Ms. Haas on that. Building off this, in your testimony, you mentioned use cases for Web 3 in the creator and gaming economies. Could you please outline a specific use case and discuss how Web 3 can empower creators and artists over mega tech platforms, which was implied earlier. And quickly, please, if you could.

Ms. Haas: (03:55:04)
All right. Let’s talk really quickly. I’ll cite the one that we just talked about earlier, which is in the month of November, play to earn. So these are where video games, one can play a video game and earn NFTs. Those NFTs are in game experiences. So if anyone here has young kids who are playing with Roblox, playing with Minecraft, playing with these, there’s in-game experiences where you can buy avatars, you can buy various things. These can become NFTs. These NFTs then can be sold for value. So what we’re having here is this kind of the concept of a play to earn. You can play a video game. You can earn money. You can then monetize that back into Fiat and you can create these new economies and these new communities that have increasing value.

Thank you. Mr. Bankman-Fried, I believe you live in Hong Kong, is that correct?

Sorry, repeat that?

Do you live in Hong Kong? Is that correct?

I do not anymore.

Oh, okay. Well, let me ask the question differently.

I did at one point.

So 10 years ago, certainly 20, 30 years ago, if you wanted to start a major internet company, you probably wanted to do it in the United States. You probably wanted to do it where you grew up in Stanford on the coast in Silicon Valley for a whole host of reasons. One of which being a very, very conducive, innovative environment. When I look at Web 3, I see a lot of projects moving overseas. To what degree is the current regulatory environment in the United States contributing to this change where projects are now being built and domiciled in nations not the United States, whereas in the previous versions of the internet, they were?

I do think it has contributed to that. I’m optimistic that we’re going to see changes in the framework over the next few years that will bring us into a world that can make the United States the source of the deepest and most liquid markets in the cryptocurrency ecosystem. I don’t don’t think we’ve seen that historically. And if you look at the difference between the volume distribution of crypto and digital assets versus most other industries, you can see that.

Mr. Brooks, do you have any thoughts on that?

Mr. Brooks: (03:57:06)
Well, Congressman, as I said earlier, there’s certain activities that our G20 partners seem to think are perfectly appropriate, legitimate and subject to regulation, and we keep resisting. Those have moved abroad.

Thank you. And thank you, Madam Chair. I yield back.

Thank you. The gentle woman from Michigan, Ms. Tlaib is now recognized for five minutes.

Ms. Tlaib: (03:57:30)
Thank you, Madam chair. And thank you so much for everyone that have been coming forward in regards to this important issue. Cryptocurrency like Bitcoin currently consumes enough energy to power a small nation, and that’s something that continues to be missed in this debate around this issue. The University of Cambridge analysis estimated that Bitcoin mining consumes 121 terawatt-hours a year. To put that in perspective for everyone, that’s more electricity than the entire country Argentina consumes. That’s more than consumption of Google, Apple, Facebook, and Microsoft combined. One Bitcoin transaction, a single purchase sale, or transfer uses the same amount of electricity as the typical US household uses in more than a month. So this is really outstanding to me and many folks do not know this, many Americans and folks that are talking about this issue. So Ms. Dixon, can you explain why for cryptocurrency like Bitcoin that rely on proof of work model mining is such an energy intensive process?

Ms. Dixon: (03:58:44)
Thank you for the question. This is a really important area, obviously in terms of sustainability and the focus on what we do in this space. We should always be trying to do it better and much more efficiently. In Bitcoin, the way that Bitcoin consensus is achieved is through really complicated math equations. So there’s a lot of energy that’s needed to be used to be able to make that happen. I know best about the consensus mechanism on seller, which is the Stellar Consensus Protocol, which can be done on a very small computer, any of the ones that you have in front of you. University of [Lund 03:59:21] did a study on the Stellar network itself, and the network is low in terms of energy consumption. It’s around 0.00022 kilowatts per hour for each transaction. That’s less than a transaction for Visa.

Ms. Dixon: (03:59:36)
So that’s a really important comparison for us all to think about. So not every consensus mechanism is proof of work or proof of stake. Again, there are many different ones out there and depending on the mechanism, it depends on the energy consumption. But it’s definitely important for us to be able to try to do this better, more efficiently and to consider the sustainability concerns around it.

Ms. Tlaib: (03:59:58)
I’m so glad you talked about a model potentially to shrink cryptocurrencies’ enormous carbon footprint. Particularly alarmed that previously idled shut down coal plants like the one operated by Greenwich generation in Seneca Falls, New York are now being brought back online to aid in cryptocurrency mining. I don’t know if the chairwoman knows this, but like in Montana, a coal fire generating station is now providing a hundred percent of its energy to Marathon Digital Holdings for Bitcoin mining under Power Purchase Agreement. Prior to the crackdown in China, it was estimated that nearly two thirds of all Bitcoin mining took place in China, included in regions with very heavy power generation sets in Mongolia and other areas. But Ms. Dixon, should the world central banks and governments be taking a more active role in monitoring and regulating cryptocurrency in order to bring energy consumption and carbon emissions in line with our own targets here in our country at the Paris Agreement. What would that look like?

Ms. Dixon: (04:01:05)
I think it’s really important for us as an industry to really focus on this issue even without regulation. I think it’s something that you need to always balance the value of what you receive in terms of the harm that’s actually created to the environment. So we constantly have to be doing that kind of analysis. I think that we all need to focus on minimizing the energy consumption as much as possible, and then think about how we can work with governments to be able to consider the best way to achieve the carbon neutral status that I think a lot of folks want us to get to. So I encourage constant discussion. I encourage us to be innovative. This is one of the wonderful things about blockchain and just innovation generally. You look and you use technology to help to solve problems just like this.

Ms. Tlaib: (04:01:46)
Yeah. The proof of work model fundamentally is incompatible with the environmental neutral like future. What tools? I mean, you’re saying we got to move in this direction, Ms. Dixon, what tools can policy makers like ourselves look at to move us away from that model? How can policy makers accelerate that transition away from carbon intensive mining? We know our planet is burning. The climate crisis is here, and I just want to get the cryptocurrency community to become part of the solution and not make this crisis even worse. So can you talk about things that you would suggest for us to be working on in regards to this issue?

Ms. Dixon: (04:02:25)
I think it’s really important. We’ve actually engaged a third party to be able to look at the additional energy consumption, not just for, as I mentioned, the University of Lund did with respect to the work that they did, but I do think it’s important to be able… And we’re engaging a third party to look at all of the different transactions and how the network actually can even be better and better with this with respect to Stellar. I think that same kind of work can be done with all of the different of consensus mechanisms out there. So I think research and more focus on what we can do to achieve sustainability and our sustainability goals is an important mechanism, and I think it would be really good to continue that conversation with you.

Ms. Tlaib: (04:03:01)
Thank you, and I yield.

Thank you very much. The gentleman from Tennessee, Mr. Rose is now recognized for five minutes.

Mr. Rose: (04:03:10)
Thank you, Chairwoman Waters, and thanks to ranking member McHenry for holding this hearing and thanks to our witnesses for hanging in with us for such a long period of time. Your testimony and participation today is very important to helping us understand this area and craft the appropriate policies going forward. Mr. Bankman-Fried, FTX and FTX.US have grown substantially over the past several years. Could you tell us about the economic impact from your perspective that FTX.US has in this country?

Yeah. Thank you for the question, Congressman. In addition to obviously the impact in terms of the hiring that we are doing and the support of a number of initiatives in the country related to job training and education, we’re also hoping that we can help provide financial services to people who have not had easy access to those before. If you think about the number of intermediaries that are involved in a traditional financial transaction, whether it’s using a bank or whether it’s investing your assets, that’s a lot of points that can be very difficult to navigate for a number of people, both in this country and in the world. We aim to be able to provide services to everyone here, all easy to access on a mobile phone, giving inclusive and equitable access to financial markets that have been missing to a number of people.

Mr. Rose: (04:04:36)
So obviously you describe a great many benefits to the US economy. So in your view, how do we keep this innovation happening in the United States?

I think I’m optimistic that on the regulatory side, we’re not that far from that point. And I think that there are a few clarifications that could go a very long way here. I think that on the market side, having a framework with a single regulatory structure and it might have multiple regulators involved in it, the CFTC and SEC are both likely to be involved to some extent, but having a single unified framework for futures and spot digital assets could go a long way towards providing the sort of experience that you can offer in a lot of jurisdictions today. I think that giving clarity on the stablecoin side of audit requirements for the reserves, but without sort of squashing innovation by requiring only a very limited number of institutions to be able to issue them could go a long way on that side.

And then the last thing I would say is moving away, hopefully, from a binary distinction of what asset class you are part of where one is very much close to a death sentence and moving towards a structure where we identify the necessary disclosures for certain digital assets related to the issuance, related to the supply, related to anti fraud measures so that they can all be part of our financial ecosystem with appropriate disclosures and anti fraud mechanisms and regulatory oversight would be really valuable.

Mr. Rose: (04:06:16)
I want to turn to you. Thank you. For a moment, Mr. Brooks. If you were king for a day and you were going to tell us, “Here’s what you need to do to structure the regulatory framework” in a minute and 39 seconds, tell us what that would look like.

Mr. Brooks: (04:06:34)
I mean, I can barely introduce myself in a minute and 39 seconds, Congressman. I come back to the concept of parody. I don’t know why we believe that incumbent institutions are risk free and anything new is highly risky. So if I have a platform built on a blockchain that is doing lending, I don’t know why it’s so hard for us to say that can participate in our banking system. If I decide that XRP is a security, why won’t we let it list on a US exchange? The problem is we treat crypto assets differently from all other assets. And the answer is just recognize them for what they are. These are assets that represent some underlying activity. It could be a network. It could be an application. They have a value that people are willing to buy and sell at. Let them in. That would be my message. Let them in.

Mr. Rose: (04:07:22)
Okay. And I’m going to ask this question and then ask you all to respond after today. I recently read an article entitled the Bitcoin Boom and the Quantum Threat. I bet most of you have read this article by Arthur Herman, who is a senior fellow at the Hudson Institute. The article discussed the fact that quantum computing could pose a security risk to the blockchain technology. My friend, Mr. Perlmutter, earlier asked Mr. Bankman-Fried about this topic, but I think it’s worth revisiting. And I would open this question up to all of you and ask you to respond in writing. Do any of you worry that in the future quantum computing could be used to compromise the security of blockchain technology? And I see my time’s expiring and I’ll just go ahead and yield back, Madam Chairwoman. Thank you.

Thank you very much. The gentle woman from Pennsylvania, Ms. Dean, is now recognized for five minutes.

Ms. Dean: (04:08:18)
I thank the Chairwoman and I thank all of you for being here today and testifying before us. I want to start in a general way. And I’m thinking, Mr. Brooks, of what you said about the practice of law with the advent of emails. I was a younger lawyer then and remember all the fears around it. As has been said, and this is really a follow up to what Mr. Green asked long ago, hours ago, it’s obviously clearly a fast growing and a bit mysterious market. Looking at the total cryptocurrency market cap over the last year, as some here have reported, it exploded from about 500 billion a year ago to now almost 3 trillion as of last month. But it’s also clearly a volatile, fast moving market. As of last night, the total market cap is back down closer to 2.4 trillion. Another example of volatility in Bitcoin, which lost half of its value over just two days in March before rebounding.

Ms. Dean: (04:09:18)
So to the people who find all of this a bit mysterious, are we at risk? Do we see warning signs of a bubble in this marketplace? If I’m allowed to call it that. What do we do to make sure that the industry does not threaten the overall stability of our financial system? Maybe Mr. Brooks, I’ll start with you.

Mr. Brooks: (04:09:44)
Thank you, Congresswoman. It’s good to see you again. I’ll just give you a very quick anecdote. When I was practicing law, I represented one of the largest mutual fund complexes in the United States and in their market room, they had a chart, a physical chart showing the US equity market from 1792 to the present. What I remember about this room is it was a full city block long and if you stood at the end of the room and looked at that chart, it was a straight line up and to the right. But if you walked right up close to the chart, you could very clearly see the Civil War and the Panic of 1907 and the Great Depression and all kinds of other volatility along the way.

Mr. Brooks: (04:10:18)
What I would tell you is in the beginning of a fundamental technological revolution like this, the early days are going to see turbulence, but the long chart of crypto in only its 11 year history is up and to the right just like the US equity market. So what I would say is there are risks. There’s disclosures that ought to be had. There’s framework regulations that should be adopted. But the fact that the price goes up and down doesn’t make it any different from US equity markets in the first hundred years of the country’s existence.

Ms. Dean: (04:10:43)
Well, that’s a great comparison and probably a metaphor for other things that we are struggling with in our democracy. Hopefully the upward trend is the trend. Let’s pray that that is so. A little more specifically, all digital assets clearly don’t fit into our current fiscal regulatory frameworks. So we’re here to try to learn what are the right policies to make sure that this is appropriately regulated. Do we need to start from scratch and create an entirely new framework for crypto with a new regulator, such as been suggested by Coinbase? Ms. Haas, can you talk about Coinbase’s view that Congress should regulate digital assets under a new framework with a single regulator?

Ms. Haas: (04:11:27)
Thank you for the opportunity to clarify. So yes, we do believe that there’s benefits to having a single regulator that can address the broad strokes of crypto generally. I share a lot of the views that Mr Bankman-Fried had in his written testimony. I also share the views of Mr. Brooks, where you say if it is a security token, then it is going to fall under the SEC. If it is a commodity token, then it will fall under the [inaudible 04:11:49], but we have also new tokens here. And when you think about NFTs in an NFT marketplace, when you think about Bitcoin itself, when you think about these new protocols where all you’re doing is getting a right to governance in a protocol, they do not fit under the contours of existing frameworks and neat definitions.

Ms. Haas: (04:12:06)
So I think that we benefit from definition taxonomy. I think we benefit from clarity on who we go to to kind of walk through these issues and find one voice. And we think we benefit from an SRO that can really get into the weeds of these issues and help us move with speed in the regulatory speed to keep up with the pace of the innovation of the industry.

Ms. Dean: (04:12:23)
Thank you very much. I appreciate that. Mr. Cascarilla, you also said in your testimony that quote, “A primary prudential state or federal regulator should regulate both digital asset companies and their products.” Could you elaborate?

Mr. Cascarilla: (04:12:39)
Yes. Thank you. Paxos was the first company in the entire country to become regulated. We operate using a trust company status. And the reason we do that is because we don’t make loans and take deposits. So a trust company is actually safer than a bank. So that’s an example of using a state regulatory authority in order to oversee our business. I think having either our primary regulator that’s on the state basis or on a federal basis is what will allow there to be a consistent application of AML KYC rules, reserve rules, customer protection rules. So there isn’t a clear way to be able to do that right now. We feel this even ourselves as a trust company where we don’t have explicit reciprocity in a state by state basis. I think being able to create a clear parody across the board, as Mr. Brooks was saying, is very important for the industry.

Ms. Dean: (04:13:30)
I thank you and my time has expired. I yield back.

Thank you. The gentleman from Wisconsin, Mr. Steil, is now recognized for five minutes.

Mr. Steil: (04:13:40)
Thank you very much, Madame Chairwoman. As you may know, I serve as the ranking member on this select committee on the economy along with Chairman Himes, both of us also members of this committee, and we’re holding the first of two round tables tomorrow on financial inclusion and access to banking for underserved communities. The topic we talk a lot about also in this committee and an issue front of mind for many underserved communities around the United States. So Mr. Brooks, I’d love to get your thoughts on the relevance of today’s topic for financial inclusion and how the growth in digital assets and decentralized finance can actually drive inclusion, and can underserved communities benefit from these developments?

Mr. Brooks: (04:14:21)
I love that question, and thank you for giving me a chance to address it. Couple of things. So first of all, let’s ask, why do we have so many underbanked people in the United States? And the answer is a combination of minimum balance fees, monthly account maintenance fees, and all kinds of other things that are a hallmark of the money center model that banking is built on. Right? If you talk to Mr. Allaire about his product, he would tell you they don’t have any minimum balance fees. They don’t have any monthly maintenance fees. You can keep your assets in a tokenized bank deposit for free. So that’s the first answer is there are no $10 a month fees. There are no $25 wire charges. Those things don’t exist that eat away at your life savings. A.

Mr. Brooks: (04:14:57)
And B, the next most important thing about crypto is here you have an early stage asset, which unlike the IPO boom, unlike venture capital, doesn’t require that you know a guy or that you be well connected or that you be an accredited investor to participate. This is a chance for underrepresented communities to be in on the wealth creation stage of some new thing as opposed to coming in at the end. So what I always say is that’s the way you solve under representation is through wealth creation. This is an opportunity, and that is why there are more minority investors than white investors in crypto in the United States is because of this.

Mr. Steil: (04:15:31)
I appreciate your comments because I think in general, technology is one of the key aspects that we have to really address some of the underserved communities in the United States and agree with your comments. You may enjoy our hearing tomorrow on the select committee in the economy. To build further, what do you see as the main regulatory impediments to further innovation in this space if we think it’s really going to help us on the inclusionary aspect?

Mr. Brooks: (04:15:51)
It’s all incumbency protection. The big banks don’t like this. The big banks have been slow to adopt because they make a lot of money on those fees I just mentioned.

Mr. Steil: (04:15:58)
Okay. So let me keep going with you if I can, Mr. Brooks, in the time that we have. In your opening testimony, you talked about-

Mr. Steil: (04:16:03)
… if I can, Mr. Brooks, in the time that we have. In your opening testimony, you talked about the do no harm approach, and that approach helped bring in a period of tremendous growth and opportunity in really Web One. You mentioned that some of the countries that U.S. crypto businesses are moving to. What are some of the examples of the positive approaches to digital asset regulation that you see in those countries if you had a put your finger on it?

Mr. Brooks: (04:16:21)
Well, I mean, for example, responding to market demand. If a whole bunch of customers want to buy a Bitcoin ETF, why is it our business to say they can’t do it? I mean, you see this domestically in New York versus the rest of the United States. Lots of investors like to buy certain tokens. New York won’t let New Yorkers buy tokens. So there’s safe in Nebraska, not safe in New York. Why would that be?

Mr. Steil: (04:16:39)
Thank you very much. I want to shift gears to you, [Ms. Haas 04:16:42], if I can. I want to ask you about your firm’s interactions with the SEC. As you know, the SEC blocked Coinbase from launching its Lend product earlier this year. Your CEO, Brian Armstrong, has been very vocal about his concerns with the SEC’s decision and the process by which it reached that decision. I think it’s important that regulators apply standards consistently. And so I want better understand how this played out. To the extent you can help us here, has Coinbase had further conversations with the SEC about why it was not allowed to offer the Lend product?

Speaker 1: (04:17:13)
We have, and we still do not have clarity as to why our product was not able to proceed.

Mr. Steil: (04:17:16)
And so how would you characterize the discussions you have had with the SEC? Is it a little bit of a black box? I don’t want to put words in your mouth.

Speaker 1: (04:17:24)
At this time, we have provided a lot of information, but not had clarity as to why or why not we can offer a product.

Mr. Steil: (04:17:29)
Okay. That’s helpful. I think it’s something that this committee needs to consider and look into as to how we assist technology being developed here in the United States rather than abroad. And I appreciate your comments there. If I can, in my final one minute, Mr. Cascarilla, earlier in today’s hearing you talked about how people around the world want stability of U.S. dollars. We all know of countries with out of control inflation and autocratic governments. Can you talk just briefly about how digital assets and Web Three will help people dealing with these challenge?

Yeah, well, I think it’s really important to recognize that, in the U.S., we have a sophisticated financial system. It certainly can be better, but it’s sophisticated and relatively stable certainly compared to most places in the world. And when you look at the developing world, it’s access to financial services that is a real problem. I think in significant ways, they want access to U.S. dollars, but they also want access to crypto. They want to have the ability to protect themselves when they’re in either politically unstable environments or economically unstable environments, or both. And this technology creates the capacity to create a global interconnected way of being able to operate on an economic basis that hasn’t existed before. And that’s very powerful and the U.S. should take advantage of it.

Mr. Steil: (04:18:49)
Thank you very much, Mr. Cascarilla. I appreciate all of our witnesses here today. Madam Chair, I yield back.

Madam Chairwoman Waters: (04:18:53)
Thank you. The gentlewoman from Texas, Ms. Garcia, who is also the Vice Chair of the Subcommittee on Diversity and Inclusion, is now recognized for five minutes.

Ms. Garcia: (04:19:03)
Thank you, Madam Chair, and thank you so much for this hearing on such a fascinated critical topic. Blockchain technology has the potential to change how we transact around the world, not just in the financial sector, but across multiple industries. Indeed, digital assets have expanded the financial marketplace in unprecedented ways already. The Bank for International Settlements recently found that decentralized finance has grown to an estimated $250 billion worldwide. I want to zero in on one part of these transactions that’s already been talked about a little bit, but I want to build on it, and that’s the cross border transactions. Ms. Dixon, your company is a nonprofit clearing network designed to facilitate financial transactions worldwide. In your testimony, you say that your primary focus is to facilitate cross border remittance transactions for over 800 million people supported by funds by migrant workers.

Ms. Garcia: (04:20:06)
In Texas, an estimated 3.1 million immigrant workers comprise about 22% of our labor force, and in my district, in particular, we are 77% Latino. So this is of great interest to me and to them. Many of these workers, however, face the same financial struggles. Not only the financial struggles, but also access to the financial services industry, and it’s multiplied by cultural and language barriers. Specifically, what is it that you think that this sector now will be able to do to be able to provide better access to wealth, better access to the financial services industry considering the economic and language barriers that many migrants face?

Ms. Dixon: (04:20:56)
Thank you so much for the question. This is another one of those areas that I love to talk about because I think it’s actually-

Ms. Garcia: (04:21:01)
We have limited time.

Ms. Dixon: (04:21:04)
There are a lot of important pieces here. The interoperability with the existing financial infrastructure means that individuals that don’t actually have bank accounts, but something like a MoneyGram relationship, which is in Texas, based in Texas, that we have on the Stellar Network, it allows these individual that have cash but they might not have a bank account, they can walk into MoneyGram, convert their cash into a digital asset, and then send that asset to their family, to their friends, to anyone that they choose using the blockchain. And then those individuals that they sent it to could send those digital assets to a MoneyGram location outside the country in those regions that are participating and they could then remove those assets from the blockchain. This is getting to the unbanked and the underbanked all over the world.

Ms. Garcia: (04:21:51)
At the receiving end, how do they then convert the MoneyGram, I forget what you called it, into their local currency?

Ms. Dixon: (04:22:02)
Right. Well, this is what’s awesome.

Ms. Garcia: (04:22:02)
And is there a fee involved there for the conversion, much like there is for traveler’s checks?

Ms. Dixon: (04:22:08)
So it’s very important that on the network layer the fees are very, very low, but we have pricing pressure created by the fact that these network fees are low, so there is going to be a fee when you have feet on the ground and you have an ability to make that transaction. So the end user who wants to go pick up their fiat at the local MoneyGram, for example, they will pay a fee, but there are no other intermediaries that are layered in top of that and the fees are much lower than those that you see in the traditional financial infrastructure. So I feel like with this particular relationship, and also just with this technology generally, what it opens up is a world for those users, as Mr. Brooks indicated earlier, where they get access to all of the ability to hold these assets to be able to create value for themselves.

Ms. Garcia: (04:22:51)
Well, I will follow up in writing with just how you’re planning to reach with those communities, because I can imagine many remote villages, many remote, rural areas even in our great state of Texas, that you’re not going to have access to this wherever you’re supposed to pick up the money at the receiving end. I have a lot of serious concerns about that, but I know that you’ve reached out to my office and we can talk. I want to now move on to, I’m glad that you all are sharing lot of data and posting things on your webpage. From each one of you, will you commit to providing transparent information not only on your employment numbers, I know that Ms. Adams asked about that, but also in terms of your leadership, your board of directors, and salaries and wages?

Ms. Garcia: (04:23:39)
Because I know at least one of you has already had a New York Times review that was not very good, and I’m not going to pick on anybody. I just want a commitment from everyone on diversity and inclusion and transparency. And just say yes or no, please.

Ms. Dixon: (04:23:56)
We can commit to that.

Yes.

Mr. Alair: (04:24:00)
Yes.

Speaker 1: (04:24:01)
As a public company, our data is available.

Ms. Garcia: (04:24:04)
I’m sorry. I can’t hear you, ma’am.

Speaker 1: (04:24:05)
As a public company, our leadership and our board data is available.

Ms. Garcia: (04:24:11)
I didn’t hear from Mr. Cascarilla.

Yes.

Ms. Garcia: (04:24:18)
Thank you. Thank you so much. And I’ve got 15 seconds. The other thing that I would like to see is, I could follow up with it in writing is, demographic data on your users. How many are Latino? How many African American? And also, by income, because I want to make sure, again, that the users are diverse and that your leadership reflects that. Thank you.

Thank you. The gentleman from South Carolina, Mr. Timmons, is now recognized for five minutes.

Mr. Timmons: (04:24:54)
Thank you, Madam Chairwoman. I want to talk about ransomware. Obviously, we’ve seen an exponential increase in the number of attacks in the last months and years, and it seems to only be getting worse. I know that the crypto industry believes it can and currently does play a critical role in preventing illicit finance, including ransomware. Could you maybe, Ms. Haas or Mr. Bankman-Fried, could you describe for us how your firms take an active role such as working with law enforcement and other market participants when these ransomware attacks occur? I just would like you a better sense of the role centralized exchanges play with the flow of funds. For example, how do you keep track of tokens, transactions, and wallets? And maybe including in your explanation, discuss the Colonial Pipeline attack and how the FBI was able to retrieve a substantial portion of the ransomware payments made. Whoever wants to go first.

I guess I’ll jump in. Yeah, we work really actively on this in addition to all of the standard procedures that we have around surveillance of deposits of withdrawals and of our customer information. We are responsive to law enforcement inquiries constantly around this. We are helpful whenever we can be, both in terms of information related to FTX and our users, but also we can extend that out to blockchain histories because it is a public ledger. We can trace these assets through and we can say, “Hey, you should go talk to this place next. This is where it seems like the assets probably ended up.” We have assisted in I think somewhere north of $10 million of successful seizures so far in cooperation with law enforcements related to this.

Mr. Timmons: (04:26:38)
Quick follow-up, if you can get a percentage back why can’t you get all of it back?

If you can get, sorry, a percentage of [inaudible 04:26:47]?

Mr. Steil: (04:26:48)
Again, the Colonial Pipeline attack, I mean, 70%, 80% of the ransom was retrieved. So what is the difference in the Bitcoin that was successfully retrieved as to the one that was not?

Right. We can follow-up with specifics on that case, but I’ll say in general that any assets which are on our platform, we can retrieve. And often you might see a case where some of the people involved would send assets in one direction, others would send it in another direction, and those others might not be in a trackable way. But anything that is on our platform, we can retrieve.

Mr. Steil: (04:27:25)
Sure. Thank you. Maybe follow-up question, do you have any tools that we could help put in your toolbox, Congress legislation, that would facilitate greater recovery percentages?

So I think that speed is frankly one of the more important things here. I think, like in any investigation, the faster that law enforcement can act on this, the greater the chances of recovery are. And so I think that we would love to just have standardized open lines with law enforcement where they know exactly how to reach out to us. We can have phone numbers available because the faster that, that action can be taken, the greater the odds that the assets are retrievable.

Mr. Steil: (04:28:09)
Sure. Thank you. [Mr. Alair 04:28:09], one curious statistic regarding the crypto to currency ecosystem I have noticed is its popularity with a younger and more diverse demographic. According to Pew Research, among African Americans, 18% have some level of experience with cryptocurrency while among White Americans, the comparable figure in the survey was 13%, Hispanic 21%, Asian 23%. Additionally, 43% of men between the ages of 18 and 29 have invested and traded or used cryptocurrency. These numbers are incredibly divergent from what we see for traditional finance. Why do you believe that to be the case?

Mr. Alair: (04:28:45)
Thank you for the question, Congressman. I think what we see with crypto assets and digital assets more broadly is it’s a form of finance that makes sense to young people. A lot of younger people have grown up with the internet. They were born with the internet in their crib, so to speak, and I think have an expectation of value being able to be used the same way that they can share a JPEG photo or react to something. And so I think there’s just a familiarity and an expectation that, of course, everything’s going to be digital. And so I think the expectations are different. I think that a component of digital asset markets is this concept of democratizing access to financial markets, and digital asset markets do that. There is more democratized access. There are fewer barriers to entry for individuals and I think that affects the adoption rates in minority communities. It affects adoption rates more generally on some of those other demographics. So I think those are some of the key contributors.

Mr. Timmons: (04:29:46)
Sure. Thank you. Madam Chairwoman, I want to thank you for holding this hearing. It has been very productive and I think this is a good example of how this committee should learn about important issues that are facing the American people, and we need to regulate carefully. Thank you, ma’am.

You’re welcome, and thank you for your participation. The gentleman from Massachusetts, Mr. Auchincloss, who is also the Vice Chair of the Full Committee is now recognized for five minutes.

Mr. Auchincloss: (04:30:13)
Thank you, Madam Chair. I appreciate the written and oral testimony from our expert witnesses. It’s timely. The current regime of regulation by enforcement in which entrepreneurs must negotiate with the SEC or the CFTC on a one off basis is not fair, it’s not efficient, or conducive to U.S. based innovation. Congress needs to provide clarity and predictability by statute and I’m ready to work with both my Democratic and my Republican colleagues to provide that. The rules of the road for Web Three can be a bipartisan initiative. The United States needs a primary crypto regulator that is tech and market structure neutral and that has three imperatives, it compels disclosure and transparency, it prevents fraud and abuse, and it promotes the efficiency and the resilience of the market. And this primary regulator should work with a self-regulatory organization as a counterpart in the private sector to establish one light touch rule book for spot and derivatives listings, custody requirements, token issuance, asset servicing, cross margining settlement, know your customer and anti-money laundering, disclosure and auditing, and, of course, stable coding standards.

Mr. Bankman-Fried, on that final point, stablecoin standards, which you’ve identified as perhaps the most important crypto innovation, in a recent interview on Invest Like The Best, you identified stablecoin regulation as a “substantial step forward for persisting dollar dominance globally.” And to quote you further, you said, “There are going to be stablecoins in the world, and if you ban U.S. dollar stablecoins, then it’s going to be Euro coins, or it’s going to be yuan stablecoins.” And in your written testimony, you propose a seven part framework for stablecoin regulation, and I want to thank you for the thoughtfulness behind that. Within this framework, can you identify the single most important thing that Congress could do right now to regulate stablecoins in order to persist dollar dominance?

Yeah. Thank you for the questions. I think the single biggest thing is just ensure the reserves are what they say they are. That is the fundamental large portion of the risk that could be posed by them is from both a consumer protection and a systemic risk perspective is, what if there is $1 trillion stablecoin with only $1 billion actually backing it? And so I think having daily attestations and periodic third party audits to confirm that the stablecoins are backed one to one with regulatory oversight of that process is by far the single most important piece of that.

Does any of the other members of the panel disagree or want to expound on that statement? Mr. Alair?

Mr. Alair: (04:32:45)
Yeah, I would jump in. I think what Sam has outlined is a really productive framework. I think clarity on this, on the disclosure and reporting requirements, and I think also on the reserve and liquidity requirements and having that be a focused set of statutes could be extremely valuable to providing confidence to the market, providing confidence to market participants, and allow dollar digital currencies to flourish on the internet.

So if you say that this stablecoin is tethered to the value of the U.S. dollar, you’ve got to disclose on a regular basis that you’ve got the liquidity in the reserves to match that to reduce run risk, and you’ve got to be willing to be audited by a primary regulator?

Mr. Alair: (04:33:34)
Absolutely.

Mr. Bankman-Fried you’ve said that you think that is the single most important regulatory step the United States could take to persist dollar dominance, and I don’t want to put words in your mouth, but it struck me from the interview you had on Invest Like The Best that maybe the most important thing we could do period for crypto innovation. Does anybody on the panel want to expound on that or disagree with that statement?

I’ll add some thoughts here. I completely agree that this is the most important thing that the U.S. can do at the moment. It’s not clear exactly how you can trust a dollar stablecoin, and that’s unfortunate. Money is ultimately a product and the way money is working today for people leaves a lot to be desired. Being able to put a dollar into a blockchain environment solves so many problems that we’ve been talking about all day to day here. And I think that it’s crucial for us to be able to set a clear regulatory plan in place that creates parity across all of these different products. And so I think it’s really simple. If you have a primary regulator, you have clear reserves, you have made sure that you back them by cash, cash equivalence, that creates very much a level playing field for all different dollar back stablecoins. And then they’ll really be stable.

I appreciate that. And this to me is an example of why these hearings, Madam Chairwoman, are so useful. I feel like we really got a pretty clear path forward for one step that we could take, which is Congress should designate a regulator, at least initially the primary regulator, and task them with disclosure and auditing requirements for the stablecoin. I yield back, Madam Chair.

Thank you. The gentleman from Texas, Mr. Taylor, is now recognized for five minutes.

Mr. Taylor: (04:35:20)
Thank you, Madam Chair, appreciate this hearing. Ms. Dixon, a question for you. As you know, my home state of Texas earlier this year created a more friendlier jurisdiction for crypto and blockchain in an effort to be a leader in that space. And I saw that MoneyGram, which has many employees in my district and is headquartered right outside of my district, you’ve developed a partnership with them. And I was just wondering if you could go into further detail what doing with MoneyGram. And then, for those that don’t know, MoneyGram is one of the premier money transfer operations in the world. There are countries that literally 20% of their GDP is transferred in by MoneyGram. So it’s a pretty important product for a lot of the world. I was wondering if you could talk about what you’re doing with them.

Ms. Dixon: (04:36:09)
Yeah. I think that’s why it’s such an important part. Thank you so much for the question. It demonstrates not just the interoperability that blockchain has with the existing financial infrastructure, but it also demonstrates that you can actually offer services to traditionally unbanked or underbanked folks all over the world leveraging this kind of technology. And, finally, I think importantly from the MoneyGram standpoint and from [Remitter’s 04:36:32] standpoint, actually, it provides instantaneous settlement. So they don’t have IOU’s out there. They actually have the money in their bank account when they’re using the stablecoins, which is very important for us to be able to get right. So the MoneyGram relationship, which is in pilot right now in the United States, allows folks, you don’t need to have a bank account to be able to get assets put on the blockchain. Right now, the hardest part about blockchain is the on and off ramp.

Ms. Dixon: (04:36:57)
We actually haven’t done that exceptionally well because, unless you have a bank account, it’s very, very hard to be able to get money into digital assets. The MoneyGram relationship could be one of many that actually demonstrates the ease of use that you can have. The beautiful thing about this is that MoneyGram, who acted very quickly, in less than two months was able to help to develop this technology and this integration with Stellar. There’s one part of it, but the other part of it is, all you have to have is a wallet that’s Stellar enabled. So, a wallet anywhere in the world. It doesn’t have to be a specific wallet to be able to then walk into MoneyGram, get assets onto the blockchain using your fiat, your local fiat. It’ll convert into USDC, which is Mr. Alair’s coin, and then you could have that in your wallet, you can generate yield on that, you can do lots of other things with respect to the assets that you have.

Ms. Dixon: (04:37:47)
You could then send them to family in a different country, for example. And once this is global, which will be next year, you could then go into participating MoneyGram locations and have those assets converted into your local currency, which is very important. So it works very well with the cash economy and cash ecosystems, and it demonstrates the true interoperability with blockchain and traditional financial infrastructure, because that’s what MoneyGram is and has done exceptionally well. And it demonstrates the value that these traditional players bring because they’ve created this really important ecosystem and network of folks all over the world that have feet on the ground that really work with cash, the individuals that have cash, to be able to deliver value to them. Whether that be to be able to get it from family outside of their country or just to be able to convert these into digital assets. So it’s a really exciting and transformational opportunity, in my opinion, for blockchain because of the speed of use and the ease at which you can get money on and off the blockchain.

Mr. Taylor: (04:38:43)
And just to follow up with my earlier statement about Texas and its role, I mean, I think all of you have testified that you have different state regulatory licensure. Everybody here has got state licenses and multiple state licenses. I mean, some of you have licenses in almost every state. And so, on some level, you’re seeing states, sometimes referred to as the laboratories of democracy, come up with their own policy sets. Ms. Dixon, do you think that’s working? Is that effective?

Ms. Dixon: (04:39:14)
I think that we actually don’t have to have those licenses because we’re the infrastructure, but I will tell you, working with companies that have to have that, it’s complicated for them to have the individualized different licensing structures all over. But I think that folks are doing it very well. Many of the individuals on this panel have been able to be successful at getting those licenses at the state level.

Mr. Taylor: (04:39:32)
And one final comment, because it seems to me that there’s a drive to say you’re unregulated. I was actually surprised reading the memo from the committee staff saying this is an unregulated industry, do any of you feel unregulated?

Ms. Dixon: (04:39:47)
I think that’s an important distinction, is that the activity itself is already regulated and I think that when we focus on activity versus focus on the technology stack, you’ll see that there’s already tremendous amount of regulation here and a lot of protections and we should just be looking for those gaps instead of actually trying to create a new framework.

Mr. Taylor: (04:40:05)
Yeah. And I think it’s funny that when I asked, are you unregulated, everybody laughed that literally the concept, I mean, the memo unfortunately is almost laughable at least to the people that are regulated, the people that live it every day to say, “Hey, you guys are a bunch of unregulated yahoos doing whatever you want.” That’s not the world you live in. Madam Chair, I really appreciate the opportunity for this discussion. Thank you for having us here. I yield back.

You’re so welcome. Thank you. I’d like to thank our witnesses for their testimony today. Without objection, all members have five legislative days within which to submit additional written questions for the witnesses to the Chair, which will be forwarded to the witnesses for their response. I ask our witnesses to please respond as promptly as you’re able. So without objection, all members will have five legislative days within which to submit extraneous materials to the Chair for inclusion in the record. And with that, this meeting is adjourned. [inaudible 04:41:28].

Speaker 2: (04:45:25)
I think we’re good. [inaudible 04:45:25]. (silence)

Crypto CEOs Testify Before House Financial Services Hearing

Other Related Transcripts

Stay updated.