▶ 0:14:19The subcommittee on digital assets, financial technology, and artificial intelligence will come to order. Without objection, the chair is authorized to declare a recess at any time. The hearing is titled American Innovation and the Future of Digital Assets uh Aligning the US Securities Law for the Digital Age. Without objection, all members will have five legislative days within which to submit uh additional material to the chair for inclusion in the record. I'll now recognize myself for four minutes uh for an opening statement.
▶ 0:14:47Good morning and welcome to the first digital assets market structure hearing for this Congress. Last week, we successfully passed the stable act out of this committee, marking a significant step forward in advancing the first half of President Trump's digital asset agenda. Today we will resume our efforts on advancing the second half of the agenda. Comprehensive digital asset market structure legislation.
▶ 0:15:10Recently, Chairman Hill and House E committee chairman GT Thompson outlined their vision for digital asset market structure legislation. An op-ed titled a blueprint for digital assets in America. In that piece, the chairman emphasized the transformative potential of digital assets and the urgent need for a clear regulatory framework, one that fosters innovation, development, and market structure legislation. The chairman also outlined core six core principles.
▶ 0:15:38The United States has been a global leader in financial innovation, balancing balancing market growth with investor protection. However, is digital assets and blockchain technology gained prominence. The Biden Harris administration's hostile approach drove the digital asset ecosystem should jurisdictions with already established frameworks. Now, we have an opportunity to correct course and make the United States the epicenter of this ecosystem.
▶ 0:16:04Our goal today is to examine what aspects of the ecosystem are implicated by securities laws and analyze the challenges of applying these laws. Let me be clear, the House Financial Services Committee recognizes that digital assets have use cases beyond financial markets. At the same time, the committee feels strongly that there's a role for the US Securities and Exchange Commission to play in the digital assets ecosystem.
▶ 0:16:29For example, the committee believes that issuers raising capital through the sale of new digital assets should fall under the jurisdiction of the Securities and Exchange Commission. Issuers should be required to disclose relevant information that helps users understand the unique characteristics of the digital asset networks they're investing in. Today, we'll explore how we can modernize our securities law to better accommodate the unique characteristics of digital assets.
▶ 0:16:54This includes examining classifications of digital assets, the adequacy of current disclosure requirements, and the applicable applicability of various requirements for intermediaries. It's crucial for this committee to enact legislation that provides clear guidelines for issuers and market participants, facilitates capital formation, and maintains the integrity of both the digital asset ecosystem and the traditional finance system. Through this process, we must ensure that American innovators and entrepreneurs can thrive at home.
▶ 0:17:24We're fortunate to be joined today by a distinguished panel of esteemed experts in securities laws, digital assets, and financial technology. Their insights will be invaluable as we deliberate on these complex issues and consider how best to address technology and legislation. Thank you for your time and for being with us today, and I look forward to your testimony. The chair now recognizes the ranking member of the subcommittee, Mr. Lynch for four minutes for an opening statement. Good morning. Thank you, Mr. Chairman.
▶ 0:17:51I want to thank you and I want to thank our our witnesses for their willingness to to help the committee with its work. On the heels of last week's markup hearing, which considered stable coin legislation, uh the committee is now quick to move on to fulfilling the crypto industry's next request addressing the crypto market structure. This hearing includes aligning the US securities laws for the digital age. in its title.
▶ 0:18:17I I interpret this to mean lowering regulatory standards and removing securities laws that protect consumers and investors which are viewed as obstacles to the crypto industry. The US has had a long outstanding history of robust securities laws designed to protect investors, encourage competition, and ensure financial stability.
▶ 0:18:40At a time when our country faces high inflation and President Trump's reckless tariffs send our markets into a tail spin, this committee should be working to preserve market integrity, not grant an industry wish list. Just this week, crypto prices dropped in line with the stock market dips following tariff announcements. Bitcoin's price plummeted to under 77,000, down more than 10% from its high last week.
▶ 0:19:05If these speculative products resemble in their activity traditional security products, they should be treated the same way. For the last several years, the crypto industry has launched a campaign against the SEC, claiming it's been unfairly targeted and that is unable to comply with securities laws. Rather than adjust their practices or acknowledge that their products do come under the jurisdiction of existing securities laws, the industry has fought to elect and appoint crypto friendly policy makers.
▶ 0:19:36As we speak, crypto firms are fighting amongst themselves to craft legislation that favors their business models and ensures they can maximize their profits. It is also notable that under the Trump administration, the SEC has dropped almost every lawsuit against some of the worst offenders in the crypto industry. This includes Crypto.com, Ripple, Kraken, Gemini, Gemini, excuse me, Binance, Coinbase, Robin Hood, and Uniswap.
▶ 0:20:03I assume that under the nominated chair Paul Atkins, who has advised several crypto firms, the SEC will continue in this direction. These are companies that have a proven history of irresponsible, illegal, and predatory practices. Yesterday, the US Justice Department announced it is disbanding the National Cryptocurrency Enforcement Team, which had been charged with combating fraud and illicit finance. This is deeply concerning.
▶ 0:20:28Cryptocurrencies have been in existence for 17 years, but still lack any meaningful use cases. Crypto assets are only needed to trade crypto. They are speculative products similar to securities that can make a handful of investors and firms handsome returns. These products also come with a myriad of risks including investor loss, lack of adequate disclosures, volatility, and more regular and more regulatory investors saving for retirement.
▶ 0:20:59Our pension funds that serve retired teachers, firefighters, and nurses should not be exposed to these risky products. While promises of faster payment and greater financial inclusion have remained unfulfilled, the only proven use cases have been for moneyaundering, terrorist financing, and illicit finance. I remind my colleagues that the crypto winter following the collapse of FTX, BlockFi, and several others was not too long ago.
▶ 0:21:25Despite multiple incidents in which crypto firms have failed, my Republican colleagues seem determined to pass legislation that would essentially legalize crypto crime and allow President Trump to add to the $350 million he has already made off his own meme coin. We cannot continue to ignore the clear conflicts of interest between the president's personal crypto ventures and his supportive industryfriendly legislation. This committee has a long history of advancing policies that protect consumers, investors, and our financial stability.
▶ 0:21:55We should not undermine those practices by allowing the crypto industry to write its own rules. Thank you, Mr. Chairman, and I yield back. Gentleman yields back. The chair now recognizes the chair of the full committee, Mr. Hill, for one minute. Thank you, Chairman Style. Appreciate the opportunity to have our good panel before us today. Last week, the committee took an important step in delivering real legislative certainty for payment stable coins by advancing chairman styles stable act.
▶ 0:22:22It's incumbent upon us to build on that momentum and continue working towards a comprehensive regulatory framework that establishes clear rules of the road for digital asset markets. I want to acknowledge this committee's strong bipartisan efforts to bring clarity and stability to the digital asset ecosystem. In the 118th Congress, we made significant progress with the passage of FIT 21, which aimed to establish clear fitforpurpose federal standards for digital assets.
▶ 0:22:53Since then, the committee has engaged with a wide range of stakeholders from government agencies to leaders in the ecosystem to identify ways market structure legislation can be further refined and strengthened. We're actively working to release a legislative discussion draft that reflects that feedback from members and market participants. I look forward to hearing from our witnesses today and working with my colleagues to get this across the finish line this year. Thank you, Chairman Style. I yield back. Thank you, Chairman Hill.
▶ 0:23:20Today we welcome the testimony of Rodrigo Sra, special counsel at Kulie, where he serves as outside counsel to digital asset focused startup and investment funds. Miss Tiffany Smith is a partner at Wilmer Hail, where she is a member of the Securities and Finance Service Department and co-chair the firm's blockchain and cryptocurrency working group. Mr. Jake Werrett is the legal officer at Polygon Labs, a software development company building blockchain infrastructure. And Ms.
▶ 0:23:49Ex Alexandra Thornton who is a senior director of the financial regul who is a senior who is the senior director for financial regulation for inclusive economy at the center for American progress. We thank you for taking time to be here. You will each be recognized for five minutes to give an oral presentation of your testimony. Without objection, your written statements will be made part of the record. Mr. Sarah, you are now recognized for five minutes for oral remarks.
▶ 0:24:14Uh, thank you, Chair Style, Ranking Member Lynch, and members of the subcommittee for the opportunity to testify before you today. I'm appearing here today in my personal capacity and on behalf of my firm or any client. My testimony will make three interrelated points. First, crypto represents a new technological paradigm that will reshape how we interact and organize in the digital age.
▶ 0:24:37Second, in my opinion, the current securities law framework is not fit for purpose in regulating crypto and attempts to force crypto into this regime without significant overhaul are counterproductive. Third, we have an opportunity to develop a new regulatory framework that protects crypto consumers and our capital markets while allowing crypto to flourish.
▶ 0:24:58My goal here today is to help us capitalize on this I've always been fascinated by the forces that bring groups of people together or push them apart, which is how I find myself here today speaking about crypto. At its core, crypto is a social coordination technology. It enables individuals to organize, interact, and collaborate based on rules enforced by transparent code rather than intermediaries or centralized policies.
▶ 0:25:25While many of crypto's early use cases have been financial, crypto is a general purpose technology with countless applications. Crypto provides new ways for individuals to be economically rewarded for their contribution to networks and other public goods, opening the door to people around the country that lack the traditional advantages of capital and credentials. Regulation, technological development, and the flows of financial capital are tightly intertwined and interact in a recurring pattern throughout history.
▶ 0:25:54As new technological paradigms such as crypto emerge, they operate in the fringes of the old regulatory regime where they attract capital which can lead to speculative frenzies. This frenzy often ends up in a rupture that exposes the need for a realignment. We are living through that moment now.
▶ 0:26:13It is clear that the current securities regulatory framework is not a viable option to regulate crypto and fails to achieve its stated policy Critics often portray the crypto industry as a collection of willful lawb breakakers refusing to follow straightforward rules. Fraud and abuse have undoubtedly occurred in crypto as they have in any emerging technology sector. However, the idea that crypto projects can simply come in and register with the SEC is demonstrably false.
▶ 0:26:42I believe that if promoters are raising capital to fund raise for new business enterprise by pre-selling crypto assets, those fundraising transactions should be subject to the securities laws. In practice, however, virtually no crypto projects have successfully registered their tokens under federal securities laws and live to tell the tale. Projects that tried to comply with SEC's current regulatory requirements expended significant resources and effort only to fail or survive in a state of regulatory uncertainty.
▶ 0:27:12Moreover, registration is not a simple one-time process. Registering a token in the same manner as stock triggers an ongoing obligation to operate as a publicly reporting company subject to extensive requirements like exchange act reports, proxy rules, tender offers, and more. Even if a project manages to register a token, its ability to trade is severely constrained. Tokens that are registered as securities can only be traded on national securities exchanges through ATS's or broker dealers over the counter.
▶ 0:27:40All of which impose significant additional regulatory burdens at intermediaries and are fundamentally incompatible with the disintermediated trading models that crypto enables. The SEC disclosure framework designed in the 1930s to regulate companies issuing securities like stocks and bonds is intended to ameliate information asymmetries and agency problems that develop between security issuers and the investing public.
▶ 0:28:04This regime is relevant when applied to initial fundraising transactions described above or to tokenized securities. However, certain types of crypto assets such as the native tokens of decentralized networks differ from securities in fundamental ways. Network tokens can persist independent of any corporate issuer.
▶ 0:28:23Network tokens confer technological abilities in the network rather than legal claims against an issuer and network tokens often acrue value based on network utility and market forces rather than a company's profits. As applied to network tokens, the current securities disclosure forms focus on irrelevant corporate and financial information while ignoring critical cryptospecific aspects like governance mechanisms, network design, tokconomics, cyber security, and network utility of the assets.
▶ 0:28:53As a result, forcing crypto into the traditional securities disclosure regime is harmful to the very public securities laws are intended to protect because it fails to provide purchasers with the material information they need to determine the value and risks of their crypto holdings. FIT 21, which passed with broad bipartisan support by the House last year, marked a significant step towards regulatory clarity in the digital space. It would provide much neededed clarity for participants to foster innovation within a structured environment.
▶ 0:29:24Thank you. I look forward to your questions. Thank you very much, Mr. Sarah. Miss Smith, you're now recognized for five minutes. You're the microphones may still not be on there, Miss Smith. You might have to point it directly. The microphone is very directional. No. Is the red light on?
▶ 0:29:54There's a little red light. Maybe you could borrow one of your mics. Nothing like a hearing on technology to have a little technology. Congress at the forefront of technology yet again. You're now recognized, Miss Smith, if that works. Thank you. Thank you, Subcommittee Chair Steel, Ranking Member Lynch, and distinguished members of the subcommittee.
▶ 0:30:22Thank you for the opportunity to present at today's hearing. My name is Tiffany J. Smith, and I'm a partner at the law firm Wilmer Hail and co-chair of the firm's blockchain and cryptocurrency working group. The views I share today are my own and do not represent those of my colleagues, my law firm, or our clients. I'd like to start by commending the subcommittee for the important and necessary work it is doing to provide regulatory clarity to digital assets industry in the US markets.
▶ 0:30:52A critical starting point is understanding the current state of securities market structure to evaluate the changes that may be necessary. While the SEC has taken steps within its jurisdiction to provide regulatory clarity, I believe that congressional action is also necessary to have true regulatory clarity for the digital industry. I'd like to briefly highlight three topics which I cover in more detail in my written testimony. First, federal securities law compliance challenges for digital assets.
▶ 0:31:23Second, SEC specific digital asset guidance. And third, why congressional action is necessary. First, the decentralized nature of certain digital assets presents unique challenges to federal securities law compliance. Broadly speaking, the Federal Securities Laws, including the Securities Act of 193 1933 and the Securities Exchange Act of 1934, are in their current form challenging to apply to digital assets and digital asset market participants.
▶ 0:31:54At the same time, a diverse set of market participants in the United States, including cryptonative and traditional financial services firms implementing emerging technologies, have significant interest in achieving regulatory clarity. Indeed, the lack of regulatory clarity has led to the expenditure of significant resources to determine how to comply or in other cases defending enforcement actions.
▶ 0:32:19Some entities have decided to dis discontinue product offerings, cease operations in the US or for highly regulated financial services firms in particular, some have decided not to offer digital asset products altogether. With concrete action to provide clarity for the industry, Congress can help ensure that this industry can flourish and thrive in the US while ensuring market integrity and the protection of investors and consumers alike.
▶ 0:32:49Second, putting aside the guidance that was recently issued in 2025, the SEC has not issued specific guidance related to digital assets since 2020. I believe it is critical to provide concrete guidance to market participants in the near term. This guidance should do two things. First, help market participants identify the circumstances when a digital asset is offered and sold as a security. so market participants can understand when the federal securities laws apply.
▶ 0:33:19Second, when these laws do apply, provide guidance to market participants on how to comply with the federal securities laws given the differences between digital assets and securities. Any formal guidance or rulemaking must take into account these key differences, including the specific risk related to digital assets that may have not be that may not be of concern for traditional securities. So compliance is feasible and regulation is effective.
▶ 0:33:47Third, notwithstanding the the progress that the SEC's crypto task force is making, the SEC and other federal agencies have jurisdictional limits such that agency action alone is not sufficient to provide regulatory clarity for digital assets. A patchwork approach across agencies and states has created the regulatory uncertainty that currently exists. A comprehensive and clear regulatory framework for digital assets is needed. something that these agencies undertake.
▶ 0:34:16This Congress has the opportunity to help steer the path for digital assets for years to come and help ensure responsible development of digital assets in the digital asset marketplace. Thank you for your leadership on these important issues. I look forward to our discussion. Thank you very much. Uh Miss Smith, Mr. Wear, you're now recognized for five minutes. Chairman Hill, Ranking Member Waters, Chairman Style, Ranking Member Lynch, and members of the subcommittee.
▶ 0:34:45Thank you for inviting me to speak with you about digital assets and blockchain technology. My name is Jacob Warren. I am chief legal officer at Polygon, a software development company that builds blockchain infrastructure. Today, I invite you to imagine a world where access to financial systems is permissionless without respect to one's ability to pay fees or maintain balances.
▶ 0:35:12To imagine a world where a simple $100 payment to your grandmother in Tokyo doesn't require a $40 bank fee from you and a $41 bank fee from your grandmother, netting only $19 after a three-day delay. Imagine a world where title companies and title insurance become obsolete, saving consumers $7 billion annually.
▶ 0:35:40Imagine a world where your online funds can be custodied by you on your terms. And if your funds are leveraged or traded, it won't be by an intermediary that captures the value. It will be by you.
▶ 0:35:54Imagine a world where uh your identification and your health care records can be locked in a vault and custodied by you and seemingly daily requests to confirm your identity or your creditworthiness can be displayed in limited fashion on your terms via crypto cryptography. In short, I inv I am I I invite you to imagine a world centered around technology that already exists today.
▶ 0:36:25Each of these applications and many more have already been developed in various stages. The question is not whether this technology is the future. The question is whether the United States itself will be a part of that future. While other countries have developed and adopted frameworks to entice innovators, we have not.
▶ 0:36:49We should act swiftly and thoughtfully to empower software developers to innovate inside the US. Turning to decentralized finance or DeFi, technological decentralization is among the most transformative advancements in modern memory.
▶ 0:37:08The internet illustrates the critical value of decentralization, which is itself a network of decentralized servers and websites, infinitely scalable, owned by independent actors across the globe, coordinating to connect and reveal Blockchains are likewise networks of decentralized validators owned and controlled by independent actors across the globe coordinating to connect and validate transactions.
▶ 0:37:39Similar to the revolutionary advent of decentralized information on the internet, decentralized blockchains facilitate global coordination, enabling self-custody, user governance, and Perhaps greatest of all and inextricably tethered to the founding principles of our nation is the power of digital asset holder self-governance to decide day-to-day activities such as fee structures, user fairness,
▶ 0:38:09grants, and leadership. Decentralization is inherently democratic. Decentralized technology facilitates self-governance and allows individuals the freedom to control their own property. In short, decentralization is uniquely American. As we contemplate policy that will govern this innovation, I urge you to consider three points.
▶ 0:38:39First, we should not allow legislation enticing innovation for blockchains offshore to outpace legislation enticing innovation inside the United States. Second, we should not assume that archaic security structures cannot be refreshed to address innovative technologies.
▶ 0:39:03And third, we should not allow stable coins pegged to foreign assets or foreign currencies to outperform stable coins pegged to the United States dollar. Decentralized blockchain technology is built for the people, by the people, and of the people. We look forward to working with you in collaboration and with the members of this committee to achieve these common goals. Thank you. Thank you very much. Uh Mr. Wear, Ms. Thornton, you're now recognized for five minutes.
▶ 0:39:34Thank you, Chairman Style, Ranking Member Lynch, and members of the subcommittee. Thank you for the opportunity to com comment on digital assets and the US securities laws. Congress seems determined to pass legislation creating a light regulatory regime for stable coins and now other digital assets, the topic today. Significant risks are at stake. First, the digital asset markets haven't functioned well so far with massive asset value swings, billion-dollar losses to investors from hacks that are ongoing and billions more from frauds.
▶ 0:40:04At the same time, these markets have fueled incredible profit margins for trading firms and compensation for their executives. These are not simply the growing pains of a nent industry, but rather result from the absence of long-standing market pro protections. Congress and regulators have been down this path before. The Commodity Futures Modernization Act of 2000 exempted swaps from its regulatory regime for the over-the-counter derivatives market where financial contracts are traded directly between two parties without a centralized exchange.
▶ 0:40:34Those markets remained opaque, expanded by trillions of dollars and ultimately contributed to the great financial crisis which devastated the US financial system and the economy. Lack of transparency and lack of regulatory oversight resulted in an inefficient market in which end users were prevented from making informed trades and dealers could increase their profits.
▶ 0:40:55What the crypto industry now seeks is eerily similar and if enacted could cause serious harm not just to crypto investors but also to the tradable also to the uh US financial system. Second, President Donald Trump and his Department of Government Efficiency have been crippling the regulators that protect investors and borrowers from scams and manipulation and that and that ensure the stability of the US financial system, including the SEC and the CFPB.
▶ 0:41:21These actions raise enormous risks and uncertainties that cry out for a cautious approach to any new regulatory regime for an industry plagued by scams, theft, and hacks. With this in mind, I've outlined in my written testimony some hallmarks of healthy capital markets and I strongly urge the committee to ensure that any new rules for crypto look a lot like the existing rules for US capital markets. I'll highlight a few. First, regulation of asset creators should match the assets tradable life.
▶ 0:41:49The securities laws in the commodity exchange act don't regulate definition of an asset but generally regulate the offering and trading of securities and commodities and related disclosures. meaning reporting. The initial disclosure of a physical commodity, say a metric ton of aluminum at the time a derivative is created on it should remain accurate for the entirety of its tradable life. The aluminum holder doesn't vote to suddenly transform the aluminum into nickel, for example.
▶ 0:42:17So, the disclosure regime for a physical commodity is tailored to when it is most useful to the investor at the time of the offering. For securities, the characteristics and risks of the asset change significantly over the securities tradable lifespan as companies grow, contract, develop new businesses, merge, and have spin-offs. The securities tied to them may change fundamentally. That's why the securities laws require public issuers of securities to make initial disclosures and ongoing disclosures throughout the tradable lifetimes of their securities.
▶ 0:42:46Second, capital market intermediaries perform different functions, and each function must be effectively regulated. These players include broker dealers, investment advisers, exchanges, and many more. Each has different incentives and responsibilities, and each is in natural conflict with the rest. Next, nearly all of these functions exist in the trading of digital assets, but top industry players have often merged functions together.
▶ 0:43:10They may remove some potential burdens and costs, but it also eliminates the long-standing checks and balances in profit motives and offsetting conflicts of interest that promote fair competition and protect investors and market integrity. Moreover, a significant amount of crypto trading occurs off the blockchain. Crypto rules should apply both off-chain and onchain. Congress also should take extreme care to avoid upending the traditional securities markets upon which the US relies.
▶ 0:43:36This could come up in an attempt to create a regulatory regime based on the definition of the asset in question um rather than on the market function. Such harm could also arise with tokenization of securities whereby a corporate bond or stock has an associated token. If the token isn't subject to the securities rules, there would be two assets that look economically similar and would trade together, but one would be free of effective regulation. A situation ripe for abuse and risks that could blow up the existing stock and bond markets.
▶ 0:44:05The result might look something like the Archagos disaster in which an investor seeking to manipulate the markets took massive positions in several companies by purchasing assets on margin through the use of derivatives which effectively hid the uh investors identity. Position reporting rules now prevent this situation in public and private securities markets. But without similar rules in crypto markets, there would be no need for fraud to accomplish this.
▶ 0:44:29Since identities can be hidden on and off the blockchain, Congress has neglected to put in place a sufficiently robust regulatory framework before and that has ended very poorly. Thank you. I look forward to answering your questions. The general yields back. Miss Smith, is your microphone up and running? Yes, it is. Thank you. All right. We appreciate the quick work by the team at the CEO. Uh duly noted by the chairman of the committee on House Administration. Um I want to begin. And I want to I'm going to now recognize myself uh for five minutes for the purpose of asking questions.
▶ 0:45:00Um I want to stage set uh because I think it's really important that we're talking about why we're crafting legislation for digital assets market structure a little bit in the first place. I want to start with you uh Mr. Sierra if I can. Um who's involved? I want to I want to walk this through in three stages. So who's involved in that early phase to get projects off the ground? Are there founders, engineers, lawyers, investors, community leads? Is that kind of the broad structure of who's involved? Uh, thank you for the question.
▶ 0:45:27When I usually get the first call or email, it's from a couple of developers that have a new idea to develop a new protocol. And the first decision that we go through is uh where are we going to form a legal entity? What structure is it? Is it in the US or elsewhere? Uh the second question is usually how are we going to finance this? Right? Uh there are two basic approaches. Most projects will uh raise funds from uh venture capital funds.
▶ 0:45:55Other projects try to do a more grassroots uh fundraising where they uh try to distribute tokens. However, the current regulatory regime makes getting those tokens into a distributed token holder base uh close to impossible. Okay. So then then let's say you you you navigate through that. I'm going to let let that let that hang for a second. And now let's shift into the issuance phase. Um talk talk to me about how this uh is different than traditional securities.
▶ 0:46:24Kind of think about let's let's maybe start with centralized intermediaries digital asset space. How does that play out? Uh so I think in the context of securities that's reasonly it's usually thought of as a fundraising transaction right it's like some promoter wants to do a business and then they raise capital from the public to go and do that business.
▶ 0:46:45In the context of crypto, uh the token issuances are largely permissionless and are usually intended and set up for capital raising to distribute the governance and the token holders to the token holder base. And and how is the recording different between securities and digital assets? Uh well, most digital assets uh are uh native to a blockchain, right? So it's a entry on a on a ledger.
▶ 0:47:10uh most securities today are uh you know digital securities and and uh custodied by big custodians like DTCC and reflected in brokerage accounts and then talk to me about the how long the process can take in in traditional securities and in digital assets. Uh well in traditional securities it really depends on whether you're doing a registered offering or an exempt offering.
▶ 0:47:32A registered offering, which is, you know, commonly known as an IPO, is a, you know, close to a year'sl long process where an issuer would pay a firm like mine or Mrs. Smith's um hundreds of thousands of dollars, maybe millions of dollars, and then uh fill out a form that has uh refers to a bunch of other forms and includes voluminous disclosure and then get that approved by the SEC. Uh if you're doing an exempt offering, you can do that much quicker uh usually a matter of a couple of weeks.
▶ 0:48:00in the context of crypto that can be almost instantaneous and permissionless and so let let's build on that then let's go to the next phase if I can I'll go to you Miss Smith when we think about the the secondary market um trade f relying on dealers and brokers digital assets relying on what Miss so digital assets relied in either centralized platforms or decentralized protocols in and how is the timing different between traditional securities and digital assets
▶ 0:48:30for those to be for those settlements to occur. So as far as settlements go, most securities transactions occur uh settle on T+1 till the next day. Digital asset transactions typically settle immediately. And what are the trading hours between digital assets and traditional securities? Traditional securities trade the markets are open from 9:00 to 5 in the US. Digital assets trade 247 globally.
▶ 0:48:58And wh which is more opaque which is provides more visibility the traditional securities model or the digital asset model that's available on the on the blockchain. Arguably the digital assets model which is available via the blockchain as you stated in your question would be uh would be more um more visible because you can view everything that's happening on the blockchain. So I want to use this kind of as a state.
▶ 0:49:20So what we're seeing is significant difference between traditional securities and digital assets which builds on this need for a framework to be put in place from a legislative side. So let me come to you Mr. Wick because you've have a lot of experience in in looking at some of these non-financial projects on the Polygon network. Um briefly can you just explain your thoughts on why a one-sizefits-all approach may not work? Your microphone may not be on. Yeah.
▶ 0:49:48So many projects um provide for example the ability to um register and log the uh the titles for real estate um abdicating or uh making it unnecessary to have title companies review title and make sure transfer is correct or healthcare records or your own identification can all transfer on the blockchain. Thank thank you very much. I think all of your testimony shows the need for market structure legislation from Congress. I now will yield to the gentleman uh Mr. Lynch, the ranking member for 5 minutes.
▶ 0:50:18Thank you, Mr. Chairman. Two days before his inauguration, President Donald Trump launched his Trump memecoin. A Financial Times analysis estimated that Trump's memecoin earned $350 million from sales and fees in the three weeks after it was launched. Early traders made millions, while a much larger number of investors lost more than $2 billion after the coin crashed.
▶ 0:50:45A few weeks after that, the Trump SEC stated that meme coins are not subject to the SEC's regulatory oversight and that neither memecoin purchases nor holders are protected by the federal securities laws because they are not securities. Do any other witnesses have a problem with that? Do do you see a problem that Mr. Sarah, Miss Smith, Miss Mr. Wurret?
▶ 0:51:15Um I mean without commenting on any uh project do you do you see an inherent problem in in that arrangement? Again without commenting on any specific project my time Miss Dorton uh additionally in March the SEC also announced that crypto mining does not fall under securities laws and therefore will not be regulated by the SEC.
▶ 0:51:42Just a few days after that, members of the Trump family launched a Bitcoin mining firm. These are clear examples of conflicts of interest and President Trump leveraging the office of the president for financial gain by launching crypto ventures outside of the oversight of critical agencies. Mr. Wer, can you imagine can you imagine a problem with that that those Uh, yeah. I think Thank you for your question. That's all. I'm happy to hear that. Happy to hear that.
▶ 0:52:12Miss Thornton, could you discuss how you believe policy makers should respond to this rejection of of conflict of interest standards, especially at the White House? Well, I I'm not an expert uh the president um his personal involvement or anything like that, so I can't comment on that.
▶ 0:52:33But I can say that there have been a number of things that the Trump administration has done that have favored crypto and um they include many that you mentioned, but also letting go of many enforcement staff um dropping many cases against crypto. Um the DOJ just announced that it was uh planning on dropping some crypto cases just this morning.
▶ 0:52:57um you know the these ideas of um a crypto reserve um or incorporating cryptocurrency and blockchain into routine spending and accounting practices at agencies. Um all of these things are very concerning because they will introduce an enormous amount of risk into uh the federal government and um of course the US financial system. Thank you.
▶ 0:53:21Uh, Miss Smith, uh, the president issued a executive order against your firm, uh, because you had done some work in the past that they were unhappy with. Um, I know your firm has, uh, has sued, uh, the Trump administration for for their executive order doing that.
▶ 0:53:39Um, did you feel any pressure in terms of being asked by uh my Republican colleagues to come here and testify on behalf of the majority uh with the fact that that the president of the United States issued an executive order that you had to defend against in order to in order to carry your your your mission out as a as a law firm and and a very good law firm if that ma you know if that matters. Thank you for the question.
▶ 0:54:08I'm here to testify about digital assets in my personal capacity. So, you have no no comment in terms of the presidential executive order against your firm. The firm you're a partner there, aren't you? Are you a partner there? Yes, I'm a partner. Okay. So, and I'm here today to testify in my personal capacity, not as a partner of Walmart. Yeah. And I'm asking a personal question.
▶ 0:54:33The executive order has gone after your firm where you are a partner directly after you because he was unhappy with the work that your firm did in the past. You had to sue the president of the United States to defend your firm and I I applaud that. I think it was wrongful.
▶ 0:54:50But, you know, this is a unique opportunity for for you to describe the circumstances that you find yourself under and how how how that pressure against a a law an outstanding law firm that has done a lot of good work over its history. I'm giving you the opportunity to defend yourself. Respectfully, I'm not here to talk about Wilmer Hill. That's unfortunate. Mr. Chairman, I yield back. Gentleman yields back.
▶ 0:55:17The gentleman from Arkansas, the chairman of the full committee, Mr. Hill, uh, is recognized for five minutes for questions. Thank you, chairman. Appreciate that. I want to say to my friend from Massachusetts that if we want to make sure that uh both stable coins and digital assets are well regulated, well overseen, subject to the full force of uh both state and federal law enforcement and supervision that we need to come together and pass our stable coin uh uh legislation
▶ 0:55:48as well as the revised version of a market structure bill that we're setting out on today with this good hearing. ing. Appreciate both M Mr. Lynch and Mr. Styles work. And I would also say as it relates to memecoins, this is not some breaking news thing. The decision to say that meme coins, which don't have any utility and are just deemed collectibles by some, was Gary Gensler and the Gary Gensler SEC approved that meme coins were not securities.
▶ 0:56:19uh at the same time that Gary Gensler and the former SEC were not overseeing in any way, shape or form how to protect Americans from FTX's offshore mischief. So, uh the key thing about this is that we're trying to get this right on a bipartisan basis, biccameal basis here on the hill to have both a dollar back stable coin uh legislation and a market structure legislation.
▶ 0:56:47And I thank both my ranking member and chair for their work on this. One thing that we're exploring today is the SEC's terminology around digital assets that's been so inconsistent particularly over under Chairman Gendler.
▶ 0:57:02Just to illustrate the point, the SEC has used the word crypto tokens, crypto security tokens, crypto assets, crypto asset securities, digital asset securities, and digital asset securities that are investment contracts. This past February, SEC Commissioner Pur outlined a potential to taxonomy to clear up some of this confusion for the past four years. Her her ideas were broken into four buckets.
▶ 0:57:32First, crypto assets that are just securities because they have the intrinsic characteristics of a security. Secondly, crypto assets that are offered and sold as part of an investment contract even though the crypto asset itself isn't a security. Thirdly, tokenized securities.
▶ 0:57:53And finally, the fourth category she outlined were all other crypto assets which are not securities and not transacted pursuant to a securities transaction. So this second and fourth category is at the heart of where the subcommittee worked all of last Congress on FIT 21. And uh Miss Smith, can you describe the distinctions between these categories to help the committee in its in its work? Sure.
▶ 0:58:22So the first category, sorry the so would you like clarification on the second and fourth or all? Yeah. Well, start with the second and fourth on the work that we're doing, but but you can comment on the balance. Yeah. So the second category is for an asset that's offered and sold in an investment contract that's not a that's not a security itself. There's been a lot of work because that's where most clarity is needed.
▶ 0:58:45Uh since 2017, the SEC has been applying the Howie test which is a three-part test to determine whether or not digital asset is a security. And because the actual asset is not a security, is it sold in a securities transaction, there have been lots of questions under which it becomes a securities transaction. A lot of work has been in in that particular area because that's where questions arise.
▶ 0:59:08The last category, all other crypto assets, they would include assets such as Bitcoin, an asset that's uncontroversially not a security. There's been a lot of work in that area because there's no federal regulatory authority for that has authority over that particular market. So there's been questions about who should have that regulatory authority. And so that's a that's the work that Congress has done on if if where those tokens should be treated as uh under the purview of the SEC or the CFTC.
▶ 0:59:36Is that is that what we were trying to work on? That's correct, sir. And so Bitcoin is not a security. So you view it would be if it's in its we're we're trying to have a spot market for Bitcoin that would be under the CFTC's regulatory authority. Is that right? So that's the open question. Open question.
▶ 0:59:55Yeah, that's the that's sort of the direction that we took with the House Agriculture Committee in the last Congress and this will be a key question for for Chairman Style as we go uh go Um Mr. where it polygon labs is leveraging its use case uh database to showcase real world applications of its technology. Can you highlight an example for us and then maybe you could submit some more for the record? Thank you for your question.
▶ 1:00:25Um yeah. So uh one example would be a provado ID which provides um an opportunity for a person to work with the issuer of identification or or an organization that certifies information such as maybe like a graduate school.
▶ 1:00:42that organization uses an API link to um essentially like transact for that person's wallet through zero knowledge proofs uh and show essentially and verify that that thing exists my age my birthday give us some examples so that we can show the utility in in the use of blockchain and I yield back to the chairman the gentleman yields back the gentleoman from California waters the ranking member of the full committee is recognized for five minutes for
▶ 1:01:16Oh, thank you very much. Um, well, before I get started, I'd like to thank uh Representative Miss Smith uh for being here representing Will Mahel Law Firm. Uh, I'd like to send a message to your law firm uh that I appreciate uh fighting back against Trump who's attempting uh to strip the law firm from their security clearances.
▶ 1:01:43Um many of our law firms are weak and spineless and they are succumbing uh to his threats and they're cutting deals uh that are not in the best interest of this country or these pe or the people. So, I thank you for being here. Let me just start by saying um I must highlight over uh two days Americans lost 6.6 trillion due to Trump's failed tariff policies.
▶ 1:02:11But as Americans wonder how they will afford retirement or afford groceries, Trump is sitting pretty. In one year, he has doubled his wealth through various crypto schemes and is using the power of the president to make himself richer. Um, ladies and gentlemen, members of this committee, you know that Mr.
▶ 1:02:29Mckenry and I worked in a bipartisan way to try to come to some consensus about the guardrails that were needed to protect our investors as it relates to crypto. But this committee is helping Trump.
▶ 1:02:44Last week, this committee voted to take Trump, make him the king of crypto by passing legislation that lets him corner the market on stable coins, kick George Washington off the dollar, and make his own stable coin US legal tender instead of stopping this grift. You're enable it, Mr. Chairman. We need to stop Trump before he take any steps further on crypto legislation in just one year.
▶ 1:03:15Miss Thornon, I'd like to direct this toward you. President Trump has doubled his wealth from 2.3 billion to 5.1 billion. His fraudulent memes coin lost investors two billion dollars while he and his family pocketed at least $350 million.
▶ 1:03:37his complex well of companies and revenue, including the Trump memecoin, his decentralized finance platform, World Liberty Financial, pending stable coin and Bitcoin mining venture, have all massively contributed to his wealth. I'm deeply concerned that these ventures have created an avenue for interested parties, whether they are allies or adversaries, to anonymously transfer money to him and his inner circle.
▶ 1:04:07At the same time, it is no coincidence that the Trump administration's Securities and Exchange Commission has issued guidance saying meme coins, stable coins, and crypto mining are not securities and therefore are not subject to the AY's oversight and investor protections.
▶ 1:04:26Additionally, this week, the Department of Justice dismantled the Cryptocurrency Enforcement Team and directed the Market Integrity and major frauds unit to cease crypto enforcement and not charge regulatory violations in cases involving digital assets such as violations of the Bank Secrecy Act.
▶ 1:04:49What will these conflicts of interest and dismantled enforcement mean for investors, especially if the SEC is not overseeing Trump's merit crypto Thank you for the question, Congresswoman Waters. Um, I'm not an ethics lawyer, so expert, so I can't um comment on that personally about President Trump.
▶ 1:05:14Um but it is definitely true that this industry continues to have thefts, frauds, hacks and that should be very concerning because it raises a lot of risks and unfortunately Excuse me. Do you think cry the president of the United States uh should own uh crypto uh and mine coins and uh interfere with us while we're negotiating on stable coins and trying to get guard rails? Do you think the president should be doing that?
▶ 1:05:43The commission has is an independent branch of government that should do what it needs to do and it has oversight over this area of legislation and it's very important because many of the functions that the other folks on this panel have talked about are also uh functions in securities law. So there are many similarities between what happens in the crypto business and what happens in other Do you understand that uh Mr.
▶ 1:06:08Mckenry and I were getting very close to some agreements on having guard wells when we've been interfered by President of the United States of America. Do you know that? I wasn't aware of the interview, but I was aware of the legislation. Yes. Thank you very much. I yield back. The gentleoman yields back. The gentleman from Michigan, the vice chair of the full committee, Mr. Heisenga, is recognized for five minutes. Uh, thank you, Mr. Chairman.
▶ 1:06:32I know this is the subcommittee on digital assets, financial technology, and artificial intelligence, but it feels uh today like it's the committee of ironies and befuddlements. Uh first irony is is that Gary Gendler, while he was head of the CFTC, uh declared that anything that was digital was uh was clearly a commodity. Now, he should know, he's the smartest guy dealing with uh crypto assets that he knows. Uh but then again, when he became chair of the SEC, suddenly everything magically turned into a security.
▶ 1:07:00Now you have to understand Washington likes to declare things either fish or fowl. You know we want very clear lines on things. Turns out that crypto assets is actually more of a platypus. It's got a lot of characteristics and it depends on where it is as to how it should be regulated. Uh Mr. Chairman, the second irony in all this is that it seems to me that the Center for American Progress is rather ironically named since it doesn't seem very progressive on this.
▶ 1:07:26I I got to tell you, nothing says progress like a quote cautious approach uh to that stops short of uh of pushing into new frontiers. U the the third thing, Mr. Chair, is that some here on this committee believe it's far better for the general public and America writ large to do nothing to sit back and just watch the realities of the world pass us by. Now, how dumb can we possibly be?
▶ 1:07:55We know that these are issues that we have to address. Now, I'm going to get to my questions, and I actually changed my question based on uh our subcommittee rankings, ranking members insinuation in his opening remarks that the crypto industry was quote writing their own rules. Um, so Mr. Wearret, uh, Miss Smith, uh, Mr. Uh Sierra, do you do you believe that that's the case?
▶ 1:08:22I mean, if you guys are writing your own rules, you're doing a terrible job at it. Uh because Miss Smith, you you you mentioned in your uh comments about a patchwork of regulations that exist uh across the country. And if an industry, it just seems to me if an industry was writing its own rules, you guys would have your act together. Or are you actually asking us to get our act together? I'm curious, Mr. Sierra.
▶ 1:08:47Um, I think this Congress has a real opportunity to pass legislature that will address the core issues that everybody here cares about, which include consumer protection and the ability of crypto founders and entrepreneurs to be able to keep this technology here at home. Miss Smith, I'm going to kind of move on to this a little bit, but feel free to ask answer that about uh about writing your own rules, but I'm going to roll it into this.
▶ 1:09:14I mean uh the the SEC's response to digital assets often have resulted in using enforcement measures against many of the companies that you have worked with some 100 in total I believe.
▶ 1:09:27So I'm curious can you describe a few of the rulemakings that came out of the Gendler SEC that uh and and what were their impacts on the digital asset So during the Gendler SEC there were a number of rulemakings that happened to mention digital assets. So it was a broader topic. So for example they covered the definition of exchange.
▶ 1:09:52The purpose was to uh modify the rules with respect to the treasury markets but they also mentioned digital ass they also mentioned digital assets and their implications for DeFi protocols. That rule was proposed but not finalized. But had it been finalized, commenters to that rule mentioned that it would have resulted them in them going offshore because DeFi protocols, as the name suggests, do not have essential intermediaries that can comply with requ compliance requirements.
▶ 1:10:22Sticking with you last week during our debate on stable coins, uh I said that Congress and regulators should recognize the unique nature of these innovations and establish a regulatory framework that targets the activity and not the technology. Um uh can you describe the importance of Congress using rules for the custody of crypto assets and legislation that it moves? Thank you for the question.
▶ 1:10:46So with respect to custody, the rules um anticipate that there's physical custody, meaning there's a paper asset. That is obviously not the case for digital assets. And so the rules need to incorporate how you can have good custody meaning possession or control of an asset that ex that only exists in digital form. Thank you. And uh Mr. Wear, I have my last 30 seconds here. Um you noted in your testimony that your company develops software for blockchain infrastructure and aggregated networks.
▶ 1:11:15Does the importance of the underlying technology which you described in your testimony get lost in this kind of debate? Uh yeah, the technology is important. self-custody is crucial um to decentralized blockchains, decentralized protocols. It's it's it's the entirety of it. Um and it would be great if this committee could protect that right to own property and to control one's own property on chain. I yield back. Gentleman yields back.
▶ 1:11:45The gentleman from California, Mr. Sherman, uh the ranking member of the subcommittee on capital markets is recognized for five minutes. Yes. So I'll point out normally a hearing on capital markets would be in that capital markets subcommittee. Uh I'll also point out that uh memecoins were determined uh by the SEC not to be uh securities only after Gary Gensler left and under that decision was made under the Trump administration.
▶ 1:12:12Uh, but I'll agree with uh a lot of the pro grip uh crypto folks here who have said it's kind of silly that we're determining how to regulate crypto based on a 1940s case involving orange groves interpreting a law written in the 1930s. We ought to have, if we could write it, a good crypto regulation law designed for this century.
▶ 1:12:42The problem is that all the money and power in this town is on one side. There is no lobby uh for uh effective enforcement of our tax laws or or uh enforcing our u uh sanctions laws or dealing with drug dealing.
▶ 1:13:01And so I fear that while uh le determining what our policy should be by having brilliant lawyers look at magnifying glasses and and and and and footnotes from the 1940s looking at a case and determining on that basis how to regulate fr is is an absolutely absurd thing for society to do. Uh passing a bad law would be even worse. Uh Mr. Heisinger says that your industry wouldn't like a patchwork.
▶ 1:13:27Many industries would like a patchwork because then they pick which patch they want to be in. And if we had a system where Wyom any crypto entity could go to Wyoming and then Wyoming would say, "Well, we're going to leave this at the county." And so, you just find one county in somewhere in Wyoming that will give you everything you want and you give them some jobs and some economic activity uh that's significant to that county.
▶ 1:13:53But I want to focus uh I also want to say that there is really a battle inside crypto that hasn't quite broken out yet between the old coins and the new coins. And most of our testimony here is in favor of making it easier to create new coins. Uh I think that what will uh be the undoing of crypto is more crypto. And I'm on I'm on the side of the new coins versus the the old coins.
▶ 1:14:18although we really should have people investing in businesses that employ people and build things in the United States. But we've got some brilliant lawyers here and I want to focus on a uh really easy legal questions. Um since uh I stopped practicing law last century. Uh Mr. Uh Sarah, um if and and I realize you're not representing your firm here, but you are a lawyer.
▶ 1:14:42And uh if a powerful politician in this state or that state came to your firm and said, "We're going to prevent your firm from practicing law in our state unless you give me a million dollars." Uh would that be legal? Thank you for the question. Uh like I said in my opening, I'm here in my individual capacity and I'm You're individually a lawyer. a pretty good one. Can you give me an answer? Uh, thank you.
▶ 1:15:08I'd like to contribute to the conversation about how we need to come up with a new regulatory framework for keeping I I know, but you're here in Congress and I'm the then this is my time and I'm asking you a question which is your obligation to answer. Can you answer? Uh, yes, sir. So, that would be illegal. Uh, I'm not an ethics expert, but that sounds coercive. Yeah. Okay.
▶ 1:15:31And if instead of the million dollars going to the politician, the million dollars was going to some political organization the politician was aligned with, would that change the answer? Uh, I'm not clear on the question. I'm sorry. The question is, a powerful politician comes to your firm and says, "We're going to make it impossible to practice in our state unless the firm gives a million dollars to a political organization allied with that So, I I can't comment on the legality of that. I'm not a lawyer.
▶ 1:16:01This is this is this is one L stuff here. Uh you you choose not to uh Miss Smith. Uh and and I'll ask you both. You could be giving us testimony that was adverse to the interests of Donald Trump coin and then your whole firm could find that it is uh disqualified to do anything and you lose all security clearances.
▶ 1:16:26How can you assure us that your testimony uh is not affected by the knowledge that you could have a billion dollar that the issues we're discussing here could have a billion dollar effect on a president willing to disqualify firms that displease them? Miss Smith, as I mentioned, I'm here today in my personal capacity, right? And I we need to know that you're representing what you really believe and not fear of Trump. Can you do that?
▶ 1:16:56My my my testimony is in my personal capacity, so I'm representing my own views today. The gentleman's time is expired. The gentleman from Ohio, Mr. Davidson, uh the chair of the subcommand national security, elicit finance, and international financial institutions is now recognized for 5 minutes. Uh thank you, chairman. I thank our witnesses for coming here to talk about the digital assets space today. And I I tend intend to devote my time to talking about digital assets, the subject of today's hearing.
▶ 1:17:22If we've learned anything from, you know, the last several congresses, the next market structure bill must explicitly include a bright line test so that whether Gary Gensler's looking at it or Warren Davidson's looking at it or someone else is, they know this is intended to be a security or it's intended to be something other than a security. And the Fit 21 Act did do that.
▶ 1:17:47Um, but I hope it does a little more than that because some things we intend to tokenize securities and we need to give a path for uh the SEC to do that in provide guidance for how to tokenize a security. Some things will be intended to be tokenized uh commodities and we need to provide that guidance and the last bill went a long ways to doing that.
▶ 1:18:09Frankly, the void that I hope we fill is yet another committee of jurisdiction here in Congress is energy and commerce because some things are really FTC regulated utility tokens and they're really different things. So, the idea that you can jam everything into uh you know either this or that. The reality is it's more more segmented just like the real world assets are more segmented today. So hopefully we keep making progress on the bill.
▶ 1:18:38But I wanted to talk first about one of the most essential things to the entire industry. Whether it's meant to be a means of payment like our stable coin bill or uh these other tokens that are out there in the market, uh self- custody is incredibly important. Um so, you know, I'd like to submit three documents for the record. One is the White House's executive order uh on state on digital assets without objection.
▶ 1:19:06Uh the other is an amendment protecting self-custody offered related to stable coins and of course this relates to stable coins but I'm going to talk about why similar language is essential for market structure and the other is the underlying bill which is the keep your coins act which is broadly applicable without objection. All right. So so those things uh in in essence um you know we must have ironclad uh protections for self- custody.
▶ 1:19:33We don't have to theorize that people want to wreck the industry. We're listening to colleagues here. They spend about 10 hours during the stablecoin bill trying to stop us from passing a stablecoin bill. Uh the ranking member opened up basically with Elizabeth Warren's anti-crypto army uh rants about the segment sector. Uh and we know that regulator after regulator as recently as January tried to make self- custody nearly illegal uh like the CFPB's uh self-custody rule.
▶ 1:20:02So, um, you know, Mr. Wearret, uh, can you come in on the need for legislation to prevent federal regulators from issuing any rule or regulation that would impair an individual from maintaining custody? Uh, yes, thank you for your question. Um, self-custody is at the core of decentralized finance. It's at the core of decentralized blockchains.
▶ 1:20:27And um you know custodying one's assets is also um a core principle of our constitution to control and own your property and to not be deprived of life, liberty or Um in pairing um as as you asked uh someone's right to own and send you know an their own asset. Digital assets are you know at their base form are not commodities or securities.
▶ 1:20:58Uh both the commodities and securities laws have you know uh frameworks that explain what it takes to make an asset into one of those other categories. But absent that um um they are just uh property. They're just assets. And uh and I I would think that you know lawmakers need to balance risks against benefits here.
▶ 1:21:22The benefit of owning and controlling one's property significantly I would argue outweighs you know the risk of possible misuse i.e. like thank you for that. I think that's really the tension and and of course you know some of my colleagues they want just to keep us safe the government to be the real custodian.
▶ 1:21:42They that's the premise behind this central bank digital currency and everything about transactions becomes permissioned and kind of their checkdown position is well we'll use a third party institution and the future they promise uh is a account-based crypto. So that's the law. If we don't take action and we don't overtly protect self-custody regulators in some future regulatory environment will infringe upon it. And that's where the word impair is so important versus restrict.
▶ 1:22:13If it just says they shall not restrict it, they can put every condition in the world on it which effectively bans it. And that's what a lot of these folks seek. We have to win this fight. I yield back. Gentleman yields back. The gentleoman from Texas, Miss Garcia, is recognized for five minutes. Thank you, Mr. Chairman, and thank you to all the witnesses for being here today.
▶ 1:22:33On Monday, Deputy Attorney General Todd Blanch sent a memo to the Justice Department staff directing prosecutors to limit limit their pursuit of certain cryptocurrency crimes. Instead, prosecutors were told to narrow crypto investigations to focus on drug cartels and terrorist groups. The memo also disbanded the national cryptocurrency enforcement team which was established in 2022 to combat fraud and illicit finance in the new industry.
▶ 1:23:03The enforcement team has investigated and coordinated multiple cases including against a case against Binance and its founder who pleaded guilty to violating money laundering laws. Deputy AG Bland said the Justice Department isn't a digital assets regulator. Well, if they're not, then who is and what does that leave? The Securities Exchange Commission under the new administration has already dropped dropped more than a dozen cases against cryptocurrency firms.
▶ 1:23:32All these actions are taking place as the Trump crypto cartel continues to launch crypto ventures that are conveniently conveniently just outside of critical agency's oversight. Miss Thornton, as Trump continues to leverage the office of the president to further enrich himself and his billionaire buddies, what actions can Congress take to rein in these obvious obvious conflicts of interest that even the average American can see?
▶ 1:24:01Well, I think that um basically the Department of Justice and the SEC should do what's in their mission and um that involves, you know, prosecuting crimes that happen and they should be, you know, broad in their view of what what crimes happen based on the facts and circumstances. Um the SEC should not be in uh making its enforcement team smaller as it's done.
▶ 1:24:28it should um have even more people there given the risks that we're imposing on the financial system now and are likely to if stable coin and market structure crypto legislation passes. So I think it's very important for um the SEC to be gearing up not cutting back and also the DOJ. Thank you. Miss Thoron, do you agree? No, I'm sorry miss.
▶ 1:24:56Uh I it's so far I can't really read it. My eyesight's not that great. Miss Smith. Yes, ma'am. The I think so today we're here talking about regatory clarity and I I agree that if you have regulatory clarity, it's good for market participants, facilitates innovation, and protects investors. But what should we do about obvious potential of interest that, as I said, the average American can see? And I'm sure that you can since we've both been through the law school, we both probably took ethics.
▶ 1:25:26Well, I know I So, I'm not an expert on ethics law. So, I can't So, I can't comment on the ethics of it, but I can tell you that regatory clarity. But, you did take ethics in law school. Yes. So, based on your knowledge of ethics, you learned in law school. What do you think? I think it's a complicated question that I don't know all the facts.
▶ 1:25:49So I would like to know them before I opine, but I can tell you if we had regatory clarity, it would alleviate some of the ethical concerns that we have. All right. Well, thank you. Now, we've all heard about Trump's meme coin. I won't go through a lot of the the details again except for the fact that, you know, the the coin earning 350 million and the people who who lost money lost a lot. So, meme coins can decrease investor confidence and trust significantly.
▶ 1:26:18A significant crash like this would historically be investigated and again regulated by the SEC. However, a staff statement on February 27th clarified that memecoins purchasers are holders and not protected by federal securities laws. Again, Miss Thordan, what is the ripple effect of this clarification and what will it what what impact will it have on the larger enforcement and oversight of cryptocurrencies, especially oversight over meme coins?
▶ 1:26:44Well, I think that it would basically create a loophole Um, if you use a memecoin, you don't have to follow the laws, the securities rules, and and if you don't, maybe you do, you know. So, h using a memecoin would then become a loophole. Um, so that's what I imagine would happen from that. I forget the second part of your question. Well, just what what would what does that do to confidence in further investments?
▶ 1:27:13Well, obviously, um, investors couldn't, uh, wouldn't have all the protections that the securities rules provide. Um, it would be just sort of out here unregulated. And we've seen time and time and time again what happens um, through history. We've seen examples of what happens. And the people who lose are the people who buy the meme coins, who invest. They're the ones who tend to lose. The people who create them often, you know, uh, profit or enriched greatly. always about winners and losers. Yep.
▶ 1:27:44Thank you. I yield back. Gentleoman's time is expired. Gentleoman yields back. The gentleman from Tennessee, Mr. Rose, is recognized for five minutes. Thank you, Chairman Style, and thank you, Ranking Member Lynch, for holding this hearing. Uh, as my time is limited, I'll dive right in. Thank you to the witnesses for being with us. Last year, I had the privilege of attending the Bitcoin Conference in uh Nashville, Tennessee, my home state, and very near my district.
▶ 1:28:08Uh, President Trump there expressed his ambition to establish the United States as the quote crypto capital of the planet and Bitcoin superpower of the world close quote. Miss Smith, could you outline specific steps the Securities and Exchange Commission and for that matter Congress should take to support this vision and foster a conducive environment for cryptocurrency growth and innovation? Thank you for the question.
▶ 1:28:38So, first, Congress should clarify when the SEC has jurisdiction and who has jurisdiction when the SEC does not, meaning the spot commodities markets. Second, when the SEC when it's clear about its jurisdiction, as it's already doing with the crypto task force, needs to clarify how the rules apply to digital asset securities because those assets have some fundamental differences from traditional securities. Thank you. Uh, Mr.
▶ 1:29:08Sarah, I would like to ask you basically the same question. Uh, what specific steps should the SEC and Congress take to foster a conducive environment for cryptocurrency growth and innovation? Um, I think it starts with a recognition that the status quo is not working for us consumers or industry. And then in terms of legislation that need to pass, I think market structure would be key.
▶ 1:29:33We have a regulatory gap like Miss Smith identified in spot markets of digital commodities that is currently unregulated. So I think Congress needs to step in and clarify when exactly digital assets become digital commodities and who's going to regulate that spot market. And I assume you're familiar with the market structure legislation that this committee passed in the last Congress. If you were rating that on a 100% scale, how close did we get to having the right mix there in your opinion?
▶ 1:30:03I mean, it's a very complicated subject and I think reasonable minds can and disagree. I think FIT 21 would be a great step forward overall. Uh I think it can do more on a couple of uh vectors if I maybe uh suggest offer some suggestions. I think the dual market that it creates for tokens that are could be regulated both by the SEC and CFTC would introduce some complexity. Uh so I think fixing that would be helpful.
▶ 1:30:29I think it could also do more to bring activity that has gone offshore back onshore. Uh but I think overall it's a great step forward uh and would bring much needed clarity. Thank you. I appreciate it, Miss Smith. Uh and we've already kind of delved into this. As you know, most traditional financial instruments fall under the jurisdiction of either the SEC or the um depending on their nature.
▶ 1:30:51But for certain complex or hybrid instruments and both agencies may assert oversight creating dual registration or compliance obligations. In your view, can the dig digital asset ecosystem be cleanly divided between regulators or will effective oversight likely require coordinated multi- agency involvement going forward? That's a very good question. I think it's too early to tell.
▶ 1:31:22So because we don't have clear jurisdictional bounds between CFTC and SEC jurisdiction, we have regulatory uncertainty. So it's unclear whether or not if we had that certainty whether there would still be overlap or whether you can clearly define who has jurisdiction when. As you noted in your question, there are assets like securities indices and securities futures which are regulated by both regulators.
▶ 1:31:48But I think until we have that initial clarity, it's too early to to determine the need the the amount of coordination that would be necessary. Mr. Sarah, in your testimony, you highlight the nightmarish difficulty of registering under federal securities laws for crypto projects. In fact, you state, quote, virtually no crypto projects have successfully registered their tokens under federal securities laws and live to tell the tale. Close quote. Mr.
▶ 1:32:13Sarah, if you or can you expand on why it is so difficult for crypto projects to successfully register under the federal securities law and what steps would you recommend that Congress take to fix the problem? Sure. I'll start by clarifying that I think that if you're have if you're selling crypto assets as part of a fundraising transaction, I think those transactions should be covered under the securities uh laws and should be either registered or exempt. Most of them today are exempt.
▶ 1:32:43uh the real issue that projects have had I think it's twofold. One is the disclosures that the securities laws currently require uh do not surface the material information that purchasers of these digital assets need. Uh so issuers are basically forced to disclose information that is not helpful.
▶ 1:33:01And second, there's no real uh off-ramp or no no real way to distinguish the initial capital raising transactions from transactions in those digital assets once the network is decentralized and not under the control of any issu. Thank you, Mr. Chairman. My time's expired. I yield back. Gentleman yields back. The gentleman from Illinois, Dr. Foster, who's the ranking member on the subcommittee on financial institutions, is recognized for five minutes. Thank you, Mr. Chair, and and to our witnesses.
▶ 1:33:26You know, as we uh think further about uh the regulatory finality for crypto assets, uh we're going to be struggling with the same three issues we've been struggling for the last decade. That is anonymity, finality, and prevention of criminal activity. And until we get our arms around these, we need I think frankly the same set of considerations have taken many decades to uh develop in our regulated financial markets. And we're going to to make the crypto markets a success.
▶ 1:33:56We are going to have to come to to terms with those three issues. You know, our regulated markets have become the envy of the world. And there that position has only strengthened as we strengthen the oversight of those markets. Uh there reasons why people don't like to trade in you know Chinese markets just to pick on China again. Um you know and this stability has been driven in large part because investors believe that bad actors will be held accountable for fraud, market manipulation, other abuses.
▶ 1:34:25Uh this committee has struggled with how to create similar trust in digital assets. And I believe a vast majority of these issues come down to these three issues of anonymity, finality and prevention of criminal um assets.
▶ 1:34:38You know, in 2024, the blockchain an analyst firm chain analysis identified nearly 74,000 tokens issued that were likely associated with pump and dump schemes and estimated more than 51 billion in crypto was received by illicit addresses including those associated with scammers, criminal organizations, sanctions, evaders, and other bad actors. Um, but our regulated markets continue to do very well.
▶ 1:35:02Uh in contrast uh just consider for a moment the the NFT market the crypto NFT market which has sort of collapsed in a heap of wash trades frontunning and other market abuses. And so I wonder you know I I've been thinking of how we can actually rescue that. What are the the things we're going to have to do to make the NFT uh markets for example you know how do we in those markets prevent run foreign running and all the other ancient frauds. uh and this this you know this collapse was driven by lack of regulation.
▶ 1:35:32And if you look at what is it about our regulated markets that really makes them work well. The starting point is you can't be truly anonymous. You you need a trader ID if you're going to trade nickel futures. All right? And and it's because you don't when you're trading those, you don't need to know who's on the other side of the trade, but you need to know that if that person does something illegal, market manipulation, something there is a regulator that will will be able to see that this trade that you thought was a fair market price was in fact a wash trade, they will identify that um and
▶ 1:36:02and you know, drag you into drag them into court and um you know, make them accountable. And until we get that and I don't think there's any hope that things like the NFT markets will um be able to um you know survive and thrive. Um so for the last decade I've been asking is there any way in a truly anonymous self-hosted wallet system to uh prevent wash trades for example?
▶ 1:36:28does anyone I've been asking that the answer has been no for a decade and I unless any of you have new information it's still no and that's a fundamental problem we have to fix. Um I I believe there are ways to do this and I and it'd be interesting I to um to hear your reaction to a proposal that would essentially allow a kind of NFT for example uh that would have license plates on all participants.
▶ 1:36:54You know, you you can think of it as automobile license plate where you're driving down the highway, you don't know um you have no idea who it is, but you know they have a valid license plate and if they do something illegal that can happen. So that means you have to register your wallets with a regulator who can see the true identity and and thereby detect front running trades the whole list of market abuses.
▶ 1:37:17Um, so my question to to everyone in our panel, if such a thing was an option for someone issuing NFTs into a into a a market, would would that have a chance of be making more of a success out of the NFT market, for example? Miss Thorton, yeah, I I think it depends. Um, the information has to go in all directions.
▶ 1:37:42So currently with securities, we have um tapes, you know, alternative trading systems and all kinds of things that help you know what orders are being placed, by whom, how much. And um so I it's hard for me to tell based on what you said whether so-called license plates would achieve all of that, but I do think there needs to be a central place where everyone can see what's being traded, by whom, how much. Yeah. Miss Smith.
▶ 1:38:13I I I agree with Miss Thornton that that's a it's a complicated question to unpack, but I do think to one of your earlier questions there there are types of data analytics that do give some not direct identity but give you some idea of who owns particular wallets. But what unless they can identify that it's a wash trade that these are the same beneficial owner behind both it won't work. I believe that's true and my time's up. Yield back. The gentleman yields back.
▶ 1:38:42The gentleman from Iowa, Mr. Nun, who's also the vice chair in the subcommittee on N or is also the the vice chair of the subcommittee on national security elicited finance and institutions now recognized for five minutes. Well, thank you, Chairman Style. I believe not only is this an important hearing to hold, but to evaluate where we're going in the future. We all know over the last decade in have built a powerful decentralized network that are transforming how our country operates.
▶ 1:39:06Digital assets are going to open the door to endless possibilities for anyone in both the financial the non-financial services and provide possibilities for economic growth domestically produced right here in the US. I am proud that last week Chairman Style led meaningful steps towards clarity by passing the stable act. Today we turn our focus to the broader digital asset market. As a member of both the House A Committee and the Financial Services Committees, I've had the privilege of working with both the CFTC and the SEC for the last two years.
▶ 1:39:37In my home state of Iowa, we know rural commodities very well. Corn, soybean, hogs. The CFTC does a great job of these things. Equally, in downtown De Moine, we have our banking industry that knows very well stocks, bonds, and things that the SEC does very well in.
▶ 1:39:51Unfortunately, we've had an SEC chairman for the last four years that believes everything maybe other than Bitcoin should be treated like an SEC stock or commodity or a stock, something that is a vast overreach of regulatory power by the SEC and actually stifles innovation. So, last Congress, we passed a bill to provide a clear jurisdictional guidance for both the SEC and the CFTC. I'd like to begin today with you, Miss Smith.
▶ 1:40:20Can you explain how the SEC's current currently determines what qualifies as a security and some of the challenges to this approach and how we could maybe clarify that through legislation starting with this So today since 2017 the SEC has been using the digital assets test as defined in Howie to define when a when a digital assets transaction is a securities transaction. That test from a 1946 case is a three-part test.
▶ 1:40:49And one of the issues with using that test is that market participants have found it difficult to apply. In 2019, the SEC issued guidance providing some, you know, direction as to how to apply that test to digital asset transactions. But nonetheless, uh, market participants have still found it challenging to apply. The second issue with using that test is that how we apply to primary market transactions.
▶ 1:41:14Meaning a transaction between an issuer and an investor is does not apply to secondary market transactions, transactions between two different investors. And that's and that is the bulk of the transactions that occur on crypto platforms today. Thank you, Miss Smith. That's a good 101 on this.
▶ 1:41:29And what we saw last time using this Howie test is that good innovators in the space came to the SEC with their ideas, with their recommendations, and their SEC chairman went into good faith meetings and used that information to aggressively, I would say, go after innovators in the space. Uh, Mr. Sarah, you were one at one of these meetings. Could you talk to us about how your experience went trying to share information with the federal government?
▶ 1:41:55Um, I'm sorry, but I'm not going to comment on any specific meetings or uh any advice that I gave to my clients. Would you say that the government was helpful to providing clarity to you or did they use information that you may have provided to further make it difficult for you? So, I I'm not specifically clear about what meeting you're referring to.
▶ 1:42:14I can speak in in general terms uh and and say that uh it's been a frustrating experience for entrepreneurs that have tried in good faith to comply with the laws and have found that it's not really a viable option. Mr. R, I'm going to turn to you then. When we talk about American innovation in this space, are we seeding this opportunity to other nations, other innovators offshore because the federal government has made it difficult for those domestically to be competitive?
▶ 1:42:44Thank you for your question. Um yeah, one of the big issues is without clarity um it's clear that a digital asset is uh is not a security without something more uh you know on the day that it's created. You can wrap it in a security potentially. You can wrap it in promises that cause others to rely on those promises and expect profits based on the efforts of others. But absent that it's not a security.
▶ 1:43:08Now the issue is it is again not a security at the outset but uh look to backs stop their actions by like relying on reggg s for example and reggg s causes innovation to move offshore it causes these tokens to be pushed offshore that causes the protocols and the use of the protocols offshore so innovation plus the use of this uh techn technology is all being pushed offshore and that's one reason Why of
▶ 1:43:38so Miss Smith I want to use the last seconds here. The CFTC maybe has a different approach. You opened up with how we do it on the SEC side. How's the CFTC looked at approaching regulating commodities like Bitcoin or Ether? So the CFTC has jurisdiction over the futures and derivatives market. It does not have jurisdiction over the spot market and so they don't have the ability today to make rules or regulations for that market. Thank you, Mr. Chair. We need to fix and close that gap. I yield the remainder of my time. The gentleman yields back.
▶ 1:44:08The gentleman from California, Mr. Licardo, is recognized for five minutes. Thank you, Mr. Chair, and thanks to all the witnesses uh for helping to guide us and inform us. Um Mr. Sierra, I I appreciate um the fundamental concern I think that all the witnesses have shared, which is a need for regulatory clarity.
▶ 1:44:32Uh, and you point out in your written testimony, I think you've said something similar verbally, that current securities disclosure rules are really focusing on irrelevant information. And in your written testimony, you identify what you believe might be relevant um, as we think about crypto regulation, uh, governance mechanisms, network design, tokconomics, which I can't say I fully understand, but I look forward to getting up to speed on. uh cyber security uh network utility of assets.
▶ 1:45:01Is the CFTC equipped to regulate the of those features of a digital asset to ensure that those disclosures are full and fair and accurate. Uh thank you for your question. I think the the core uh point that I'm trying to get across is the securities laws framework are designed under the premise that the value and existence of a security is dependent on an issuer.
▶ 1:45:30And in many contexts uh for tokens that relate to decentralized networks where there's no issuer that's controlling the token, that premise is false and it's not surfacing the right information. I think we would have to update the disclosure regimes under either the SEC or the CFTC to be able to fully account for this. But the issuer centric model is has a wrong focus and the wrong approach to really get at what uh consumers of these digital assets need to be protected.
▶ 1:45:59And so regardless then and I I certainly understand appreciate the point you're making. Um, CFTC would need substantial I mean this is not the same as regulating pork bellies. Um, clearly it would need perhaps more expertise, more staff, etc. Is that right? Um, I I think that's right. Uh, the CFTC has not historically regulated retail markets.
▶ 1:46:26It's been more of a a regulator of sophisticated markets, but I think uh with the right funding and the right team, uh, I I don't see a reason why they wouldn't be able to do it. Miss Smith, I also want to express my appreciation uh that Wulmer has taken what I regard to be an ethical response to uh the administration's efforts to force law firms to capitulate. Uh so thank you for for to your firm.
▶ 1:46:52Um and I appreciate your call for regulatory clarity and and I would agree that we don't want regulation by litigation. We have seen though in just the last 24 hours, this was earlier suggested an announcement from the deputy attorney general um that the national cryptocurrency enforcement team would be disbanded. We had earlier announcements from the department of justice that uh the market integrity major fraud unit would no longer handle criminal cases involving crypto.
▶ 1:47:19Um, is it fair to say that there are significant cryp criminal uses of cryptocurrency that we should be concerned about? I think that there may be criminal uses in crypto, but there's criminal uses in all types of financial markets. You say there may be, you don't believe that there are criminal uses today of cryptocurrency?
▶ 1:47:48There are some criminal uses, but the the my broader point is that they're not unique to crypto. Agreed. But there are certainly aspects of crypto, particularly with regard to anonymity, that may facilitate criminal activity more easily. Is that fair to I'm I'm not sure if I would agree with that statement. For example, North Korean hackers using tornado cash, just to take one of many examples.
▶ 1:48:14uh the anonymity is in fact a tool that helps criminals is it not? It is a factor but on the other hand there's been instances where there's been hacks and the hackers have been identified because of the blockchain and undoubtedly if there are criminal uses or perhaps fraudulent uses which maybe may cross over the line to criminal activity.
▶ 1:48:42a rugpole pump and dump scheme that's clearly uh intended to defraud u someone should investigate and prosecute those criminal cases, shouldn't they? Yes, those cases should be prosecuted. And SEC, CFTC, none of those agencies have criminal prosecutoial prosecutotorial authority, do they? I don't believe so. And so it would have to fall on the DOJ. The Justice Department would not. Yes.
▶ 1:49:12Or perhaps other regulators. Well, we need Department of Justice to step up. All right. Thank you. No further questions. Gentleman yields back. The gentleman from Montana, Mr. Downing, is recognized for five minutes. Thank you, Mr. Chairman, and thank you to the witnesses for being here. Uh, as a former securities commissioner for the state of Montana, uh, Gary Gendler's name has come up a bunch in my life and and issues.
▶ 1:49:34Uh what I really saw is, you know, in some instances a lack of guidance and and in some instances just a a hostility towards digital assets. And uh I just want to start out because there's been some comments about memecoins in in this uh in this chamber. And and I just want to point out that memecoins are a product of the Gendler SEC and its failure to provide the digital asset industry with clear guid guidelines around what makes a digital asset a security.
▶ 1:50:04Um, I also want to point out that under former uh chair Gendler, the SEC rout routinely asserted that everything other than Bitcoin is a security and issued enforcement actions against legitimate projects seeking to build or facilitate markets in digital ecosystems underpinned and maintained by digital assets. You know, for some, creating digital assets with no stated value or profit potential was one available path to operate without the SEC breathing down their backs.
▶ 1:50:34Um you know and again about this guidance you know Gary Gensler had he worked with the industry and with Congress to put out guid guidance identifying the aspects of digital asset projects that would implicate the securities laws there's a good chance we would not have seen such explosive growth of memecoins in relation to other projects with practical utility. So just wanted to start with that and u I'm going to transition quickly before I get into questions on on on blockchain. Yeah, I'm really excited about the potential of blockchain.
▶ 1:51:04I think uh in terms of uh you know fraud elimination uh proof of ownership I there's so many the immutable nature, the distributed nature. I I'm really excited about it. Um you know these benefits uh should not be limited just to tech hubs. So I'm going to start with uh uh Mr. Wearret. Um can you explain what benefits blockchain technology can bring to rural Uh thank you for your question.
▶ 1:51:31Um yes uh blockchain blockchain technology allows um allows users to custody their own funds and send payments to others uh without the use of intermediaries. Um you know rural areas don't have uh the same access to banks. They don't have the same access to payment structures and systems. Um and so that is a significant benefit.
▶ 1:51:56Another benefit would be for example um you know uh when I uh in in a past state that I lived in most states keep their property records um state by state and oftentimes it's even in paper form uh but having uh you know property titles kept onchain where they can be audited and tracked and then also uh you know um would eliminate the the need for title companies and structures that in a lot of rural areas they don't have access too, right?
▶ 1:52:26Thank you. Um, you know, switching, Miss Smith, you know, much of the debate on digital assets, uh, has been whether they should be classified as securities and what should be classified as commodities and, uh, we've already talked a little bit about the Securities Act of 1933 and of the Howy test and um, you know, that uh, you know, supposedly you provides a clear definition of an investment contract.
▶ 1:52:52Um and uh we've regulators have have relied on this 1946 Supreme Court decision. So one thing I want to ask you is how should Congress seek to address the differences between assets that are inherently securities and digital assets that are not inherently securities but may be offered as part of a securities So the first part of providing clarity is just what you stated that the issue of whether or not
▶ 1:53:22the underlying asset is a security itself or so pursuant to an investment contract has been something that has been um un misunderstood over the years. So that is a key question where clarity is needed. Right. Thank you. So uh moving on Mr. area. You know, the uh the SEC under former chairman Gensler pursued an aggressive enforcement and regulatory agenda that sought to extend the SEC's authority over the entirety of the digital asset asset ecosystem.
▶ 1:53:51So treating every digital asset as a security regardless of its purpose risk to the United States forfeiting its leadership in financial technology. I think about you know the United States being leaders here. So rather than ensuring the US remains a hotbed for innovation, Gary Gendler seemed more focused on waging an ideological crusade against an industry he fundamentally distrusted.
▶ 1:54:13Can you think of a single action taken by the SEC under Gary Gensler that made the United States a more attractive place to innovate? Uh I I do agree with your premise that uh Chair Gensler focused on enforcement and I think that had a uh effect to draw a lot of the activity outside of the United States. Right. Thank you. I've run out of time. Uh Mr. Chairman, I I yield. Gentleman yields back. The gentleman from Illinois, Mr. Casten, is recognized for five minutes. Thank you, Mr. Chair.
▶ 1:54:43Um there's something very surreal about this hearing. We're sitting here in the wake of a massive collapse in global equities around the world triggered by a really dumb decision from the White House. You've got Jamie Diamond saying today that we're approaching a recession. Um massive selloff of treasuries and the financial services committee, the committee of jurisdiction historians are going to look back and say, "What did we today?" This is what they're going to read about.
▶ 1:55:12They're going to read that a bunch of good lawyers, members of the bar in good standing, ducked every single question about whether they could defend basic ethics because they didn't want to make a bully angry. I'm not going to dwell on that. Others have done it. I would point out only that bullies only back down if you punch them back. And if you disagree with that point, you should ask my Republican colleagues what their cowardice has bought them. But let's talk about crypto because that's what we're doing today.
▶ 1:55:39Um, since Liberation Day, as the president called it, we've seen a collapse in global equities. We've also seen a collapse in crypto. Bitcoin, Ethereum down 9%. We've seen margin calls at institutional investors that have caused people to run out of crypto in one 24-hour period after Liberation Day. $41 million of Bitcoin was converted into dollars. 340 million of Ethereum. Miss Thornton, do you agree with the point that many of the crypto advocates have made that crypto is a hedge against instability in markets?
▶ 1:56:11No, I would not agree with that. If if you were facing a liquidity squeeze, um, could you pay your bank in crypto or would you want dollars? You'd want dollars. I'm reminded of the old Robin Williams joke that cocaine is a sign that is God's way of telling you you have too much money. The when liquidity is short, people are running away from this asset class. Um, Miss Smith, in the exchange with Mr. Style earlier, he he had asked you if the blockchain makes transparency more likely. You agreed with that.
▶ 1:56:40I noted he used the singular. How many blockchains are there? Well, there's multiple the more than more than one. Yes. More than 10. I don't know the exact number, but I would say more than 10. Mr. Wear, you're I know you've got your Polygon blockchain. How many blockchains? What's your guess? How many we have? Um thousands thousands. Okay.
▶ 1:57:03And you within your within your Polygon blockchain um you you can people can run from chain to chain. They can bounce on. You can buy Polygon. You can move it into some other chain. Correct. Uh correct. And that's a really good way to hide your paper trail, right? Because you need a bunch of additional details to figure out. You have to have exact details, the time stamps, everything else. Do you guys track that to make sure that the bad guys are not hopping Uh, thank you for your question.
▶ 1:57:32Um, so, uh, I'm just I'm just wondering yes or no right now. Do you do you track that to pro keep the bad guys from chain hopping to hide their trail? Yes. And and do you shut things down when people do bad things? The answer is that um there are established companies TRM, chain analysis, elliptic, cloudflare. I'm not I'm not asking what other people do. Wallet. Miss Smith said that that the blockchain singular creates transparency. We've now acknowledged that there are hundreds of blockchains.
▶ 1:58:02When you hop a chain, it's harder to track, right? So that's the opposite of transparency. It's not harder to track. It's uh when you all blockchains are discoverable and auditable. Um you're right that you can move from one blockchain to another blockchain. So would you support more rigor around making sure that we block people from moving because the North Koreans seem to really like chain hopping.
▶ 1:58:27They you know when when we see these hacks the bybit hacked they said what 300 billion immediately disappeared because they were able to hop a chain and all of a sudden it was untraceable. We had chain analysis in here the other day. They couldn't do it. My understanding is that uh on all blockchain blockchains are auditable and blockchains are visible to the public.
▶ 1:58:52That is look there is this story we we've we've the amount there's this massive ratio of theoretically legit cases theoretically legit use cases for crypto offset against the massive number of actual illegal activities. And every time we ask a question about why are they using these illegal activities, they say, "Well, the blockchain makes everything traceable, but it's anonymous." Well, yes, it also anonymous. And we're defunding the damn police. As Mr.
▶ 1:59:21Licardo aly pointed out, Thornton, if you were a bad actor, you were a child trafficker, a drug trafficker, a North Korean nuclear smuggler, are you happier or sadder since Donald Trump has taken office? I can just answer that I would be happy today seeing that crypto is being favored so much in the Trump administration. Thank you. I yield back.
▶ 1:59:50Gentleman yields back. The gentleman from Florida, Mr. Heridopoulos is recognized for five minutes. Thank you, Mr. Chairman. I appreciate everyone being here today. I know these are interesting times and uh your valuable expertise is very much appreciated as we get under the hood, especially as new members of the of the committee.
▶ 2:00:06uh this has been very helpful to understand different person's perspectives and and how we improve the marketplace so that people who choose to invest in crypto technology and currency etc have a better understanding of how we might create a regulatory structure that gives them peace of mind and and also if you're a company of course knowing actually how you be regulated uh because as I' I've tried to keep up with the moving parts here it's it's very frustrating to me if I was thinking I always try to think of if I was in your shoes or or if I was in a company shoes trying to get into this marketplace and
▶ 2:00:36do the right thing. The last four years has been a lot of confusion and frustration as they've attempted to work with the government to try to come up with a regulatory model only to be hit by let's just say some unique uh reactions by the government which caused even more chaos or or least confusion and in some cases charges or or at least um uh uh situations where they they feel like the government wasn't there to assist but just kind of playing a game with them.
▶ 2:01:02So with that in mind, I wanted to get into disclosure uh regime at the uh SEC and obviously a disclosure regime is designed to protect consumers. The idea that if you're going to invest, you want to have the confidence that they have been vetted in such a way that they can go and make these decisions with confidence. And so um t uh let me start with um Mr. Sierra if I could. Um, can you describe what the existing disclosure regime actually looks like at currently at at the SEC?
▶ 2:01:34Yes, and thank you for the question. The uh existing SEC disclosure regime is intended to amilarate information asymmetries between the issuers of securities on the one hand and the investors uh on the other.
▶ 2:01:48uh unless uh an offer or sale of securities qualifies for an exemption, every uh offer or sale needs to be registered and this process entails an issuer filling out a form that again refers to very many other forms and calls for voluminous information that the SEC has to approve and it includes things that uh are related to the the uh issuer right so it's things like financial information uh operational results information uh and of the executives of the issuer which drive the value of the security
▶ 2:02:19and and and Miss Smith, we could maybe follow up with this uh questioning this this current regime. To me, it's hard to follow. To me, if I was running a company, I wouldn't know exactly how to kind of get get through this morass. What What would be the qualities of a regulatory uh regime being put in place by the SEC that you think would help consumers make better decisions should they choose to get into this line?
▶ 2:02:47because of the differences with digital assets and traditional assets, I think a more tailored regulatory regime would be helpful. Um, an example of this is what happened with asset back securities. The SEC came up with tailor uh regulation and disclosure for that particular asset class. And and in in some of the proposals you've seen in years past, and of course, we're we're working on our our bill today. Um, is are those found in the bill today that you think are moving in that right direction?
▶ 2:03:16I think we're we're moving towards the right direction, but I think the engagement that the SEC crypto task force is doing today and currently with the industry is important and necessary to make sure that the disclosure regime is fully uh comprehensive of the key elements that would be important to With that, Mr. Chairman, I'll yield back. The gentleman yields back. The gentleman from South Carolina, Mr. Timmons is recognized for five minutes. Thank you, Mr. Chairman.
▶ 2:03:46I want to thank the witnesses for joining us today. The tokenization of real world assets has the potential to fundamentally transform our financial systems. More importantly, it offers a powerful tool to reduced to reduce waste, fraud, and abuse in government operations. I've had countless meetings with innovators who have developed technologies that if implemented at scale could reshape how we think about blockchain and payment systems. This is a long-term effort, but it begins with Congress getting this legislation right.
▶ 2:04:13We must provide blockchain innovators with the space to build supported by clear and fair guardrails. This is what true international leadership in the digital asset space looks like. Crafting legislation that ensures a level playing field and encourages innovation right here in America. Um, Mr. wear it.
▶ 2:04:31Beyond financial applications, can you highlight any use cases being built on the Polygon blockchain that if adopted by the federal government could significantly improve efficiency across sectors? Uh yeah.
▶ 2:04:46Uh we spoke earlier about provado ID which is uh provides services to allow someone to um intake and provide uh access to their ID but in a way that's protected by cryptography um uh you know when you're asked to verify your age or you're asked to verify your identity um that that can be done essentially through this uh non-custodial wallet that's that is burned or imaged into that wallet.
▶ 2:05:15it the uh the confirmation that that you are who you say you are. Another is the the movement of titles of property uh across the blockchain uh health care allowing your healthcare records to be custodied by you instead of h having to ask one doctor to send another doctor x-rays and then get specific requests fulfilled and um but instead you can actually have control of your health care records and also control in a self-custody wallet of your assets or your crypto.
▶ 2:05:42So yeah, numerous really all of those things involve reducing or removing intermediaries and it's very exciting even something as simple as voting. I mean you know we are have this issue with knowing uh who people are and them being who they say they are and this the technology can solve these challenges and really create a lot of efficiencies.
▶ 2:06:07So, a follow-up to that question, how might uh the upcoming market structure legislation support or potentially impact the future integration of blockchain technology into government systems? Uh, thank you for your question. Um, I I I think the market structure bill um is is a great start. It's very encouraging to see um you know, this legislative body taking cryp crypto seriously and trying to solve for blockchains.
▶ 2:06:34Um I think that you know a few of the things that need to be addressed are you know the howy test you know uh issued by the Supreme Court in the 1940s um should be refreshed not not abolished but a refreshed and given a gloss or you know uh there should be an additional test that looks at the decentralization of a pro of a project it's relevant right if whether something's a security or not deals with whether there's a promise and whether there was reliance on that promise you know whether there's an
▶ 2:07:04expectation of profits based on the efforts of others and that goes to the center of what you know is this a centralized is there a centralized intermediary or a centralized promoter or manager that's running this project that the investor is relying on to provide information. So it makes sense that this um would be a part of the securities That's that's one way that leads into my next question perfectly.
▶ 2:07:31Uh, Miss Smith, in your testimony, you stated that the decentralized nature of certain digital assets presents unique challenges to federal securities law compliance. Could you explain why decentralization makes it more difficult to apply US securities securities laws to the digital asset ecosystem? Sure. So, decentralization at its core assumes there's no central intermediary. The fair securities laws are are based on there being the presence of a central intermediary. So in some respects are a little bit inconsistent.
▶ 2:08:00That's why regatory clarity is necessary. Thank you for that. Uh when you talk about decentralization, are you referring to the blockchain network that these projects are built on, the digital asset project itself, or both? That's a great question. I'm referring to both. As Mr. Sierra explained, some some token projects themselves are decentralized and then once the the token is issued, they can trade on a decentralized protocol. So, it's both the issuer and then the mechanism for trading. Thank you.
▶ 2:08:30One of the more complex issues in securities law today involves NFTTS and how they can be effectively and fairly regulated here in the United States. That's why my colleague, Congressman Richie Torres, and I are working on the new frontiers and technology act to establish clear and equitable guard rails for NFT creators operating within our borders. We've seen the SEC take the position that some NFTs or securities in extreme cases like the Stoner Cats example even instruct artists to destroy their own work.
▶ 2:08:56That's deeply concerning and we need to ensure that this technology isn't subject to shifting political winds depending on which party is in power. I appreciate the work of this committee. And with that, Mr. Chairman, I yield back. Gentleman yields back. The gentleman from North Carolina, Mr. Moore, is recognized for five minutes. Thank you, Mr. Chairman, and thank you to the witnesses today for this uh for this testimony. It's been very informative.
▶ 2:09:17You know, digital assets have demonstrated the the ability to be the foundation of a new decentralized digital ecosystem, but unfortunately, our regulatory posture just hasn't kept pace. Uh instead of clarity and consistent rules, innovators have been met with ambiguity and enforcement first approaches. Uh rather than providing a roadmap for compliance, agencies during the last administration largely offered roadblocks, pushing talent and capital overseas. Um Mr.
▶ 2:09:45Sarah, you were you were asked a question earlier by Mr. Herodopoulos that I want to follow up on and that had to do with the you the existing security laws which foundational were never designed to account for decentralized open-source systems powered by millions of users, validators and developers etc worldwide. And so we talked about he asked you a question about the registration with the SEC and you went through that. Um it seems that the pre the former chair Mr.
▶ 2:10:12Gensler took an expansive view of the jurisdictional authority over the digital asset ecosystem in terms of the registration if you and I don't know that you got a chance to really delve into more of it. Are there what suggestions would you have if any in terms of ways to improve that registration system? So I think for uh distributions of digital assets that are fundraising transactions those fall under the securities laws and should be either registered or exempt.
▶ 2:10:43I think in as a general matter uh registered offerings or IPOs have gone down a lot over the last 1015 years. There were something like 7,000 public companies in the '90s. We're about 4,000 right now. And that's because of compliance cost of being a public company and the associated liabilities with the disclosures. So I think making it easier for companies to go public and making the information that those companies are providing more useful to consumers and investors would be a great step forward.
▶ 2:11:13Would in terms of in terms of moving forward that would you feel comfortable at some point submitting like even a detailed roadmap and I want to invite frankly the other witnesses as well to that same thing. a detailed plan that could be shared with the administration as they move forward if this committee could also have. Yes, I would be happy to. Same with the other Yes. Thanks. Happy to work with your staff. Yeah. Okay. Okay. Great.
▶ 2:11:39Um just you and this was referenced earlier where you Mr. Gensler would come before the committee uh in in prior years and assert that everything other than Bitcoin is a security and that projects simply needed to come in and register. I think Mr. Sarah you referenced this but Miss Smith I would say there how's your response? Do you think it's really that simple or would you do you think these other projects are simply putting their heads in the sand to avoid regulation? I mean what are your thoughts on that?
▶ 2:12:09I agree with Mr. area is difficult because of the differences between traditional assets and digital assets. That's why regulatory clarity is needed. So, so the so the proposals that would that I'm hoping you all will submit to us as well with with with detailed would maybe offer some new language that we would be able to work with the administration on. So, thank you for that. Uh with that, Mr. Chairman, I yield. The gentleman yields back. The gentleman from Florida, Mr. Donald's is recognized for five minutes. Thank you, Mr. Chairman.
▶ 2:12:38And I want to thank uh all the witnesses for being here. Mr. uh Mr. Sarah, in your testimony, you explained that certain types of crypto assets such as the native tokens of decentralized networks differ from securities in fundamental ways. Can you explain what a native token what a native token of a decentralized network is and describe why it's fundamentally different than a security? Yes. Uh thank you for for the question.
▶ 2:13:05uh the taxonomy of digital assets is still being worked out. But I think the easiest way to understand this is to first understand uh what I mean by decentralized networks. Uh as people we all like to organize in groups and most of those groups are hierarchical and centralized. Uh decentralized networks are just another way to organize as a group, but instead of being centralized and hierarchical, uh they're spread out.
▶ 2:13:29And tokens uh are basically a uh tool that enables uh participants in these networks to have economic incentives and therefore it either incentivizes uh or or can penalize certain types of activities. And the key uh concept here is that these uh tokens in the centralized networks are not deriving their value from any specific centralized issuer. They don't even derive their existence from a centralized issuer.
▶ 2:13:56So for example, Satoshi, the pseudonmous founder of Bitcoin disappeared and Bitcoin has continued uh to exist and thrive. There's no it's uh that couldn't happen in the context of a security, right? If if if a company goes bankrupt, you can't think of a share of stock persisting after that. So they're fundamentally different. So let me ask you this question. Are all digital assets native tokens? Are all digital assets native tokens of decentralized networks? And what functions and roles do these do these other types of digital assets serve?
▶ 2:14:26Uh no, I think uh digital assets encompass a wide range of uses. Uh Hester Pur for example, Commissioner Pur put forth her taxonomy. Uh and there's been other taxonomies. So I think memecoins are different. I think NFTts are different. I think you can also have things like tokenized securities, just a share of stock on blockchain rails, which shouldn't be treated any different than if it was on a piece of paper. Mr. Mr.
▶ 2:14:51Werrick, can you describe blockchain uses and applications outside of the crypto ecosystem such as the tokenizing of real world assets? Uh yeah, thank you for your question. I I can speak about real world assets. Uh was that your question? Yeah. Yeah. Um uh yeah, sure. So um real world real world assets are difficult to uh to sometimes transfer uh or to lend against or um to trade.
▶ 2:15:21Uh and so uh the tokenization of real world assets allows you know for example a piece of real estate can be fractionalized let's say into 10 different fractions and then those 10 owners of that one piece of real estate then can have uh you know a reflection of that asset memorialized on the blockchain and then that title can be transferred from owner to owner or it can be lent um uh from from one owner to another.
▶ 2:15:50So that's one example of uh the tokenization of a real world asset. I mean to to simplify it, I would say for people who watch this hearing, is it safe to say that tokenizing real world assets is is essentially a more efficient form of of a limited partnership where you might have a general partner, but then you have a suite of limited partners who have a piece of that investment. Is that a fair? Uh yeah, that that's exactly that is another example of of a way to tokenize, you know, an investment in a fund.
▶ 2:16:19For example, uh your ownership in that fund could be reflected by a token on the blockchain and then you could um lend against it or uh or you could um uh transfer it via the blockchain. Miss Smith, um how would the current accredited investor rule impede retail investing in tokenized securities? So the I'm going to unpack the question a little bit. So So retail investors are nonredit investors.
▶ 2:16:45So they can't participate in any and in any offerings that are restricted or private placements. Um separately tokenized securities that market is still developing. So if we're talking about tokenizing public shares then presumably those would be available to retail investors. What if we were in a position to tokenize restricted offerings? You tokenize restricted offerings assuming that the token behaved like the actual underlying stock. It would be restricted to retail investors as well.
▶ 2:17:16Is what's the limiting principle that would that create if you have a more efficient way to fund restricted offerings but retail investors are limited because of the accredited investor rule? I mean the the restriction would be the accredited investor rule right so you would make them you would make the offering more efficient but because the rule which goes to the offering because it is a securities transaction retail investors would still not be able to participate. All right.
▶ 2:17:42Uh, chairman, I know I'm over time, and this is one of the reasons why I think it's the time has now since come to get rid of the accredited investor rule or make some modifications to expand the ability for investors um, at the retail level to be engaged in all forms of finance. With that, I yield back. Gentleman yields back. The gentleman from Nebraska, Mr. Flood, who's also the chair of the subcommittee on housing and insurance, is recognized for five minutes. Thank you, Mr. Chairman.
▶ 2:18:07One of the reasons digital asset market structure legislation is so important is that it's not just important to digital assets uh is that it's not just important to digital assets used for speculative purposes. There's a whole group of blockchain applications, many of which are not primarily for financial or capital raising uses.
▶ 2:18:28Under former SEC chairman uh Gendler, the rigid interpretation of securities law with no allowance for re-examination or serious thought put into this technology, it was stifling creation and innovation with blockchain technology. Thankfully, with uh President Trump's victory, those days are over. We now have an administration that is going to work to regulate blockchain and digital assets, not seeking to destroy them. We also have a place to start with legislation for this Congress.
▶ 2:18:57Chairman Mckenry and then subcommittee chairman Hill set a great foundation with FIT 21. Now we need to work with the new regulators and the new administration to put together legislation that can pass into law. Miss Smith, in your testimony, you touched on some of the challenges applying traditional custody standards for securities to digital assets.
▶ 2:19:18Can you highlight ways in which traditional custody is at odds with digital assets and identify certain aspects of custody regulation that can and should apply to this space? Thank you for the question. So traditional custody rules are premised on there being a physical asset. There used to be physical stock certificates. That's no longer the case, but the rules were drafted when that was the case.
▶ 2:19:42And so there's some tension with uh native digital assets and physical assets which don't exist for for digital assets. With respect to the the framework for custody, what is key to any framework is the separation between customer assets and proprietary assets. So customer assets should be segregated so that if the firm goes bankrupt, they can be easily identifiable and given back to the to the customers.
▶ 2:20:09Next, I'd like to highlight some of the non-financial uses for blockchain technology that are really exciting. Uh, Mr. Wearret, I recently read Chris Dixon's book, Read, Write, Own, uh, with great interest last year. Can you describe what a potential web 3.0 future would look like, particularly taking into account how it might affect social media and media more broadly? Thank you for your question.
▶ 2:20:38Um yeah, so now in in our current infrastructure with web two um you know the the internet evolved essentially from uh you know uh central central companies providing information. Then it evolved to a state where uh um you know like YouTube and Wikipedia and different platforms uh you know social media platforms gave folks the ability to contribute their own information.
▶ 2:21:07The problem is all of that information contributed in a decentralized way was funneled through centralized actors who then tapped into privacy and used you know that information for their own gain. Um and also uh you know this is not this is similar to how banks use our money banks also like central intermediaries use our our money to um to lend against or whatever. So um anyway so the nice thing about web 3 is it unlocks that need for an intermediary.
▶ 2:21:37Um uh folks can lend one person to the other through their non-custodial wallets that they have full control over. So you control and own your own assets. They're not held by an intermediary just like on YouTube in web two that's in web three but in web two you um you know your videos are held by YouTube you know the blockchain allows you to you know uh host your own videos host your own information host your own um essentially
▶ 2:22:08everything on the blockchain and the title to that property is held there and controlled by your wallet and uh following up uh this is more just help me understand what are decentralized physical infrastructure networks and what role could they play in the future?
▶ 2:22:25Uh yeah, so um decentralized networks for example are you know you think about the internet is a lot of different servers that um that are decentralized and they work together to uh they're not owned by one company but all of these different servers communicate with each other. computers communicate with each others and that's how blockchains work and the the various distributed validators.
▶ 2:22:48So a single blockchain can have hundreds of validators in it and those validators work together in a decentralized way across the globe to validate transactions and once they're kind of burned onto that blockchain uh block by block they build a ledger together in a unified way though they are you know in uh decentralized in their validating work. So that's a decentralized network. I have no more time left. I yield back. The gentleman yields back.
▶ 2:23:16With no further members in the queue, I'd like to thank our witnesses uh for their testimony today. Uh without objection, all members will have five legislative days to submit additional written questions. Uh for the witnesses to the chair, the questions will be forwarded to the witnesses for their response. Witnesses will please respond no later than May 14. The hearing is adjourned.