▶ 0:03:47Test
▶ 0:04:26>> crash on the outer near river clear, not only traffic
▶ 0:13:31>> we've got a few minutes waiting for other members. They just called a vote. I will go run a boat and come back. You will see other members trickling in. Then we will get started. Takes me about seven or eight minutes to run over and run back. So please enjoy each other's company until then. Thanks.
▶ 0:29:55>> we have joined the 21st century. I could not be more great. So this hearing will come to order. I do want to first of all congratulate our calling and ranking member, senator gallego. He is at home today with a brand-new baby, cooper. And we wish you the very best with you and your new son.
▶ 0:30:25I know you are deeply engaged in the discussion on market structure and we will be submitting questions for the record. Our congratulations to you. I also want to congratulate senator hagerty, chairman scott, senator gillibrand, and brooks, and members of the subcommittee on the passage of the g.e.n.I.U.S. act.
▶ 0:30:53It was a historic moment for digital asset regulation. It was a bumpy ride getting it done. But all the sweeter for that. And we showed we can use regular order in bipartisanship to get things done around here, regardless of how arduous that may be. We don't want to lose momentum.
▶ 0:31:22Today's hearing will focus on the need for digital asset market structure legislation. In the themes the senate banking committee will need to consider in the coming weeks. To avoid the bumping us we experienced in getting through the process with stable coins, we will start the market structure component of digital asset regulation with general guidelines and principles governing the committees consideration of bipartisan market structure legislation.
▶ 0:31:53We released those principles this morning. They were signed by chairman scott, tillis, haggerty, and myself. These principles include the following. Legislation should clearly define the legal status of digital assets meaning congress should draw the line between security and commodity in statute.
▶ 0:32:17That has been a clear source of frustration for those who were attempting to identify the regulator. Second, jurisdiction should be allocated among regulators. All digital assets in distributor ledger technology should not be regulated equally, but that different opportunities and risks come with different assets.
▶ 0:32:44And I invite you all to provide guidance based on your experience in this particular area. Third, regulation should be modernized to foster innovation, including the new securities registration pathway with general asset fundraising and modernization. So we can have existing rules brought up-to-date with respect to custody and recordkeeping to account for efficiency and transparency of distributed ledger technology.
▶ 0:33:16Fourth, regulation should protect consumers. Including requiring digital asset exchanges to be subject to comparable regulation as other centralized intermediaries and customers should have priority in bankruptcy. Fifth, illicit finance measures should be targeted and pro-innovation. This has been an area that has fixed me trying to understand where some of the people on the intel community are coming from.
▶ 0:33:47I think I'm letting -- getting a clear picture because I have been spending a lot of time with them as we were negotiating stable coins. This would require adopting digital asset standards and considering the extent to which distributed ledger technology can improve the work of law enforcement.
▶ 0:34:09Finally, financial regulators should welcome responsible innovation and promote the use of no action letters, sandboxes, regulatory coordination, and appropriate timelines for application decisions. This industry over the last four years has been embroiled in expensive litigation that provided no clear path forward. And being innovative in the process.
▶ 0:34:39That is our goal. I look forward to working with ranking member gallego, members of the subcommittee, chairman scott, and chairman boozman. And the trading commission. We have a very distinguished panel of witnesses. Sarah hammer is executive director of the university of pennsylvania working school. Greg xethalis, general counsel of motif -- multipoint capital.
▶ 0:35:10Ryan vangrack, vice president of legal at coin base. In the honorable rostin behnam, former chair of the commodity commission, and distinguished fellow at georgetown university. Welcome and thank you to each of you. Ms. hammer, you are recognized for your opening remarks.
▶ 0:35:38Ms. Hammer: Thank you. Thank you for the opportunity to testify on this pivotal issue on american financial leadership. Your leadership comes at a critical moment as the U.S. stands at a crossroads in shaping the next generation of financial services.
▶ 0:35:59Ms. Hammer: I'm sarah hammer, executive director at the morton school, founder and ceo of wharton site for accelerator, adjunct professor at the university of pennsylvania law school. I previously served as acting deputy assistant secretary for financial institutions at the U.S. treasury and acting secretary of banking and securities for the commonwealth of pennsylvania during the 2023 ranking crisis.
▶ 0:36:29Ms. Hammer: Additionally, I've held rules in portfolio analytics, macroeconomic research, training, portfolio management, investment strategy, and institutional asset management. I have more than 25 years of experience in finance, law, and technology. Before I begin, I would like to note today's testimony reflect my personal views and does not necessarily reflect the views of the wharton school or the university of pennsylvania.
▶ 0:36:57Ms. Hammer: I will draw upon extensive research, analysis, and professional experience to assess the U.S.-position in the global digital asset landscape. And to outline the strategic steps necessary to strengthen our leadership.
▶ 0:37:14Ms. Hammer: To begin my research, I conducted a temp oral analysis of proprietary geographically tagged data on stable coin transfers, active digital wallet addresses, and block chain transactions.
▶ 0:37:30Ms. Hammer: Across all categories, the data shows while north america led the digital asset landscape in 2021 and 2022, by 2025, they've nearly closed the gap and now poised to surpass us. Notably, the 2023 passage of the use market and crypto assets regulation did not suppress activity. On the contrary, it appears to have potentially accelerated it.
▶ 0:38:01Ms. Hammer: Reinforcing the importance of regulatory clarity as a catalyst for vibrant digital asset markets. I also conducted a global assessment of digital asset regulatory frameworks. Since as early as 2018, jurisdictions, including bermuda , singapore, switzerland, dubai, and the european union, have established comprehensive legal regimes.
▶ 0:38:31Ms. Hammer: Today, approximately 50 countries have either enacted or actively developing digital asset frameworks. These jurisdictions recognize a fundamental point. Regulatory clarity does not hinder innovation. It enables it. The question now is how the united states will lead.
▶ 0:38:52Ms. Hammer: In my 2022 paper, a comprehensive approach to crypto regulation, I set forth three foundational principles for effective digital asset oversight. First, clear standards, rules, and enforcement mechanisms. Second, robust consumer protections. Third, leadership in global standard settings.
▶ 0:39:19Ms. Hammer: This principles-based approach provides a strategic print for balancing responsible innovation with market integrity and financial resilience. Additionally, my assessment of foreign jurisdictions offers insights that can inform the development of a bold and enduring U.S. regulatory framework.
▶ 0:39:41Ms. Hammer: A foundational pillar of a comprehensive digital asset framework is a clear and coherent taxonomy codified by statute and tailored to the complexity of this evolving market. Other essential pillars include a streamlined supervisory structure, appropriate regulation for stable coins, market integrity provisions to prevent crime, manipulation, and systemic risk and a bankruptcy
▶ 0:40:11Ms. Hammer: Regime. Equally critical, provisions that foster innovation and active engagement. Securing america's role at the helm of financial leadership. Block chain and digital assets are reshaping the global financial system in real time. While international models offer valuable lesson, the U.S.
▶ 0:40:31Ms. Hammer: Will chart its own course, guided by principles, driven by innovation, and anchored in our leadership. This is how america will marshal the future of finance. Thank. >> thank you, I look forward to exploring more with you on your remarks. Now I would like to ask Mr.
▶ 0:41:05Ms. Hammer: Xethalis for your opening remarks.
▶ 0:41:05Mr. Xethalis: Thank you for the opportunity to testify today in my personal capacity. I'm the general counsel of multipoint capital, registered cheeseman investment advisor -- advisor focus on the digital asset ecosystem cheeseman sirius and the defied education and teach at duke university school of law where I've had the privilege of helping train the next generation of financial regulatory.
▶ 0:41:33Mr. Xethalis: Multipoint invests in both liquid assets and early-stage venture. Through that work, we support founders on the future of the financial infrastructure and internet native commerce. Increasingly the founders are not building in the united states. They are setting up a broad not because they want to avoid rules, but because the rules here are often opaque, fragmented, or even contradictory. That is not a sustainable outcome.
▶ 0:42:00Mr. Xethalis: The 119th congress has the opportunity to reverse that trend. I want to begin by commending the committee and your counterparts on agriculture and the house for advancing bipartisan proposals that aim to bring clarity, structure, and accountability to the industry. The house clarity act and durations of the financial innovation act are serious, thoughtful proposals as are the market structure principles released by members of the committee earlier this morning.
▶ 0:42:32Mr. Xethalis: The house and senate proposals are not competing. They are complement three. Together, they provide a framework for regulating centralized intermediaries as two essential ingredients out understanding the taxonomy. First, the maturity test grounded in decentralization and functionality that helps determine when a token no longer relies on the efforts of an identifiable third-party.
▶ 0:42:57Mr. Xethalis: Second, a legal recognition that a token offered in an investment contract is not itself a security. It is the transaction, the context of the transaction. This is important. The current state of affairs were almost every digital asset transaction is up to second-guessing and nearly all innovation has been met with enforcement threats. That has produced a chilling effect.
▶ 0:43:24Mr. Xethalis: Entrepreneurs face the risk of building and established institutions like banks, corporations, and exchanges sitting on the sideline afraid to touch new important technologies. As a venture investor, I want to be very clear. The industry and our founders are not asking for a free for all. To the contrary, we are asking for regulation that is fair, functional, and intelligible.
▶ 0:43:53Mr. Xethalis: Today's environment imposes a tax on innovators, compliance costs that skill not with the complexity of the big product, but the ambiguity of the law itself. And while we debate clarity here at home, other countries are moving forward. The european union passed, the uae, singapore, switzerland, and hong kong are establishing but spoke licensing regimes.
▶ 0:44:22Mr. Xethalis: According to the 2024 electric capital developers report, the U.S. share of global block chain developers dropped from 42% in 2018 to just 24% last year. That is a striking decline in a sector where developers are the leader -- leading indicators of future company formation and capital investment. At the same time, we also need to preserve the mechanisms that enable permission this innovation. Self custody and decentralized finance are not edge use cases.
▶ 0:44:55Mr. Xethalis: They are however a new token and protocol begins. Centralized intermediaries only support assets after there is proven demand measured by usage, liquidity, and community support. Without defiance of custody, we lose the sandbox to allow innovation to flourish. Without preserving legal space for these tools, we push early-stage projects entirely outside the reach of U.S.
▶ 0:45:23Mr. Xethalis: Regulatory oversight and our country's commercial norms. We also need a principles-based approach. Regulation should define the outcomes we want my name transparency but that should not mandate that today's business models are the forever business models. This market evolves quickly. In the last five years we've seen radical improvements how protocols launch, govern themselves, and deliver value.
▶ 0:45:52Mr. Xethalis: We need legislation to accommodate the future, not lock us in the past. Let me emphasize clarity is not the enemy of regulation or innovation. It is the foundation. Clear rules and power responsible builders, allow users and investors to make important choices. More targeted, effective, and just. The U.S. has led the global financial markets not by closing doors to innovation, but I setting the rules of the road.
▶ 0:46:23Mr. Xethalis: This is a defining moment for this committee to do the same for digital assets. Thank you for your leadership. I look forward to your questions. >> we are pleased you are here. I want to reiterate the same to ryan vangrack, you are recognized for your opening remarks. >> thank you, good afternoon. Thank you for the opportunity to appear before you today.
▶ 0:46:56Mr. Xethalis: I'm the vice president of legal at coin base. The largest digital asset exchange in the country. It is an honor to speak about the growing and urgent need for regulatory clarity in the digital asset industry. Today, more than 52 million americans, one in five adults, own digital assets, including stable coins and digital commodities like bitcoin.
▶ 0:47:25Mr. Xethalis: Globally, these markets exceed $3 trillion in value. But congress now stands at a crossroads. It can pass comprehensive market structure legislation as soon as possible, or it can risk losing the momentum forged through months of bipartisan collaboration. Bypassing the g.e.n.I.U.S. act, the senate has shown it is up to the task.
▶ 0:47:53Mr. Xethalis: And while we applaud him -- and strongly support that bill, stable coins are only one piece of the puzzle. Congress cannot leave market structure legislation behind. As detailed in my written testimony, we are at a generational inflection point. We have the opportunity to deliver a clear, uniform, and simple legal framework for digital assets.
▶ 0:48:22Mr. Xethalis: And if we get this right, we don't just regulate these markets, we will have unlocked their full potential to drive innovation, inclusion, and economic growth. Allow me to flag a few key points. First, american leadership in digital assets is at stake. To position the U.S.
▶ 0:48:43Mr. Xethalis: As the epicenter of crypto innovation and capture the full promise of digital assets, we must unite and deliver the durable, legal certainty that only legislation can provide. Without that, regulatory gaps give at actors room to exploit the system, putting customers at risk and eroding public trust.
▶ 0:49:11Mr. Xethalis: Meanwhile, responsible innovators are left navigating the legal uncertainty which drives talent and capital abroad's and undermines U.S. leadership and financial markets. We can and must do better. The risk of inaction doors the risk of taking action. Second, this is not just about fostering innovation, it is about protecting customers.
▶ 0:49:40Mr. Xethalis: Block chain technology is already transforming lives. Enabling faster, cheaper cross-border payments, strengthening identity verifications, and driving the democratization and modernization of global finance. Today, americans face a fragmented regulatory landscape. A patchwork of overlapping and often conflicting assertions of state and federal authority.
▶ 0:50:07Mr. Xethalis: The result, customers lack consistent comprehensive protections. No other financial market of this scale is plagued by such uncertainty. Americans deserve clear, uniform, and simple federal safeguards no matter where they live. The good news, senator, congress has read, consensus, and authority to act now.
▶ 0:50:35Mr. Xethalis: We are not starting from scratch. Both chambers have made critical progress and put to legislation with strong bipartisan support. There is growing alignment on key principles including the cftc should oversee spot markets, not all transactions involving digital assets are securities, and token issuers need clear workable paths to complaints. Legislation is not just possible, it is within reach.
▶ 0:51:05Mr. Xethalis: In closing, are not mutually exclusive. Clear comprehensive rules can both promote american innovation and protect american consumers while ensuring america shapes the future of global finance. The opportunity is clear and the urgency is real. Now is the moment to deliver for the american people. Thank you, I look forward to taking your questions.
▶ 0:51:37Mr. Xethalis: >> thank you. Last but certainly not least. The honorable russ benham --rostin behnam, it is great to see you again and we welcome your opening remarks. >> thank you, senator. Great to see you. Members of the digital assets subcommittee. I'm honored to testify before you on this important topic. Between 2017 and 20 25, I served first as commissioner, chair of the cftc.
▶ 0:52:06Mr. Xethalis: I observed the significant growth of digital asset market. The digital asset market endured multiple periods of dramatic volatility. Through this time I publicly stated one consistent message to congress. Under current U.S. law, there is a gap in regulation for the nonsecurity digital asset market. The regulatory gap remains today, it must be filled with targeted legislation.
▶ 0:52:34Mr. Xethalis: It has facilitated countless scandals and activity, some very small in criminal form, others massive in scale and profile. Based on my current observations , I don't believe public interest for digital assets will wane.
▶ 0:52:53Mr. Xethalis: Inaction will only result in greater risks to our financial markets and those investors that participate in them through a lack of market transparency, fraud, market manipulation, corruption, and conflict of interest. One common refrain -- refrain in connection with pasley saving efforts suggests the U.S. regulatory framework will legitimize the digital asset market.
▶ 0:53:22Mr. Xethalis: Leaving opportunities for bad actors and industry players to capitalize on regulatory loopholes in unwitting retail investors. I believe this argument is the loophole. It only left the vast majority of the asset market unregulated and investors vulnerable to fraud and manipulation. I believe it is critical to anchor digital asset market structure legislation in the following. First, durable legal precedent to define tokens for commodities.
▶ 0:53:53Mr. Xethalis: Second, current securities in market structure as the model for digital asset market structure. Market structure and traditional finance has evolved over many decades. I urge the committee to examine how current unregulated digital asset market structure differs from market structure. And consider whether there might be opportunities for change and were existing market requirements should be preserved.
▶ 0:54:24Mr. Xethalis: The cftc and sec have a long-standing partnership that facilitates strong, robust regulation of securities and commodities derivatives markets. In a situation where a regulated entity has security and nonsecurity tokens, separate and occlusive jurisdiction for the cftc and sec is critical to a healthy regulated ecosystem.
▶ 0:54:54Mr. Xethalis: It explores legislative solutions, I would like to focus on oregano tory framework where U.S. market regulators have the tools to provide customer and market protections. The cftc's rentable space oversight model has served its regulated markets well. Striking inappropriate -- an appropriate balance between clear, outcomes-based requirements and measured flex abilities to meet those outcomes.
▶ 0:55:20Mr. Xethalis: Second, appropriate funding which includes technology and human capital is necessary to meet the mandate of any regulatory program. A reliable self-regulatory organization like and the national futures association have been critical to the success of the cftc and the sec for decades.
▶ 0:55:41Mr. Xethalis: Fourth, it is essential legislation provides comprehensive for money laundering, knowing your customer and customer identification program build off of requirements for market participants. Fifth, given the broad adoption of digital assets by a significant portion of the american population, a disclosure regime tailored to the underlying asset in a comprehensive education outreach program will enable the investing public to understand the risks and opportunities of this technology.
▶ 0:56:12Mr. Xethalis: Separately and as was mentioned by my colleague, the current divide between the U.S. and the international counterparts creates regulatory arbitrage opportunities that are exploited by bad actors. It prohibits the U.S. from contributing in a positive way to much needed multilateral coordination efforts. I encourage this committee as it asset framework to ensure state and local law enforcement remain a key partner in fraud prevention.
▶ 0:56:41Mr. Xethalis: The principles and regulatory foundations that make markets and derivatives markets the most liquid and resilient in the world provide an effective model for digital asset market structure. We need to act thoughtfully but with urgency to fill this harmful regulatory gap in order to give american investors the protections they deserve. The chair, ranking members of your committee for your focus and I look forward to answering your questions.
▶ 0:57:12Mr. Xethalis: >> thank, panel. We will have other members coming and going. I got a note from Mr. marino that he's speaking on behalf of another member on the four but will be back shortly. So I will take the liberty of having some extra time to ask you the myriad of questions I have been dying to ask. I'm going to start with fraud prevention. I will take it to both Mr. rostin behnam and miss hammer.
▶ 0:57:46Mr. Xethalis: As we in the U.S. continue to have a lack of clarity with regard to our regulatory framework, are we inviting fraudulent actors away from jurisdictions that have more regulatory clarity? Do you have a thought on that?
▶ 0:58:04Ms. Hammer: Thank you so much. Thank you for the opportunity to be here today. I appreciate that greatly. I think by not enacting a regulatory framework that the united states does leave the door open for fraudulent activity.
▶ 0:58:26Ms. Hammer: As I mentioned earlier in my testimony, I believe a regulatory framework can enhance and enable innovation and enhance and enable responsible innovation. A couple of other thoughts on that.
▶ 0:58:40Ms. Hammer: One is as I will speak to and is found in my written testimony, the other jurisdictions I have studied that enact a comprehensive digital asset framework have placed a great emphasis on fraud prevention clarity and compliance obligations, anti-money laundering requirements, and antiterrorist financing requirements.
▶ 0:59:08Ms. Hammer: And in doing so, they have made it clear and enable organizations to better comply with their regulatory frameworks. I feel that is an essential component of the regulatory framework in the U.S. the second thing is engagement. By that, I mean the united states leadership in the international community.
▶ 0:59:33Ms. Hammer: That coordination and collaboration across the globe is critical to fraud prevention, anti-crime, anti-money laundering, and antiterrorist financing. I believe strongly the united states can take a step forward by enacting a framework that clarifies obligations that makes it clear to organizations what is required and what can provide leadership and international community in this space. >> before I can get to you, Mr.
▶ 1:00:11Ms. Hammer: Behnam, I want to follow-up up with Ms. hammer. What country has the most antiterrorist language --?
▶ 1:00:16Ms. Hammer: Thank you for that question. Several other countries have antiterrorist financing language. Each country, as I noted in my written testimony, has tailored its regulatory framework to its own principles and values. Ultimately the united states will need to do the same. That is how we will provide leadership. >> is there any country that you have looked at and said that is as close as the U.S. should get to accurate language?
▶ 1:00:45Ms. Hammer: Thank you, senator. I feel there are several jurisdictions. I would say that the singaporean framework makes it very clear what compliance obligations are. It does that with a stated express purpose of anti-crime, antifraud, anti-money laundering, and antiterrorist financing while no regulatory framework is perfect, I think there is a lesson for the united states in terms of clearly
▶ 1:01:15Ms. Hammer: Setting forth what is required and strongly stating what companies must do in order to adhere to our standards and principles on that issue. >> thank you very much.
▶ 1:01:30Mr. Behnam: So much of what I want to respond echoes what Ms. hammer said. There are different components of fraud in a market landscape. There is what you just heard around anti-money laundering, your customer, anti-illicit activity, antiterrorist activity. A lot of it is at the saint -- state level, regulated by the treasury department, but we are here discussed market structure.
▶ 1:01:59Mr. Behnam: So much of what I have advocated for when I was chair of the cftc was driven by my experience and the experience of the agency itself and the sec with an enforcement program around fraud, manipulation and markets. Ultimately I think bad actors will gravitate towards areas that are unregulated, where they know they can get away with conduct that does not have a legal framework around it. As I said in my written testimony, market structure is not terribly complex when you think about it from a principles level.
▶ 1:02:30Mr. Behnam: We talk about the intermediaries from the starting point which is the customer, broker, the exchange, and I think it is important you and your colleagues think about that existing market structure as you start to develop -- develop a framework for digital assets.
▶ 1:02:47Mr. Behnam: I believe very strongly in an arena that is essentially a regulatory vacuum, a market structure bill will go very far in dis-incentivizing bad conduct and bad activity and creating a more transparent market. There certainly will continue to be fraud and manipulation, we have seen that in regulated markets. But a march more powerful set of regulators in deterrence for bad actors where they can have transparent markets.
▶ 1:03:14Mr. Behnam: And ultimately as we hear from other panelists, give opportunities to grow and a jurisdiction where they know there are clear rules of the road. >> my next question is going to be focused on Mr. xethalis and vangrack.
▶ 1:03:32Mr. Behnam: I want you to talk to us about common themes in the regulatory frameworks associated with how to determine what is the security and what is a commodity. >> thank you very much.
▶ 1:03:51Mr. Behnam: I believe generally speaking when we ask this question, first as a general principle, digital assets are not typically securities. They typically are fungible, intangible commodities. Some can be designed to be non-fungible. Generally speaking talking about these, they are fungible, intangible digital assets.
▶ 1:04:17Mr. Behnam: In most cases, those digital assets do not represent a claim against a third party or a right that can be exercised against a third party. Under those circumstances, we can look at those tokens and say these look more like a standard commodity. This is a technological innovation that can be designed in many different ways. There certainly are tokens that can be designed to have a right that might be associated with traditional security. A good example would be black rocks middle fund, which tokenizer is an instrument.
▶ 1:04:50Mr. Behnam: You can tokenizer just about any type of security that you want. The typical digital asset we are talking about is something that does not reflect a right or a claim against a third party, but instead a technological tool that can grant certain powers or access within a block chain network or distributed application.
▶ 1:05:11Mr. Behnam: When we are looking at the inherent securities characteristics of a token itself, we have to understand we have to look at the transaction around those tokens and whether or not the transaction around the token is a securities transaction. That has been the issue where we have struggled with as an industry and focused on the now infamous test.
▶ 1:05:35Mr. Behnam: >> when I used to go around with gary gensler on this issue, one of the things I know he was concerned about was using a tokenized security to try and get around some of the existing disclosure requirements for traditional securities.
▶ 1:06:02Mr. Behnam: Could you fold that into your response as well? >> thank you for the question and for the work you have done on this committee and beyond for years. The principles you and your staff and others have worked on, meaningfully advanced the conversation and the ball on this critical issue. I started from the premise that securities laws should only be applied to securities.
▶ 1:06:30Mr. Behnam: The fundamental challenge with the question you just asked is a tokenized security should potentially have securities law applied to it. That is not a loophole, that is not a problem, that is not in dispute read the problem which the sec belatedly conceded after the courts weighed in, is there is nothing inherent about a digital asset that makes it a security.
▶ 1:06:55Mr. Behnam: It is only at the digital asset as part of a transaction that has a like certain obligations and rights that you are in the purview potentially of the securities laws. I don't mean to undermine it, but it is not that complicated.
▶ 1:07:11Mr. Behnam: What has happened is the failure to define the rules and regulations has allowed uncertainty to become more pervasive, has allowed others at the federal and state level to take over what is ultimately the prerogative of this congress, establishing the clear, legislative framework. At the end of the day the issues are important but not impossible or intractable. The principles you outlined are meaningful and important step in getting this.
▶ 1:07:42Mr. Behnam: >> thank you, I feel like a kid in a candy store. I'm going to defer for a moment to the father of the g.e.n.I.U.S. act. Senator hagerty. >> thank you, thank you for holding this hearing and to of our participants, thank you for being here and good friends I see in the audience as well.
▶ 1:08:08Mr. Behnam: Also chairman, I want to thank you for your commitment providing clarity for digital assets. You've done a remarkable job in leading not only on the national level, but on the international level to bring clarity to an asset class that is critical. Those are guiding principles regulatory framework for payments able coins.
▶ 1:08:38Mr. Behnam: We think about the momentum we establish with the passage of the g.e.n.I.U.S. act, this committee and the full senate last week, I'm very encouraged we have been able to generate bipartisan cooperation to work out a framework for digital asset markets. You think about it, for too long, the lack of clear definitions, clear jurisdiction, and navigable pathways registration have forced digital asset innovation beyond our borders.
▶ 1:09:08Mr. Behnam: Jeopardizing our nation's financial leadership in putting american consumers at risk. It has also left a chilling effect on investment and regulatory vacuum that was filled by the sec "regulation by enforcement approach. That approach had an extra and a really chilling effect on the development of the marketplace. I would like to start with you. Mr. vangrack.
▶ 1:09:34Mr. Behnam: If you think about where you were under that approach of regulation by enforcement, you had to guess whether the sec would deem a project, security, clues from what other digital asset related cases you might have been informed of, and as a result, I feel like you have faced lawsuits, investigations, you did not know what was going to hit you next.
▶ 1:10:00Mr. Behnam: And your experience, what was the impact of the lack of regulatory clarity on the ability of firms to operate and innovate in the U.S.? >> thank you for that important question and your leadership. With respect to stable coins and on this issue as well. The short answer is it was devastating across the board.
▶ 1:10:25Mr. Behnam: Regulatory clarity empowers innovators, it protects customers, and it allows america to lead on these important issues. There are two important tensions. First, america could have seated jobs in innovation and leadership abroad. America should be setting the standard and instead it was following.
▶ 1:10:49Mr. Behnam: The second innovation is in the aftermath of not having clarity at the federal level and not having the robust framework, you lead with a patchwork of states trying to usurp federal authority and you end up with a consistent -- inconsistent rules, some of which directly conflict with what the federal government has said are the securities.
▶ 1:11:12Mr. Behnam: >> continuing on this format, you think about jurisdictional authority for digital assets and the lack of clarity there, how important is it when you think about making investments in america, developing products in america to have clear jurisdictional authority established? >> thank you for the question, senator.
▶ 1:11:40Mr. Behnam: I think I and our colleagues and our counterparts in venture capital and asset allocation space see this concept of an invisible tax not only on builders in this country, we have to pay again for compliance and legal costs, because we allow this industry to remain so uncertain. Also from an acid allocator perspective.
▶ 1:12:02Mr. Behnam: We saw the burden of regulatory inquiries and have to make an assessment when allocating capital in our risk assessment of the costs of a lack of clear rules of the road in the united states. As I mentioned in my written testimony, we have seen not only developers migrate from the U.S.
▶ 1:12:24Mr. Behnam: To abroad, we have also seen capital flows move from the united states to our jurisdictions. That is not effective. It hampers growth, it does wonders for law firm profits -- I'm no longer a partner at a law firm. >> one more question before my time comes to an end.
▶ 1:12:45Mr. Behnam: If you think about the factors that should be considered when you are to determine jurisdiction, whether the cftc, fcc, run through a list of backers that come to mind that we should be considering >> the first foundational principle is are we dealing with something that is a security -- and that is table stakes. As Mr. vangrack said, if it is a security, putting it on the block chain does not change that aspect read what we are looking about his the context of the transaction.
▶ 1:13:15Mr. Behnam: In most instances outside of the when we are wearing our venture-capital hat and using it to develop systems, that is a securities transaction.
▶ 1:13:29Mr. Behnam: The tokens that might be issued are the digital assets that might be issued down the road by virtue of that investment are not themselves necessarily securities and not necessarily going to trade in secondary markets as security so we must develop a clear line, clear guidelines and a clear fine tuned distinction between what is a commodity, what is a security, assign appropriate regulatory jurisdiction and we will find some areas that approach that line and have
▶ 1:14:02Mr. Behnam: Hopefully a shrinking gray zone where there is a lack of clarity and engagement with regulators, lawyers, policy folks, we will find solutions but we should be gunning for getting 95% of the market not needing to get a law firm opinion to launch a business. >> the timing will be invaluable. Thank you very much. >> the chair recognizes Mr. marino followed by senator alsobrooks.
▶ 1:14:32Sen. Moreno: Thank you for putting together the hearing. Why has this become partisan? In other words, talking about innovation, I don't think the hearings about the sears catalog going digital or blockbuster video becoming netflix, why all of a sudden has this become so partisan for some reason?
▶ 1:14:53Ms. Hammer: Thank you for that thoughtful question, senator. From my perspective this is not a partisan issue. I have been in the financial sector and legal and regulatory space for over 25 years.
▶ 1:15:10Ms. Hammer: I became interested originally in blockchain technology and digital assets because of my experience as a trader and portfolio manager and recognizing the propensity for blockchain and digital assets to bring the attributes of decentralization and transparency and immutability to our financial sector could reduce risk. That could increase financial inclusion and can increase efficiency.
▶ 1:15:40Ms. Hammer: I believe the best approach to digital asset regulation is one which recognizes our values, our american leadership and the importance of having a clear regulatory framework that promotes innovation and protects us from malfeasance. I don't see this as a bipartisan issue.
▶ 1:16:01Ms. Hammer: I see this as an issue that could support american entrepreneurs using digital assets to manage personal energy related data, to increasing the ability to make cross-border payments, and to those who are using digital assets even for things like health care, supply chain management, in my experience at the wharton school working with emerging technology I have had the privilege of
▶ 1:16:32Ms. Hammer: Working with entrepreneurs looking at many of these interesting use cases. And students, great and talented students who are excited, who are innovating and building companies in the digital asset space, and they are looking for a clear regulatory framework.
▶ 1:16:52Ms. Hammer: I think the united states is a great leader in innovation and in thinking about how the technology can benefit, but on the other counts of having a regulatory framework at all, enshrining our values in statute and in terms of our growing, our lead in the digital assets space, whereas in 2021 or 22, by usage, transaction volume, the
▶ 1:17:23Ms. Hammer: U.S. was by far the world leader.
▶ 1:17:26Sen. Moreno: Do you think we got scared? America has always been about fearlessness and bravery. When you think about sitting here, I'm not trying to be funny , in a literal swamp, if you need proof, walk outside. We have people who lived here who said we are going to go west. Imagine what it would be like 200 years ago to get to what ohio from washington dc. It is not a 40 minute flight.
▶ 1:17:53Sen. Moreno: It took bravery, leadership, to say we will not fear the unknown. It seems like what is holding us back in the big picture is genuine fear. I think the fear is grounded, and Mr. -- latino and greek names aren't combined so I will call you greg.
▶ 1:18:18Sen. Moreno: Part of this is I think you have been paralyzed -- we've been paralyzed by the fact that it isn't working for gen z and young demographics.
▶ 1:18:33Sen. Moreno: Those of us who are older, tolerate the existing financial system because it is what we have known but in 10 years when you explain to somebody that you use to take a physical piece of paper, right fancy things on there, sign it and mail it to somebody and they would open it and take the physical piece of paper, drop it off at what looks to be a retail stock, and the money got transferred at some point, it is like saying you had to go to school in the snow
▶ 1:19:04Sen. Moreno: Uphill both ways. It doesn't make sense. The financial system of today is not working. It is completely stagnant and what I hope I guess is, as we talk through this, that we can't lead through fear. If we lead through fear we will be europe. Something you said Mrs. hammer, that killed me, the eu has caught up to us.
▶ 1:19:27Sen. Moreno: When you think about bravery, boldness and fearlessness, those are not the attributes that we unfortunately attribute to western europe today. I challenge this committee that when we think about this regulation, that we understand the system is inevitably going to change. The system that exists today will not be that system, and what we have to do is chart a bold course, and I will throw some quick thoughts here.
▶ 1:19:56Sen. Moreno: We need clarity, we need fairness, we need to make certain that the standards are achievable, and we need to make certain that we understand the current system is not perfect. What we are building is a better system, not a perfect system. If building a perfect system is our standard, we will never get things done and we will lose this.
▶ 1:20:24Sen. Moreno: We want america to lead, to be at the cutting edge of this technology but we have to do it with total and complete understanding and humility, that the system cannot be perfect. I went over time but thank you madam chair and I look forward to working on this going forward. >> I love when someone who draws his roots from south america is the one who draws attention to the fact that it is american ingenuity and fearlessness that brought us here.
▶ 1:20:54Sen. Moreno: For those of us who brought our roots from europe, we are looking in the wrong direction for guidance. Ms. alsobrooks you are recognized.
▶ 1:21:06Sen. Alsobrooks: I want to thank senator lummis for hosting the hearing along with senator gallego who is out on paternity leave but has played an important role in this discussion. I have enjoyed working with them and their staffs on the g.e.n.I.U.S. act and I'm proud of our progress and I look forward to building on the partnership as we consider market structure. Thank you to the witnesses for being here. I have a couple questions for Mr. behnam and Ms. hammer.
▶ 1:21:40Sen. Alsobrooks: Thank you for your service to our country. More and more americans and and especially the next generation view the broader digital asset market as a genuine opportunity to build wealth and create jobs. I'm learning about real-world cases every day. I have to tell you, baltimore used blockchain technology to create a centralized information database that made it easier to identify vacant housing lots.
▶ 1:22:10Sen. Alsobrooks: During your careers in government and academia I know you both had unique opportunities to learn about these technologies and assess their real-world impacts. For both of you, when you consider the wide range of digital asset technologies, which do you believe can provide the most tangible benefits to americans and do any examples in particular come to mind?
▶ 1:22:36Ms. Hammer: Thank you, senator. I'm so grateful to have the opportunity to talk about the innovation and some of the use cases that I have had the privilege of working with. I lead an emerging technology accelerator at the wharton school called cypher accelerator founded as a blockchain based accelerator and is open to any emerging technology startup anywhere in the world.
▶ 1:23:05Ms. Hammer: Working with the tremendous group of students, dedicated, hard-working, brilliant and far ahead in terms of thinking and innovation, we have had the privilege of working with startups. For example, using blockchain technology to manage supply chain health care.
▶ 1:23:23Ms. Hammer: So I mentioned this earlier, but for example, with surgical devices, traditional methods of tracking surgical devices are inefficient and unreliable, a problem for compliance. Using distributed ledger technology, blockchain technology, a start up we worked with is able to create a system for tracking supply chain management in surgical devices.
▶ 1:23:53Ms. Hammer: Thereby increasing efficiency, and creating an immutable record that will better enable hospitals to do compliance reporting. That is one example. I have seen startups that use blockchain technology for managing energy data to increase efficiency, especially after the pandemic when occupancy rates and buildings changed.
▶ 1:24:15Ms. Hammer: I have seen startups looking at tokenization for real-world assets to provide access to certain assets to a broader population. There are many interesting use cases. Another one that is striking to me is the use of stable coins. We worked with a nonprofit organization that was implementing stable coins for individuals who were repatriating after the pandemic started.
▶ 1:24:44Ms. Hammer: Those individuals didn't have access to traditional financial services. By learning how to use their mobile device to use digital assets to make payments, to take care of their loved ones and even start small businesses, that use case really struck us and it was a great privilege to learn about it. Those are a few of the use cases I believe had great promise. There are many more.
▶ 1:25:12Ms. Hammer: Many more that we haven't even imagined yet, and I look forward to the opportunity to see that innovation fostered in the U.S. as we move towards a clear regulatory framework.
▶ 1:25:25Sen. Alsobrooks: Mr. behnam, from your perspective as a former regulator, what are the most essential can protection component that you believe must be put into market structure legislation?
▶ 1:25:41Mr. Behnam: Thank you for the question. I would say there are several but the number one issue in terms of customer protections, specifically as it relates to digital assets, has to be around bankruptcy protection and as we look at traditional markets and as the former chair of the safety seed knowing the customer -- the cftc and knowing the cut -- customer regulation rules, it
▶ 1:26:13Mr. Behnam: Is essential customer assets are fully segregated so if you do have a situation where there is a bank see, there is no question -- bankruptcy there is no question in the first minute it starts, the customer assets will be returned to the customer, not part of the larger intermediaries assets.
▶ 1:26:31Sen. Alsobrooks: Thank you.
▶ 1:26:34Sen. Lummis: The gentleman from pennsylvania, Mr. mccormick is next.
▶ 1:26:40Sen. Mccormick: I will ask a series of quick questions so if I could get quick responses. First, providing the rules of the room will give innovators and entrepreneurs the opportunity to invest in growing businesses. This attracts investment from around the world and cutting edge innovation. Ms. hammer, can you describe what you are seeing in the venture capital industry as it applies to digital assets?
▶ 1:27:10Ms. Hammer: Thank you, senator, for the question. Through our work within the accelerator we work closely with the venture capital industry and very insightful, successful investors who evaluate startups and have rigorous criteria. It has become more difficult for those investors to invest in digital asset businesses when there isn't regulatory clarity.
▶ 1:27:40Ms. Hammer: Investors can't know if their investment will be sound over the long-term, so I think providing that regulatory clarity is essential to promoting venture investment in america.
▶ 1:27:53Sen. Mccormick: The emerging area of tokenization and commodities, equities, deposits, could bring operational efficiencies, increase transparency and real-time data. Could you highlight the legal considerations that traditional financial institutions face in exploring blockchain technology, specifically relating to tokenization?
▶ 1:28:18Mr. Behnam: Thank you. There is significant operational risk that I don't think necessarily exists in traditional markets that would have to be thought about, not insurmountable but an issue of concern and first impression for the entities. I think as Mr.
▶ 1:28:35Mr. Behnam: Van grack said, these are important questions to think about how tokenization of real-world assets will impact existing commodity and security laws.
▶ 1:28:50Mr. Behnam: I'm not suggesting they will absolutely undermine them, for there is not a sufficient way to ensure the existing laws are preserved, but I do think there are potential ways if not done correctly, that wedon't undermie correctly, that wedon't undermir commodity laws as we see assets frequently tokenized.
▶ 1:29:11Mr. Behnam: It will provide access for users and customers and as you have suggested, better ways to move assets around different portfolios but we have to be careful how we approach it from a customer protection standpoint.
▶ 1:29:25Sen. Mccormick: As we stand up a new regulatory regime, attempting to register with the sec and cftc is a massive undertaking. How should we balance creating new pathways to register new firms with ensuring the existing sec and cftc entities are able to enter the digital asked that ecosystem with as little friction as possible?
▶ 1:29:51Mr. Van Grack: Thank you for the question. It is important because inherently the industry, and kueng based specifically -- coinbase specifically, has been seeking regulatory clarity. With clarity comes risk. Companies want to know how to comply with laws, investors want to know the laws are being complied with.
▶ 1:30:15Mr. Van Grack: Three years ago I -- we bag the -- begged to promulgate the rules and regulations but rather than getting rules and regulations we got subpoenas and a wells notice. That is backwards. I see that as a former lawyer. You have to develop rules and regulations before you enforce them. But I think is important here is, the pathways, those are not unique questions to ask.
▶ 1:30:46Mr. Van Grack: The sec and cftc under the leadership of chair behnam, have found ways to create a balance, not just independently but in areas like swaps. You have an ecosystem where both of these commissions have a role to play and the short answer is, that is the exact question to ask. It is not intractable.
▶ 1:31:11Sen. Mccormick: If you think about principles that should guide the design of such pathways, are there key principles you might suggest to the committee?
▶ 1:31:21Mr. Van Grack: The kiss method. Keep it simple. Complexity sucks the life out of innovation. The last four years has been a boondoggle for lawyers. It is hard for innovators and customers. As simple as possible should be the mantra that keeps us on the right path.
▶ 1:31:39Sen. Mccormick: Thank you.
▶ 1:31:41Sen. Lummis: We, I have at least one more question and I know to -- you do. Do you have another? Ok. We will do a second round but I will ask us to go with 1, 1, one, until these people are exhausted. Self regulatory organizations.
▶ 1:32:11Sen. Lummis: Can you explain how they work and how they benefit the organization?
▶ 1:32:15Mr. Behnam: Thank you, senator. Important questions I mentioned in my statement. They are partners of regulators and pardons of the private industry. They are often quasi--private organizations. As chair of the cftc, large but not huge, we did not have the capacity to oversee the entire commodity derivatives market.
▶ 1:32:40Mr. Behnam: We lean on, and the agency leans on the national futures association critically to handle a lot of the work, the boots on the ground for introducing broker associated persons, swap dealers, fc ends. They are a partnership with the statute under securities laws and they are extremely important from an important -- enforcement and exams and supervision perspective and understanding what the market is.
▶ 1:33:10Mr. Behnam: By proxy, that is a product of the fact that there is a limitation to what a federal agency can do. I don't think we want the federal agencies to get to big but it is a partnership where you have an acute expertise that is somewhat unique from the agency and is more integrated into the day-to-day operations of the market, and is a support. They are a partner above all else.
▶ 1:33:36Mr. Behnam: I had a fantastic experience with the national futures association, a close relationship with finra and the sec feels the same, it is critically important to have those sros around to succeed. As I said, as you think about a market structure bill, having an sro part of this effort will be critical.
▶ 1:33:58Sen. Lummis: The next question, where do we put it? We have sec and cftc jurisdiction here. But the question is now yours.
▶ 1:34:10Sen. Moreno: Please answer this as briefly as humanly possible. How much time do we have to regain leadership in america, and what is the price of failure in your mind?
▶ 1:34:28Ms. Hammer: Thank you, senator. We need to act now. I believe the U.S. is far behind our third jurisdictions in terms of enacting regulatory framework and as data shows in the written testimony, while we have had the lead in digital assets, others are rapidly catching up and perfectly poised to surpass us. We must act now.
▶ 1:34:59Sen. Moreno: What does failure look like?
▶ 1:35:02Ms. Hammer: The price of failure is that we will have criminal activity, illicit activity in digital assets, fraud. We will have a more difficult time enforcing our rules and regulations and we will have expensive, costly, time-consuming regulation enforcement.
▶ 1:35:24Mr. Xethalis: I agree that the time to act is now. There are two significant costs that come from not acting now. As Ms. hammer pointed out, other jurisdictions are acting and we saw the cost of that in global data protection, where more onerous rules coming from europe and the gdp are regime have created problems and liability concerns for internet commerce more broadly.
▶ 1:35:55Mr. Xethalis: We don't want the same thing to happen with the digital asset ecosystem. We want the rules to be created and viewed with dna of american commercial practice, legal practice and policy focus. The second cost is the economic one. Ownership of technology has been the great hallmark of america in the 20th century and the initial part of the 21st century. It was from the steam engine to the internet but we faltered in the last 10 years.
▶ 1:36:23Mr. Xethalis: We have been behind on 5g, we lost our manufacturing capabilities which migrated abroad, we don't want to do the same with the next generation of the internet that has the possibility to transform not just financial transactions, but consumer transactions and how information flows.
▶ 1:36:44Mr. Van Grack: I will not repeat some of the consequences but I will agree with my -- disagree with my fellow panelists. The time to act was yesterday. This technology was founded 16 years ago and we are nearly two decades later where the industry is asking for rules and regulations. That is not unique, that is unprecedented in our founding.
▶ 1:37:12Mr. Van Grack: In that interim, we have had investors lacking the full suite of protections, innovators, struggling to understand the rules of the road and if they aren't moving abroad, they are hiring armies of lawyers trying to understand the rules. Jason, like coinbase did, spurious lawsuits to defend themselves against rules and regulations that have never been promulgated. The consequences are devastating and I don't think we have any time to waste.
▶ 1:37:41Mr. Behnam: I will take you down the regulators point of view. I was a commissioner in the first trump administration, I wrote an op-ed in 2018 or 2019 saying we needed a change of statutes by virtue of the operations -- observations I made.
▶ 1:38:02Mr. Behnam: In the biden administration, we heard about the regulatory enforcement standpoint, too much fraud, too much manipulation out there, constituents across the country getting hurt and I think in our fiscal year 2024 enforcement program the cftc enforcement document come near 50% was crypto related which is astonishing for a market the agency doesn't regulate.
▶ 1:38:28Mr. Behnam: That gives you a sense of how much fraud is potentially going out there that the agencies are unable to identify or see because there is no traditional regulatory authority so the time to act is now.
▶ 1:38:46Sen. Moreno: I wanted that on the record. Is it possible for that transcript to get distributed to all the members of the banking committee? This is a completely bipartisan point of view. There is no dispute that we squandered the last four years in not acting and because we did that, we are behind the eight ball. This place doesn't operate in a speedy way.
▶ 1:39:11Sen. Moreno: This is in the chick-fil-a drive through, but we have a responsibility to this country because the actions we are taking now will affect future generations and future technologies. That is my last question.
▶ 1:39:23Sen. Lummis: I want to thank our witnesses. I want to explore your thoughts about ancillary assets and self-regulatory organizations, where you put them, between the cftc and the sec.
▶ 1:39:41Sen. Lummis: If you have thoughts about that, please submit them in writing or call me personally because we want to make sure that when we put a piece of legislation out, it incorporates some of the great thinking and experience of those of you who have been very boots on the ground in this area. I further want to invite you to make sure that we continue to have a bipartisan discussion.
▶ 1:40:11Sen. Lummis: I know there is a lot of competing committees this afternoon and hearings in places people need to be, but I don't want to come up with a piece of legislation that the other side of the aisle feels they haven't had adequate input in.
▶ 1:40:33Sen. Lummis: That will require me to go out of my way to pursue additional discussions directly with the other side of the aisle, but I hope you will too. You heard senator moreno 's question, why is this partisan? I'm scratching my head about that.
▶ 1:40:55Sen. Lummis: It was never that way during the four years I was working under the biden administration leadership with senator gillibrand. It was very bipartisan then. And now it seems not to be. I don't understand what has changed. At least with regard to this topic.
▶ 1:41:17Sen. Lummis: I understand what happens when you have a set of leaders that are not engaged in digital assets, and in comes an administration that has family members that are engaged in digital assets or maybe that is what this is about, maybe this is about concern that certain people that have family members in the administration are going to be advantaged in some way by what we are doing. I don't want that to be the case.
▶ 1:41:47Sen. Lummis: I want everybody to be advantaged. I don't care what your politics is. If you are american and you want to lead and innovate in this space, I don't care what your politics is. Sir? I'm going to close the portal part of the hearing right now and then we will let you ask your question.
▶ 1:42:09Sen. Lummis: Let me announce that the formal part of the hearing is over and I appreciate very much the attention and the expert testimony of our witnesses. With that, I'm going to close the hearing.