▶ 0:27:22Committee for Financial Services will come to order. Without objection, the chair is authorized to declare a recess at any time. Today's hearing is entitled tokenization and the future of securities modernizing our capital markets. Without objection, all members will have five legislative days within which to submit extraneous materials to inclusion in the record. I now recognize myself for four minutes for an opening statement. Good morning. We stand at the threshold of a significant transformation in our financial landscape.
▶ 0:27:50Currently, early adoption efforts in the tokenization of assets are changing the ways that securities are issued, traded, and recorded. By leveraging distributed ledger technology to represent financial instruments and their ownership, tokenization has the potential to streamline processes and introduce entirely new ones, promising greater efficiency, transparency, and However, as tokenization becomes more prevalent in our capital markets, it raises
▶ 0:28:20very important legal and regulatory policy questions. We must ensure that our existing security laws are equipped to govern these modern emerging technologies without stifling the very progress they offer. Today's hearing provides members with an opportunity to identify regulatory gaps and inefficiencies that could create risk or hinder investor protection and orderly market objectives.
▶ 0:28:45We must foster an environment that supports growth while maintaining investor protections which are the bedrock of our system. As we move forward, we must also consider the broader impact of tokenization on market integrity, capital formation while examining how it can enhance transparency, efficiency for investors, regulators, market participants by upgrading the very certain complex compliance functions themselves.
▶ 0:29:12Evaluating this impact will help the committee better understand both the opportunities and the risks associated with this emerging technology. Today's discussion is vital to shaping the future of our capital markets and guiding policy and legislative approaches that can support innovation and the growth of US capital markets while maintaining our position in the world and our strong investor protections.
▶ 0:29:35The United States has led the world in financial innovation and it's essential that we continue to pave the way for future advancements in a manner that are responsible and supported by clear effective regulatory frameworks. In doing so, we can help ensure innovative innovation serves the broader public interest, strengthens market integrity, and reinforces the United States continued leadership around the globe in capital markets and capital formation. I look forward to the panel's discussion today, and I yield back the balance of my time.
▶ 0:30:05Now, recognize the ranking member for a 4-minute opening statement.
▶ 0:30:10Uh, thank you, Mr. Chairman. Democrats on this committee support innovation, helping companies raise capital, and strengthening investor confidence in our financial markets. This has never been a question.
▶ 0:30:26New technologies that convert securities into digital tokens on a blockchain, known as tokenization, might be able to make stock trading more efficient through faster settlement, more transparency, and increase participation from global investors. It would be a good thing to increase demand for US securities and lower costs for issuers.
▶ 0:30:53Democrats support technology when it delivers real benefits to American people. However, our first priority should be to ensure that any innovation actually serves investors and businesses, not the middlemen looking to take advantage. Our caution comes from experience.
▶ 0:31:15Leading up to the 2008 financial crisis, we were told that securization and new financial would make borrowing easier, spread risk, and lift everyone up.
▶ 0:31:29What they actually did was allow Wall Street to build a process that legitimatized predatory loans, stripped wealth from middle class homeowners, and created the conditions for the worst economic catastrophe since the Great Depression. Working families lost their homes. Communities of color were devastated. and the people who built and sold those products walked away richer.
▶ 0:31:59While creating new types of middlemen may sound innovative, in practice, it appears that tokenization also adds new fees, complexities, and risk for investors and the financial system.
▶ 0:32:14When a retail investor buys a tokenized stock on a decentralized exchange and pays seven times more in execution cost than if they just brought the stock on NASDAQ as a former SEC chief economics has documented. It is that reality innovative? Is that really innovative or just predatory?
▶ 0:32:41I'm also concerned about the gamification of investing and gambling associated with these technologies. This committee has already examined how trading apps use designs to turn invested into a game. Tokenization could make those trades faster, always on, and with fewer guard rails.
▶ 0:33:08And most importantly, it is impossible for this committee to ignore the blatant corruption from this administration. The Trump family has earned an estimated $1 billion in profit from their crypto ventures. Just last month, crypto executives gathered in Mara Lago, where market participants paid millions of dollars to appear on stage with President Trump's children.
▶ 0:33:37When officials in the government who are approving the rules also profit from the market those would regulate the American people rightly ask whose interest truly comes first. must be should be used to strengthen not weaken investor protections.
▶ 0:33:59Innovation should be used to help working families and build wealth and extract it from and innovation should be used to learn from the mistakes of the past, not repeat them on a greater scale. So, I look forward to hearing from our witnesses today. And I yield back the balance of my time.
▶ 0:34:19The gentleoman yields back to recognize the chair of our subcommittee on capital markets, Miss Wagner, Missouri, for one minute for an opening statement.
▶ 0:34:26I uh thank you, Chairman Hill. As chair of the capital markets subcommittee, I'm focused on tokenization's realworld impact. how this technology will streamline capital formation and modernize our markets. But most importantly, I'm focused on how tokenization will benefit my constituents in Missouri and Main Street investors throughout the United States. Tokenization is revolutionizing finance.
▶ 0:34:56Yet, regulatory uncertainty threatens to push this technology offshore. To ensure American markets continue to set the global standard, we must provide legal clarity to foster innovation without compromising investor protection. By modernizing outdated rules, the SEC can encourage innovation within our existing securities law.
▶ 0:35:22Let me be clear, modernization must never come at the expense of rigorous oversight. I look forward to your insights and I yield
▶ 0:35:32Gentlewoman yields back. We recognize the chairman of the ranking member of our subuno capital markets, Mr. Sherman of California. One minute for an opening statement. Now the people who have tried to create a payment system without know your customer or anti-moneyaundering are trying to create a stock exchange without know your customer anti-money money laundering or any other regulation.
▶ 0:35:53This is such a bad idea that they know they can't pass it through Congress even though they spend more money on lobbying and campaign contributions than the next 10 industries combined. They know they can't even get this through the SEC through a regular rulemaking process. So, they've gone to the SEC and asked for a blanket exemption, a rubber stamp scarcely more than a no action letter.
▶ 0:36:19If this uh new approach to stock transactions took place, it would be perfect for those engaging in insider trading. It would doom the consolidated audit trail. Sure, you might know that a particular account number seemed to make a big trade just before the announcement, but you'll never know who the person was behind that account and what inside information they had. This is a bad idea. We ought to say no. Gentleman yields back today.
▶ 0:36:47We welcome the testimony of the Honorable Ken Benson, president and chief executive officer of the Securities Industry and Financial Markets Association. The honorable Sar Messenger, chief executive officer of the blockchain association. Christian Sabella, the managing director and deputy general counsel of the depository trust and clearing corp. John Zea, the executive vice president, global chief legal risk and regulatory officer at NASDAQ, and Salman Bani, the general counsel of Plume Network. We thank each of you for taking time to be with us.
▶ 0:37:16Each of you will be recognized for five minutes to give an oral presentation of your testimony. And without objection, your written statements will be made part of our record. Congressman Benson will recognize you for five minutes.
▶ 0:37:28Uh, thank you, Chairman Hill. Uh, ranking members, waters, and distinguished members of the committee. Thank you for the opportunity to testify today on tokenization and the future of US Securities Markets. My name is Ken Benson. I'm president, CEO of the Securities Industry, and Financial Markets Association or Sithma. United States leads the world with the deepest, most liquid capital markets built on a foundation of robust investor protection and market integrity.
▶ 0:37:50The underguarding of that foundation is the most technologically sophisticated market infrastructure that ensures robust operational resiliency proven deliver to deliver maximum execution, quality and efficiency, including during periods of extreme stress and is the result of constant investment in new technology and processes to better serve clients.
▶ 0:38:11As such, Sithma and its members strongly support innovation in the securities markets and believe new technologies such as distributed le ledger technology or DT and tokenization offer many potential benefits for the US. Sithma's members and other industry participants have been investing in DT for more than a decade to determine how such new technologies could benefit investors, issuers, and other market participants across the securities life cycle.
▶ 0:38:37This includes enhancing market infrastructure, increasing investor access and choice, and supporting more efficient capital formation. At the same time, the continued strength of the US securities markets depends on preserving the investor protections and market integrity safeguards that provide trust and confidence to market participants.
▶ 0:38:54That strength and efficiency is not an abstract thought, but it provides real benefits across the US economy, including lower cost of capital for issuers, broader access and liquidity for investors, retirement savings, business investment, and economic growth. As SIPA has emphasized across a series of submissions to the Securities and Exchange Commission, our securities markets thrive because of, not despite, long-standing regulatory frameworks that protect investors and ensure market quality and integrity.
▶ 0:39:21The goal of policymakers should be to modernize markets in a way that builds on these strengths rather than bypassing them. Developing a durable approach that is built on existing regulatory frameworks will enable innovation to flourish and new operating models to develop while also protecting investors and ensuring that our markets remain the envy of the world. Specifically, I would like to highlight four recommendations. First, tokenized securities are securities. Technology does not change the underlying definition of the instrument.
▶ 0:39:48And like like any securities, tokenized securities should be subject to the same robust investor protection and market integrity rules that have helped make the US securities markets the deepest, most liquid and efficient in the world. Second, DT and tokenization can deliver meaningful benefits across the securities life cycle. But those benefits will be realized on a on a scalable and durable basis only through technology neutral functional regulation that protects investors and preserves market quality.
▶ 0:40:14Third, there may be areas where the current regulatory framework is fundamentally incompatible with DT technology, making existing requirements infeasible. In these instances, carefully tailored exemptive belief may be necessary to allow innovation while maintaining the spirit of the regulations and the protections they offer. Even then, bespoke exemptions must be narrow, transparent, time bound, and aligned with the intent of the underlying regulations. They should never serve as a substitute for a notice in comment rulemaking.
▶ 0:40:43Congress and the commission must ensure regulations are calibrated to actual risk, avoiding workarounds that undermine investor protection or market integrity. Fourth, tokenization must be evaluated as part of a broader set of market structure reforms that also includes extended hours trading or so-called 247 uh the ongoing review of rule 611 on trade through or trade through prohibitions and other areas of regulation in MS.
▶ 0:41:08Congress can play an important role, as it always has, in supporting the responsible development of tokenized securities markets by reinforcing that tokenized securities are securities and they should be integrated into the existing federal securities regulatory framework, not placed outside of it.
▶ 0:41:24Tokenization offers real promise across the securities industry, but those benefits will only be realized if tokenization develops in a framework that preserves investor protection and market integrity and builds on rather than undermines the strength, depth, and efficiency of US securities markets. Thank you for the opportunity to testify today and I look forward to the committee's question.
▶ 0:41:45Thank you, sir. Miss Mer Messinger, you're recognized for five minutes for your oral presentation.
▶ 0:41:52Thank you, chairman. Uh, Chairman Hill, Ranking Member Waters, and members of this committee. Thank you for the opportunity to testify today. My name is Summer Mercinger, and I am the chief executive officer of the Blockchain Association. It's the largest crypto native trade association. We represent the leading builders and innovators in digital assets, and we work to promote policies that support responsible innovation, protect consumers, and strengthen US competitiveness.
▶ 0:42:23The central point I want to leave the committee with today is this. Tokenization can help modernize American financial markets, but we must provide clear rules that help innovation to grow here at home. Tokenization means representing an asset like a stock or a bond on a blockchain in digital form.
▶ 0:42:44Tokenization provides expanded access to US capital markets by reducing reliance on intermediaries, lowering transaction costs, and enabling 247 trading and continuous market access outside of traditional market hours.
▶ 0:43:00The blockchain technologies used in tokenization enable near realtime settlement, reducing counterparty risk by narrowing the gap between a trade and final payment by replacing flawed manual recordkeeping processes with more transparent time stamp stamped records. Tokenization lowers the cost and reimagines US financial markets.
▶ 0:43:26These are real improvements for market participants, for investors, and for the long-term strength of US markets. To be clear though, modernization is not deregulation. Tokenized markets should be regulated. The question is whether our existing capital markets framework is appropriately calibrated for how tokenized securities markets actually operate. There's three ideas that should guide that approach.
▶ 0:43:54First, regulation should focus on function, not the technology itself. A security does not stop being a security because it's recorded on a blockchain. This is consistent with how financial regulation has always operated. The law regulates the activity pl taking place, not the technology used to carry it out.
▶ 0:44:14Second, regulation should distinguish between intermediaries and Traditional markets rely on intermediaries that custody assets and control transactions. Blockchain systems work differently. Software can handle recordeping, transfer, and settlement without any one party taking custody or control of the customer's assets. Rules should reflect that difference. Third, regulations should reflect changes in settlement and risk.
▶ 0:44:44Traditional market rules were designed for delayed settlement and multiple intermediaries. But when assets and payments can move together in a single transaction, those legacy risks are reduced. A modernized framework should match the risks that are actually present. There has already been important progress. The SEC has provided helpful definitional clarity on the treatment of tokenized securities that makes clear that a tokenized security is still a security.
▶ 0:45:13The commission has also shown a willingness to engage with tokenized technology through staff guidance, no action relief, and other tools. That is the right approach and it reflects how the SEC has handled other major technological advances in the past. But uncertainty remains, especially when the rules written for financial intermediaries are applied to disintermediated systems.
▶ 0:45:38More clarity is needed so that oversight remains strong without holding back better, more efficient market structure. Tokenization is the next step in the evolution of US financial markets. And the benefits are clear. Faster settlement, lower risk, greater transparency, and broader access. The question is whether the United States will lead this transition or allow it to take shape somewhere else.
▶ 0:46:04The next generation of finan of market infrastructure should be built here at home under the US rules with robust US investor protections in a way that strengthens American leadership, supports American innovation, and keeps the future of finance anchored in the United States. Blockchain Association and our members stand ready to work with Congress, regulators, and other stakeholders to help make that happen. Thank you, and I look forward to your Thank you, Mr.
▶ 0:46:35Sabella. You're recognized for five minutes for your oral presentation.
▶ 0:46:39Chairman Hill, Ranking Member Waters, and members of the committee. My name is Christian Sabella, and I am deputy general counsel and a managing director of the Depository, Trust, and Clearing Corporation. It is my privilege to be here today to discuss DTCC's ongoing development of digital securities and tokenization solutions which represents just the latest instance of DTC performing its role as a pivotal driver of innovation and interoperability across US and global financial markets.
▶ 0:47:06On behalf of DTCC, I thank you for the opportunity to participate in this important discussion. DTCC owns and operates three important financial market infrastructures. National Securities Clearing Corporation, Fixed Income Clearing Corporation, and the Depository Trust Company, each of which are registered with the US Securities and Exchange Commission as a clearing agency.
▶ 0:47:27Additionally, each clearing agency has been designated as a systemically important financial market utility or CIFMU and thus is subject to heightened risk management standards and oversight by over 20 different supervisory bodies globally. As a user-owned business, DTCC's core purpose is to serve as a strategic partner to its members and their clients in creating and implementing innovations that promote efficiency, resilience, and interoperability across some of the most important financial markets.
▶ 0:47:58In 2024, DTCC played a pivotal role in facilitating the transition of the US equities market to a T+1 standard settlement cycle and is presently spearheading the implementation of expanded central clearing in the US Treasury market. It is this purposeful innovation and deep expertise that led the firm to begin developing digital asset solutions starting in 2016.
▶ 0:48:21These efforts accelerated in 2024 with the acquisition of a company called Securency, which today operates as DTCC's newest subsidiary, DTCC Digital Assets, or DDA. DDA's purpose is to provide institutional-grade infrastructure and products that facilitate end-to-end life cycle processing for tokenized traditional financial assets, including those assets serviced by the SIFMOS.
▶ 0:48:46Following this acquisition, DTCC's tokenization efforts have intensified as evidenced by a no action letter approval from the Securities and Exchange Commission's Division of Trading and Markets late last year. This no action letter approval allows for limited and targeted relief that will enable the launch of the DTC preliminary based tokenization service using DDA tokenization More broadly, this development will also accelerate DTCC's efforts to deliver to its users and
▶ 0:49:16their clients new solutions that could ultimately underpin the evolution of an open access and interoperable digital asset infrastructure for financial markets. Thus, bridging DTCC's existing technology and services with the benefits of transacting in real world assets on distributed ledger technology.
▶ 0:49:34If successful, this bridging of the traditional infrastructure and DT offers market participants the potential to optimize asset mobility and liquidity with increased efficiencies and interoperability across clearing, settlement, and other FMIs.
▶ 0:49:50Unlocking the potential benefits of tokenization for critical markets like the US public equities market and the US Treasury securities market is a tremendous opportunity equal to if not greater than the opportunities presented by the transition to T+1 and the expansion of central clearing for treasuries. However, as in those prior endeavors, with great opportunity comes great responsibility.
▶ 0:50:12In pursuing the great opportunity of tokenization, DTCC believes that financial entities and policymakers should ensure that a responsible regulatory approach, one based upon and derived from the historical approach used for traditional assets, is applied. In practice, this means resisting calls to upend the pre prevailing legal and regulatory framework. Properly tokenized assets still must constitute the same bundle of rights and privileges that holders of traditional assets enjoy today.
▶ 0:50:40DTCC's perspective is that the existing legal and regulatory approach is core to ensuring tokenized assets deliver this outcome. At the same time, tokenization does raise the potential for asset holders to expand upon or experience their existing rights and privileges in more efficient and flexible ways, and we should look at efficient and responsible policy approaches to realize that potential.
▶ 0:51:02In DTCC's experience, an advisable approach is surgical and principles-based, which will ensure competition and choice for market participants, their customers, and investors. This is the approach that informed our December 2025 no action request and will continue to inform the innovation and deployment that we plan to unveil in the months and years to come. DCCC is honored to have been asked to contribute to this discussion and applauds this committee for taking a leadership role on the issue.
▶ 0:51:29We look forward to continuing to work with Congress as they explore these important issues today and I look forward to answering your questions. Thank you.
▶ 0:51:37Gentleman yields back. Mr. Zucker, you're recognized for five minutes for your oral presentation.
▶ 0:51:41Chairman Hill, Ranking Member Waters, and members of the committee. Thank you for the opportunity to testify today on behalf of NASDAQ. I'm John Zea, NASDAQ's Chief Legal Risk and Regulatory Officer. For more than 50 years, NASDAQ has operated at the intersection of capital markets and technology.
▶ 0:51:59We were the world's first electronic stock market, helping lead the transition from paper certificates to electronic ownership, from floor-based trading to automated execution and from domestic markets to globally connected financial Throughout that history, our focus has been consistent, protecting investors, supporting deep and resilient liquidity, and safeguarding the integrity of US equity markets. And that liquidity is not abstract.
▶ 0:52:29It is fundamental to capital formation. Research shows that companies that go public in deep competitive markets generate nearly 40% higher capital investment and materially higher employment growth in the years following the IPO, underscoring why market integrity and trust are essential to long-term economic growth. That's the lens that we bring to tokenization.
▶ 0:52:53At its core, tokenization should reflect in change in how ownership is recorded, not what is owned. A tokenized share is still a share. Merely changing the technology used to represent a security should not alter its legal status, the rights it conveys, or the protections that apply under US securities laws.
▶ 0:53:14Done responsibly, tokenization can modernize market plumbing, reducing reconciliation, streamlining settlement and corporate actions, and improving shareholder engagement while preserving the investor protections and market integrity that make the US public markets the global standard. Tokenization can also reduce real costs in the system. Processing corporate actions is estimated to cost the industry 58 billion annually.
▶ 0:53:41costs that ultimately are borne by investors and can weigh on capital formation and job creation. But tokenization can also be done poorly, creating parallel pools of liquidity, inconsistent rights or uneven safeguards. Avoiding that outcome is essential. That is why NASDAQ's approach is focused on integration, bringing tokenization into regulated markets rather than creating parallel systems.
▶ 0:54:08On March 18th, 2026, the SEC approved NASDAQ's proposal to enable securities to trade on our markets in either electronic form, as they do now, or tokenized form, applying existing exchange rules so that tokenized securities remain fungeible with their counterparts, share the same CQIP, and convey the same rights.
▶ 0:54:29Building on that framework, NASDAQ recently announced our intention to develop an equity token design, an issuer sponsored way for shares to be held and moved in token form without changing what it is. It is designed to create the to treat the digital representation and the underlying share as a single security.
▶ 0:54:51By doing this, investors keep the same core protections and companies continue to operate under the same governance framework while using modern technology to reduce friction in areas like settlement workflows, corporate actions, and proxy voting. Put simply, it's upgrading the rails underneath the stock, not creating a new kind of stock. Congress also has an important role to play.
▶ 0:55:16NASDAQ supports this committee's bipartisan work on the Clarity Act because clear statutory guidance can protect investors, strengthen confidence in the US markets, and support capital formation by ensuring innovation reinforces rather than fragments public markets. In closing, tokenization should be about building on the strength of our public markets.
▶ 0:55:40It should be about responsibly modernizing infrastructure and ensuring the United States continues to lead with the deepest, most liquid, and most trusted capital markets in the world. NASDAQ stands ready to work with Congress, the SEC, and market participants to ensure tokenization strengthens the US capital markets and supports long-term economic growth. Thank you, and I look forward to your
▶ 0:56:05Thank you. We recognize the chair recognizes Mr. Banana. You're now recognized for five minutes for your oral presentation.
▶ 0:56:12Chairman Hill, Ranking Member Waters, members of the committee, thank you for the opportunity to testify today. My name is Salman Benai, general counsel of Kimber Labs, also known as Plume, a New York-based tokenization startup. Plume is Ethereum's compliance layer and its only layer 2 blockchain with AML and sanctions controls at the at the protocol level. Our Nest asset management protocol also embeds compliance directly into tokenized assets. Since launching in June, the Plume blockchain has attracted over 220 tokenization projects, including blue blue chip issuers like Apollo and Wisdom Tree.
▶ 0:56:43There is now over 350 million of value on the Plume blockchain across 260,000 wallets, nearly half of all public tokenized asset wallets, primarily across Southeast Asia, Latam and Nigeria. Plume is not available in the US. We are working with FINRA to obtain a broker dealer registration to augment our existing SEC transfer agent. Bloom and tokenization projects like it are happening today mostly outside the US while our tokenization policy remains under construction. Why should Congress, the SEC, and the administration act?
▶ 0:57:12The fact that most tokenized markets are outside the US should concern this committee. The demand is global and the benefits are local. Consider a practical example. Today, a $200 million highway expansion is funded in opaque mun bond markets, difficult to access for the taxpayers who fund and use it. Tokenization of that project can allow people to invest in their community for as little as $50. The state could reward civic engagement by airdropping mun bonds to community volunteers through a QR code as an example.
▶ 0:57:41The opportunity is not just local. Over 7 billion people globally are middle or upper income, up from 1.6 billion in 1990. Tokenization through permissionless blockchains can channel that expanding pool of capital into US markets, funding job creating opportunities here at home. What are our competitors doing? Hong Kong subsidizes bond tokenization after finding it lowered yield spreads by nearly 24%.
▶ 0:58:06Applied to our $200 million highway example, this represents about $4.8 million in interest savings. Singapore does the same and leads Project Guardian, a coalition of over 40 institutions, including the IMF and World Bank in seven other countries, not including the US. Singapore, the UAE, and the EU, to name a few, are advancing as well. The pattern is unmistakable. Our competitors are racing to capture the infrastructure layer of global capital.
▶ 0:58:34How can we return to the head of the global markets? I want to express six principles that center American investors' interests and should guide the transition to tokenized markets and secure the US as the global leader. First, the same or better outcomes. Section 505 of the Senate Clarity bill gets this right. The format of a security should not change the regulatory outcomes.
▶ 0:58:55Clarity also implements this principle in section 108 directing the SEC to update its rules around market infrastructure but not outcomes in response to digital asset technology. Second, accountability. Congress should ensure retail investors have the same protections regardless of which app they use, including DeFi apps as well as super apps. Such accountability is essential for customer protection and confidence. Third, prioritize legislative and regulatory actions based on net benefits. Bonds are particularly suitable products.
▶ 0:59:25Indeed, competitors are providing subsidies to promote bond tokenization, but here in the US, these products are effectively banned under the 1982 Tax Equity and Fiscal Responsibility Act, also known as TERA. Fourth, the Hypocratic oath, do no harm. As Chairman Atkins indicated, tokenized finance is incompatible with the existing wellunctioning regulation NMS framework. It will be a complex multi-year effort to incorporate tokenization benefits for public equities. Fifth, solutions should be durable.
▶ 0:59:54If exemptions and no action relief is temporarily offered, these should be milestones on a clear path toward formal, lasting rulemaking or legislation. The SEC's goal should not be deregulation by exemption, but instead durable, modernized regulation. The EU's DT pilot presents a cautionary tale. Six, safeguards should be proportional. Scale the safeguards to the risks on chain.
▶ 1:00:16Some risks, for example, associated with intermediary abuses and rent seeeking are reduced, while others are higher, for example, the risks of hacks and scams. In my written testimony, I applied these principles to guide recommendations for the safe integration of tokenization into capital markets. Chairman, Ranking Member Waters, members of the committee, tokenization is to capital what the internet was to information. With the right policy framework, America leads this transformation.
▶ 1:00:44We lead global finance by driving a global race to the top and we can do the same. Thank you.
▶ 1:00:50Gentlemen yields back when I'll turn to member questions. I recognize myself for five minutes for questions. Much of today's hearing has focused on technical issues surrounding how tokenization would be integrated into the existing securities legal arena. But I want to step back and consider how tokenization could benefit just ordinary investors out there.
▶ 1:01:13For example, let's say uh an investor in Little Rock needs to sell some shares late on a Friday afternoon for some reason. Mr. Sabella, under the current T+1 settlement rules, if she were to sell uh on late on a Friday afternoon, what's the earliest day that she would see her proceeds in her account?
▶ 1:01:36Thank you, Mr. Chairman. The person in question would probably expect to receive the proceeds on the following So in contrast, you know, to the tokenized world with the idea of so-called atomic settlement because of the use of the distributed ledger, could she have access to her funds on a same day basis in my example?
▶ 1:01:58Uh yes, Mr. Chairman, under that example, if she was able to otherwise um have a counterparty that could meet the deadline on the same day, yes, she would get assets, get her proceeds right away. In the US, financial innovation is central to America's role as the world's premier capital market and preserving the international standing of the dollar. Our market attracts, as we've heard from our our president, trillions and trillions of new foreign direct investment.
▶ 1:02:27And they're attracted here by our regulatory system, our legal system, our capital formation system, our transparency of our of our market. So as more market participants develop tokenization technology uh some in recent years before this past year have chosen to do so in Europe rather than in the United States which is a little uh counter messaging compared to what we normally uh hear in this committee. So Mr.
▶ 1:02:56Vincson, are updating the technology rails uh important to our competitive position as as we obviously are going to maintain market integrity no matter what technology we select.
▶ 1:03:08Yeah, Mr. Chairman, I I mean, this this industry constantly is investing in new technology and and has done. I mean, we would not have gotten from three to two to two to one uh uh if it hadn't been for that. we wouldn't you know we invented electronic markets uh which this committee by the way played a big role in uh over the years so this is an ever evolving industry and so it's it's but and it's absolutely essential that we are constantly evolving uh but we but at the same time we want to do it on the basis of the of the legal and regulatory framework
▶ 1:03:39that we have so some of the things that are happening outside the US are in products that are not traditional securities some of the things are happening outside the US are products which congress and others have suggested are not retail products So there are some issues that Congress, you know, things like security back swaps, for instance. Congress is going to have to think about, but legal legal and regulatory clarity is paramount uh for regulated firms to know what they're, you know, what they can and can't do.
▶ 1:04:04Thank you. Well, I in just the 50 years since one of my first summer jobs was typing confirmations uh at a brokerage firm using something called carbon paper which people don't know what that is but uh so that it would be in triplicate. Uh it was T+5 this summer I was doing that. So in 50 years look at the advance of our technology in our markets.
▶ 1:04:29Um, but this point I've heard it mentioned a couple of times today that, you know, we're, and I like the way, uh, Mr. Zea, I think you phrased it on, we're updating the rails. We're using a different technology in the rails. We're not, uh, uh, doing something inappropriate to an issuer of a corporate stock or people who are buying and selling that corporate stock. It's just using a different technology. And, um, Miss Sminger, I wanted to kind of talk to you about that.
▶ 1:04:57um placing a traditional security on a blockchain doesn't change that underlying nature of the assets or the goals of protect investor protection I think that's we've got to recognize that I hear a lot of conversation about that that is making a broad assumption that it does I argue that it doesn't but tell us what role decentralized finance can play in that broader tokenization ecosystem what dos provide to markets and investors.
▶ 1:05:28Thank you for the question. And when I talk about DeFi, what I'm talking about is non-custodial,
▶ 1:05:39And it provides the the way for the market to move, for the asset to move, to settle, to be traded. It's really the plumbing. It's the infrastructure of the uh the market. And it takes away there's a lot of efficiencies involved. you remove a lot of intermediaries that add costs to the trade and it allows for more broader access to the markets.
▶ 1:06:04If all of you would sort of expand on that thought in in answer to that question, I yield back. I recognize the ranking member for her five minutes of
▶ 1:06:13Mr. Mr. Chairman, before I begin my questions, I ask for unanimous consent to submit into the hearing records a letter from Investment Company Institute and the North American Securities Administration Association.
▶ 1:06:27Without objection, they'll be included.
▶ 1:06:28Thank you very much, Mr. Vani. Uh, the Trump family has earned 1 billion from crypto ventures. While this administration simultaneously loosens the regulatory framework governing these same markets, the SEC has dismissed or scaled back numerous enforcement actions against crypto companies, including the most recent slap on the wrist settlement with Justin Sun.
▶ 1:06:57The president's family venture world liberty financial is actively launching tokenized products. As a market participant, does this concern you? And should tokenization enabling legislation include provisions barring senior government officials, including the president and their immediate families from holding financial interest in tokenized securities platforms.
▶ 1:07:27Thank you, Ranking Member Waters, for that question. Um, public confidence in our institutions is at is at an all-time low. Um, and uh, there are currently laws and regulations on the books that uh are intended to prohibit um, conflicts or the perceived conflicts of interest involving public officials.
▶ 1:07:49Um these when it comes to the uh to the administration um the question is whether uh current oversight and enforcement um as well as legislation is adequate to address concerns uh that would otherwise uh ensure public confidence in our institutions.
▶ 1:08:09Um I'll say that um public confidence in institutions is also eroding uh because of a perception u that congress and the administrative branch the executive branch um are not adapting to new realities. Um and uh digital asset legislation being among them. Um these debates about digital asset legislation have have now been circulating in DC for many years.
▶ 1:08:34Um, and so we would encourage Congress to look at the merits of pending market structure legislation um, as opposed to um, ethical uh, and and and not letting um, concerns around ethics um, get in the way of making incremental progress.
▶ 1:08:50H further uh section 505 of the Senate Clarity Act establishes a critical principle that a security does not stop being a security simply because it is issued, recorded, or transferred using distributed ledger technology. NASA, which represents states securities regulators, has urged Congress to maintain this provision as drafted.
▶ 1:09:16Do you agree that this principle should be preserved in any crypto or tokenization legislation Congress advances?
▶ 1:09:26I think section 505 does a great job of expressing congressional intent that the format of uh security does not change the substantive requirements around it.
▶ 1:09:36Mr. Benston SAM has submitted multiple comment letters to the SEC's crypto task force making a point that I think this committee needs to hear clearly. Your organization has argued that the regulatory framework for tokenized securities should be established through formal notice and comment rulemaking not through the uh whole no action letters or broad exemptive relief.
▶ 1:10:02Can you explain uh to this committee while that distribution matters and while the process by which we build these rules is just as important is the substance of the rules themselves.
▶ 1:10:15Uh uh thank you uh congresswoman. Um many of the uh uh we are aware that uh there have been requests to the commission to make material changes or ask for exemptions that are quite material in terms of the application of the existing securities rules and securities laws. And as such we think it's only prudent that those be put out for notice and comment because they'll affect the broad uh securities market.
▶ 1:10:40Um, and it's not, you know, the the SEC puts out, you know, numerous proposals uh throughout the year on rulemaking. Uh, and we think this should fall in that in that uh category.
▶ 1:10:55The importance of uh robos uh rulemaking um is very important to us as we try to develop legislation. Um, and I want to know whether or not there is something specific that you think we should be paying attention to.
▶ 1:11:15Well, I think we should be paying attention to any efforts either through exemptive relief or no action relief that would create, you know, very material exemptions under the securities laws under things like reggms for certain market participants that don't apply across the entire ecosystem. your organization has argued. Uh, thank you. We'll continue the questions perhaps in writing. Thank you very much. I yield back.
▶ 1:11:41I thank the ranking member. The gentleman from Michigan, Mr. Heisinga, who's also the vice chairman of this committee is now recognized for five
▶ 1:11:48Uh, thank you to my colleague from Ohio. Um, uh, Mr. Benson, uh, good to see you again. Appreciate your time here. Uh, so how can the SEC balance the need for technological flexibility with the rigorous oversight required to maintain the highest standards of market integrity? I mean, I don't think anybody questions that we need to have a rigorous integrity to the market. But how do how does the SEC balance?
▶ 1:12:11Well, I I should say at the outset, what I would say is I think the FCC right now is doing what they should be doing by creating a task force and and inviting stakeholders, the public to comment on how they think the rules should apply for whether you know what's a security
▶ 1:12:28You you take it that Mr. Atkins is running a very inclusive
▶ 1:12:31very much. We've you know, we have filed over a dozen letters to that. We have another one that's in the works now. Other stakeholders have as well. I think that's a very appropriate response. Then I think it's the SEC believes with within their authorities where they where where they believe there are certain you know uh round peg square holes where uh uh a a certain rule for securities will not work for something on DT or or in DeFi and again there's very important definitions and we can get into intermediaries and versus infrastructure.
▶ 1:13:02I would argue intermediaries are infrastructures in many case. Then they have then they have to they have to think about do they need to go in and do rulemaking? Do they have to come to Congress and ask for additional authority but they're doing the investigation work now and that's the right approach.
▶ 1:13:16Okay. Um obviously our capital markets are the envy of the world. Our liquidity the depth all those things uh make it very attractive. But is there a risk to just maintaining the status quo? Um well I I wouldn't say our markets have been have have been have been static or at the status quo. Our markets are constantly evolving. Again if you think back I mean we didn't have electronification of the equities markets 30 years ago. That work started this committee.
▶ 1:13:44You look at when this committee started the work that ended up in what became rese but today retail investors in most cases pay no commissions. They have the cheapest execution they've ever had before. We've gone, as the chairman said, from T5 to T1. It wasn't easy. We did, we ran that with with ICI and DTCC. So, this market's always evolving. You're seeing the app, you know, the adoption of DT. It's taken longer than I think people thought in the securities market, but it's happening
▶ 1:14:11and and so it is possible to maintain innovation and protection of of
▶ 1:14:18right? And and obviously market integrity has to reign supreme and all that. Um, uh, Mrs. uh, Messinger, Mr. Uh uh Zeot uh should we view tokenization as the next natural evolution of our capital markets like electronic trading? Are there aspects of tokenization that create novel problems unlike what we've seen in the adoption of other technologies? Messinger
▶ 1:14:44thank you for that question and yes it is an evolution versus re rewriting the system. So I think it's a natural evolution. I think that's where we're headed. Of course, there's going to be challenges with any time of um you know change in technology, but I think the SEC has the tools to overcome any challenges that they face and put into place a system that will provide appropriate customer protections while allowing this new
▶ 1:15:14infrastructure to take
▶ 1:15:17Mr. Zea, I want to hear from you, but I I'll just note that uh last month, eight Chinese government agencies issued a joint notice reiterating their domestic ban on cryptocurrencies and cracking down on real world asset tokenization, restricting it onshore without prior approval and tightening controls on crossber activity. That's not where we want to go, is it?
▶ 1:15:38No, it's not. And I I think the the key is to if we think about it as a technology evolution and not a new product, then I think things flow much more consistently. You say, "All right, we still need investor protection. We still a stock is still a stock. It hasn't changed. We're still worried about fragmentation of liquidity. We want to make sure the capital formation is not impacted." We want to make sure that the investor knows, are we getting am I getting the full rights of a stock or am I getting something else? And if I'm not, there should be disclosure.
▶ 1:16:07And then the markets that trade it should be if you're trading the same instrument, you should be regulated in a similar way. And what we're seeing now is the products are developing overseas and they tend to be not full equity. They tend to be a synthetic product that is not ownership. It's not always clear that investors fully understand what they're buying. So what we want to do is bring it
▶ 1:16:27why why is that?
▶ 1:16:28Well, it's disclosure.
▶ 1:16:31It part of it I think is regulation. Like what is the regulation that applies in in these foreign jurisdictions and you know there is some bleed I think where American investors find ways to invest there. So what we're saying is get the regulatory structure here in the US, make sure they understand what they're buying, and try to have interoperability so a retail investor can still take advantage for trading of the markets that they know, the stock markets that are fully regulated.
▶ 1:16:56My time's expired. I yield back.
▶ 1:16:59Uh I thank uh thank you, Mr. Heisinga. The gentleman from California, Mr. Sherman, who's also the ranking member of the subcommittee on capital capital markets, is now recognized for five minutes. I'm flabbergasted that there's even the possibility of making a change this big. Not through legislation, not even through notice and comment rulemaking, but the industry has just asked for a complete exemption from all the rules with a rubber stamp.
▶ 1:17:28We could see digital receipts where a company claims to have a thousand shares of Apple stock in reserve and issues a thousand tokens. But maybe they'll issue 2,000 tokens. We could even see derivative where they don't even claim to have any reserve any Apple stock, but they just say their Apple coin is worth as much as Apple stock.
▶ 1:17:52As I mentioned the consolid this kill would kill the consolidated audit trail and provide a wideopen system for insider trading and exchanges must monitor and surveil for manipulative tra manipulative trading activity including spoofing, front running and wash trading. There's no equivalent in this tokenized system. Um Mr. Benson by the way welcome back once again to this room.
▶ 1:18:19The United States is the deepest, most liquidated capital markets in the world. Uh, as a result, broker dealers are uh subject to rigorous know your customer and anti-moneyaundering requirements to prevent our capital markets from being used as an arm of illicit finance. Uh, are you concerned that granting this exemptive relief for tokenized securities would open the door to our capital markets being available to money laundering?
▶ 1:18:46Well, I think that Congress should be concerned and and policy makers should be concerned uh that uh everyone active in financial markets is abiding by the existing BSA uh know your customer rules.
▶ 1:18:59And so that's an issue that uh uh if you're as we're thinking about tokenization, as we're thinking about DT, we're thinking about any exemptive relief or even DeFi, um that policy makers need to understand where KYC BSA rules can apply and if there are gaps, how you're going to deal with them because that becomes more of a national security and and uh issue that is your is in your
▶ 1:19:23There is a tremendous power in Washington to let people make huge huge amounts of money by opening giant gaps in the know your customer and anti-money laundering. There's huge money to be made in being the financial uh services subp part of the industry to provide aid first to the to the drug dealers and the human traffickers and the sanctions evaders and then eventually to the tax evaders as well.
▶ 1:19:50uh exchanges provide transparency regarding fees, conflicts of interest, access, user segmentation, order handling. Uh there'd be no uh requirements uh for unregistered defy systems, enabling bad actors to charge investors exorbitant fees and use opaque, conflicted, discriminatory order handling practices.
▶ 1:20:11Furthermore, broker dealers are required to obtain beexed execution for customer orders and also provide extensive disclosures regarding order routing decisions and execution quality. There would be no equivalent requirements for unregistered defy intermediaries, meaning that conflicts of interest can pervade the execution process as an intermediary can manipulate transaction ordering. Uh Mr.
▶ 1:20:37Benson uh can uh how can we ensure that the introduction of tokenized uh securities does not raise uh new best execution investor protection or market manipulation concerns?
▶ 1:20:50Well, I think applying the existing rules again a security is a security whether it's tokenized, whether it's book entry or whether it's paper which virtually nobody has um and has it for a long time. And so all these rules are very important.
▶ 1:21:03So you shouldn't be exempting uh that by virtue of technology and and I have to say with all due respect in in where we've been concerned about issues around DeFi where you have intermediaries or infrastructure again infrastructure are intermediaries are infrastructure often if the if the infrastructure is doing the same thing that a broker dealer does if it's routing uh if it's being compensated for that if a custodian is acting as a custodian uh as opposed to pure selfisian
▶ 1:21:34and they're also providing order order selection, order routing. That's the same thing and that's what the that's what the SEC and maybe ultimately Congress has to figure out is how you draw those lines and definitions. But if you're doing the same thing as somebody, you're being compensated for it, then you should be regulated as such.
▶ 1:21:51Thank you. I'm concerned that we're creating a two-tiered market where tokenized securities uh and uh onch uh you know blockchain platforms are exempted from core securities regulations. We've learned over the last hundred years. We need these regulations. And to turn to the tech bros and say go fleece investors, do whatever you want because you're cool, you're hip, and you're electronic is absolutely absurd. I yield back.
▶ 1:22:19Thank you, Mr. Sherman. A gentleman from Oklahoma, Mr. Lucas, who is also the chairman of the task force on monetary policy, is now recognized for five
▶ 1:22:28Thank you, Mr. Chairman. Uh, Mr. Sabella, the DTCC announced at the end of last year your intention to enable the tokenization of a subset of US Treasury securities. How do you anticipate this technology affecting the broader Treasury market?
▶ 1:22:46Uh, thank you for the question, uh, Congressman. So initially I think we're looking at this as some of my co-panelists have described as a very evolutionary process. And so while treasury securities are being contemplated as part of the suite of potential assets that our members or their customers could come to ask us to tokenize uh we have a wide range of instruments and I think in terms of how this will uh spread out to the broader treasury market structure that still remains to be seen.
▶ 1:23:13And at FIC, we're very focused on the Treasury clearing mandate in terms of regular way transacting. We think at a point in the future, maybe there will be a convergence between what we do at FIC and tokenization of treasuries at DTC, but it's still a little bit too early to
▶ 1:23:27Okay. NASDAQ recently conducted a survey that showed that 50% of firms plan to manage tokenized collateral by the end of this year. Mr. Vica, what other insights can we learn from that survey? And how are market participants already utilizing this technology?
▶ 1:23:45Well, I think the regulatory certainty that we're talking about here will help adoption, but you've seen in the asset management space, you've seen in the ETF space, you're seeing a lot of ways that new products can can develop.
▶ 1:23:59And so, um, I think what we're saying and and what we're focused on is really drawing that those products and that innovation into the regulated space, creating products that are available for retail investors that retail investors understand that meet the expectations for the protections that they expect. So, I think you will see an acceleration of that. There's still some some things that need to be worked out. We were talking about where settlement goes in the long run and timing. I think that's a real question.
▶ 1:24:26their questions on netting and you know their value chains that I think are important. The piece that I I I would like to mention if I could is is the issuer side. So on the issuer side the real value from a tokenized security can be that corporate actions can be digitized on the record uh proxy the proxy process can be uh also handled through the through the blockchain and as I think most people know that the process is very Byzantine right now.
▶ 1:24:53if at a at mass scale that could be a real cost save for issuers.
▶ 1:24:58This topic also raises important questions about how to integrate new technology into existing market regulations. Our capital markets, I think we would all agree, are the envy of the world and certainly we must safeguard that status. Mr. Benson, what is the benefit of diverse industry input as the regulators in Congress seek to apply investor protections and market integrity principles to the new Thank you. Uh it's very important.
▶ 1:25:25I mean hearings like this are very important and hearing from all the stakeholders uh and and and then finding out where there may be instances again where you have, you know, a square peg round hole and the rules aren't going to work. But if you're going to change those rules, do it through notice and comment and change it for the entire the entire uh marketplace.
▶ 1:25:45Miss Merzinger, would you like to speak to that as well? and as a former regulator, how can the SEC and the CFTC be good partners to all industry
▶ 1:25:57Thank you, Congressman, and thank you for your years of support for the CFTC. I really appreciated that when I was there. Um, these are tools the regulators use. Um, of course, notice and comment rule making is very important, but sometimes you have to have an iter iterative approach to regulating.
▶ 1:26:17And it's not unusual for the agency to use things like no action relief exemptive use their exemptive authority to create the appropriate regulatory structure that will then go to rule making. So I think it it is eventually uh rule notice and comment rule ma making is kind of the gold standard but it it takes time to get there and this is how we've done this in the past and I think on the SEC CFTC cooperation what you're seeing now is exactly what needs to happen. and they've recently signed anou.
▶ 1:26:47They're working hand in hand. Um they're issuing guidance together and I think that's what we need in the market to make sure that people are clear of where where the rules are for them.
▶ 1:26:59Thank you. And with that, I yield back, Mr. Chairman.
▶ 1:27:02Thank you, Mr. Lucas. Uh the gentleman from Massachusetts, Mr. Lynch, who's also the ranking member of the subcommittee on digital assets, is now recognized for five minutes.
▶ 1:27:12Thank you, Mr. Chairman. Uh first of all, I want to thank all of our witnesses for for your help on this. This is a big deal. It's a big deal tokenization. It's going to change a lot. Uh I think it is, you know, inevitable in some in some degree. Uh but but our current US markets are are the best in the world because they're trusted. Uh they really are and those regulations that we have encourage that.
▶ 1:27:38Uh but uh I want to talk about NMS uh 611 just the order protection rule. I know that Mr. Benson you mentioned that in your your opening statement. So under reggg NMS right now uh we try to make sure every customer gets the fair price right best uh best available price in the market. And that is possible because of the regulatory requirements we have on on uh trading venues. They've got to be transparent.
▶ 1:28:07they've got to post their the best possible price. They have to look at the the other markets and uh so so that customer knows they're getting the best possible price. It prevents uh pass through trades as well where in this this age of high-speed trading, if you were able to get a customer to pay a higher price, you could resell it at another and then you you you make money on that. So it introduces an opportunity for scams.
▶ 1:28:37That's not that's not possible in this this system with with uh tokenization. You've got unaffiliated uh uh issuers who are out there uh you know selling at and it's very very difficult for them to to to figure out in the market what the best possible price is. So that's that's that's the essence just on a a a single transaction level that that I have problems with.
▶ 1:29:07Now there is some suggestion that the SEC might give an exemption uh on that and uh Mr. Benson is that is that sort of where you see this going? I I just don't see how this works in a tokenized world, especially if you have uh people doing the traditional trading uh method and then you also have people trading that same security uh on a on a tokenized basis through blockchain.
▶ 1:29:34So that's an important question. I'm sure my colleague from NASDAQ will have some views on this as well. So a couple of things. First of all, you I think you're spot on. I I do think tokenized securities that are treated as securities under the under the rules that we have today that you could live in a 611 NMS world. I don't think there's any question about that. Um I the other thing though and the the SEC has talked about they've had two roundts now to look at this. We participated in one of them.
▶ 1:29:59Um our view is more if you're going to change 611 you're going to have to change a lot of other things uh in in rens. You're going to have to go think about how best execution works which is very important. Not to say you can't do it, but you've got to but and and the and the issue the concern our members have depending on how they're how they're structured, what their business model is have different thoughts about about this issue.
▶ 1:30:20But core to it is particularly for our retail oriented members is how can they show their clients how of their what their execution quality has been and that was one of the intent part of the intent behind it. So the concern the other concern that you raised is very important I think and I think John mentioned this in his comments is if we end up with uh the same security the same name trading in parallel unlin markets because today under NMS the equity markets all have to be linked everything has to report into the SIP so you have displayed uh
▶ 1:30:51rout routing from the broker as well
▶ 1:30:52and if you don't have that even in and we can talk about 247 because we have 24/7 today but we can talk about if you have the same security trading in different pools of liquidity at different price transparency. If I'm an issuer, I'm going to be concerned about it. Yeah. But if I'm an investor, I should be concerned as well because I'm not getting the best displayed
▶ 1:31:10Right. So So this goes back to this idea of an exemption or a broad exemption for on a certain rule. And and I I I tend to favor this process where we look at an individual rule and we figure out how do you protect the consumer? How do we maintain the integrity of our our markets at the same time where we onboard some of this technology? That seems to be the challenge here.
▶ 1:31:36And so if you get broad exemptions on the part of the SEC, I think it it you know we we lose that opportunity to look at the rule by rule analysis that I think is required uh to maintain those those competitive markets. Um, we haven't talked at all about and I know there's too much going on, but uh, the whole settlement process.
▶ 1:31:56You got a lot of P people down in Manhattan that are doing a lot of this settlement process and I see their jobs going away if we if we go forward with this in a in a big way with further adoption. Is is anybody anybody got any thoughts on that?
▶ 1:32:11I mean, it's probably efficiency, but it's just, you know, when your job goes away. Yeah, I I think with any new introduction of technology, there is a change in how uh companies including companies like ours may do business, but at the same time, new technology usually offers new opportunities and new functionalities that didn't exist before and people need to do those jobs as well. So, I think it might be a mixed
▶ 1:32:29Thank you, Mr. Chairman. I yield back. Thank you, Mr. Lynch. Uh the general from Missouri, Miss Wagner, who is also the chairwoman of the capital market subcommittee, is now recognized for five
▶ 1:32:40I thank the chair. Uh the United States has the deepest and most liquid capital markets in the world. So many of us have said that on this day as today as one of our economy's greatest strengths. They have helped make America the premier destination to start and grow a business.
▶ 1:33:00Uh however, global competition is intensifying and other jurisdictions are actively modernizing their financial systems to attract investment. Mr. uh how does the tokenization of traditional assets directly support the international standing of US capital
▶ 1:33:23Uh thank you uh uh Congresswoman. Um I think is if this is part of a long evolution of the US innovating its market infrastructure uh and and and and market operations which is one of the reasons why we lead the world and as I go around the world and meet with other you know with other policy makers uh and and work with my colleagues around Europe, the UK, Asia are all trying to do what we do here. They're all they have problems that are getting away in that.
▶ 1:33:52We don't have to talk about that but but they're all looking at the US markets. Europe is trying to create a SIP. They're trying to create a consolidated tape that we've had here for years. They're trying to create they're trying to build a a a broader uh retail uh wealth environment like we have here where more than you know what 6% of households are invested in the market in the US. So people are looking at what we have here.
▶ 1:34:14We need to be careful uh not to import things that are in are inconsistent with what we built in in the US. So we need to think while they may be developing new products with technology that can be interesting uh we need to make sure that they're fit for purpose for the market
▶ 1:34:32but we want to get ahead of them. So
▶ 1:34:34we are ahead but we're
▶ 1:34:35they will take our standards our models
▶ 1:34:38I I I would put our markets against anybody's in the world.
▶ 1:34:41Agreed. Mr. Zea, NASDAQ just launched a new equity token design that puts public companies at the center of the process. For uh a main street investor, that is the for a main street investor, I'd say, what is the practical difference between holding a traditional share um of an S&P 500 company and its tokenized counterpart?
▶ 1:35:09Well, thank you for the question. I think the core thing is we want it to be about flexibility for the retail investor, not because there's something a better price or something like that. So we the the goal for our product is to essentially make it a technology differentiator, not a new product. So some people have wallets uh that they have, you know, they're maybe younger, maybe more techsavvy, but they they have wallets, they have investments in digital assets.
▶ 1:35:36This is a way to connect and bring those assets back into the regulated markets. If they can transfer those easily into these tokens, the token is subject to all the know your customer, all the uh compliance controls. It goes to a broker process. It's subject to surveillance.
▶ 1:35:53It really protects the investor.
▶ 1:35:55Exactly. Exactly. But it gives them a choice because there is going to be a subset of your constituents who want to trade that way. Let me ask you this, Ma. How can exchanges and regulators ensure that price discovery and liquidity don't become fragmented uh between traditional securities and tokenized ones?
▶ 1:36:14Well, probably two core ways. One is the product itself to try to avoid there's the risk of synthetic products and other things that aren't really securities trading out there and they're going to trade at different prices. And so we're saying look make it a a stock is a stock or if it's not as the Senate bill says make the disclosure very clear. So so that's one. The second is to avoid uh parallel markets and walled gardens where some securities are trading but you but a retail investor can't access them.
▶ 1:36:43So make sure that all markets are subject to the same rules.
▶ 1:36:47Um quickly I'm running out of time. Mr. Benson SEC Chair Atkins has discussed an innovation exemption to help harmonize blockchain with existing laws. The securities industry and financial markets association or SIFMA has cautioned that broad exemptions are no substitute for comprehensive rulemaking.
▶ 1:37:08Given that major firms are ready to tokenize, how can the SEC craft an innovation exemption that provides the legal clarity firms need to stay in the US without creating a permanent two-tier system where tokenized assets have different investor protections and uh than traditional assets? Well, we we've conveyed to the chairman and his staff that we think the best approach on doing this and and we've had a lot of discussions as have many stakeholders and we can compliment them for doing that, for opening the door to do that.
▶ 1:37:38Um, but that they should put it out for notice and comment. So stakeholders can see what the impact of this would be before going final. Uh, we'll see what they do obviously the balls in their court, but we have weighed in considerably as have all the stakeholders. And again, I give them credit for opening the door to hear from this from the
▶ 1:37:54my my time is expired. I thank you. And if you'd like to elaborate, that would be great. I yield back, Mr. Chair.
▶ 1:37:59Thank you, Mrs. Wagner. Uh the gentleoman from Ohio, Miss Batty, who is uh also the ranking member of the National Security Subcommittee, is recognized for five minutes.
▶ 1:38:09Thank you, Mr. Chairman, and thank you to our ranking uh member, and I'm going to start with that as uh the sitting uh chair just said, where he chairs that committee, and I serve as ranking. Uh I'm going to frame my questions kind of around that because I think uh most of us are on the same pl page with this. We just want to make sure that we're protecting um the security the integrity of the markets and we're have the appropriate guard rails there.
▶ 1:38:36So my my first question is uh to you uh Mr. Bunai or Mr. uh Benson. uh we've seen that certain crypto products have become an avenue for fraud uh for investment scams, money laundering, etc. How do we ensure that tokenized assets do not similarly become another avenue for fraud targeting unsuspecting investors?
▶ 1:39:01Talk to me about what are the challenges that law enforcement may uh face in investigating illicit activities. So if you follow the rules that you have on the books and we think you can run tokenized securities on the laws and rules that we have on the books, there are multiple avenues uh through you know reporting requirements through oversight through cypic protection for lost and stolen securities uh through KYC AML rules and ultimately if something goes wrong uh that there's
▶ 1:39:31somebody on the other side of that transaction that you can hold accountable you can go to the regulators. If you have none of that then you have nothing. And so those are the key things. But so that's why we think it if it's a security regulated as a security tokenization is just the next iteration of the technology by which by which securities are meant.
▶ 1:39:50Mr. I can I can follow up on that. Um, one of the recommendations that we included uh in detail in our written testimony um is to extend the same protections we have for um customers using broker dealers to the uh retail apps that use DeFi technology onchain technology um which would provide an additional um touch point for for regulation and and transparency for the regulator. Um right now we don't have that that layer of regulation.
▶ 1:40:19um and uh addressing that I think should be at the core of uh Congress's considerations um on market structure legislation. I I'll add to that that um there is now some case law um there's a Coinbase case um that uh the SEC won on most of the issues, but one issue they they lost on uh was on the SEC's authority to regulate um the Coinbase wallet and its trading functionality as as a broker. and that just makes the need for legislation all the more important.
▶ 1:40:49Um, this is a good time for me to um segue into another uh question. I'd like to follow up on the the ranking members uh question when she was addressing the issue of do you think that President Trump's involvement in crypto gives the appearance of conflict and the reason I'm following up on this u we've on both sides talked about guardrails integrity and and when you think of while it appears to me and many others that this administration
▶ 1:41:20is loosening crypto's regulation the Trump family has earned like $1 billion and Trump has surpassed something like 62 uh million dollars just in the first half of of last year uh with crypto. So I I'd like to dig deeper. Do you feel that that has the appearance of
▶ 1:41:46Uh thank you, Congresswoman. Uh I think the uh the ties between um the the the Trump family and this industry has unfortunately created a cloud um over the legitimacy of uh moving forward on uh this important market structure legislation. Um I believe uh Congress should think seriously about the gaps that exist um under existing law and uh how to address those.
▶ 1:42:12um in addition to looking at the lack of um enforcement um power um under current law which could you know potentially still be applied and and and why it hasn't been applied.
▶ 1:42:24Okay. Thank you. I I take that kind of as a yes you know conflict the cloud. Um, so I I think that sends a strong message to us and I thank the ranking member uh for opening uh that door for us because certainly we want to make sure that we do the due diligence for oversight and for having uh those guard rails. Um let me just try to get one more uh question in. I've heard from some that anti-money laundering compliance is impossible on permissionless blockchains.
▶ 1:42:55uh your company has built AML and sanctioned screening directly into your blockchain's infrastructure. How can you talk about that and describe how that works in real practice? And you might have to give it to me in writing because I only have two seconds.
▶ 1:43:10Yes. So um I'll just give you a data point. Um so we did a scan of how many transactions um were screened um in our blockchain. Our blockchain deters obviously these these bad actors um and it's currently about 0.00 00005% of the transactions have been blocked and this is using the same commercial
▶ 1:43:29Lady's time is
▶ 1:43:30that are saying one to one to
▶ 1:43:32I would encourage the gentleman to respond in writing. Time is
▶ 1:43:35expired. Yet
▶ 1:43:36uh the gentleman from Kentucky who Mr. Bar who is the chairman of the financial institutions subcommittee is now recognized for five minutes.
▶ 1:43:44Well, thank you to all our witnesses and no doubt um tokenization of securities uh is coming. it's here and uh our modernization of our securities regulation is required both in terms of preserving um that gold standard of of investor protection but also making sure that the United States is leading the way. Um I wanted to tease out maybe perhaps a source of tension between Mr.
▶ 1:44:12Benson's point of view and Miss uh Mercinger's uh po testimony here today. And may maybe there there isn't tension, but I want to kind of get at uh two pieces of testimony, Mr. Benson.
▶ 1:44:25First of all, I think you make a great point when you say securities are securities, whether they're tokenized or not or look more traditional, and that tokenized securities should be subject to the same robust investor protection and market integrity rules that would have that have made the US security markets the deepest, most liquid, and most efficient in the world.
▶ 1:44:44you do acknowledge the square peg round hole point, but the overall point is uh is is that uh investor protection regulations need to But then Miss Mercinger, you make a very good point as well when you say requirements designed to manage settlement delays, counterparty exposure, and reconciliation across multiple entities may not be necessary uh in a tokenized world.
▶ 1:45:12Um, blockchain based settlement models illustrate how changes in infrastructure can reduce or eliminate certain forms of settlement risk. Therefore, regulation should remain calibrated to the risks that are actually present rather than those associated with legacy market structure. Is there a disagreement there? Um, and I'll ask Mr.
▶ 1:45:32Benson, do you acknowledge that with um gravitation to the blockchain does eliminate some of the risk uh with intermediaries and therefore regulation should evolve
▶ 1:45:48Uh so it depends right so and and here's how I will come at it is I'll break it into two parts intermediates and I'll break it into settlement. So in settlement if the issue is that going to anytime you reduce the settlement cycle there's no question that you're reducing risk in the system to a point and certainly we reduced a lot when we went from two to one atomic settlement real-time settlement can reduce some risk but it may introduce other risk and it may introduce other risks in terms of things like securities lending which is a key function in the marketplace
▶ 1:46:18areas issu issues affecting prime brokers and the like. So those are things we talked about when we were doing T1 that we were involved with DTCC. So that's one on the intermediaries. I would go back to
▶ 1:46:30infrastructure is often an intermediary. Uh infrastructure providers are often intermediaries. And so if they are doing the same function and I know the argument's been made if it's if it's pure code uh autonomous code that that has just been put out there uh uh there are no humans involved. So because there are no humans there there's no risk to mitigate. There's no no risk of malfeasance.
▶ 1:46:53But there is risk that the code doesn't work and there is risk and and and and also if the code is being paid to order route uh uh to do the same functions to act as a true custodian and being paid for that then they're basically doing the same thing. So I think that's where the tension is from our standpoint of where do you draw the
▶ 1:47:10Miss Marching.
▶ 1:47:14Thank you. And I actually I think there's a lot of areas where um with Mr. Vincent and I probably agree, which is, as we both stated, a security is a security even if it's on chain. And those rights and responsibilities and consumer protections that are baked into a security will continue as they go on chain.
▶ 1:47:33Um, some of the issues that he highlighted, I think where where I might think a little differently on this is though because of those reasons, because there are questions around, you know, how does the risk shift? um what happens if if something goes wrong. That's why we need an iterative approach to regulating in this space.
▶ 1:47:54That's why I think it is really important for the SEC to use their no action tools, their exemptive authority to take an iterative approach to regulating in this space. Notice and comment rule making will come once that's established.
▶ 1:48:09Last question. As the financial institutions chairman, I get a lot of questions from community banks about DeFi and blockchain. Um, community banks, as you know, serve as the foundation of small towns and local economies, but they've been at a disadvantage compared to large institutions when it comes to accessing capital markets. Could tokenization actually level that playing field for community banks?
▶ 1:48:32Miss Mercinger?
▶ 1:48:33Yes. Thank you. I think that's a great question. I grew up in a small town. My mom worked at a community bank. I know how important it is to a to a small rural community and yes, there's a lot of opportunity there. Um you are you're you're taking costs out of the system and that's going to broaden the access and so I think there's a lot of opportunities for community banks to begin um using DeFi technology for their act for some of their their
▶ 1:49:02gentleman's time has expired.
▶ 1:49:04Thank you.
▶ 1:49:05Thank you Mr. Bar. Uh the gentleman from Illinois, Dr. Foster, who is also the ranking member of the financial institutions subcommittee is recognized for five minutes.
▶ 1:49:16I will yield to Mr. Vargas, who I believe was in line.
▶ 1:49:20He's recognized Mr.
▶ 1:49:22I recognize Mr. Vargas instead for five
▶ 1:49:26Well, thank you very much. I appreciate it, Mr. Chairman. Uh ranking member, again, thank you very much. and and to the the crowd here today. Thank you. I I think that this has been excellent actually a very good hearing. Two things I want to talk about the issue of technology and risk. With the issue of technology, first I agree with what my good friend and colleague said that we have these fantastic capital markets because of trust.
▶ 1:49:55People trust them. I think that investors trust them and I think that we have to continue with that trust. So Mr. Zika, I go to you. Although you did uh say this. You said a stock is a stock by any other name. I believe in your testimony.
▶ 1:50:11Apologies to Shakespeare.
▶ 1:50:13That's right. You did write this in in your written testimony. Like the transaction from paper certificates to electronic book entries decades ago. Tokenization done right can enhance efficiency, transparency and engagement across the life cycle of security without weakening the regulatory framework or the rights that investors and the public companies expect and rely on again the trust that Mr. Lynch.
▶ 1:50:42So are we going to have the same trust or is there going to be a dimmunition of
▶ 1:50:48Well, I think it's the way tokenization is done. It can be done right and it can be done wrong. If it's done right, it's drawing it into the existing market with the same regulatory structure, the same set of rights. So you own the same stock. It's just in tokenized form. So in that context, everything we've talked about, all the protections, all the way the capital markets function would exist. So that's that's one scenario that I think is good.
▶ 1:51:12Where there could be concerns is there are other ways to do it where you start to u create synthetic instruments which are certain rights but not the ownership. People may not realize whether or not they get dividends. They don't get voting rights. In that context, and it's largely overseas right now, but in that context, it is it is a different instrument. And so, an investor certainly at a minimum needs to know what they're getting. And so, there needs to be full disclosure of that. They may choose it, but that's a different instrument.
▶ 1:51:42But but in the world we're talking about with a tokenized security stock tokenized share of Apple let's say you know that is the idea is to give them exactly the same rights and the same experience when they trade as they would normally get.
▶ 1:51:57So in a sense it must be like what the chairman talked about going from the old carbon paper to basically computerization to
▶ 1:52:06exactly like paper to digital as we did with electronic shares.
▶ 1:52:10All right. I would like to switch then to risk. This is what former acting controller Michael Zoo warned about the potential unintended consequence of tokenization. He said to the extent tokenization reduces settlement frictions, it will also accelerate the velocity of banking and finance the characteristics of bank runs are changing and banks and regulators need to adapt accordingly.
▶ 1:52:32We need to develop better breaks to keep banks safe from sound to keep banks safe and sound to mitigate systemic risk. Now, I was here obviously when the three CEOs came and testified, Silicon Valley Bank, Signature Bank, and Republic. And the CEO of Republic Bank said something that was very interesting to me. And he said, "I had had customers that were with me forever who trusted the bank, but once the panic hit, they were able to move billions of dollars out. There wasn't much we could do.
▶ 1:53:02And the amount of money that moved out of those banks almost instantaneously was incredible. A real run on the bank as opposed to how it used to be. What is the risk here? Are we looking at Are we forgetting some risk here that could be problematic because of this velocity? Mr. Z, why don't you try it first? Go
▶ 1:53:21I'll I'll try first. I I you know we we don't operate a bank so I'm less familiar with that side but I will say the thing you want in that situation from a trading perspective is to have deep liquid markets that can withstand the shock and I think you've seen the US capital markets handle those situations very well and so again if you keep that liquidity pool together then the experience whether it's a tokenized security or a non-tokenized security should be the same but I would defer to others on on the banking
▶ 1:53:49I just add a couple of things in the securities markets you have things like an equity market. So you have as opposed to SUV you got limit up limit down you got circuit breakers you have things when there's pan you know when there's confidence issues or panics going in the market you have segregation of assets you have 15 C33 uh so that you know the the customer's assets are segregated a little bit different than the way the banking system works.
▶ 1:54:09So, right, but if you get some illlquid some of the derivatives you're talking about or some illlquid assets that you're getting from other places and you tokenize them and put them into our market, if you were able to move those quickly, I mean, it could shock the system. I don't know. I'm That's what I'm thinking. You know, you have to take a look at all the potential risks. With that, my time is up and I thank the chairman. Thank you. I yield back.
▶ 1:54:31Thank you, Mr. Vargas. The gentleman from Texas who's also the chairman of the uh small business committee, Mr. Williams is now recognized for 5
▶ 1:54:40Thank you, Mr. Chairman. And we've heard today how to and all are here. Thank you for being here. Uh we've heard today how tokenization can modernize our capital markets, including faster settlements, reduce counterparty risk, more efficient movement of capital. Shortening the settlement cycle can free up liquidity, reduce costs uh tied to delays, and allow capital to be put to work more freely.
▶ 1:55:03For a small business owner operating on tight margins like myself, I'm a small business owner in Texas, tokenization can translate into better financing, more predictable cash flow, and lower cost. So, Miss Ms. Mercinger, how could tokenization and a shorter settlement cycle benefit Main Street
▶ 1:55:21Thank you for that question. I think the overall um kind of theme here is that it reduces the advantage of scale. So you have lower cost um broader in investors available. Um you kind of level the playing field between the small businesses and the large um you know Wall Street businesses.
▶ 1:55:42And the other kind of piece to this that I think is really interesting is this idea of fractional ownership where you might be able to invest in something that you normally wouldn't be able to invest in because of the cost but now you can um because of the fractional ownership. So I think there's a lot of opportunities for small businesses. Also, it's it broadens their access to the capital markets as well.
▶ 1:56:06Thank you for that answer. The strength of US capital markets has been built on a combination of deep liquidity, strong investor protections, and a regulatory framework that promotes transparency and integrity. As tokenization develops, global competition accelerating with other countries and jurisdictions acting quickly to establish clear frameworks and attract the inract innovation. And I am concerned with the risk that regulatory uncertainty here in the United States could frankly push innovation offshore. So Mr.
▶ 1:56:36Benson to you, how can we create a regulatory environment that encourages innovation and tokenization here in the United States while also ensuring that we don't compromise transparency, integrity, and investor confidence?
▶ 1:56:48It's a great question and and I would say I do want to say one thing. You can buy fractionalized shares today. uh many of our members offer fractionalized shares whether it's in in high price stocks whether it's Tesla, Berkshire Hathaway, whatever it was. So that's a market innovation that's that is in the US today. It's like 247 exists today. Most people don't take advantage of it. Um but I think the I think the other thing Congressman is I would step back and look at what's already happening.
▶ 1:57:13I mean DTCC made an investment 10 years ago in in in digital partners and now they're expanding what they're doing. Uh NASDAQ is doing a partnership uh with Kraken and they and and and doing that. Nice. New York Stock Exchange is doing the same. Uh firms that are digital native firms uh like Kraken and and Coinbase have now registered as broker dealers so they can do tokenized securities.
▶ 1:57:39While the incumbent firms, the Wall Street firms have been looking at at tokenization on everything from equities to fixed income uh uh for many many years. So I would argue that this is happening now. We have done an analysis of the securities laws and and in most cases we believe almost all of those can can are fit for purpose for tokenization. In a couple of places there might need to be adjustments. We don't need to throw the baby out with the bathwater here.
▶ 1:58:07We need to let let I mean this is a very innovative industry and we should just we're taking advantage of it.
▶ 1:58:12Okay. Thank you. Uh much of the conversation around tokenization has been focused on trading market infrastructure but issuers sit at the center of our capital markets and companies rely on those markets to raise capital manage stockholder base and support long-term growth. Tokenization introduced the possibility of rethinking how ownership is recorded and how issuers interact with investors across the life cycle of a security. So Mr.
▶ 1:58:36Zea, quickly could you walk us through how issues insur issuers are thinking about tokenization their shares and what benefits they set from having more direct control over that process? Well, I think that that's a critical question and just to give you one sense of a stat for that small community bank that you talking about, uh, a average corporate action cost the industry about $34 million because there are 110,000 touch points across all the shareholders because there's such a Byzantine system
▶ 1:59:06behind the scenes to reach shareholders. There is a route with blockchain and of course it has to be adopted at scale to do it, but there is a route where there's a much more streamlined connection. You could see a world where in issuers can speak directly to their shareholders who want to be engaged. And I think there's no more loyal motivated stakeholder base for a company than its shareholders. So I think there's huge opportunities there. What we want to avoid are situations where uh because we have different instruments under different regulations.
▶ 1:59:34The there's competition for capital that hurts the ability of companies to raise capital and create jobs. That's the thing we have to keep in mind.
▶ 1:59:42Thank you for that. And I yield my time back, Mr. Chairman.
▶ 1:59:44Thank you, Mr. Williams. Uh, the gentleman from Illinois, Dr. Foster, who is the ranking member of the Financial Institutions Subcommittee, is now recognized for five minutes.
▶ 1:59:54Uh, thank you, Mr. Chair, and to our witnesses. Um, you know, it it seems like one of the big branch points that has to be decided here is um once things are tokenized u are they going to be traded on a a private permission blockchain or a variety of public blockchains which often allow anonymous participation through um self-hosted wallets and things like that.
▶ 2:00:16And in the the second option, it seems like it it must be technically very difficult to uh establish things like position limits and stuff like that where you actually don't know the true owners of wallets that are owning a lot of these. What what's the approach that's been taken so far and what are the proposed approaches for for that sort of problem where you know it seems like in the conventional markets there is one regulator who knows the true identity behind both participants of a trade.
▶ 2:00:44So you can identify, you know, front running and and wash trades and all these sort of things that um are a threat to a lot of the tokenized or you know the crypto world. I was just wondering what is the approach taken so far on that? Is there uniform KYC for all participants? Is
▶ 2:01:01I can only speak to uh what we're working on. And I would say we're working in the permissioned world where on the blockchain you would have the KYC information the controls and the corporate governance and everything is is embedded in there and can't be overridden. So from that perspective uh we would be not
▶ 2:01:19so you have no anonymous participants correct essentially. Yeah. Are there other approaches that are being talked about or taken that are likely to happen to others on that? Yeah, I I can comment at least on on the tokenization solution that we're starting to develop uh largely what uh Mr.
▶ 2:01:34Zea said in terms of wanting to impose some degree of identifiability onto the activity, but that could also potentially happen on on a permission so-called permissionless chain in particular if in the tokenization uh protocol itself, you basically embed the identification and the compliance features for KYC and AML.
▶ 2:01:53So under our our approach, we will be looking basically for our participants and their customers to bring uh chains and wallets to us that lend themselves to being able to practice the KYC AML uh identification uh that folks here have described as being very valuable, which we agree with. And so we would then um and this is speaking to an intermediated solution. Certainly there's options for less intermediation, but we would come in and basically act as the party that helps do that mapping and maintain that mapping for compliance with existing
▶ 2:02:24And I can speak from a more permissionless uh environment. So the the way we've gone about it is uh embedding uh as it relates to AML um is embedding um AML and sanctions screening at the token level. So regardless of where um a particular tokenized asset may trade um or be transferred um it can be freezed um if it's a if it ends up being flagged as being
▶ 2:02:48but is there in the systems you envision is there a regulator that can see the true identity of participants to identify wash trades. So um when it comes to wash trades that that that's a market surveillance issue um and uh right now we are working with FINRA and some uh commercial vendors um in order to extend um onchain native surveillance capabilities which would then be augmented under our proposal um through the uh regulated D5 brokers which would then be capturing um KYC information
▶ 2:03:19um to enhance uh the uh attributions of the of the wallet owners. But but does that did you answer my question? Is there a regulator that can see the true identity be behind all
▶ 2:03:28not not at present?
▶ 2:03:29Not at present. Do you have any technical solution in sight that might allow that to happen? And if not, how do you prevent wash trades, front running um you know violations of market uh positions and stuff like that. You know, everything that we've learned the hard way is necessary to have a well-regulated system. Do you have technical solutions that could implement
▶ 2:03:48Yes. There are there are vendors out there both vendors that um provide services into the traditional markets that are now capable of ingesting uh onchain data as well as onchain native
▶ 2:03:58So that you the world you anticipate will have um will have a regulator that can actually identify wash trades and things like that. there will be someone that has full visibility into the true identity, legally traceable identities, you know, everything that's necessary in
▶ 2:04:13Absolutely. Yeah. The the the the the proposal that we've detailed in our written testimony would uh includes a proposal for FINRA to operate a surveillance system because these are, you know, uh transparent markets um and they would have the capability of extending uh market.
▶ 2:04:28So they will know the true identity of every wallet that's operating for any of these um any of these tokens will be traded. they will know who owns that wallet and be able to um identify them. Is that that that's the sort of Yeah.
▶ 2:04:42for US markets that would be the case under our proposal.
▶ 2:04:45But if you these are but will you allow international participants into this? If you have a technical write up on that that you could get for the record. I'd be interested in seeing how you're really going to map that sort of anonymous pseudonymous system onto the sort of regulated system that we've learned the hard way has to be implemented here.
▶ 2:05:01Yeah, that's an important question and I'll be happy to follow up with you on that. Yeah. Thank you.
▶ 2:05:04Thank you, Dr. Foster. The gentleman from Georgia, Mr. Loudermilk, is now recognized for five minutes.
▶ 2:05:09Thank you, Mr. Chairman. Thank you all for being here today. Very important subject. U Mr. Benson,
▶ 2:05:15before we act or to Congress acts, I think it's important that we know exactly where we stand. So, simple question. Does the SEC already have the authority it needs to oversee tokenized
▶ 2:05:27Yes, I believe so.
▶ 2:05:28Okay. uh to the extent there are gaps, how much can be addressed through uh ex exemptive relief, no action letters or guidance versus what actually requires Congress to act. In our analysis, I we think they have as it relates to securities, tokenized securities, we think they probably have the authority that they need.
▶ 2:05:49Okay. All right. Um, Miss Mercinger,
▶ 2:05:55just with one one exception, there's been discussion of products that are that are that are not true that are not true underlying securities, tokenized products that are like, you know, reference products, which by law may not be allowed in the United States and in that instance, if if the Congress would have to take that up. So that with that
▶ 2:06:16Okay. I appreciate you clarification there, Miss Mercinger. uh Congress acts in conjunction with the SEC and CFTC on tokenization, where do you think we can be most productive?
▶ 2:06:28Thank you for that question and I think you know the support of the agencies is very important. Um I would point to the section 507 of the clarity act which was the um uh requiring a study between the agencies to look further into tokenization and see what kind of um regulations need to develop in order to make sure that these markets maintain the safety and soundness and um the customer protections that exist.
▶ 2:06:57So I think Congress has done some good work here and I I believe you know continuing as you work through market structure you'll see that um the kind of the support for the agency that's most
▶ 2:07:09So for this committee what is the single most important thing uh you think we should do to get the regulatory framework correct? Um I would say you to get the reg get past market structure legislation clarity or something else. Um it's very important that we have that to provide the clear rules rules of the road for the industry.
▶ 2:07:35Okay. Anyone else?
▶ 2:07:36I I I I think again I think in our analysis we believe for tokenized securities true securities that are allowed under the law in the US that the SEC has probably the authority that it needs. They may find some areas where they don't.
▶ 2:07:50In that case they have to come back for Congress where Congress should be acting though and is which is I personally think a good thing is for nonsecurity products non-commodity products and then and you know better there in some cases the CFTC doesn't have the authorities particularly with retail investor protections for spots commodities that the C SEC has.
▶ 2:08:09That's where Congress needs where there clearly are some gaps for these new innovative products that are not e either not securities may not be commodities um and the law is not clear and even for what we might call traditional finance the law is not clear and how they might engage in those on behalf of their clients so that there are areas where Congress does need to take a role.
▶ 2:08:29Okay. Thank you all. Mr. Chairman, I yield back.
▶ 2:08:34Thank you, Mr. Latim. Uh the gentleman from Illinois, Mr. Cassin is now recognized for five minutes.
▶ 2:08:39Thank you, Mr. Chairman. Thanks to all our witnesses. Um, so it strikes me that like most of the things that we're talking about here in terms of the way that markets have to work are are essentially accounting problems, right? Who's who's the buyer? Who's the seller? Where's the clearing house? What's the settlement process? And tokenization at its best is a boring accounting conversation. Right. It's um we if we can do that faster, if we can have better accounting, that's great.
▶ 2:09:09The minute it becomes not boring and not accounting, I get really really nervous. And I guess Mr. Ze, if I'm if I'm understanding right what you've done at NASDAQ, um proposing tokenized trades, you're still going under DTC rules. It's the same sort of settlement. Is is that is it is it safe for me? And I don't know, Mr. Mr. if you want to chime in. Would I would I be accurate in describing what you're doing as a a boring accounting change to NASDAQ rules?
▶ 2:09:37Yeah, I would say it's it's an interesting technology uh upgrade and I think it is bringing the system forward, but yes, I don't think again we're we're looking at it in the context of upgrading not creating new products or new systems. Okay. Um,
▶ 2:09:54so this now brings me to this innovation exception, which scares the dickens out of me because it's it's neither boring nor accounting.
▶ 2:10:02Um, we and look, there's this there's this talk about like, oh, it's innovation. We shouldn't get in the way of innovation. Having conversations about what might happen in the future if we ignore what's happening in the present is not innovation. That's stupid. Right? And so we and so we have seen when when Trump did this tariff announcement, we saw this massive deleveraging event in the crypto space largely because those DeFi platforms did not have the kind of checks in place. They didn't have the market stops.
▶ 2:10:33They didn't have the rules that markets have learned through hard experience. And somehow this narrative that like, well, if software does it, it's fine. Auto deleveraging cost 1.6 6 million investors, $19 billion. The idea that somehow like a human created SOP is incapable of human error is is dumb, right? And hugely irresponsible.
▶ 2:10:57Um, we've seen tokenized stocks trading at massive variances to what the the actual underlying security is. Tokenized Apple traded at a 12% premium to the stock price at one point. And I guess Miss Mercinger, since you've been, you know, the advocate for tokenized securities here, put yourself in the shoes of Apple's auditor. If you're closing your books and the tokenized Apple security is trading at a wild difference from what they're trading at on the nice, what do you use to calculate stockholders equity on their books?
▶ 2:11:27Is there any confusion in that question, but that you would use the public security? Well, I think what this is pointing what you're pointing out is there are a lot of questions left unanswered and I think that's why it is
▶ 2:11:40No, but but I'm just asking is there any place where someone who is actually a boring accountant is going to look at that tokenized value as a better representation of value than the security that's trading through markets like like Mr. Zeus with those
▶ 2:11:55That's the oversight we're hoping that the SEC can offer because these are
▶ 2:12:00Okay. which does not yet exist. So then we're back to why are we even having this conversation about an innovation exception. We've we've seen that the DeFi markets are failing to put the rules in place that you all have learned through hard experience. We've gone through market crashes. We've we've got all these rules in place to do that. What is the innovation exemption that what what is the innovation we're trying to achieve if our goal is boring accounting? And we've got boring accounting pretty well.
▶ 2:12:27And the markets like NASDAQ seem to be figuring out how to do boring accounting pretty well, right? Because the last thing we want to have is something super exciting that brings all the markets back in here to say something exciting just happened in the market that's not particularly boring. And we've got a bunch of political pressure now to talk about it. Mr.
▶ 2:12:43Benson, can you I don't know where I don't know if you're as uh where you sit with my own view that innovation exemptions are dangerous, but if we're going to do something on the innovation exemption, can you talk about what sort of guard rails you would at least like to see in the D5 space to ensure that there is absolutely no difference in the price of these securities and it isn't an arbitrage opportunity and we're not creating these these kind of risks to to investors?
▶ 2:13:10I think well it's that's all a reason to put we think to put it out for notice and comment in the first place so we can see exactly what it is we're there the SEC is thinking about and and then you we think there should be guard rails and those guardrails could be certainly time limitation who is who could have access to that if it's high net worth whatever it may be we don't really know until we know what the exemption looks like does it apply to all registered registers versus just a limited group so again all reasons we think to put it out
▶ 2:13:41for Comet to see. But again, I'll restate some of the groups who've been asking for exemptions have now figured out that they can register as broker dealers. And so they they've shown that they can live under the existing framework. And I don't to your point, I don't think we want to import some of the market practices in the nonsecurities uh world into the securities world.
▶ 2:13:58The gentleman's time has expired.
▶ 2:14:01Appreciate you. I yield back.
▶ 2:14:02Thanks, Mr. Castton. I now recognize myself for five minutes. Mr. Dr. Sabella, today's market structure relies on intermediaries like clearing houses and part of a settlement uh that is not instantaneous uh which creates counterparty risk and those institutions are designed to manage that risk.
▶ 2:14:18Um if we move to a model where transactions settle auto uh atomically or you know real-time settlement effectively eliminating that counterparty exposure would you agree that one of the core risks to the systems is built significantly around around is uh reduced in this new model.
▶ 2:14:36Uh thank you for the question congressman. So yes I do agree that in a sort of so-called atomic or t0 settlement environment in particular market risk is reduced. What you still have to contend with and some of the discussion we've had so far has hit on is heightened operational risk because you're really relying on that technology to be there to perform accurately and consistently and to scale when you need it. The second is liquidity risk which still exists and intermediaries still can play a role in helping to basically ensure there are no drops in the transmission of assets from one to the other.
▶ 2:15:06Things move so quickly now, obligations move so quickly now. You need to ensure you have enough resources in the system in the right place at the right time. Technology can help do that but intermediation is the coordination of that technology that still remains
▶ 2:15:20Yeah, thank you and thank you for highlighting liquidity is still there and you know we saw that for example when Robin Hood you know is is still doing broker dealer they've made it in a much more consumerfriendly way but if you remember the GameStop uh short squeeze that resulted in a lack of liquidity. uh those things could be heightened and you know Mr.
▶ 2:15:39Benson you highlighted uh you know or really suggested that of of course uh there would never be such a thing as malicious software uh which reality is maybe there could be so you do need systems to safeguard it and Mr. Cast highlighted that even when the software is designed right, there could be some rapid changes in the market. So, I think the thoughtfulness that's going about tokenizing securities makes sense and I I think Chairman Atkins is doing a great job. Uh, Commissioner Pur has been very thoughtful on this for years.
▶ 2:16:10We've been set back for a long time though because uh, frankly, Gary Gensler wanted to prevent any kind of real progress on the commission and a lot of the companies wanted to just be deemed not securities. they were working to be not securities and that interfered with the people that really did intentionally want to be a security and getting the clarity. The commission didn't pro provide the uh regulatory clarity there. So, Mr.
▶ 2:16:34Zea, you're moving forward and trying to develop a way where people can intentionally work with securities and when you talk about some of the things that some of my colleagues have brought up about, you know, things that aren't securities, well, of course, those things don't necessarily have all the same rules that you do have for our securities. So whether it's tokenized or not, let's say we have a tokenized future and now tomorrow or let's make it Monday, you know, so that we have the weekend for the radical change.
▶ 2:17:00Monday morning markets open and 100% of its tokenized with the accredited investor rule be gone.
▶ 2:17:09If it's a future or if it's a
▶ 2:17:11I mean I'm for a future where we change that radically. Since it's your money, you should be able to use it. I'm not talking about the markets we should have. I'm just saying, hey, if the only thing that we changed is tokenizes,
▶ 2:17:22would we change the accredited investor rule by tokenizing these things?
▶ 2:17:25No, I don't think so.
▶ 2:17:26Yeah. Would you would you change the regulations for broker dealers?
▶ 2:17:29Would you eliminate the requirement of know your customer?
▶ 2:17:33Would insider trading instantaneously now be legal?
▶ 2:17:36Uh, you know, all these things that we're talking about are still critical features of the market, but fundamentally the technology is changing and that's been a constant in our market. the technology does change and adapt and now you suggest as I have long advocated that there are some other changes that we might make because they're not really fair or efficient and the credit investor rule is is one of those and so um u minger I think you've highlighted some of the challenges as you look at the rule making even if we
▶ 2:18:06pass the clarity act uh and it comes through there's still a lot of rule making to go through so how do you see that playing out and how does that affect markets as they're really awaiting the certainty of a final rule?
▶ 2:18:22Thank you for that question and that's a great point. You do need certainty for these entities while they're awaiting uh rule making which can take a very long time. So that's why there are other tools available at at the SEC, at the CFTC to guide markets, to guide the activity to make sure that they're following the law while they get to the place of of rulemaking. So this is why we have no action relief, why we have exemptive authority.
▶ 2:18:49And one thing just to mention on exemptive authority, I think it's really important for everyone to remember is this isn't an exemption from everything. this is you are getting certain tailored um tailored kind of rules to the the technology that we're talking about now. So at the end of the day, you're still under the SEC's regulation. You're still abiding by rules that the SEC lays out.
▶ 2:19:17Thank you for that. I appreciate it. And I I now yield back. And I recognize the gentleoman from Massachusetts, Miss Presley, for five minutes.
▶ 2:19:25Uh thank you very much, Mr. Chair, as we're um talking today about tokens and digital assets, I just want to uh for those watching at home, just really center the American public and my constituents of the Massachusetts 7 um you know, it seems everything and everyone is being attacked except for affordability and um people are really uh struggling. They are struggling to pay for their rent, groceries, gas, and medical bills.
▶ 2:19:53um they are exhausted um by the constant chaos coming out of this White House and um Donald Trump and uh his co-conspirators are making millions at the expense of everyday working people. Trump and Republicans in Congress are continuing to try and weaken the SEC and make it harder for them to protect investors and consumers. Mr. Bernay, you worked at the SEC and CFTC and now you work in digital finance.
▶ 2:20:21Previously you mentioned that you think regulators uh could have played more of a role in shaping these emerging technologies years ago. Can you just expound and elaborate on how the SEC, the Securities and Exchange Commission can uh could have exercised oversight of these technologies and uh protect consumers.
▶ 2:20:44um the same decisions that the current SEC is thinking about um you know could have also been um those authorities could have been exercised under the last administration. a different strategy was uh was undertaken and um we we could talk about it sometime but um I think uh the the hardest thing for the SEC to do right now is uh for example looking at the whole myriad rules under reg including the order protection rule which was which was mentioned earlier um and conducting
▶ 2:21:14industry outreach and roundts um in order to try to understand how we can bridge the gap between for example um the public price feed um the securities information processor, the SIP um and uh onchain based trading um for example uh integrating um data both onchain and offchain through connectivity between the SIP and uh US regulated um liquidity pools.
▶ 2:21:42Um these are all issues that can be surmounted but it requires extensive factf finding. Um, and I would encourage this uh this SEC to engage in that factf finding um alongside the other efforts it's doing. Um, otherwise it's it's going to lead to the same lack of
▶ 2:21:58Thank you. Thank you, Mr. Ben. Mr. Zucker, I'm interested in NASDAQ's approach to tokenism tokenization as a way that empowers shareholders to hold companies accountable. Are you working with consumer groups and advocacy organizations or other stakeholders on that goal? And how can interested parties uh like myself be involved? Well, thank you for the question. Uh, you know, we're not directly in touch because we're sort of the we're the exchange. We we're not the end we're not with the end customer.
▶ 2:22:25I do know that there are intermediaries who uh do speak to various groups and we're happy to demo our technology for anyone. Uh,
▶ 2:22:33okay. All right. Happy to reach out to
▶ 2:22:34I'm going to take you up on that, Mr. Zeo. On the record, would you uh commit to working with my office as we move forward in that process? And I just really do believe as we innovate that uh we have to have advocates and impacted consumers. they should be at the table. Will you commit to that?
▶ 2:22:51Yes, we'll be happy to work.
▶ 2:22:52Okay. Excellent.
▶ 2:22:53Happy to work with you.
▶ 2:22:53All right. Mr. Benson, as a former member of Congress, I know you understand the importance of the public trust. Do you agree that there should be laws around digital assets so members of Congress or the president, for example, cannot unjustly enrich themselves or abuse their position? My time is short. Yes or no? Yes, we're on record as saying Congress should write rules around digital assets that are not securities.
▶ 2:23:21Okay. All right. Um, for the record, I'm certainly not against innovation. I have introduced legislation to advance financial technology in a way to protect consumers, not harm them, obey the law, or enrich the pockets of the already wealthy and well-connected. As we innovate, we should not exploit and leave communities behind. And we should not let Trump continue to make money and put our economy at risk by changing or not enforcing the laws created to protect consumers.
▶ 2:23:51Thank you. And I yield back.
▶ 2:23:56Back chair recognizes the gentleman from Wisconsin, the chair of our subcommittee on digital assets, artificial intelligence, Mr. Style.
▶ 2:24:05Thank you very much, Mr. Chairman. Thank you all to our witnesses for being here. Blockchain technologies helping modernize our capital markets. I think we all agree on that. From if you think about the history from kind of the ticker to the digital terminal, uh each leap in communications breakthroughs, expanded access, improved efficiency uh and reduced costs. But history also shows us uh that regulatory hostility can stall innovation and weaken uh American leadership in this space.
▶ 2:24:33Our capital markets have long been the envy of the world and led uh because we've consistently upgraded both our market infrastructure but also importantly upgraded our rule books and that means providing clear rules of the road uh for innovators developing new base layer technologies and applications uh as well as some integrators combining those tools with in some cases centuries of market expertise.
▶ 2:24:58If we get this right, I think we can uphold the core principles of capital formation, liquidity, and investor protection while making the regulatory upgrades needed to sustain them uh in a rapidly evolving financial system. Uh let me begin with you Mr. Zea and Mr. Sabella. Your firms recently proposed a rule change and no action relief uh respectively in the SEC uh from the SEC to undertake tokenization projects. Um want to get your your view here.
▶ 2:25:27Do these actions appropriately address the regulatory gaps needed for you to undertake these market upgrades? And if not, what does Congress need to do? What does the SEC need to do? I'll start with you, Mr. Zech, if I can.
▶ 2:25:38Sure. I I think in the immediate term, the answer is yes. So, the the SEC approved the rule and so now we're working on the technology side and working with our partners including DTC on that. um in the longer term as as this develops because I think that was part of your question. Uh I think there are areas where uh CFTC coordination and things like that we're going to need uh work there. I think the sandbox question that's come up has been critical as
▶ 2:26:04Yeah, I would echo Sorry.
▶ 2:26:05Yeah, go ahead.
▶ 2:26:06Um I would echo what Mr. Zecha said and I I think for us um the no action relief we have is is to a sort of base version of the tokenization. It's limited number of equities. It's sort of limited to our members and their customers. It runs on a three-year period. During that three-year period, we'll be looking to support uh stakeholders like NASDAQ and others in the market to give choice and competition. But once we get to the end of that three-year period, we're hopeful we would provide more um comprehensive answers about solutions.
▶ 2:26:34Thank you very much. We we and at at the end of this this project three years out I think it's going to be really imperative that we continue this dialogue between us here the financial services committee the SEC stakeholders uh to make sure that we're getting this right with the opportunity to expand the scope uh as we look for additional efficiencies and embracing the technology. Um let me shift gears. I'll I'll come to you uh um uh Miss Minger.
▶ 2:27:01Um, one of the things we haven't um, we can't discuss tokenization without talking about decentralization um, and the innovation happening in DeFi. Uh, you have a lot of background experience in this space. Um, the lack of the intermediation uh, the lack of intermediation poses some really novel uh, legal and regulatory questions for trading and custody of securities. it really in some ways spins on its head kind of our framework with which we've thought through this uh over the past hundred years.
▶ 2:27:31Um can you just comment how decentralized exchanges complement or can coexist alongside the traditional market structure and what are the benefits of a decentralized trading?
▶ 2:27:42Thank you for that question and I just want to make sure when we talk about DeFi what we're talking about is non-discretionary code. So this is a technology that's going to improve the markets. It's going to bring faster settlement. It's going to reduce costs because there's not the intermediaries. And just like with electronic trading, these the technologies can operate side by side in a regulated space.
▶ 2:28:09And eventually you'll see the the evolution of the markets going to the more efficient system such as using DeFi for these trades. So I think what you'll see is more efficiency from them, lot lower costs, and really less risk because of the settlement time. I I I I think that's right, and that's what we're all going for, right?
▶ 2:28:32Is efficiencies in the market, embracing technology, and maintaining those investor protections, which I think are so essential to the the core structure of US markets. Appreciate all of you being here today. Uh thank you for hosting this holding this hearing, Mr. Chairman. I'll yield
▶ 2:28:46The gentleman yields back. The chair recognizes the gentleoman from Texas, Miss Garcia. You're recognized for five
▶ 2:28:52Thank you, Mr. Chairman, and thank you to all the witnesses. I'm sure by now you're getting a little hungry. Uh but bear with us. We're almost to the end. Um Mr. Chairman, our nation's capital markets are the backbone of our economy. I think we can all agree with that. As we continue to talk about innovation and how to modernize securities, we need to keep strong guard rails in mind. to start. Innovation is often considered a way to improve capital market access for ordinary Americans. Mr.
▶ 2:29:20Bernay, you offered in an example in your testimony where you're where you talked about ordin ordinary Americans investing on a highway project in your community. I frankly can't think of a single person who would want to own a piece of a road, but uh maybe that's true for for in your area.
▶ 2:29:37It this is a great theory, but in practice, who is really buying these So um right now um um we see a uh strong global demand um
▶ 2:29:51Well, I heard that in your testimony, but which ordinary Americans are ordinary Americans buying these tokens?
▶ 2:29:58These tokenized securities are actually pretty hard to access in US markets. U most of the entry points, for example, the the the website that we help administer um block US. Um, I think that's the same with most of the other tokenization projects, whether they're US-based or not.
▶ 2:30:13Um, one of the things that I think we can do here is make progress toward uh providing the the legal certainty needed to be able to offer tokenized uh products to US um that follow the panopoly of securities laws um adjusted for this new new
▶ 2:30:32So these these are mostly then retail Uh the there's there's a there's a range. Um there's a distribution of uh you know holdings based on wallet that we see. Um it is uh you know pretty pretty concentrated but there's a lot of people that are owning very small pieces you know $10, $20, $100 um of different types of tokenized assets. The most popular being uh those that are are backed by US treasuries.
▶ 2:30:58But but you said you're saying that it's hard for Americans to actually have have access to these.
▶ 2:31:05That's right. And um the DeFi interfaces that are out there as a best practice do try to prevent access to um tokenized securities. Mhm.
▶ 2:31:14Well, it's interesting because Miss Mercinger, you said in your testim written testimony that the total market capitalization of digital assets exceeds 2.5 trillion and more than 50 million Americans own digital assets. So, do they have access to these tokens? So, this is this is more of a um crypto digital asset. Uh you know the Bitcoin, Ether. Yes.
▶ 2:31:41US customers about one in five own digital assets. I think what we're talking about now is the tokenized securities. And
▶ 2:31:49I know what we're talking about, but I'm trying to reconcile the two because we're talking about access. So, does the ordinary American truly have access to tokens today?
▶ 2:31:59Not to all tokenized products.
▶ 2:32:01Okay. and the the the 50 million Americans that that do do have access to digital assets. Uh is that today? Is that a current number for 2026?
▶ 2:32:13And could you tell me what the profile of the average uh person uh who owns digital assets might look like?
▶ 2:32:21Unfortunately, I don't know the exact profile. Um but what I know is it's pretty widespread.
▶ 2:32:28What is the income? I can I can comment on this. Um it it it's it's a wide range. Um it's primarily male. Um it tends younger. Um tends to look like me. Um and you know, younger on down. Um so it it's uh it's definitely a technology forward
▶ 2:32:50So are any of these folks in any of the underserved communities?
▶ 2:32:56they are. There there are a lot of uh uh the numbers in terms of uh when you look at the democratic spread disproportionately brown disproportionately uh black
▶ 2:33:08and male and young
▶ 2:33:10black male and young. That's interesting. I I asked that because I I've always been concerned that we're creating just another divide. the to me the financial system the banking system is not in fair fair and equal uh to to everyone. We still have so many people that are unbanked. Will this solve any of those issues? Mr.
▶ 2:33:32Benson, the the issues with the unbanked uh will access to the tokens, access to digital assets improve that or or just continue the divide.
▶ 2:33:45I I will say this. I think that I think our market structure that we have in the securities markets and by the way just to your question there are about 25 billion tokenized securities in the US it's up considerably but still small and about a a billion of those are are tokenized equities so it's still a nent market in the US I think in this in the investment markets in the US under a regulatory structure are are are quite accessible increasingly efficient increas increasingly price efficient so we think there's a lot of opportunity for the unbanked or the uninvested as you might
▶ 2:34:15say
▶ 2:34:16thanks Thanks so much,
▶ 2:34:16Mr. Chairman. I'll I'll submit a follow-up question in writing. Thank
▶ 2:34:20I thank I thank the gentleoman from Texas. I now recognize the gentleoman from California, Miss Kim. You're recognized for five minutes.
▶ 2:34:27Thank you, chairman and ranking member for hosting this hearing. And I want to thank all of our witnesses for joining us today. You know, when we discuss the term brain drain, uh it's often used in the context of foreign content. the talents leaving their home countries to come to America because of the opportunities that we provide.
▶ 2:34:50However, in the digital asset industry, this drain reflects a 2% year-over-year decline in the US share of blockchain developers over the last five years. In 2018, the US share of global blockchain developers was 40% and today it is down to 20%.
▶ 2:35:12While the rogue regulation of former SEC chair Gary Gensler did America no favors in fostering crypto innovation in America, that does not mean it is too late to reverse his policies and establish America as the crypto capital of the world by doing something that we already did passing clarity act. Uh Miss Mercinger when innovation moves offshore where is it going? Thank you for the question.
▶ 2:35:41Often it's going to jurisdictions where they do have clear rules of the road. Um that's best case scenario. Other times they're going to jurisdictions where they don't have the same protections available for consumers. And that's why it's important that we have the ability to have these markets here in the US where we have the best consumer protections available for those who want to invest in these markets.
▶ 2:36:06So you're saying we're losing our blockchain developers because foreign jurisdictions are adopting clearer uh frameworks. So there is that urgency for us to get this done and get it across the finish line as soon as possible. Um for decades uh our capital markets have been the greatest in the world because of the clear and consistent regulation that have been crafted.
▶ 2:36:29It is time that we extend the same standard to crypto industry and help it return to a regulatory regime that is ready to foster more innovation. Uh Mr. Benson, uh what lessons can we draw from the success of the US securities market when evaluating how new technologies like tokenization uh should be regulated?
▶ 2:36:52Uh Congresswoman, thank you for that question and I I I should thank you and I would have thanked Miss Batty if she had asked me a question. Thank both of you all for the work that you all do as co-chairing the financial literacy caucus and I know we've been able to engage with you on that over the years and look forward to in the future. Um I think we can learn a lot from the US security market as I mentioned you know uh fractionalization of shares we have that in in this market system. Uh we have you know 70 uh 78 million households in the US are invested in our markets. Uh that's 58% of households in the US.
▶ 2:37:22That's great. That's more than most jurisdictions. um that can be more uh through things like financial literacy but also because of the continued development of our markets through electronification through increased you know operational efficiency lower cost the fact that you can buy basically buy uh equities for no commission uh today uh our markets are continuing to evolve and continually get better uh and and greater access for more people.
▶ 2:37:49Thank you. You know, as we evaluate the benefits of tokenization, one aspect that interests me is the global exposure that tokenization provides for our US markets. Um, again, back to you, Miss Murray Singer.
▶ 2:38:06How would tokenization open the US markets to investors that have historically been excluded by high minimums, currency barriers, or lack of That's a great question and that goes to what the having tokenized securities means. It's it's broader access. It's faster settlement. It's fewer intermediaries. So, it brings down the cost of the transactions.
▶ 2:38:32So, it is opening up um markets that you know have not always been available to the average retail investor. So it really is broadening our access and making sure the costs are lower for for retail
▶ 2:38:48Then how critical is the innovation exemption from the uh SEC that is coupled with Clarity Act to kickstart that type of innovation?
▶ 2:38:57It's it's critically important um that the SEC be able to use that authority that Congress gave them. Um, again, this is about tailoring the rules to apply to the technology. It's not avoiding the rules. It's not being exempt from the rules. It's a tailored approach to the rules. You're still under the SEC's jurisdiction and there are going to be conditions around these exemptions. So, it but what it does is help us move ahead.
▶ 2:39:25And if you're waiting on rule making, you know, even with with clarity when it passes, it's going to take a while to get that rule making in place. But these markets need to go on.
▶ 2:39:35Mr. Sabala can quickly talk about
▶ 2:39:39if I can ask you to respond to that in writing or submit that question.
▶ 2:39:42I'm pleased to respond in writing to the
▶ 2:39:44Thank you.
▶ 2:39:45Chair recognizes the gentleoman from Colorado, Miss Peterson. You're recognized for five minutes.
▶ 2:39:50Thank you, Mr. Chairman, and thank you all for being with us today. I this is such an important discussion as we're looking at how we modernize our system and make sure that we're not that that our financial system is still protected and so blockchain blockchain technology is increasingly sorry I have a cold um it's that time of year I have a one-year-old at home so I blockchain technology is increasingly becoming an important catalyst in the evolution of our capital markets and tokenization is helping firms achieve faster
▶ 2:40:20settlements and we've talked at length about this I but it also can come with risks with with innovation. So we have to find a balance in making sure that the same principles that have led America American capital markets to be the most liquid and powerful in the world continue to safeguard investors and help our businesses thrive which is the core of our discussion today. So Miss Mercinger, your testimony highlights the important improvements our capital markets stand to gain by adopting tokenization.
▶ 2:40:48I can you give specific examples of what this looks like on the
▶ 2:40:55Yeah, thank you. And is you know some of the benefits that come from tokenization, you know, you are talking about faster settlement which reduces the u counterparty risk. You're also looking at expanded access, you know, the 24 hours 247 trading which is globally where markets are headed. It's already here.
▶ 2:41:14Um overall just reduced operational costs and really improved compliance and recordkeeping because you have an immutable audible ch audible trail uh that is timestamped um that is you know nobody is in it's it's automate automatically happening. So you're not relying on an individual um for that that uh for that compliance and recordkeeping. So there's a lot of benefits to having uh these tokenized
▶ 2:41:45Can you give some real world examples of of how this has benefited individuals that you've worked with?
▶ 2:41:53Well, as you know, we the retail investors in United States don't have as much access to these because of the lack of clear rules around how this will work. Um but certainly you can see where um it globally it is allowing those who are under underserved underbanked to access markets that they wouldn't normally access.
▶ 2:42:18And so I think it's going to be a huge win in the United States when we open this up and allow more retail investors to access tokenized security because again it's going to bring down the cost. It's going to make this an easier, less costly, less less expensive transaction for the average retail
▶ 2:42:40Great. Thank you so much for that. And Mr. Zea, everyone in this room, we're familiar with this debate. We we've talked about this at length. I But I just want to follow up on some of the questions that have been asked. I you know I think that tokenization brings a different perspective around whether digital assets should be treated as commodities or securities. Would you agree that where a security is traded via token on the blockchain that the exact same securities laws and market rules should apply to both that product and trade?
▶ 2:43:10I would I would agree.
▶ 2:43:12Mr. Benson, should trading tokens on blockchain where the underlying asset is a security be treated any differently than a security traded on a regulated exchange? they should they should be treated the same. And I would argue that today retail investors have access uh it's it's not the question of tokenization. That's a technology. It's a question of of the of the broker dealer and the provider. And retail investors have full access today at the lowest cost they've ever had before.
▶ 2:43:36Mr. Benai, would you like to comment add Uh I I I think that we can um create a regulatory framework uh with Congress's direction um that achieves the same outcomes as the current securities regulatory architecture and extended to the onchain capital markets in a way that would expand the scope um of capital formation opportunities as the rest of the world also moves onchain.
▶ 2:44:01Thank you. Um, and Miss Mercener Meringer in Manai, what are the strengths or weaknesses of tokenized securities in combating fraud?
▶ 2:44:12You want to go first,
▶ 2:44:14Mrs. Mercinger?
▶ 2:44:15Yep. I can I can start. Um, again, it's that kind of automated trail. Um, you have it's improves your compliance and your recordkeeping because it's all done automated. It's on a public blockchain. So there's a lot of um again you're not you're not relying on um human surveillance you're relying on the technology to do the the work of protecting against fraud, manipulation and other u market abuses.
▶ 2:44:44Tokenized equities right now are an inferior product. Um the only reason there's demand for them is because there is a large population of people outside the US that are unbrokered that want access to US capital markets. We need to leverage the moment and
▶ 2:44:56gentleoman's time is expired.
▶ 2:44:57All right. Thank you. Thank you. I yield
▶ 2:45:00Gentlewoman yields back. The chair recognizes the gentleman from Texas, Mr. Green, who is the ranking member of our oversight and investigation subcommittee. You're recognized for five
▶ 2:45:09Thank you, Mr. Chairman. I thank the witnesses for appearing and I thank the ranking member for her opening statement. Um it has been concluded that um there are opportunities to tokenize equity securities and u in so doing this may provide the opportunity to avoid having a central bank involved in the uh database.
▶ 2:45:39If this occurs, uh can we assume that there may be some efforts by some persons to avoid their tax obligations? Uh would it be made possible for some persons to do this to avoid tax obligations? And u Mr. Plume, would you kindly give a response?
▶ 2:46:06right now there's many different strategies that um high netw worth individuals in the US um use to avoid taxes. Um under the proposal that we've submitted um we would be extending the remitt of the SEC to incorporate um the entry points into the DeFi ecosystem which would include uh KYC as well as uh tax reporting obligations. um and that would reduce that surface area for that type of tax avoidance.
▶ 2:46:36Thank you. I use the term avoidance with because ultimately the concern is evasion. Uh avoidance while may not be preferable is legal but evasion when we can now have these transactions take place from one person literally to another that opens the door of opportunity for evasion.
▶ 2:47:03Uh it also opens many other doors for concerns that um that might be nefarious. Can you talk about some of these nefarious opportunities that would be available as a result of the this type of tokenization when it comes to tax compliance? Actually, some of the best um and and highest profile uh seizure cases of digital assets have occurred um by our IRS enforcement um friends.
▶ 2:47:33Um when you look at um and they've actually been the the primary drivers of uh seizure rates um in onchain um contexts um we see in onchain context a seizure rate of about 12%. Um so when uh when you look at the universe of illicit activity uh onchain about 17% of it ends up being seized by law enforcement primarily actually by by the IRS.
▶ 2:47:57Um that contrasts to an estimate from the UN of about 0.2 2% uh in in the real economy. So the traceability of um onchain data of permissionless public blockchains um has actually been a really powerful tool in law enforcement's toolkit particularly as it relates to tax evasion
▶ 2:48:17and that is accomplished because we do have the central bank. Uh it it's accomplished because when we when we find wrongdoers, when we find tax evaders, um we can trace their activities onchain um to all the different um wallets that they may have. And uh that's enabled quite successful record of uh seizures. Well, without a central bank, would you be able to do
▶ 2:48:44Um, without um anti-moneylaundering enforcement and that that that would obviously pose a challenge, but um I I would say that right now that the enforcement of tax evasion is pretty robust in an onchain environment. um what about u the persons who tend to want to extort from other people by using uh crypto.
▶ 2:49:18Uh we have seen um for example um one common type of uh illicit activity involving crypto is uh um these these uh uh these types of extortion schemes. um that that has been reduced in recent years. Um and uh law enforcement has actually been pretty successful in in in tracking um those those uh digital assets.
▶ 2:49:42What I what I will say under the the framework that I've proposed for tokenized securities um that the assets that would be extorted from somebody could could be frozen and seized by law enforcement by being with that logic being programmed into the tokenized security. Um, so it would make uh tokenized securities particularly um useless for uh for illicit actors.
▶ 2:50:04Thank you, Mr. Chairman. I yield back.
▶ 2:50:06Gentleman from Texas yields back. Chair recognizes the gentleman from Tennessee, Mr. Rose, you're recognized for five
▶ 2:50:12Thank you, Chairman Hill and Ranking Member Waters and and for holding this important hearing and thanks to our witnesses for your time here today. Uh Mr. Bonnie, did I say that correct? Okay. Romance fraudsters today often need victims to sell securities uh move money through bank accounts and then convert it to cryptocurrency. A multi-step process that sometimes gives families, banks or law enforcement time to intervene.
▶ 2:50:42with tokenized securities that can be transferred in seconds. How concerned are you that this friction is being engineered out making it easier for criminals to drain a victim's life savings in a single transaction?
▶ 2:50:57U thank you, Congressman. That's a that's an excellent question. Um it's actually a good follow-up to the congressman's question before. Um uh I think the uh again the we can this one of the benefits of tokenization is the programmability aspect of it and being able to embed compliance controls at the token level.
▶ 2:51:17Um, and that would include the ability to um for law enforcement to identify um the the tokenized security um ask the issuer or their transfer agent or their or the broker dealer administering AML controls uh to freeze uh the asset and pending a lawful seizure order.
▶ 2:51:37Okay, I think I followed that. U appreciate it. Mr. Mercinger. Uh, many have argued that payment for order flow operates as an opaque cost to investors, one that is difficult to see or evaluate and that most retail investors do not fully understand. In your view, how might the development of tokenized securities and new market structures built on them create competitive alternatives to today's payment for order flow driven platforms?
▶ 2:52:06Thank you for the question. I think the kind of core issue here is this idea of the transparency that's involved. And so you're you're going to have a a transparent system um where you know the order flow. You'll be able to see all the information on the public blockchain. So some of a lot of it is just a transparency for the investor.
▶ 2:52:31All right. Thank you, Mr. Sabella. In your written testimony, you referenced a future with greater settlement optionality where characteristics like asset class, liquidity needs, and counterparty risk help determine the optimal settlement cycle for a given tokenized transaction.
▶ 2:52:51Could you expand on the potential benefits of a more tiered settlement structure where some trades might settle in real time while others settle on longer cycles and how such a framework could improve market efficiency, risk management and cost outcomes for different types of market participants?
▶ 2:53:10Thank you for the question, Congressman. So, this is a theme that I think even started before tokenization really took off after the transition to T+1. But what we observe at DTCC even today is that um market participants like to have choice in terms of how quickly they can access liquidity uh by converting assets um into cash or other assets.
▶ 2:53:32And so one of the uh propositions around tokenization is it may give uh market participants uh more flexibility in actually realizing uh a variety of settlement cycles. today. In fact, you can actually settle a transaction T0 at DDT DTC today, but that's very limited based on the technology and participation requirements we have.
▶ 2:53:52In a tokenized future, it may be possible to uh have more parties able to do T0 um settlement, and that may suit their needs if they have a particularly time-sensitive funding need or they need to get into and out of a certain asset class. Um all of these um use cases exist today, but they may be more available and more graceful for participants if they use tokenization. And so that's what we really mean by choice and allocating liquidity efficiency across markets.
▶ 2:54:21Thank you. And finally, in the 50 seconds we have left, Miss Mercinger, many Americans who are watching watching this hearing are excited about tokenized securities and wondering when they'll actually see them in everyday use. If you had to give your rough best guess, how long do you think it will be before we see broad adoption? For instance, the thrift savings plan providing federal employees access to tokenized retirement securities in addition to its current core funds.
▶ 2:54:48I think the timeline depends on how quickly the SEC can provide uh clarity to these markets and how the securities transaction transacting on the blockchain are subject to um the the rules of of securities laws. So a lot of it is dependent on the regulator. I know uh Chairman Atkins is moving very quickly. So I think it'll be soon.
▶ 2:55:12Thank you. I appreciate it. Mr. Chairman, I yield back.
▶ 2:55:14Gentleman yields back. Chair recognizes the gentleman from New York, Mr. Torres. You're recognized for 5 minutes.
▶ 2:55:20Thank you, Mr. Chair. Um, a significant share of capital is effectively frozen as collateral. Uh, traditional settlement is so inefficient, so intermediated that it often causes firms to overcolateralize. Tokenization has the potential to transform trillions of dollars of idle capital into productive capital. Do any of you have an estimate of exactly how much capital could be unlocked through tokenization?
▶ 2:55:49Uh so I could start congressman. So at this point um we we don't have an estimate. We saw the the benefits that you were describing certainly happen when we move from T2 to T1. But I think uh one of the challenges in terms of getting to the bottom of an answer to your question is market participants I think and I'll defer to Mr. Benson and others here on the panel have a variety of views about what the next step is for moving to T1. And as I mentioned before, some people may want to move to T0 very quickly. Others may want to have a little bit of a more nuanced approach.
▶ 2:56:19Depending on how that shakes out in terms of what becomes the new standard settlement cycle after T1, we can't really figure out what the savings look like. But we do agree with your instinct that the savings are there if we can basically unlock collateral further.
▶ 2:56:32I have a question. I spoke about the benefit. I want to address a possible cost of tokenization. I'm generally supportive, but you know, I have a question about the role of technology in accilerating financial contagion. So, we saw during the collapse of Silicon Valley that a single rumor amplified by social media can trigger widespread panic and an instantaneous bank run. In March of 2023, SVB lost approximately 25% of its deposits in a single day, making it the fastest bank run in modern financial history.
▶ 2:57:03It seems to me that a a 247 financial system can be a blessing and a curse, right? It's a blessing because it enables more efficient collateralization, but it's also a curse because it can enable more efficient and rapid liquidation. You know, tokenization could enable financial contagion to spread more rapidly and widely. And so, how do we mitigate the risk of financial contagion in a world of 247 tokenized financial markets?
▶ 2:57:28So, so I can start but defer to others as well. Well, I mean, I I I think we're partnering again with partners like NASDAQ, uh, members of SIFMA as there's an extension of 24/7 trading in the equities markets to provide the same risk protections that I think you're pointing at, Congressman. And as we noted before, with the introduction of new technology, that means on a good day, you worry less. But on a bad day, the risk profile is a little bit different.
▶ 2:57:53So we get we reduce counterparty and market risk because we're able to reduce our exposure to each other and the market value of the asset we're exchanging, but we do have to still keep in mind both operational risk, but also liquidity risk, which I think is what you're really getting at in so far as if things move quickly and there's a drop somewhere, we need the resourcing in the system to deploy and be available to cover that drop as quickly as possible.
▶ 2:58:18Happy to add a couple things to that. I I think the the yeah the best uh risk avoidance in a volatile market is deeply liquid markets. And of course uh we've seen that time and again in the US and so I I think when we say with with crypto how do you and digital assets and and tokenized securities how how do you best protect it from being a separate uh risk exposure is to bring it into the into the markets into the deepest pool of liquidity so that it's available in times of stress.
▶ 2:58:47I did want to note, you know, we do have versions of 247 equity trading now. Uh, and what we're talking about as it extends and becomes more of a regular session would be ensuring that we have all the protections that we have now. There's surveillance, there are limit up, limit down bans to prevent wild trading. So, we're working on adding that as well. You know, tokenization has the potential to expand retail access not only to public markets but also to private markets to an extent we've never seen before.
▶ 2:59:15At the same time, we are witnessing growing stra signs of strain in the private markets, particularly private credit. How should the stress in the private credit market inform our thinking about the role of tokenization in expanding retail access to alternative assets? Retail access to alternative assets.
▶ 2:59:33So there's kind of two different things in there, but I I think you're right that and the work that we've looked at you tokenization can be a tool for alternative investments, private markets, um as a more efficient means uh to move that type of product.
▶ 2:59:48On the other hand, uh policy makers, Department of Labor, Securities and Exchange Commission, Congress have all been looking at what are the right suitability rules or how would suitability rules apply to alternative investments that otherwise been only the purview of high netw worth investors, foundations and institution institutional investors. So that's some there's sort of two different things have to be worked out there. But I but from a technology standpoint, I think there's a view in the industry that tokenization would be a useful uh uh uh infrastructure tool.
▶ 3:00:18I agree with that. Thank you.
▶ 3:00:21Gentleman yields back. Chair recognizes the chair of our oversight investigation subcommittee, Mr. Muer of Pennsylvania. You're recognized for five minutes.
▶ 3:00:28Thank you, chairman. Thank you all very much. Appreciate it. Uh President Trump has called for the United States to be the most pro- crypto nation in the world. And I think all Republicans in the House um agree and have delivered. We did pass the Genius Act, Clarity Act, which provided framework for payment stable coins and the greater digital asset ecosystem. Now we are turning to the next phase, making sure the United States leads the way in tokenization. We get this right.
▶ 3:00:53Tokenization and decentralized finances can increase liquidity and expand access to capital markets so retail investors in Pennsylvania across our nation can participate in more opportunities. Um so um the SEC is considering an innovation exemption that could enable certain tokenization offerings to move forward in the near term providing a pathway for products to reach market while long-term standards are developed. Uh Mrs.
▶ 3:01:20Messenger, what does the blockchain association want to see out of the SEC's innovation exemption?
▶ 3:01:27What we're looking for is clarity in how securities laws will treat tokenized equities. So really what it is is just clear rules of the road so that we can have this innovation onshore and make sure the United States remains the crypto capital of the world.
▶ 3:01:44That seems to make sense. Uh Mr. Zea, do you agree with Mrs. Mingers's Yeah, I I think what the core question that that we're facing with tokenized security is how to do it in a way where retail investors can access the the wallets that they have, the the uh the investments that they already have in the crypto space, bring them into a digital environment, bring them into a tokenized environment, but trade with the protections that they're used to. And that's sort of what we're focused on. We think there are huge opportunities there.
▶ 3:02:14Great. Um, can you, Mr. Zea, can you explain the difference between a native and rapper model for tokenization and what risk do tokenized securities that trade outside the national market system, the NMS pose?
▶ 3:02:27Yeah. So, I think the the the concern that's out there right now is as we watch the way the markets have developed, it's mainly been overseas. It's been a lot of synthetic products. So, they're not true equity ownership. You don't you may not get dividends. You may you may not get other rights. and they're probably priced different differently as a result. It's not clear that investors are always informed as to what that is. And so what we're saying is the tokenized product certainly for the retail investors should be one that they're very familiar with.
▶ 3:02:56And we don't want to avoid one of the biggest risks not only for investors but also for issuers and capital formation which is that you fragment liquidity through different pools, different assets and therefore there's uh there's less pricing. there's less liquidity in a in an in in a problem and so what we want to have is a is a core base of of liquidity and an instrument that retail investors are familiar with.
▶ 3:03:20Right. Great. Thank you. Mr. Mercer, back to you please. Can you explain the benefits of the rapid model for tokenization and how does it increase
▶ 3:03:29Sorry, can you repeat the question?
▶ 3:03:31The benefits of the rapper model for tokenization and how the effects it has, how it increases liquidity. I think it's a lot of the benefits are are the same. It's, you know, we're talking about, you know, expanded access, faster settlement, um reduced operational costs. So, it's it's it's a lot of the same uh benefits that we see with putting these tokens or putting securities any security on the
▶ 3:03:58Okay. Uh Mr. Sabella, the DTCC was granted no action relief in December 2035 to operate a pilot tokenization program. Can you describe the program and the benefits of temporary relief allowing tokenization pilots?
▶ 3:04:12Sure. Uh thank you for the question congressman. So effectively uh it's limited to a certain subset of the security assets we service. It is limited to our participants and their customers and effectively we will look for those parties to bring to us different wallet protocols and different chains where they would like us to tokenize their holding in DTC today so that it can be deployed into uh new tokenized environments um whether provided by traditional market actors or new market actors.
▶ 3:04:38Uh it's a three-year program because we're trying to and we view this as effectively just an extension and evolution of the services and value we provide today in the depository. So we want to see how effectively uh that will work and we did it under a no action approach because in contrast I think to some of the other uh approaches we've been discussing this was very technical very targeted we were basically just trying to get the um the minimum uh the MVP version off of the ground so we can grow back into some of the more technical uh requirements that just
▶ 3:05:09to apply to our operations as a clearing agency. We're hopeful at the end of the three years, if not before, we'll have learnings and feedback to give to um bodies like this one and the regulators about how to better um accommodate uh tokenized activity in our financial markets.
▶ 3:05:23Okay, thank you. I'm just about out of time. Messenger, maybe you could tell us later or in writing. Um Singapore US tokenized securities to um current rules allow it to be traded in Singapore but limit their use here at home. uh wondering what you believe the competitive disadvantage that's created in the US markets. But with that um we'll have to
▶ 3:05:42gentleman yields back. We'll take that answer in writing.
▶ 3:05:46Chair recognizes the gentleman from California, Mr. Licardo. You're recognized for five minutes.
▶ 3:05:50Uh thank you, Mr. Chair. I appreciate all the testimony and I've learned quite a bit about the tremendous advantages and opportunities u with tokenization of assets for trade investment on blockchain.
▶ 3:06:05Uh undoubtedly obviously as Congress we have to be concerned about uh those cases of fraud of deception of illicit finance of various kinds uh and criminality and and I know that we're all concerned about that and I appreciate testimony several of you uh who have said look we we've got to have clear protections for investors and for the public.
▶ 3:06:28Uh just yesterday in New York, the Wall Street Journal came out with a story describing um how some tokenized offerings had significantly deviated in value from underlying public shares. Uh we saw earlier stories Amazon stock was its token was selling at a price 300% higher than the stock itself in one case. Um and obviously there are other examples uh and obviously the challenge that tokens are technically derivatives.
▶ 3:06:57um that don't convey the same shareholder rights as underlying securities uh until otherwise determined. So I I my fundamental concern is not what's going to happen. I'm certain that NASDAQ's going to do a good job. I'm certain that many centralized exchanges um will uh apply regulations in a way that protect investors and certainly there'll be regulators in place to ensure that happens.
▶ 3:07:23I'm concerned about the anonymity or or maybe the pseudo anonymity of those participants on decentralized exchanges. Um and DeFi certainly provides I know great opportunity but enormous risk and I I really appreciate Mr. Rene, your company's approach.
▶ 3:07:43Uh, as I understand it on Plume, um, investors are less likely to be the the victims of fraudsters who may be selling the tokenized equivalent of the Brooklyn Bridge. Um, and to the extent there's a know your customer requirement, uh, it makes it less likely that there'll be insider trading. uh there's less likely that there'll be members of Congress trading on stock that they shouldn't be trading on because of conflicts of interest.
▶ 3:08:12Now, my understanding is your company provides essentially a layer 2 app over the the the DeFi protocol. Uh and not all companies require what you require. Is that right?
▶ 3:08:26Yes. Most blockchains do not have protocol level um AML controls. And why do you decide that you're going to apply those controls?
▶ 3:08:34Uh our goal was to um make uh regulated financial institutions comfortable deploying their assets into our ecosystem because of the lower AML risk
▶ 3:08:44and I assume you do it to also protect your customers, make them feel more
▶ 3:08:50Yes. And uh that includes for example the capability to um freeze and seize or burn and remint um tokens through our Nest uh tokenization platform. Now, in your written testimony between pages 12 and 14, you talk about treating uh companies that are in your position layer two as brokers subject to the same the same requirements of uh anti-fraud and fair dealing standards, know your customer, anti-moneyaundering,
▶ 3:09:20etc. Um and I guess the question is if that were applied across the entire industry uh do you feel confident that other competitors of yours uh would comply?
▶ 3:09:38This is a a natively global architecture uh which poses both opportunity and and risks. Um I think if the framework that we've adopted which includes uh consumer protections um at the uh retail app level um and uh the SEC and Treasury work together when it comes to anti-moneyaundering requirements um at at the at the token level um we can achieve uh a pretty good level of
▶ 3:10:08protection. Um and then you you mentioned also uh the the price discovery issues that we see in tokenized markets and um that can be addressed um through the network effects that would be established once these markets move on chain.
▶ 3:10:22Um that will move price discovery away from you know these uh less liquid offshore um trading centers uh that have uh you know limited liquidity and poor quality products and toward um the markets that would be overseen by the SEC um which would operate under the the same types of uh transparency and and and regulatory
▶ 3:10:45I appreciate that sir. I know I'm out of time. I just wanted to ask Miss Meringer off the record if she could might be able to provide written statement about what blockchains association their position might be on this issue. Happy to follow up with you.
▶ 3:10:57Thank you very much. I yield.
▶ 3:10:58Thank you very much. Chair recognizes the gentleman from South Carolina. Mr. Tim, you're recognized for five minutes.
▶ 3:11:06Thank you, Mr. Chairman, and thank you to the witnesses for joining us today. I've long been interested in the concept of tokenization, not just as an emerging technology, but for its potential to integrate onchain systems seamlessly into our financial markets in the near future. Realizing that potential will require clear, well-defined rules of the road that support innovation in the United States, protect consumers, and encourage existing systems to evolve toward more efficient, lowerc cost models.
▶ 3:11:33I commend Chair Atkins in the SEC's January statement on tokenized securities that together with today's discussion. It represents an important first step in shaping how our markets can responsibly harness the transformative potential of blockchain technology. I want to begin with crossber transactions and the potential for tokenized securities to allow individuals around the world to access and move assets into US markets.
▶ 3:11:57Uh, Miss Mayor Singer, when you speak with member companies exploring the space, what are you hearing about the demand for tokenized securities from investors and are firms seeing this as a meaningful opportunity to bring more global capital into the American financial system?
▶ 3:12:14Yes, absolutely. Um, there is certainly the demand is there. Um, we see it offshore and um, you know, opening up these markets more globally will just mean more capital, more liquidity. So there's a lot of opportunity there if the right rules are in place and are
▶ 3:12:32Thank you for that. And from the perspective of financial institutions, I want to touch on compliance. As tokenization and blockchain technology evolve, they introduce the possibility of self-executing compliance where regulatory requirements can be embedded directly into the asset or transaction itself. How do you see this capability enhancing compliance with existing rules, strengthening investor protections, and potentially reducing the cost firms face in meeting their regulatory obligations? Again, Mr. Mayor
▶ 3:13:01I think it's what's interesting is the technology around compliance is moving as quickly as the technology that we are seeing with the markets. And so there's a lot of opportunity to bring efficiencies into the compliance side of this as well. And we we're seeing it. Um Plume, one of our member companies, is is doing this.
▶ 3:13:24And so it's certainly um the the technology is catching up and the compliance is becoming very uh automated and part of the the the
▶ 3:13:35Thank you. I really believe this is where the greatest potential lies. Removing intermediaries and creating efficiencies is what uh emerging technolog is all about. And I think the future's very bright. Uh, and combine that with President Trump's emphasis on attracting foreign direct investment to drive economic growth. The tokenization of traditional financial assets presents a new and compelling pathway for investment in the United States, particularly for individuals and firms and countries with strict capital controls.
▶ 3:14:01If we establish the right regulatory framework and allow issuers and intermediators to adapt, blockchain technology could significantly reduce barriers to entry and expand access to US markets. Um, that reflects the long-term vision. In the near term, I want to focus on the role of Congress in ensuring that our exchanges continue to operate efficiently and without disruption as this technology is introduced.
▶ 3:14:23As tokenization begins to intersect with existing market infrastructure, including clearing, settlement, custody, and trading, it is important that integration is thoughtful, orderly, and does not introduce unnecessary friction or risk. One area of particular interest is the potential for markets to operate on a 247 basis through tokenized securities. Mr. Dr.
▶ 3:14:42Za, given your experience overseeing market structure, regulation, and risk at NASDAQ, how should we think about the practical steps required to integrate tokenized securities into existing exchange infrastructure without disrupting the in the efficiency and integrity of our markets?
▶ 3:14:57Well, it's a critical question and I think the short answer is that it most of it can be done quite easily through the through the current processes. uh our vision of what we got SEC approval of is basically a message that tells DTC look my choice is I want to clear in tokenized form non-tokenized form otherwise your experience is the same you're in the same order book you get the same priorities everything else is the same so I I think a lot of it can be incorporated it's frankly what retail I think expects to your point on 247 there
▶ 3:15:27are innovations uh from the crypto space that have uh evolved in the market I will argue that we have 247 trading and equity Now, it's obviously not as robust, but I I think the systems are are ready to go with the exception of we want to make sure when we really launch it as more of a regular session that we have the same uh data, information, uh safeguards, and surveillance. And so, I would argue that that will be the main protection going forward. We're going to treat it like a regular day session.
▶ 3:15:57Thank you for that. I had one more question for Mr. Benson, but it seems I'm out of time. We will send it to you. And if you could follow up, that'd be great. Appreciate y'all. I yield back, Mr. Chairman.
▶ 3:16:05Gentleman yields back. The gentleman from Montana, Mr. Downing, is now recognized for five minutes.
▶ 3:16:10Thank you, Mr. Chairman. I'm really excited that this administration and this committee has charged head first on embracing innovative technologies from, you know, payment stable coins to digital assets, artificial intelligence, and now to tokenization.
▶ 3:16:27you embracing these technologies and establishing regulatory frameworks will maintain the United States preeminent position as the global leader in And one thing that interests me in tokenization is its potential to bolster financial freedom by making peer-to-peer trading more accessible. However, this presents its own risk to investor protection.
▶ 3:16:51and I I was the former securities regulator for the state of Montana and one of my primary responsibilities was protecting investors from fraud. And I'm going to start um uh with Mrs. uh Mercinger here. How should Congress and regulators balance the risks associated with increased dis uh uh disintermediated securities trading with with protecting retail investors from bad actors?
▶ 3:17:17I think that's where it's important for the regulators to have some flexibility in deciding how the rules will apply to this technology. So we've talked a lot about um the SEC's innovation exemption which is authority that Congress has given them being able to use that flexibility to ensure that there are protection consumer protections in place um even though the technology might be different from the way it's you know currently working.
▶ 3:17:44Uh we want to make sure that those investor protections are are are still there and that we are not enter bringing in new risk because of a different system.
▶ 3:17:54Yeah. Thank you very much. I'm going to shift now in the interest of time here. Uh I want to shift to the regulatory framework and I'm going to go to Mr. Ze on this one. Um regulation national market systems or regms uh contains requirements for trading centers designed to prevent the execution of trades at prices that are inferior to what is displayed on other platforms. So to what extent would reggg NMS currently apply to tokenized versions of publicly traded equities?
▶ 3:18:23So uh if it's in the reg regulated environment uh it would apply just like anything else. I think that's separate and apart from as you know the SEC is considering whether to make changes
▶ 3:18:34and that's a separate analysis. We would argue if they do decide that changes make sense and frankly we've supported some change that that be done globally and and for everybody not just in in some sort of an exemption.
▶ 3:18:46So how much do you think Congress should be concerned about liquidity uh inhibiting price discovery with digital assets trading across both security exchanges and decentralized trading protocols and should that be regulated in in some form.
▶ 3:19:02I think it's an important question. We are very concerned about uh fragmentation of liquidity because for capital formation for price discovery it's all critical. So I do think it's something that we have to uh consider and that's why we're saying if there are somehow exemptions which we don't necessarily favor uh that they be time limited and size limited because you you want to ensure that you are not breaking
▶ 3:19:23Right. Thank you. Uh I'm move to Mr. Benson. There's been data showing the custodians have been much faster to adopt tokenization than asset and wealth managers. Why do you think that is? I I think the industry as a whole, custodian is probably at the front end, but the industry as a whole, I think, has been looking at tokenization because it's constantly looking to take cost out wherever it can and improve efficiencies.
▶ 3:19:45But the but I would say as part of that, the one thing that and we've talked about this morning is uh there's still human oversight because technology can go wrong uh from time to time and so you have to do constant risk ma risk management, auditing, etc.
▶ 3:19:59All right. Thank you. I'm going to switch now to what tokenization means for retail investors. I'm going to go back to Mrs. is Mercinger here. If tokenization really takes off, what does that mean for someone in Montana with a retirement account and do they notice anything different and do they benefit directly or is this primarily an efficiency story for institutions?
▶ 3:20:21What I think will happen for most retail investors in Montana is they the experience will look a lot like it does today. Um they're going to have the same benefits. um they're going to have the same protections, but they'll have it the benefits of faster settlement, lower cost, smoother transactions.
▶ 3:20:38I think where they where it's visible in the change is the flexibility in the access because you can you have a expanded kind of range of assets available through Um, and it's also going to improve the actual investing experience by reducing some of the delays that we've talked about previously about, you know, taking it longer for the um, for the asset to show up in your account. Um, this will be near instantaneous settlement.
▶ 3:21:06So, your assets will be under your control almost immediately. So, there's a lot of the benefits that your constituents from Montana will see.
▶ 3:21:14Well, thank you all for uh, participating and Mr. Chair, and that I
▶ 3:21:18Gentleman yields. The gentleoman from Michigan, Miss Talib, is now recognized for five minutes.
▶ 3:21:22Thank you, Mr. Chairman. Can I start with just asking for unanimous consent to address uh to include in the uh journal the real estate scheme gobbling up Detroit, one digital token at a time by Aaron Mbury. He's been tracking it in our city.
▶ 3:21:37Without objection.
▶ 3:21:38Thank you. So, the Real Token LLC, also known as Real IT, is a cryptocurrency real estate company with a portfolio of more than 600 homes and apartment buildings in and around Detroit. VIA web of LLC's re real T sells what it claims to be uh fractional ownership of its properties in a form of tokens to overseas and accredited investors.
▶ 3:22:04Real Tea launched in 2019 and raised more than $93 million for its Detroit properties. But today, its real estate empire is in ruins. I want you all to look at the shocking condition endured by real's tenants. This is important for people to understand. Real T is subject to the largest nuisance abatement lawsuit in the history of the city of Detroit. Real Tea faces hundreds of blight violations and thousands of code violations.
▶ 3:22:33It owes the city more than $5 million in unpaid water bills and property taxes. The city's complaint sites uh buildings that are fire, flood damage, lack doors, windows, have no heat or structure are structurally unsound. I mean, you just have to look at this. One of the things that people don't understand is according to the complaint, 48, it's not a little bit, but 408 properties lack paperwork certifying them as safe for habitation.
▶ 3:23:01Tenants have reported going this has been going on for years without heat. They are not functioning only in the city of Detroit. Mr. Chair, they're functioning in 40 cities around our country. One home, for example, is owned by 331 people who have enjoyed a 9.3% annual return on their investment.
▶ 3:23:22But tenants report that the heating is broken, the water only works sometimes, and one tenant who lives with her her grandchildren has stated that she can't sleep at night for a fear of intruder might enter through one of the buildings because of broken windows. By issuing tokenized interest, real has avoided disclosure requirements. And Mr. Chair, we need to do something about that. Mr. Um, Bay, do you think it's possible to have disclosure requirements or stronger investor protections that could help prevent conditions like this?
▶ 3:23:53I I think what you're pointing out here is actually a great case study in uh the need to make sure that the market structure bill um keeps in place um state regulator um anti-fraud authority
▶ 3:24:05um because these types of
▶ 3:24:06so no disclosures you want to do
▶ 3:24:09um no for sure I mean this looks like particularly if this is distributed publicly um you know the
▶ 3:24:17well I just want you to know so real's own white paper stated that its operating agreements would be intentionally struck structured to minimize responsibility of token holders over the upkeep and maintenance of the property. Like Mr. Chair, they're actually saying it. They know this is happening. They don't care. They just
▶ 3:24:33this is outrageous and I I would like to see these types of broadly available products um come under the same type of securities uh laws that apply to public publicly traded equities. I mean the the risk of that that the tokenization or related complex financial uh arrangements can be manipulated right and skew away respon responsibility isn't that a big issue to again try to make sure this doesn't happen.
▶ 3:24:57Yeah, the these types of uh offerings should be exposed to uh the full level of uh disclosure that we have for the public markets for sure given particularly how they're distributed so so broadly. You you know I know people are so scared of regulation. This is oversight. We can't allow people to live in this kind of conditions and say everyday people even those who have never invested a penny are impacted by decisions we make in this room. And so it's a difference between innovation and exploitation. And I think that's something that we need to really really work hard.
▶ 3:25:27Um, you know, Mr. Chair, the only reason we know about realy is not because of our oversight work in in in Congress. It's because of these pictures and everything that's happening from local reporting in our in our city uh by a nonprofit news organization called outlier media. And Mr. Bay, while Real T claims that it offers investors ownership, scholars have argued that the investors more accurately get shares in an LLC as members of an LLC. Do such investors have property rights?
▶ 3:25:58I I think uh if there's a potential misrepresentation there, there is definitely grounds for um anti-fraud uh enforcement in this case.
▶ 3:26:07Okay. What lessons do you think Congress can draw when we see poorly regulated tokenization schemes like this? I I think you know one of the benefits of tokenization is it allows broad public distribution of assets and it looks like uh I'm not that familiar with this case but it looks like in this case they are issuing securities into a public
▶ 3:26:26um and these are not you know regggd private market offerings offered to a handful of investors. It looks like these are broadly distributed. You mentioned you know 331 people having an interest in in in just one of the
▶ 3:26:3848 properties. Um so to me this looks like um you know a very sketchy scheme that um you know house city inspectors state securities regul
▶ 3:26:50I mean they owe them money but is the fees going to really work
▶ 3:26:52gentle woman's time is
▶ 3:26:53thank you Mr. gentleman yields back.
▶ 3:26:56I now reci recognize myself for five First of all, I appreciate the opportunity to learn learn more about something that has become an exceedingly important topic for both our capital markets and financial innovation. Tokenization represents two different worlds colliding. Our traditional capital market system and the world of distributed ledger and blockchain technology.
▶ 3:27:18While our committee has spent a great deal of time trying to ensure that native digital assets are properly regulated, there is now the separate question that regulators are also wrestling with. What happens when a traditional security or a realworld asset is put on the blockchain? How would regulators treat that technological transition and what imple implementation uh imple and what would shift towards a broader tokenization uh what does that mean for our markets? Mr.
▶ 3:27:46Zecha, in your testimony, you describes NASDAQ's approach to tokenization as one of integration between the strengths of traditional equity markets and blockchainbased markets. Can you expand on that thought and specifically what would an integrated market harnessing the strengths of both tokenization and traditional equity markets look like?
▶ 3:28:07Sure, thank you for the question. I I mean the one thing to keep in mind is that for markets generally and whether they're in uh token in in the crypto space or otherwise is that it tends to be a central order book very similar to what we have. So when you think about the technology it's data coming in it's orders they're matched and then they're written to the blockchain or you know in the case of a normal security they're sent to DTC. So the the technological structure is very similar.
▶ 3:28:33We view this as not a new product so much as a new way to technologically represent a security. So where is the question and the bridge coming in from the DeFi world? You're going to have a growing share of the American population that is invested in crypto assets. They have wallets. They want to expand. They want to use those assets to expand into other asset classes including equities. We want to give them a path to do that in the world that that they probably know best through brokers with uh trading occurring on regulated exchanges.
▶ 3:29:03So that's what we say when we say integrating the bridge uh between the Mr. Benson uh the regulated settlement network was a basically proof of concept exercise in 2024 designed to explore the effects of tokenization on efficiency. What kind of calcul conclusions did you draw from that exercise and do you anticipate other similar exercises to take place in the future?
▶ 3:29:27Yes. Uh thank you congressman. So that was an exercise that actually was uh looking at other asset classes besides equity. So treasuries uh uh and and other uh fixed income assets and and I think we I think it underscores that the industry has been looking at this technology for many many years to see where it can where it can be adopted. Um and I think you'll see more of that.
▶ 3:29:47I I I I think things like the regulated settlement network uh work that's been done that uh the exchanges have done DTCC's done uh uh central banks have done in Europe of looking where they can adopt this technology is this is happening now and so it's not a question of if we will have tokenized securities that we have tokenized securities today because of the of the pre-work that's been done and I would argue that uh it's happening under our reg the regulatory framework that we have in place today.
▶ 3:30:17Now we may find over time that there are friction points but to date uh we have we have found that we can adopt this technology and I think we it's taken a while. It's not a it's not a big market at this point but I think we will see it grow because as Mr. Zecha said this is not necessarily a new product. It's a it's just an upgraded technology.
▶ 3:30:36Thank you. Mr. Manay you talked a little bit about the possible tokenization of low-income housing tax credits. Could you expand on that? Yeah. So, um what we see in um the litkkey program um among uh other um federal pro federally backed programs that are uh seeking to enhance the availability of capital to develop communities is a weak secondary market.
▶ 3:31:02Um, institutes such as the Sornson Institute have identified the potential of securization um, of these types of products um, as a way of unlocking secondary market liquidity which would in turn um, in incentivize more participation in the primary markets as well.
▶ 3:31:22Um and so uh we've recommended that the SEC convene a roundt um around the securization of uh these types of uh community development project assets um in conjunction with I know as a part of their rulemaking agenda um they are considering um new shelf registration requirements. These would these would also further enhance the ability to securitize these types of of of projects. Um and so that could be done uh that round table could be done to help inform that that future rulem. Thank you very much.
▶ 3:31:51With that, I yield back. Uh the gentleman from Iowa, Mr. Nun, is now recognized for five minutes.
▶ 3:31:57Well, thank you very much, Mr. Chair, and thank you for the team for being here. I know this has been a long committee hearing, so we'll try and be quick. I want to be clear. Since 1996, the number of companies that were publicly traded dropped from 8,000 to about half that, 4,000. IPOs dried up and that hit home in my home state of Iowa, where fewer ways were provided for businesses to raise capital, grow, and hire. Now, tokenization won't fix everything, but it does lower the cost and opens more doors for investors. This technology, we all know it's going to come either way.
▶ 3:32:28The only question is whether we build it here in the United States or whether lack of ability in DC drives it overseas. So, Mr. Messinger, I'd like to begin with you. We'll do some rapidfire questions here. Tokenization lowers transaction costs. It speeds settlement from days to seconds. And it opens capital formation for a broader pool of investors. for a small business in Iowa that can't crack into the public market today. Would you agree that those are real and concrete
▶ 3:32:57I think there are a lot of factors, but I think tokenization can help, but I don't think it's the only factor.
▶ 3:33:01I would agree. Would you also agree that the biggest barriers for a company in Iowa might be that they aren't technological and aren't investor appetite, their regulatories uncertainties that lack clear SEC for small investors. I mean, there may be issues where they want to look at like reggga a or regggd and determine whether or not uh those need to be upgraded.
▶ 3:33:24But honestly, I would I would separate those from tokens from the technology and that's more of a of an investor uh you know what the rules are around disclosure, what the rules are the and uh uh for the issuer uh which do add cost. Whether tokenization can improve that or not, we don't know. But but but it could it could. I certainly hear from my small business investors that they would like to have that
▶ 3:33:48I'd also offer that we should agree that if the Senate doesn't move the Invest Act forward this year, capital formation might be incentivized to move overseas. Would you agree with me on that?
▶ 3:33:59I think I think if Congress could move the Invest Act, that would be a real win for the American people.
▶ 3:34:04I would agree. I look to you, my colleagues in the Senate, to help us with that. back in Iowa when I took my uh first driver's test um and back then it was a 1982 Volvo uh it didn't matter what kind of car I drove it mattered that I knew the rules of the road and so when we talk about knowledgebased pathways to accredited investors that status applies with the same logic in my opinion it opens investing to millions of Ians who have plenty of smarts but don't happen to have millions of dollars should American
▶ 3:34:34companies have the freedom to choose tokenized infrastructure for their securities if they meet those same rules of the road. Would you agree?
▶ 3:34:43I think that I think Congress should definitely look at and I know you've been working on this, definitely look at the rules around accredited investors, whether it's tokenized or not. I think the rules are outdated where they are
▶ 3:34:54Mr. I'd like to turn to you here. We know that um the SEC has approved NASDAQ proposals to list and trade tokenized securities. That is one of the things that NASDAQ still needs from the SEC to launch tokenized security trading. Would you agree with that?
▶ 3:35:09Uh I'm sorry. What do we need? What do we need from the SEC still? Is that
▶ 3:35:12tokenized security trading?
▶ 3:35:14Yeah. So, uh I you know the the approval order got us most of the way there. There's still some technological things, but you know, it's it's a pilot program and uh you know, frankly, it doesn't cover all securities yet. So, I think they're going to be other things we're going to go back to the SEC on.
▶ 3:35:29And I think that we've got to be able to have a clear framework for this. Would
▶ 3:35:32Well, exactly. I mean the the part we're most concerned about is that there's some parallel market out there that is straining liquidity. To your point about issuers worried about raising money. I think that's a critical point. Let's keep the uh liquidity together so that it's the it's the strongest for capital formation. And to your other point about cost saves, I will say on the proxy side, I do think that there's significant saving possibilities if it's adopted at scale for issuers if we can get around the Byzantine structure right now to reach your shareholders.
▶ 3:36:00I would very much agree with you on that and I hope that's someone we can move on. I'll even go so far to say would appreciate your feedback on this. If the US creates a more clear regulatory pathway here, offshore trading activity could actually move back to the United States in that
▶ 3:36:14I I think that's right. I mean, right now they're they're basically trading synthetic securities overseas. I think a lot of people would prefer to come back.
▶ 3:36:21Well, Mr. Chair, uh I'm not sure what your first car was. I think was a um 48 ambulance based on the grays in your hair and mine included. uh the US cannot continue to stand on the sidelines on this. We must ensure the next generation of financial and internet technology is built here in the United States and I think tokenization is a clean area where we can do this. I ask for your help both with the Senate and with the SEC to continue to move this forward. Thank you, Mr. Chair. I yield back my time.
▶ 3:36:45Gentleman yields back. The gentleman from Indiana, Mr. Stzman, is now recognized for five minutes.
▶ 3:36:50Thank you, Mr. Chairman, and thank you all for being here today. Um, before getting into the more technical aspects of today's hearing, I want to start with the real world impact this technology could have on working families back in Indiana. Northeast Indiana is a major manufacturing hub, and many of my constituents spend long days building the products that make our country run. Because of those hours, they don't always have the flexibility to participate in our capital markets during normal trading hours.
▶ 3:37:19Um, I want to start with um, Mrs. uh Mercinger, could you briefly explain how tokenized securities could expand opportunities for Americans to participate in our markets and what kinds of other benefits might they see?
▶ 3:37:36So, thank you for that question and I think in your question you um part of it was answered is that these markets can be 247 markets. We already have 247 but the expanding expansion of 247 access will help people access those wealth generating opportunities of our capital markets. And so a lot of it is around when the markets are open when you can trade.
▶ 3:38:02And if your only trading time is after markets close um that's that's a barrier to entry that tokenization can As we've heard throughout this hearing, tokenization can enhance efficiency in areas like collateral management, settlement, trading speed, and transparency. But it can be hard to conceptualize what this actually actually means. U Mr.
▶ 3:38:27Sabella, as the DTCC has begun incorporating tokenization into its work, what examples can you share that help illustrate how this technology is improving your operations?
▶ 3:38:39Uh, thank you for the question, Congressman. So, I think we're still in early days. Um, we haven't actually uh activated the three-year period under the no action letter yet. We expect to do that in this in the second half of this year. I think the thesis we have is that it will help with uh giving investors more optionality around settlement cycles. So, to your point about folks in Indiana, not only can they trade faster, they can get the benefit, the economic benefit of their activity faster through faster settlement. Um, there's also the ability to um have more optimized uh collateral deployment.
▶ 3:39:09So folks holding securities in Indiana can get more uh economic benefit from using them in different ways via tokenization. And then finally issuance and distribution, which is something we would do with others, but I'm happy to report back later in the year when we've actually gotten our feet off the ground.
▶ 3:39:22Yeah, that'd be great. Mr. Zea, uh NASDAQ has begun deploying similar tools. How is tokenization making it easier for companies to modernize operations like investor engagement and proxy voting?
▶ 3:39:37Sure. So I think that's that's an important point. One of the great benefits of the blockchain is that there is the opportunity to have sort of direct connection to your shareholders. Now, of course, there's still SEC rules on objecting beneficial owner and who wants to be known and not, but but by and large, you can bypass the Byzantine system that exists right now, which uh you know, there I think it's from DTC measure that a corporate action leads to 110,000 actions across the system as everyone has to implement it.
▶ 3:40:07It costs $34 million per corporate action. So if if this is adopted at scale and you can bypass some of that or streamline some of this, imagine the cost savings for companies that they can deploy to jobs in Indiana.
▶ 3:40:24Yeah. No, that's um I want to talk a little bit about broker dealers and self-custody. And um Mr. Benson, I ask you, are there scenarios in which a broker dealer would still play a role in a tokenized transaction that culminates in self-custody? And then if so, uh, how should regulators be thinking about those transactions and the role of broker dealers more generally?
▶ 3:40:49Thank you, Congressman. Uh, I I I guess if you had a true self-custody wallet where the wallet itself that was there was no qualified custodian involved in that, that wallet uh could engage could be a a DeFi app. It could be any sort of app that's an order routing that's matching a seller with a buyer, buyer with the seller. then you would be dealing with a broker dealer or registered ATS.
▶ 3:41:12So I I I could see that concept and and I think the SEC is probably thinking about it because it's the questions that they need to answer are when something is truly DeFi uh no control, no transaction fee uh versus when when there is control.
▶ 3:41:28Very good. All right. Thank you, Mr. Chairman. I yield back the balance of my
▶ 3:41:31Gentleman yields back. A vote has been called in the House. Pursuant to the previous order, the chair declares the committee in recess. Subject to the call of the chair, we will reconvene directly after this voting series. The committee stands in recess.
▶ 4:24:45The committee will come back to order following our recess. The gentleman from New York u the chair who is the chair of the homeland security committee, Mr. Garberino is now recognized for five minutes. Thank you very much u Mr. Chairman and thank you to all the witnesses for being here today. US capital markets are the deepest and most liquid in the world. But the infrastructure beneath them, clearing, settlement, and reconciliation, still relies on systems and processes built decades ago.
▶ 4:25:14While reliable, they remain complex, fragmented, and costly. Because of this, there's a growing interest in tokenization as a way to modernize this plumbing. Miss Mercinger, can you walk us through what tokenization actually changes in how securities move from seller to buyer? And in practical terms, what does that mean for settlement speed, risk, and the overall cost of operating in our markets?
▶ 4:25:37Thank you for that question. Yet, tokenization entails a paradigm shift in the function of our capital markets. Um instead of relying on multiple intermediaries to reconcile the ledger and to complete settlement, tokenization allow collapses that and offers, you know, an disintermediated um transfer of and settlement of um of of these assets.
▶ 4:26:01So the delivery and the payment are happening simultaneously and it really is a more efficient um and and certainly lower cost way of moving these assets.
▶ 4:26:14Thank you very much. Uh NASDAQ has emphasized a commitment to advancing tokenization in a way that preserves investor protection and supports issuers. SECA, do you believe tokenized securities can be offered with the same within the same regulatory framework that governs today's equity markets without weakening core protections?
▶ 4:26:35We do I think that's actually what we should be aspiring towards because um in in reality there's very little difference between the digital way that securities trade and the way that most crypto assets trade and tokenized securities would trade. Obviously, there's peer-to-peer, but by and large, it's it's in a uh it's in a central limit order book just like we have. And then it's written to the blockchain. So, it's it's it's something that we can do in the securities market very similar.
▶ 4:27:01You'd do the trade, you would have the same priority as a normal equity uh any other equity uh you would have the same rights, the same surveillance and then you would make a selection and it would go to clearing and you would get it on token form. How does that approach um what are the imp implications of that approach for the competitiveness of uh the US and and specifically jobs?
▶ 4:27:22Well, I think there are a couple. One is right now the market is developing overseas with synthetic securities that are not real ownership interests. So, uh the market is developing without us essentially. So, bringing that back and giving an opportunity for US investors to participate in a regulated market I think is is a key one.
▶ 4:27:40I also think for issuers the the part that's important to note is for them I do think that the blockchain provides real advantage uh because of what we've talked about with uh you know what can be on the ledger whether it's corporate governance whether it's um the proxy process communication with shareholders all of that can can help uh avoid some of the bottlenecks and the expensive bottlenecks that exist right now. Thank you.
▶ 4:28:06We're seeing we're also seeing clear momentum uh clear market momentum. Just yesterday, there was a new partnership announced between Invesco and Superstate. Another example of how major institutions are embracing tokenization building on moves we've seen from Black Rockck, Franklin Templeton, and JP Morgan. Tokenized treasuries alone have already reached roughly 12 billion, and somebody says some some estimates say it could be 20 to 30 billion by the end of the year.
▶ 4:28:33Many would argue this acceleration reflects a more coordinated and supportive posture from US regulators. Merzinger, as digital assets evolve toward utilitydriven finance and as a large asset as large asset managers begin putting traditional assets like treasuries on on chain. Are we truly moving towards a more open 247 global market where individual investors have the same access as major institutions?
▶ 4:29:01Yes, that's where we're headed. Um there's already 247 trading. Um and there's a lot of a lot of this is happening offshore. We need to bring that back into the US and have it available to retail vest investors here in the US.
▶ 4:29:15So this is something is this something new or just an expansion of the exist this is making the system the current system faster and uh more efficient.
▶ 4:29:22It's it's bringing the it's evolution of the current system making it the settlement more quick uh faster um lower the cost because there's fewer intermediaries. So it really is just an evolution of our current system to what's going to be a more efficient
▶ 4:29:38Are we leading on this? Is the US leading on this right now?
▶ 4:29:41The US is not leading on this right now. we um we shouldn't take for granted that we are always the leader in financial markets and I think we have an opportunity here to um lay the ground rules so we can step back into uh the position of leading on this on with our financial markets in the tokenized
▶ 4:30:01Thank you very much. I'm out of time. I'll submit the rest of my questions for answers in writing. I yield back, Mr.
▶ 4:30:06The gentleman yields. The chair now recognizes himself. Um start off first off with thanking the witnesses for today's testimony before the committee and as to this topic you know tokenization has the potential to fundamentally modernize how our operates work. It enables these traditional financial assets to be represented on blockchainbased systems means faster settlement lower cost greater transparency and expanded access for investors.
▶ 4:30:33But today's markets still rely on layers of intermediaries that process and can uh which can delay settlement and increase operational risk. Tokenization however introduces the possibility transaction transactions can be completed in real time. Uh so first question Mr. Mayer how does eliminating the settlement lag impact systemic risk and how does it shift risk elsewhere in the system?
▶ 4:30:58Thank you. That's a great question and systemic risk will never be 100% eliminated. Um, but instantaneous settlement certainly reduces the overall risk by setting the same time as a transaction itself by settling it as the same time as a transaction itself is taking place. The SEC has re recognized even even recently that there is a correlation between settlement speed and counterparty risk.
▶ 4:31:24Um and that's part of the reason they have reduced the settlement times from T+1 to T plus T+3 to T+1. Um as you as you bring down the settlement times, you're moving the payment with the settlement, you're taking a lot of the counterparty risk out of the system.
▶ 4:31:42You know, while our existing security laws have provided a strong foundation for decades, they're built around a system of identifiable intermediaries, brokers, dealers, exchanges, and clearing houses. tokenized markets may not u always fit neatly into these categories. So, Mr. Benson, where are the biggest areas of regulatory uncertainty today that are slowing the development of tokenized markets in the United States?
▶ 4:32:07Thank you. Uh uh Congressman, so first of all, again, I I would say we are seeing markets, securities markets move towards tokenization. It hasn't moved as fast as I think some people thought, but people but broker dealers are doing it, custodians are doing it under the existing uh rules that we have. And I think that's a good thing because those rules have served our markets uh very well. Uh in fact, if you see in our testimony, we did an analysis uh or had one of our law firms do an analysis of of mapping the securities rules against tokenized securities.
▶ 4:32:36And pretty much across the board, we feel that it's that it it can be accomplished and it's obviously being done by NASDAQ and DTCC. Um I I think what we have to look at as we're going forward is uh when we're thinking about things like 247 which exists today exists for retail investors today. If we we have to be careful we don't end up with uh unlin markets or unlin pools of liquidity that result in price differentiation that's not good for the investor and not good for the issuer.
▶ 4:33:06And so I I think as these markets grow, we're going to have to pay attention to that particularly uh uh particularly in things like 247 trading. So somewhat of a followup to that uh Mr. Sabella to what extent are regulator or you know regulatory uncertainty driving innovation and trading activity offshore as opposed to here in the US.
▶ 4:33:25Uh thank you for the question. So uh to be clear I mean we sit at the post trade settlement side. So we don't have as I think clear view in terms of trade execution dynamics as others uh here may have. But I think one of the biggest issues just comes around access. So effectively uh the way you come into US markets today uh is very broad, it's very expansive, but it's not perfect for everyone.
▶ 4:33:46And so I think what we see folks trying to do is expand access through instruments that are offshore and as others have on this panel have noted may not exactly be the equity instruments that we want uh investors to have to access US capital markets.
▶ 4:34:00So So what kind of risk uh would that in fact pose to US market leadership and investor protection? Well, I I I think one thing that it does, and again would defer to others on the panel who follow this a bit more closely, I think, than we do at DTCC, but one of one of the issues is that breakage of of liquidity, so that effectively offshore investors aren't getting the same uh price discovery and frankly uh economic and legal benefits that you get when you have an actual tokenized equity instrument in the United States.
▶ 4:34:27This is particularly important in insolveny where if you think you're holding something that is not in fact a cash equity interest in an issuer, you are going to end up with less than what people get in traditional markets today.
▶ 4:34:38So of course tokenization could also expand access to markets through the fractional ownership as well as 247 trading. Uh so back to Meringer, how might these developments benefit retail
▶ 4:34:52Well, I think it's bringing down the barriers to access. um making that being able to access the markets um with lower costs um 24/7 means that you have extended hours when you can trade um and certainly that's going to improve access as well. So there are a number of benefits to the system that retail investors will see as benefits to their ability to access capital markets.
▶ 4:35:21So that time has expired. Uh looks like there are no other members who would be asking questions at this point. So uh again, I want to thank all of our witnesses for today's testimony. Very informative, very helpful to the committee. We appreciate you taking your time and your expertise being here with us today. Without objection, all members will have five legislative days to submit additional written questions for the witnesses to the chair. The questions will be forwarded to the witnesses for their response.
▶ 4:35:47Witnesses, we would ask if you would to please respond no later to any of those questions uh than April 29th of this year. With nothing further before the committee, the hearing is adjourned.