[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                THE FUTURE OF DIGITAL ASSETS: PROVIDING
                CLARITY FOR THE DIGITAL ASSET ECOSYSTEM

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 13, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-31
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                           

                              __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
53-179 PDF                  WASHINGTON : 2023                    
          
-----------------------------------------------------------------------------------    

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 13, 2023................................................     1
Appendix:
    June 13, 2023................................................    59

                               WITNESSES
                         Tuesday, June 13, 2023

Allaire, Jeremy, Co-Founder, Chairman, and CEO, Circle...........     5
Garrison, Coy, Partner, Steptoe and Johnson LLP, and former 
  Counsel to SEC Commissioner Hester M. Peirce...................     6
Kaplan, Aaron, Co-CEO and Founder, Prometheum, Inc...............    12
Sexton, Thomas W., President and CEO, National Futures 
  Association (NFA)..............................................     8
Sirer, Emin Gun, Founder and CEO, Ava Labs, Inc..................    10

                                APPENDIX

Prepared statements:
    Allaire, Jeremy..............................................    60
    Garrison, Coy................................................    65
    Kaplan, Aaron................................................    72
    Sexton, Thomas W.............................................   114
    Sirer, Emin Gun..............................................   124

              Additional Material Submitted for the Record

Davidson, Hon. Warren:
    Written responses to questions for the record submitted to 
      Aaron Kaplan...............................................   134
Waters, Hon. Maxine:
    Written responses to questions for the record submitted to 
      Jeremy Allaire.............................................   135
    Written responses to questions for the record submitted to 
      Coy Garrison...............................................   135
    Written responses to questions for the record submitted to 
      Thomas W. Sexton...........................................   136
    Written responses to questions for the record submitted to 
      Emin Gun Sirer.............................................   136

 
                     THE FUTURE OF DIGITAL ASSETS:
                       PROVIDING CLARITY FOR THE
                        DIGITAL ASSET ECOSYSTEM

                              ----------                              


                         Tuesday, June 13, 2023

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:42 p.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick McHenry 
[chairman of the committee] presiding.
    Members present: Representatives McHenry, Lucas, Posey, 
Luetkemeyer, Huizenga, Wagner, Barr, Williams of Texas, Hill, 
Emmer, Loudermilk, Mooney, Davidson, Rose, Steil, Timmons, 
Norman, Meuser, Fitzgerald, Kim, Donalds, Flood, Lawler, Nunn, 
De La Cruz, Ogles; Waters, Velazquez, Sherman, Meeks, Scott, 
Lynch, Green, Himes, Foster, Beatty, Vargas, Gonzalez, 
Pressley, Horsford, Tlaib, Torres, Garcia, Williams of Georgia, 
Nickel, and Pettersen.
    Chairman McHenry. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Today's hearing is entitled, ``The Future of Digital 
Assets: Providing Clarity for the Digital Asset Ecosystem.''
    I will now recognize myself for 4 minutes for an opening 
statement.
    Nearly 15 years since the Bitcoin White Paper, an idea has 
become the new internet architecture with ownership, digital 
identity, and value storage native to technology. Digital 
assets are no longer a new technology. They are used all over 
the world, and America has always led technology invention, and 
if not invention, implementation, and today we are at risk of 
falling behind competitors around the globe.
    This bipartisan hearing has been years in the making. Over 
the past several months, this committee has engaged in an 
unprecedented joint effort with our colleagues on the House 
Agriculture Committee. Earlier this month, Agriculture 
Committee Chairman Thompson and I, along with Subcommittee 
Chairs, French Hill and Dusty Johnson, released a discussion 
draft that would close the gaps between our securities and 
commodities laws and provide much-needed clarity for digital 
assets. We adhered to the time-tested principle of same risk/
same regulation, while modernizing our regulatory framework to 
better match this innovative technology. In fact, requirements 
set out in the draft bill are much more onerous than the 
requirements for traditional financial intermediaries.
    As I have said in all of our markups, I have an open door. 
This should be a bipartisan process, and I intend it to be, so 
please share your input. This is a draft bill. There is plenty 
of time for Members to find common ground on how we legislate 
here, but be advised that I intend for this committee to mark 
up some form of this legislation when we return from the July 
4th recess.
    Let's start with where I know we all agree: consumer 
protection. The draft bill would require trading platforms to 
comply with strict requirements regarding the segregation of 
customer assets, similar to most traditional intermediaries. We 
also address how digital asset issuers raise capital for their 
projects. The U.S. has the deepest and most-liquid capital 
markets in the world, and we intend to keep it that way. We 
want to keep that strategic advantage here in the United States 
to the best of our ability.
    We know informed disclosures are critical to helping 
investors make informed decisions. By making disclosures fit 
for purpose, the draft bill will ensure that issuers provide 
users with necessary information, including the number of 
tokens in circulation, the concentration of assets held by 
affiliates, and much, much more.
    Additionally, we enhance the SEC's ability to detect and 
punish fraudulent actors and activity. Today, traditional 
financial intermediaries are registered with a Federal 
regulator. Digital asset trading platforms should be no 
different. The draft legislation will establish requirements 
for digital asset trading platforms to ensure that Americans 
and their assets are protected. The draft bill will provide a 
workable path for trading platforms to register with the SEC 
and/or the CFTC. It will provide clarity to those assets that 
are offered as part of an investment contract and, therefore, 
security.
    And I would submit that the central part of this bill is a 
workable timeframe and a workable time period for assets, 
started as part of an investment contract, to transition to a 
digital commodity if the network is functional and 
decentralized. I think that is the central piece of this 
legislation on which our discussion should be focused.
    Let me close with this: We are at a critical moment for 
American dynamism. We can choose the side of financial freedom, 
innovation, inclusion, and American competitiveness, and 
important consumer protections at the same time, or we can let 
this moment pass us by and surrender our leadership of the 
global financial system to other countries. I hope we will 
choose the former. I yield back.
    I will now recognize the ranking member of the committee, 
who as Chair last Congress, started this long arc for 
stablecoin legislation and the discussion that we are centering 
on today on this market structure bill. With that, I recognize 
Ranking Member Waters for 4 minutes for her opening statement.
    Ms. Waters. Thank you very much, Mr. Chairman. Good 
afternoon. Last week, Republicans posted a bill that would 
rewrite our nation's security and commodities laws. Committee 
Democrats are taking a serious and thoughtful look at this 
piece of legislation. However, the bill is 160 pages long, 
highly complex and was only made public about a week ago. Any 
bill that would so dramatically overhaul our nation's capital 
markets must be worked on collaboratively with the Minority. We 
also need the analysis and views of our independent regulators, 
the Administration, and the stakeholders on the implications of 
this legislation.
    With that said, I have some initial concerns I would like 
to discuss today. For starters, I am particularly worried that 
the Republican bill would allow crypto firms that are currently 
being sued for violating our securities laws to continue doing 
business through provisional registration. We witnessed this 
last year when disgraced FTX CEO, Sam Bankman-Fried, defrauded 
millions of customers, and now the SEC has taken actions 
against firms like Binance and other firms for potentially 
similar behavior. This bill appears to halt any enforcement 
actions by the SEC against crypto firms, even when they have 
committed fraud. This provisional registration could reward bad 
actors with a get-out-of-jail-free card and allow them to 
continue harming consumers and investors.
    We also know that FTX illegally commingled customers' funds 
to make undisclosed investments and to trade against its own 
customers. The SEC has ramped up its enforcement against other 
crypto firms for the same misconduct. Broker-dealers today are 
and have been for decades prohibited from commingling customer 
assets, so I wonder why Republicans would legitimize this 
illegal practice for crypto firms and allow customer funds to 
be put at risk?
    Another point I would like to raise is that three crypto 
firms recently received approval to operate legitimately under 
our securities laws. Franklin Templeton received approval to 
offer a money market fund on the blockchain, OTC Markets 
received approval to trade crypto securities, and Prometheum, 
whose CEO is one of our witnesses today, received approval to 
custody and trade crypto assets. As SEC Chair Gensler has 
repeatedly said, the door is always open for crypto companies 
to register with the SEC. Despite the claims of some in the 
industry, our securities laws, which have worked for every 
other industry for 90 years, can also work for crypto firms.
    Turning to the stablecoin bill that was also noticed for 
this hearing, I am encouraged by the legislative progress that 
is being made. That said, while Republicans have heeded a few 
of our concerns, there are still major red flags, including the 
bill's lack of diversity and inclusion protections, weak 
consumer protections, and wholly-insufficient oversight by the 
Federal Reserve or State-chartered stablecoin issuers. So, I 
look forward to returning to the negotiating table to finish 
what we started last Congress.
    I do believe that Mr. McHenry and I had gotten a long way 
in dealing with stablecoins, and I am sorry that it got 
interrupted somehow, but I am looking forward to getting back 
and negotiating to see if we can move stablecoins forward.
    Chairman McHenry. I look forward to those continued 
conversations, and I appreciate you starting this long 
discussion on digital assets under your leadership. And my 
intention is to utilize those conversations we have had and 
come to some reasonable conclusion that we both can support, 
and I want to thank the former Chair and current Ranking Member 
for that.
    The Chair now recognizes the gentleman from Arkansas, Mr. 
Hill, who is also the Chair of our Subcommittee on Digital 
Assets, Financial Technology, and Inclusion, for 1 minute for 
an opening statement.
    Mr. Hill. I thank the chairman. Good afternoon. Thank you 
all for joining us on our panel, particularly for the 6th 
hearing that we have had in this committee on digital assets.
    For months, the Digital Assets Subcommittees of the House 
Financial Services and the House Agriculture Committees have 
been working on legislation to establish a functional 
regulatory framework with strong consumer protections. The two 
proposals noticed at the hearing are the result of that good 
work.
    Importantly, the market structure bill would prevent 
another FTX from happening by ensuring that customer assets are 
protected, by providing robust guardrails to mitigate conflicts 
of interest, and by establishing clear oversight and 
supervisory authority for Federal regulators to ensure that 
market participants like dealers, exchanges, and custodians are 
compliant with our securities and related commodity laws. Like 
then-Chair Waters said in November, after FTX, we need 
legislative action to ensure that digital asset entities cannot 
operate in the shadows, and that is exactly what we have done.
    I want to be clear: We want feedback from our Members and 
we look forward to that during the course of the hearing today. 
I yield back.
    Chairman McHenry. The Chair now recognizes the ranking 
member of our Subcommittee on Digital Assets, Financial 
Technology, and Inclusion, the gentleman from Massachusetts, 
Mr. Lynch, for 1 minute.
    Mr. Lynch. Thank you, Chairman McHenry, and Ranking Member 
Waters. I must say I continue to have grave concerns with key 
elements of both of these bills under consideration, which I 
believe will serve to fundamentally undermine our broader 
financial system. By creating a whole new regulatory carveout 
dedicated to digital assets, these bills create a loophole that 
will allow any non-bank security issuer to digitize or tokenize 
its products so it will be able to avoid compliance with 
existing investor protections and financial stability 
regulations.
    I am also deeply concerned about the new roles defined for 
the SEC and the CFTC. These bills are both targeted at greatly 
reducing the SEC's authority and would hinder its ability to 
conduct adequate enforcement. Our financial system, which is 
the envy of the world and the source of U.S. primacy in global 
finance, is in its essence built on trust and the investor 
protections afforded by the rule of law. I would urge my 
colleagues to take a critical view of these bills and consider 
how the insecurity and volatility that these changes will 
inject into our traditional financial system will endanger the 
trust and confidence in that system. Thank you, and I yield 
back.
    Chairman McHenry. The gentleman yields back. Today, we 
welcome the testimony of a great panel: Jeremy Allaire, the co-
founder, chairman, and CEO of Circle; Coy Garrison, a partner 
at Steptoe and Johnson, and a former Counsel to SEC 
Commissioner Hester Peirce; Thomas Sexton III, the president 
and CEO of the National Futures Association; Emin Gun Sirer, 
the founder and CEO of Ava Labs, Incorporated; and Aaron 
Kaplan, the founder and co-CEO of Prometheum, Incorporated.
    We thank each of you for taking the time to be here. Each 
of you will be recognized for 5 minutes to give an oral 
presentation of your testimony. And without objection, your 
written statements will be made a part of the record.
    Mr. Allaire, you are now recognized for 5 minutes.

  STATEMENT OF JEREMY ALLAIRE, CO-FOUNDER, CHAIRMAN, AND CEO, 
                             CIRCLE

    Mr. Allaire. Chairman McHenry, Ranking Member Waters, and 
members of the committee, it is an honor to be here today. I am 
Jeremy Allaire, chairman and CEO of Circle. I co-founded Circle 
10 years ago with the vision that digital currency would 
transform how value was exchanged. Five years ago, we launched 
USDC. Today, USDC has grown to become one of the largest dollar 
digital currencies in the world. USDC powers tens of thousands 
of applications and has handled over $10 trillion in 
transactions.
    The core of Circle's day-to-day mission is expanding the 
role of the dollar on the internet. The demand for safe and 
secure dollars on the internet is real and growing. Stablecoins 
and blockchain networks will likely become strategic 
infrastructure for the future of the internet. It is a profound 
moment for the dollar in the world today. Currency competition 
is real and is increasingly defined by technological 
competition. No nation understands this better than China with 
its own state-controlled digital yuan, complete with embedded 
surveillance. The steps the U.S. Government takes now will have 
a significant impact on dollar competitiveness in the decades 
that follow. Failing to take the appropriate steps could have 
devastating consequences for America. As a nation, we need to 
ensure that the dollar is the most-competitive currency on the 
internet.
    There also needs to be universal access to the safest and 
most-secure digital dollars possible. These digital dollars 
must be backed by the safest assets. The world must have the 
safety and assurance needed to exchange value without fears of 
bank runs. Access and safety are cornerstones of keeping the 
dollar competitive, but at the heart of dollar competitiveness 
must be technological superiority. That means unleashing the 
innovation made possible by software, the internet, and free 
market competition.
    We are here today to consider and discuss proposed 
stablecoin legislation. I appreciate the substantial and 
bipartisan work you have all done. Delivering a stablecoin bill 
to President Biden's desk should be a national priority. 
Already, other major nations are enacting laws to regulate the 
use of dollar stablecoins. Rather than let other countries 
define our future, the United States needs to lead the 
development of global rules that will determine how our 
currency moves around the world. The broad parameters of this 
bill are strong, providing for robust supervision, strict 
reserve requirements, redemption, custody, and reporting 
requirements that protect consumers. The bill also provides 
roles for both State and Federal regulators and supports both 
bank and non-bank issuers.
    At the same time, there are several issues on which I would 
like to comment. The first is the respective roles State and 
Federal banking regulators should play. We need to ensure an 
important and continuing role for States in the growth of well-
regulated stablecoin adoption. To start, we need nationally-
established standards that set a high bar for all issuers and 
that can be enforced by Federal regulators where appropriate.
    A second issue is related to reserves. Circle believes 
issuers should only hold reserves that are even safer than for 
banks, where fractional reserves put the safety of money used 
for payments at risk. A simple solution would be to afford 
issuers limited rights to basic Fed services, facilitating 
more-timely redemptions, and protecting consumers and financial 
stability, without needing to provide access to the discount 
window.
    Finally, are questions around custody and safekeeping. The 
harsh lessons of 2022 teach us that we need stronger 
protections around the custody of digital assets. A common-
ground solution would be to require that any stablecoin 
intermediary be required to hold them with either a State- or 
federally-chartered qualified custodian.
    Back in the late 1990s and early 2000s, we went through an 
intense hype cycle and then a dramatic crash in the development 
of the web. There were total losses, scams, and frauds. A 
combination of proactive policy and private-sector development 
led to a period that made America the uncontested technology 
leader. We are in a similar moment today, but we don't have the 
luxury of time. The tech capability gap that existed then has 
now been closed by China. The dollar is at a crossroads, and 
currency competition is now technology competition.
    I ask all of you as Members of Congress to consider this 
moment. Ask what value system we want to enshrine in law and 
how do we safely and deliberately unleash the creative forces 
of U.S.-led technology innovation?
    Thank you again for the opportunity to be here today. I 
would happy to answer any questions you may have.
    [The prepared statement of Mr. Allaire can be found on page 
60 of the appendix.]
    Chairman McHenry. Thank you. Mr. Garrison, you are now 
recognized for 5 minutes.

 STATEMENT OF COY GARRISON, PARTNER, STEPTOE AND JOHNSON LLP, 
      AND FORMER COUNSEL TO COMMISSIONER HESTER M. PEIRCE

    Mr. Garrison. Thank you, Chairman McHenry, Ranking Member 
Waters, and members of the committee, for inviting me here 
today. My name is Coy Garrison. I am a partner at Steptoe and 
Johnson where I advise participants across the digital asset 
industry on securities laws compliance. Prior to a year ago, I 
was an attorney at the SEC where I had the honor of serving as 
Counsel to Commissioner Hester Peirce. I am testifying today on 
my own behalf and not on behalf of my firm or any client of my 
firm.
    My message to you today is simple: Congress must act to 
bring sensible regulation to the digital asset industry. 
Today's discussion draft is thoughtful and measured. It would 
create a workable regulatory framework for the industry with 
much-needed investor protections. Before highlighting the 
positive aspects of the draft, I would like to discuss why 
congressional action is needed.
    First, the application of securities laws to digital assets 
is not always clear. Sweeping statements that nearly all 
digital assets are securities or are not securities ignore the 
complexity of the analysis and distract from finding a workable 
solution to the issues at hand. Congress defined, ``security,'' 
in 1933 by referencing more than 30 instruments. 
Unsurprisingly, digital assets are not included in this list. 
Generally, the question becomes whether a digital asset is sold 
pursuant to an investment contract.
    Under the Howey case, an investment contract is a contract, 
transaction, or scheme where you have an investment of money in 
a common enterprise that leads to a reasonable expectation of 
profit from the efforts of others. The application of this test 
is not always straightforward. Indeed, the SEC staff issued 
guidance on the subject in 2019, and it identified over 60 
factors to consider. Additionally, even if a digital asset is 
sold pursuant to an investment contract, the digital asset 
itself is not the security. Rather, it is the digital asset 
plus the promises of the third party that constitute the 
transaction, the contract, or the scheme that is the security.
    Further, as of today, there simply is no case law 
addressing the application of the Howey Test to a secondary 
market transaction in an investment contract. And if that is 
not enough, adding to the complexity, the SEC staff has taken 
the position that a digital asset that at one point in time may 
represent a security, may over time no longer represent the 
security if the network becomes sufficiently decentralized. 
There is no clear guidance on how this happens.
    Second, congressional action is needed because the SEC has 
refused to create a workable regulatory framework. Digital 
asset trading platforms cannot register under existing rules 
because those rules are not designed with the realities of how 
digital assets trade or operate. Existing equity market 
structure rules do not contemplate concepts made possible, such 
as instantaneous settlement, the potential for trading of 
securities and non-securities on the same platform, and the 
lack of a need for intermediaries for various functions.
    The SEC has shown little interest in considering changes to 
existing rules. The Commission is instead relying on 
enforcement actions, some of which will take years of 
litigation and appeals to result in any binding judicial 
precedent. Absent a congressional directive to the SEC to 
engage in rulemaking, the status quo will likely persist for 
the foreseeable future.
    Third, congressional action is needed because the lack of 
regulation harms investors, responsible industry participants, 
and the U.S. economy. The status quo fails to protect people 
who are trading digital assets. While there are a number of 
responsible platforms appropriately safeguarding customer 
assets and monitoring against fraud and manipulation, some 
platforms have notoriously put their customers' assets at 
dramatic risk and caused significant loss. While enforcement 
actions are important tools to hold wrongdoers accountable, 
they simply cannot replace sensible market regulation that can 
help deter, identify, and mitigate wrongdoing.
    Fortunately, the market structure draft provides a 
foundation for a responsible regulatory framework and addresses 
a number of the regulatory uncertainties I have just 
highlighted. The bill forces the SEC to turn its focus to 
producing a more-workable regulatory regime and to also 
responsibly divide responsibility of the digital asset spot 
markets between the SEC and the CFTC.
    First, the bill would create a new exemption where a 
digital asset can be sold pursuant to an investment contract to 
non-accredited investors with important investor protections in 
place. Second, the bill would require the SEC to modernize its 
secondary trading rules to permit the trading of digital 
assets. Third, the bill would also provide the first framework 
for how a network can become decentralized, and it creates a 
formal process to transfer regulatory responsibility from the 
SEC to the CFTC. Fourth, the bill gives the CFTC authority to 
regulate the spot markets and digital asset commodities in a 
responsible manner.
    In conclusion, the discussion draft would provide the 
regulatory certainty that is needed to ensure that the digital 
asset industry can innovate and grow the U.S. economy. Thank 
you for your tremendous work on this important legislation, and 
I look forward to your questions.
    [The prepared statement of Mr. Garrison can be found on 
page 65 of the appendix.]
    Chairman McHenry. Thank you, and I recommend to the panel 
that you bring the microphones closer. This is the best 
technology that we can bring to you from the 1940s.
    [laughter]
    Chairman McHenry. Mr. Sexton, you are now recognized.

  STATEMENT OF THOMAS W. SEXTON, PRESIDENT AND CEO, NATIONAL 
                   FUTURES ASSOCIATION (NFA)

    Mr. Sexton. Thank you, Chairman McHenry, Ranking Member 
Waters, and committee members for inviting the National Futures 
Association (NFA) to appear before you today. My name is Tom 
Sexton, and I am the president and CEO of NFA. We applaud this 
committee's and the House Committee on Agriculture's joint 
work. The committees' June 2nd discussion draft contains the 
critical customer protections that Congress should adopt as it 
moves forward with developing a statutory framework for spot 
digital asset commodities.
    Congress in 1974 authorized the creation of registered 
futures associations. NFA is the only one. Congress and the 
CFTC in 1982 gave us the responsibility to regulate firms 
engaging in exchange-traded derivatives. Over the years, 
Congress expanded the CFTC's jurisdiction, and we were 
entrusted with additional responsibilities over spot retail 
forex and swaps.
    NFA is solely a regulator, and we partner closely with the 
CFTC to perform our work. We currently have approximately 3,000 
global member firms that the CFTC requires to be members of 
NFA, and 42,000 individual associate members. We have 
approximately 520 employees, and our budget is approximately 
$140 million, all paid for by the industry. Our seven primary 
areas of responsibility are described in my written testimony. 
Let me highlight two.
    First, we monitor and examine our members for compliance 
with NFA's rules. One key oversight area relates to customer 
funds. Futures Commission Merchants (FCMs), by rule, must hold 
these funds in segregated accounts at qualified depositories, 
which are separate from the FCM's proprietary and operational 
funds. Each day, we receive reports directly from depositories 
holding these funds to ensure that an FCM holds sufficient 
money to cover the amount owed to customers.
    Second, we investigate possible rule violations and 
vigorously enforce our rules. Our enforcement efforts are 
coordinated closely with the CFTC and, if necessary, law 
enforcement. Over the past 10 years, nearly 25 individuals have 
gone to prison due to criminal misconduct, many involving 
retail customers initially investigated by NFA.
    My written testimony describes our strong track record in 
two areas and how we partner with the CFTC to protect retail 
customers and prosecute retail trading abuses and fraud. In 
both cases, our enforcement actions and customer-filed 
arbitrations drop precipitously due to our actions.
    Let me highlight how we tackle customer abuses in the spot 
retail forex market. Forex dealers appear to function similar 
to firms that offer digital asset commodities. They solicit 
retail customers, accept customer funds, operate an electronic 
trading platform, and may take the other side of the trade with 
customers. In 2008, Congress gave the CFTC anti-fraud and 
regulatory jurisdiction over spot retail forex transactions and 
their dealers. Congress prudently placed a fence around these 
spot forex transactions within the Commodity Exchange Act and 
created a separate registration category for forex dealers, 
whom Congress required to be members of a Regional Financing 
Arrangement (RFA.) Today, NFA and the CFTC impose extensive 
customer protection rules upon these dealers.
    Let me now turn to our involvement with spot digital asset 
commodities. Member firms engaging in spot digital asset 
commodities are already within our doors. NFA has proactively 
acted to oversee members engaged in this activity. In 2018, we 
required members to provide enhanced disclosure requirements 
and an investor advisory to customers. More recently, we filled 
a jurisdictional hole by adopting a rule that imposes anti-
fraud and supervision requirements on members engaged in this 
activity. NFA's rule currently covers Bitcoin and Ether.
    Retail customers have suffered significant monetary harm in 
schemes involving digital asset commodities and deserve 
protection. Only Congress can create a Federal registration and 
regulatory regime. Therefore, we encourage you to provide the 
CFTC with the regulatory authority to complement its current 
anti-fraud authority over spot digital asset commodities. Only 
then, can the CFTC adopt the discussion draft's critical 
customer protections, including those relating to customer 
assets, business conduct and disclosures, minimum capital 
requirements, and trade practices.
    Finally, I want to voice our strong support for the 
critical role as provided in the discussion draft that an RFA 
should play to partner with the CFTC to regulate this area. NFA 
has always been willing to take on the additional 
responsibilities entrusted to it by Congress and the CFTC, and 
we would do so again to the extent requested. Thank you, and I 
am happy to answer any questions.
    [The prepared statement of Mr. Sexton can be found on page 
114 of the appendix.]
    Chairman McHenry. Thank you. Dr. Sirer, you are now 
recognized for 5 minutes.

  STATEMENT OF EMIN GUN SIRER, FOUNDER AND CEO, AVA LABS, INC.

    Mr. Sirer. Chairman McHenry, Ranking Member Waters, and 
members of the committee, it is an honor to be here with you 
today. I thank you for the opportunity to appear before you as 
a computer scientist to discuss blockchain technology, its 
innovative uses, why it is impactful to our economy, and why it 
must thrive in the United States.
    I am the founder and CEO of Ava Labs, a blockchain software 
company headquartered in Brooklyn, with the mission to digitize 
the world's assets. We have developed some of the most-
significant recent technological innovations in blockchain, 
including the biggest breakthrough in consensus protocol since 
Bitcoin. I was previously a professor of computer science at 
Cornell University for almost 20 years. I consulted with 
various U.S. Government agencies and made fundamental 
contributions to distributed systems, operating systems, and 
networking. I am also currently a member of the CFTC's 
Technology Advisory Committee.
    We are living through a period of unprecedented 
technological progress and transformation. Computers initially 
set the strand in motion with isolated mainframes and personal 
computers that lacked network connectivity. The emergence of 
the internet marked a pivotal shift from isolated local 
computing to global-scale computing using what we call client-
server architectures. This new paradigm, which enabled us to 
connect to services operated by others, gave rise to systems 
that cater to the entire world, created millions of jobs, and 
solidified the United States' position as a global economic 
leader.
    Blockchains represent the next phase of networked computer 
systems. Whereas client service systems rely on point-to-point 
communication, blockchains facilitate many-to-many 
communication, allowing multiple computers to collaborate, 
achieve consensus, act in unison, and share services under 
adverse network conditions. This enables the development of 
unique digital assets, more-efficient financial services, 
programmable assets in computer games, and digital identity 
solutions, among many other innovative applications. My full 
written testimony contains examples of blockchain applications 
that tangibly improve people's lives.
    The implications of this breakthrough are far-reaching 
because blockchain and the digital uniqueness it creates allows 
us to redefine trust, ownership, commerce, recreation, and 
communications, ultimately transforming how we interact with 
digital systems and each other. The determination of the 
regulatory regime for blockchains must start and end with the 
functionality and features of the digital assets and not the 
technology used to create them. At Ava Labs, we call this a 
sensible token classification.
    Blockchains have the ability to build into their 
technological fabric any set of rules that are then 
automatically applied to all relevant transactions. This 
enables us to build efficient, self-enforcing networks. For 
example, the Ava Labs software allows anyone to build custom 
blockchains with creator-defined rule sets, including financial 
regulations. Other blockchains are working on their own 
equivalent solutions.
    Now, let me be clear on three key points. First, 
decentralized networks are a desirable goal for many reasons 
that have nothing to do with regulations governing use cases. 
In fact, they are more resilient, secure, auditable, and 
available than traditional systems. Blockchain builders did not 
set out to develop technology to evade loss. We set out to 
solve hard computer science problems.
    Second, tokenization also was not created to evade laws. It 
is the natural product of blockchains and an improvement over 
traditional systems, just like computer databases were an 
improvement over paper filing cabinets.
    Third, as we enter this new era, we must support this 
revolutionary technology. By doing so, we can ensure that the 
United States remains at the forefront of innovation, 
propelling the next generation of internet technologies and 
ushering in great economic growth.
    The U.S won the first wave of internet revolution precisely 
because it enabled the freedom to innovate responsibly. The 
United States must follow the same path of enabling free but 
responsible growth of blockchain technology through sensible 
regulation of blockchain applications and tokens based on 
implementation and use case. Otherwise, there are two critical 
paths of failure for any regulatory framework.
    First, the blockchain platforms themselves should not 
become regulated at the protocol layer. This would be the 
equivalent of regulating internet services and internet 
routers, which would have doomed the vibrant internet we have 
today.
    Second, the tokens and smart contracts created with 
blockchains should not be lumped into homogeneous and 
incompatible categories. This would be the equivalent of 
regulating a social media application the same way we regulate 
a consumer healthcare application. Instead, tokens and smart 
contracts must be regulated based on their function and 
features.
    Finally, it is essential to remember that just as good 
people are committed to public service, there are also good 
people committed to building technologies to improve lives. By 
working together, we can lay the groundwork for trustworthy, 
efficient, and self-enforcing systems that serve as the 
foundation for our modern economy. I thank the committee for 
the opportunity and look forward to your questions.
    [The prepared statement of Dr. Sirer can be found on page 
124 of the appendix.]
    Chairman McHenry. Thank you, Dr. Sirer. And Mr. Kaplan, you 
are recognized for 5 minutes.

STATEMENT OF AARON KAPLAN, CO-CEO AND FOUNDER, PROMETHEUM, INC.

    Mr. Kaplan. Chairman McHenry, Ranking Member Waters, and 
esteemed members of the committee, thank you for the 
opportunity to testify at today's hearing on, ``The Future of 
Digital Assets: Providing Clarity for the Digital Asset 
Ecosystem.''
    My name is Aaron Kaplan, and I am the founder and co-CEO of 
Prometheum. As an attorney, my background is in securities 
laws. Since 2013, I have dedicated my career to the application 
of distributed ledger technology to the securities industry and 
the related regulatory issues.
    Prometheum and its subsidiaries are building a public 
market and custodial infrastructure for digital asset 
securities pursuant to the Federal securities laws. Prometheum 
has developed proprietary technology in the United States, 
integrating the requirements and investor protections of 
securities regulation and the efficiencies of distributed 
ledger technology. Prometheum's subsidiaries are Securities and 
Exchange Commission registered broker-dealers and Financial 
Industry Regulatory Authority (FINRA) members. Prometheum ATS 
is an SEC-registered alternative trading system that matches 
orders for buyers and sellers of digital asset securities under 
the Federal securities laws. Prometheum Capital was recently 
approved as the first Special Purpose Broker-Dealer, meaning it 
is the first SEC-registered custodian for digital asset 
securities under the Federal securities laws.
    By operating under the SEC's established regulatory 
frameworks through registered entities overseen by the SEC and 
FINRA, Prometheum provides Americans participating in the 
crypto and Web3 space with the investor protections of the 
Federal securities laws. Through this, Prometheum is developing 
a fair and orderly market, ensuring customers' assets are 
properly segregated, secured, and custodied.
    In the vast majority of cases, crypto is a financial 
instrument offered to the public as an investment. 
Intermediaries are required to be regulated by the SEC based on 
the services they provide to the public. Properly regulating 
crypto trading, clearing, settlement, and custody under the 
securities laws provides a proven mechanism which allows and 
encourages responsible participation and innovation, while at 
the same time ensuring that investors are protected.
    There has been much discussion lately about the need for 
greater regulatory clarity for digital assets. The essential 
point at hand is not about more or less regulation or even new 
regulation, but rather, the application of the existing 
regulatory frameworks to digital assets. The Federal securities 
laws have been tried and tested for almost 90 years and have 
allowed the United States to establish the world's most-trusted 
and advanced financial markets.
    The SEC is by far the most-capable financial markets 
regulatory agency in the world. The SEC relies on FINRA, a 
self-regulatory organization whose mission is market integrity 
and investor protection, to regulate the securities markets. 
Together, the SEC and FINRA employ approximately 8,000 
employees to oversee these vital securities functions. Put 
simply, the Federal securities laws and oversight from the SEC 
and FINRA have proven to be the most-effective system to 
protect investors, operate fair and orderly markets, and 
protect customers' funds and assets.
    As early as July 2017, the SEC put the industry in the DAO 
Report, stating that digital assets and related financial 
services could (and likely did) implicate the Federal 
securities laws. Subsequently, the SEC created a marketplace 
framework with the release of the four-step process on July 8, 
2019, and the three-step process on September 25, 2020. 
Thereafter, the SEC created the framework for the clearance, 
settlement, and custody of digital asset securities through the 
Special Purpose Broker-Dealer release on December 23, 2020. 
These releases provide the framework for a compliant path 
forward for crypto in the United States.
    I want to stress that point: There is a compliant path 
forward for crypto in the United States, that the SEC has 
clearly laid out. Those who argue for new laws are simply not 
willing to comply with existing applicable securities laws and 
regulations. New legislation is not in the best interest of the 
investing public or the blockchain industry. Legislative 
efforts will take years to implement while the American public 
will continue to operate on reckless, unlawful platforms.
    In conclusion, the United States fosters innovation through 
the vibrancy of our capital markets. U.S. capital markets 
flourish under the established regulations of the Federal 
securities laws overseen by the SEC and FINRA. In order for 
innovation to continue to thrive in the digital asset space, 
the protections afforded by the Federal securities laws need to 
be in place. Proper regulation under the Federal securities 
laws is not a hindrance to innovation, but rather, a 
prerequisite that will allow innovation to flourish.
    Thank you again for the opportunity to testify at this 
hearing, and I look forward to answering any questions.
    [The prepared statement of Mr. Kaplan can be found on page 
72 of the appendix.]
    Chairman McHenry. I will now recognize myself for 5 minutes 
for questions.
    Mr. Garrison, how many foreign regulators have proposed new 
regulatory frameworks for digital assets?
    Mr. Garrison. You are looking at about half a dozen to a 
dozen.
    Chairman McHenry. Okay. Including Europe?
    Mr. Garrison. Including Europe.
    Chairman McHenry. And Europe is far more advanced than we 
are?
    Mr. Garrison. Yes.
    Chairman McHenry. Okay. We see venture capitalists now 
deploying offices--American venture capital firms going there 
to seek to invest. Are other countries implementing new 
regulations around digital assets, specifically digital assets?
    Mr. Garrison. They are. Whole cloth new regulations.
    Chairman McHenry. Okay. And do you think consumers are 
protected here in the United States by our lack of clear rules?
    Mr. Garrison. No, they are not.
    Chairman McHenry. Okay.
    Dr. Sirer, how does the threat of enforcement action stymie 
innovation and hold back developers from new projects here in 
the United States?
    Mr. Sirer. Lack of clarity around regulations involving the 
issuance of tokens holds back quite a few innovators from 
actually residing in the United States, and we are actually 
seeing people who are active in this field move wholesale out 
of our borders to other jurisdictions.
    Chairman McHenry. And that is putting pressure on you to 
develop your technology overseas, not here in the United 
States?
    Mr. Sirer. Well, I am very happy to be in the United States 
myself, but I can see the pressure on other people.
    Chairman McHenry. Okay.
    Now, Mr. Garrison, in terms of the cost structure of 
potential enforcement action by the SEC, what does that look 
like for a firm? I don't want to get into what they charge, but 
it is not cheap, right?
    Mr. Garrison. It is not. Hundreds of thousands of dollars, 
and into the millions, depending on the charges.
    Chairman McHenry. Okay. As I said, we want a purpose-built 
regime for digital assets, right? We want same risk/same 
regulation, that is the focus.
    Mr. Sexton, in the draft here, we have said that 
decentralization is the key. If a digital asset is associated 
with a decentralized and functional network, they would be 
treated as commodities. Would the CFTC and your organization be 
able to serve as primary regulators over the digital commodity 
spot market?
    Mr. Sexton. Chairman McHenry, if that is the definition as 
far as a commodity is concerned, then the CFTC and NFA would be 
able to implement that definition within and regulate that in 
the spot market, yes.
    Chairman McHenry. Okay. Over here in the Financial Services 
Committee, we have securities law protections for consumers. We 
have consumer protection. That is a key part of our 
discussions. Is there similar consumer protection in the world 
of commodities?
    Mr. Sexton. Absolutely, everything from segregation, 
capital requirements, risk disclosure. You monitor the trading 
that occurs, the exchanges do on the exchanges. Very similar 
type of customer protections are in place with regard to retail 
participants.
    Chairman McHenry. Dr. Sirer, about decentralization, what 
are the features? What is the end goal state of a functional 
decentralized network? What are the attributes of it? Give us 
some sort of, not your 401 class, maybe your 201 class from 
your college days?
    Mr. Sirer. Simply put, a decentralized network aims to 
provide a service wherein, even though some of the actors in 
the system might be what we call, ``Byzantine,'' and they might 
be acting in an adversarial fashion, the system is still able 
to maintain its safety and integrity guarantees for all of its 
users. These networks are more resilient than other computer 
network systems.
    Chairman McHenry. When we see the Securities and Exchange 
Commission ramping up their enforcement action, it's time for 
hearings. I would think there has to be some contemplation from 
our friends over there. What we are trying to build is 
consensus around changes in law, around a new object, a new 
asset, a new digital architecture.
    Mr. Garrison, if you have an innovator who wants to set up 
shop here in the United States in the world of digital assets, 
how would you advise them?
    Mr. Garrison. I tell them that the laws, the regulations 
are very uncertain, and often those conversations end with the 
entrepreneur deciding to either launch offshore or to drop the 
idea altogether.
    Chairman McHenry. Let's pivot to stablecoins. Mr. Allaire, 
where are you currently regulated? Where is Circle currently 
regulated?
    Mr. Allaire. Circle is regulated in a number of 
jurisdictions. We are regulated across the United States by 
State payments and banking supervisors. We are regulated in 
Singapore as a major payment institution. We are in 
registration with the French government, and we are also 
regulated by the Financial Conduct Authority (FCA) in the UK.
    Chairman McHenry. Do you comply with any money laundering 
rules here in the United States?
    Mr. Allaire. Yes, absolutely, comprehensive Bank Secrecy 
Act/Anti-Money Laundering (BSA/AML) programs, which we have had 
in place for a very long time.
    Chairman McHenry. Okay. Are you licensed in the State of 
New York?
    Mr. Allaire. We have a BitLicense in New York, and we are 
also licensed as a money transmitter in the State of New York.
    Chairman McHenry. Okay. Thank you all for your testimony. I 
appreciate the wide-ranging panel we have here.
    I will now recognize the ranking member, Ms. Waters, for 5 
minutes.
    Ms. Waters. Thank you so much, Mr. Chairman. I did not I 
anticipate that we would have such strong advocacy for the CFTC 
and for the SEC, so this is interesting.
    Mr. Kaplan, while Democrats are taking a serious look at 
the Republicans' market structure bill, I am deeply concerned 
that some of the most-basic investor protections are missing 
from the bill. First, any commingling of investor funds must be 
strictly prohibited. We saw with the collapse of FTX that much 
of the fraud and investor harm came from the commingling of 
customer funds, which enabled the CEO, Sam Bankman-Fried, to 
steal his customers' property. The bill also seems to permit 
trading facilities to trade against their own customers and 
engage in other activities prohibited by today's security laws. 
Do you agree that commingling of customer funds should be 
prohibited? Will your firm commingle customer assets, Mr. 
Kaplan?
    Mr. Kaplan. Our firm will not commingle customer assets 
with that of the firm. Our model does not have proprietary 
trading or market-making activities. Thus, customer assets will 
not be commingled with firm assets because, in that sense, 
there are no firm assets. And customer assets will be properly 
segregated as outlined by Securities Exchange Act Rule 15c3-3.
    Now, when it comes to the investor protections of the 
Federal securities laws, we saw the dangers with FTX, of what 
happens when they are not in place. The Federal securities laws 
would have done the most in terms of preventing an FTX-like 
situation. They ensure fair and orderly markets. They ensure 
that markets are not manipulated. They ensure that you can't 
trade against your customers' accounts necessarily. They also 
ensure proper segregation of customer funds and assets from 
that of the firm.
    These were major issues when it came to FTX, and they could 
have been prevented had there been proper regulation and 
oversight with the SEC. So, in order for the best route going 
forward, I think the best way to protect the American public is 
with the application of the Federal securities laws, which are 
built to protect investors. There is literally no need to 
recreate the wheel here.
    Ms. Waters. Thank you very much. As a Special Purpose 
Broker-Dealer (SPBD), are there activities you are prohibited 
from doing but that are permitted for crypto brokers in the 
Republican bill, and can you describe why the securities laws 
prohibit those activities and how changing the prohibition 
would affect investors?
    Mr. Kaplan. The Special Purpose Broker-Dealer is capable of 
custodying digital asset securities under the Federal 
securities laws. Pursuant to the Federal securities laws, there 
are filings and disclosures that must be submitted to the SEC, 
and these disclosures and filings include firm financials, 
possession and control reports, and it goes as far as requiring 
disclosures about firms' affiliates. Having these systems in 
place with the ongoing reporting, the proper oversight, and the 
investor protections of the Federal securities laws will ensure 
market participants are properly protected and are the best way 
to protect the American public, going forward.
    Ms. Waters. Mr. Kaplan, I also have concerns with what the 
bill refers to as, ``provisional registration.'' Specifically, 
I am concerned that this gives crypto firms that are violating 
our securities laws a get-out-of-jail-free card. This provision 
seems particularly harmful, because firms like Binance or even 
FTX, which have both been accused of fraud, could effectively 
block the SEC from continuing its investigation. Are you 
concerned by this provision of the bill? What impact do you see 
this having on investors?
    Mr. Kaplan. I am very concerned by that provision of this 
bill, as the provisional safe harbor would essentially prevent 
a system where the American public is still exposed to the 
dangers that they were previously exposed to while that safe 
harbor goes to full registration. Furthermore, when you look at 
the best way forward, the best way forward has to be to use the 
most-robust system to protect the American public, and the 
most-robust system to protect the American public is the 
Federal securities laws.
    I would like to point out that the American public was left 
holding the bag when it came to the FTX violations, or the 
alleged violations, when it comes to Binance and Coinbase. And 
essentially, the best way to protect them going forward is to 
establish the most-robust regulatory regime. The SEC and FINRA 
combined have 8,000 employees. The CFTC and the NFA combined 
have approximately 1,300 employees. The best way forward that 
is pretty clear and logical is the application of the Federal 
securities laws.
    Ms. Waters. Thank you very much. I yield back.
    Mr. Hill. [presiding]. The ranking member yields back. I 
now recognize myself for 5 minutes.
    Last week, the House Agriculture Committee heard testimony 
from CFTC Chair Behnam and former SEC General Counsel 
Berkovitz, who served under Chairman Gensler, and it was 
striking to see how both of those witnesses called for 
congressional action to address the gap in Federal regulation 
of digital assets, and this mirrored the Financial Stability 
Oversight Council's (FSOC's) report last October.
    And this morning, for those of you who are not glued to C-
SPAN here at the House, we had Treasury Secretary Yellen here 
for a very interesting morning, and she also suggested that she 
stood by that FSOC report calling for a comprehensive 
regulatory framework for digital assets. And she said, ``We 
would like to see your regulatory framework over those markets 
and their gaps and regulations. I would point out specifically 
stablecoins, and I do believe we need a comprehensive Federal 
prudential framework, and I would be pleased to work with you 
and the Congress to develop such a framework.'' In my view, the 
CFTC thinks that this is the right direction to take because 
there are gaps in the system, notwithstanding the comments from 
Mr. Kaplan, and our Treasury Secretary seems to agree as well.
    Mr. Garrison, I want to start with you, because I think the 
ranking member brought this subject up. She had a good 
interchange with Mr. Kaplan about this provisional registration 
issue. It is very important. This was also discussed in the 
House Agriculture Committee hearing last week. It is a tricky 
area to get right, and we want to make sure we draft it in the 
best way possible. This is a temporary provision, as I 
understand it, meant to bring digital asset firms into the 
remit of the SEC and the CFTC before rules of this 
comprehensive framework can be stood up, and this was similar 
to how we approached swap dealers after Dodd-Frank. Is that 
your understanding?
    Mr. Garrison. Yes.
    Mr. Hill. And we patterned this drafting based on that. The 
last time the committee worked ably with the Agriculture 
Committee was in the Dodd-Frank Act, on looking at swap rules, 
which was a tough debate. I think Mr. Lucas and Ms. Waters 
would agree with that. Why is a process like this needed, and 
how it can be structured to provide actual customer protection 
in the digital asset markets in the interim before those rules 
are ready? Is it possible that we can do that?
    Mr. Garrison. It certainly is. The provisional registration 
or provisions, I think are designed to acknowledge the reality 
that these markets exist now, that these trading platforms 
exist now, and that customers, consumers are using them. And 
until the new rules are written, there are no rules of the 
road. So by requiring them to raise their hand, to signal an 
indication of seeking full registration when the rules are 
provided by committing to certain undertakings of meeting 
certain standards----
    Mr. Hill. Those standards might include books and 
recordkeeping, customer disclosure, segregation of customer 
funds, right? No one is letting somebody off the hook for those 
responsibilities, even under provisional rules. Isn't that 
right?
    Mr. Garrison. Correct.
    Mr. Hill. Do you have any suggestions on further refining 
provisional registration that would be best for both the 
regulators and the market participants?
    Mr. Garrison. Sure. I think there is a provision exempting 
any actions relating to fraud, and it sounds like there might 
be some confusion on that point. So, I would recommend really 
drilling down and making sure that during that provisional 
period, obviously, that shouldn't cover any fraudulent acts 
that would occur during that provisional period. So to the 
extent there is uncertainty on that, It seems like a good area 
on which to focus.
    Mr. Hill. Good. Thank you. Last week, the Commission issued 
an enforcement action against Binance for failing to register 
as a national securities exchange broker-dealer or 
clearinghouse. More concerning was also the allegation that 
they were commingling customer assets with house assets and 
misrepresenting the controls to investors. This absolutely 
cannot be allowed to happen. We need clear rules of the road to 
prevent that kind of thing or another FTX. You have looked at 
our draft. Do you think that we have a good bill, with 
provisions on prohibiting commingling?
    Mr. Garrison. I think it does, both on the SEC side and the 
CFTC side.
    Mr. Hill. Would it allow conflicts of interest to persist 
if we have the new framework in place?
    Mr. Garrison. It would not.
    Mr. Hill. Mr. Garrison, Mr. Kaplan made a very good comment 
about his success in becoming a registrant of the Commission. 
Are there things you saw that took place there that we should 
change in our bill about registering broker-dealers?
    Mr. Garrison. No. I believe the Special Purpose Broker-
Dealer is limited to a certain universe of digital assets.
    Mr. Hill. My time has expired. You can answer in writing if 
you would.
    The gentleman from Georgia, Mr. Scott, is now recognized 
for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman. Mr. Kaplan, 90 years 
ago, Congress created our Federal securities laws to protect 
our investors and to establish robust regulation against 
misrepresentation and fraud in our securities market. However, 
since then, we have seen decades of legal precedent established 
that consistently yielded benefits to our consumers and our 
investors in the long run. Unfortunately, I believe that under 
this misguided digital asset market structure bill we are 
dealing with now, the fundamental approach to securities laws 
is effectively undermined, to the detriment of the American 
investor.
    I am particularly referencing sections of the bill which 
give much of the authority over digital assets, previously with 
the SEC, to the CFTC, and the bill would also exclude digital 
commodities and payments stablecoins from the definition of a, 
``security,'' under the securities laws. This is antithetical 
to current law where an asset can be both a commodity and a 
security. So by creating an entirely new regime for so-called 
digital commodities, the bill eliminates the SEC's ability to 
determine what is or is not a security.
    Mr. Kaplan, what consequences may arise from this? Make it 
plain to us. This is the heart of the matter. Could this 
potentially result in less protection for our investors than is 
currently provided?
    Mr. Kaplan. I anticipate that it would. Essentially, as you 
mentioned, the Federal securities laws are tried and tested 
over generations. There is not just case law; there is follow-
on legal precedent, and additional regulations, and basically 
continuing actions thereafter. And essentially, the concept of 
creating a new regulatory regime that would make a 
determination of whether a digital commodity will exist would 
create sort of a void in between what we have now and when that 
is fully in place. It would take maybe half a decade to a 
decade for those laws to be flushed out such that they might be 
viable. And in the meantime, we have an existing framework that 
is purpose built, meant to protect investors, meant to ensure 
there are proper disclosures, and meant to ensure that there 
are fair and orderly markets, and basically, that customer 
funds and assets are properly segregated and secured.
    Essentially, in the meantime, while all of this is sort of 
flushed out in the legal system, and basically the digital 
commodity is operating in a semi-security capacity because it 
has always arguably been a security, the investors 
participating in that space will not have proper disclosures, 
and proper protections, and also not proper oversight to ensure 
they are properly protected.
    I also want to circle back to the provisional registration. 
The provisional registration really provides a get-out-of-jail-
free card because, essentially, when an entity registers or 
provisionally registers, the SEC cannot go after their previous 
actions. So in theory, if Binance, or if FTX was still around, 
were registered, once they became provisionally registered, 
those who suffered at the hands of the malfeasance of those 
entities would not have legal recourse. How is that in the best 
interest of the American public? It is not.
    Mr. Scott. Mr. Kaplan, I agree with you 100 percent. What 
do you think we should do about this?
    Mr. Kaplan. Follow the existing Federal securities laws, 
which have been tried and tested over generations and are 
literally meant to protect the retail investing public. It is a 
clear and logical pathway forward.
    Mr. Scott. Thank you, Mr. Kaplan.
    Mr. Hill. The gentleman from Georgia yields back.
    The gentleman from Oklahoma, Mr. Lucas, is recognized for 5 
minutes.
    Mr. Lucas. Thank you, Mr. Chairman, for holding this 
hearing and for your work, and I thank the Chairman McHenry for 
his work on the digital market structure legislation. Both this 
Financial Services Committee and the House Agriculture 
Committee have had many hearings, and many roundtables in the 
lead-up to this draft, and this hearing gives us another 
opportunity to examine the underlying legislation and discuss 
why it is important for Congress to provide a clear regulatory 
framework.
    And I will begin with this: If the United States wants to 
be a leader in the future of digital assets, it is essential 
that Congress act. Other jurisdictions, such as the European 
Union and Japan, have frameworks for digital assets, and 
countries like the U.K. are crafting their own rules. At the 
same time, our regulators here in the U.S. are at odds. We have 
the Chairman of the SEC telling Congress that legislation is 
not needed, while the Chairman of the CFTC says legislation is 
needed. Congress should settle this by passing much-needed 
regulatory clarity for digital assets, not jurisdictions abroad 
like the EU, and not the SEC through a chaotic enforcement 
approach.
    Mr. Garrison, could you discuss how it makes our job 
passing meaningful legislation more difficult, the longer we 
wait?
    Mr. Garrison. The longer that it takes to get legislation 
together, the more the trading public in digital assets are put 
at risk, where there are no rules in place. The longer that 
industry participants do not have certainty, the more difficult 
it is for them to continue to operate, and the greater the risk 
that they move offshore.
    Mr. Lucas. Mr. Allaire, could you further underscore the 
missed opportunity of allowing other countries to create a 
workable digital asset environment, while here in the United 
States we allow the SEC to take the lead?
    Mr. Allaire. Thank you for the question, Congressman Lucas. 
Very specifically, we are seeing governments around the world--
the EU, the U.K., Japan, Hong Kong, Singapore, and others--
actually defining the rules for how dollars, digital dollars, 
are issued and operate in those markets, which is astounding. 
The United States is responsible for the dollar, and the United 
States does not yet have clear regulation for payment 
stablecoins and digital dollar issuance. And with respect to 
the different need for clarity, I think as recommended by 
Secretary Yellen and the entire President's Working Group, who 
have also led an effort internationally to establish stablecoin 
rules, we need to adopt stablecoin rules so that other markets 
are not actually regulating the dollar.
    Mr. Lucas. Many of the consumer protection concerns that we 
see today in the crypto market are reminiscent of the forex 
markets of the 2000s, which were rife with get-rich-quick 
schemes under an unclear regulatory framework. In 2008, 
granting the CFTC jurisdiction over retail forex transactions 
provided tangible consumer protection results.
    Mr. Sexton, drawing upon your experience and tenure at the 
NFA, how important is it for Congress to act if we truly want 
to protect consumers?
    Mr. Sexton. Mr. Lucas, thank you for the question and thank 
you for meeting with us yesterday. As a member of the 
Agriculture Committee, you worked with us on retail forex 
issues, and it is extremely important in light of the similar 
type of retail customer fraud that occurs with regard to spot 
digital asset commodities that a similar framework be built.
    We know that the CFTC has anti-fraud jurisdiction over 
these products currently. We need to complement that with 
regulatory jurisdiction, as we did in the retail forex space. 
As we have often said, it is far better to prevent fraud than 
to prosecute fraud because retail customers have been hurt 
after that has occurred.
    Mr. Lucas. Mr. Sexton, I understand you are still reviewing 
applications of the market structure discussion draft, but 
could you discuss broadly how the National Futures Association 
would amend its compliance rules to account for Congress 
creating a classification for digital commodities? What would 
the process look like?
    Mr. Sexton. The process would be very similar to what we 
have done in the past when we have taken on additional 
responsibilities in the retail forex and the swaps markets. The 
first thing that we would do is--as I said, we currently have 
an anti-fraud rule for digital asset commodities that covers 
Bitcoin and Ether. Depending upon what Congress derives as far 
the definition for those products, we would amend our rules to 
cover those products. We also would amend our rules to permit 
digital asset commodity brokers and dealers to be members of an 
NFA if we are participating in this, and then afterwards, we 
would adopt compliance rules in the areas that are identified 
in the discussion draft, working closely with the CFTC in doing 
so, from customer seg to capital disclosures, you go down the 
line, as to the elements of the discussion draft.
    Mr. Lucas. Thank you for those insights. My time is about 
to expire, Mr. Chairman.
    Mr. Hill. The gentleman yields back.
    The gentlewoman from New York, Ms. Velazquez, is recognized 
now for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Allaire, as you know, the New York Department of 
Financial Services has developed its own regulatory regime 
providing for the legal issuance of stablecoins in the State of 
New York. There has been significant conversation on this 
committee about whether the Federal Government or the States 
should be the primary regulatory authority regarding stablecoin 
issuance. What is your view? How do you view the role of the 
Federal Reserve vis-a-vis the States?
    Mr. Allaire. Thank you for the question, Congresswoman 
Velazquez. This is a critical issue which I know is central to 
ultimately getting stablecoin legislation done here in the 
United States. We believe there needs to be a strong role for 
both States and the Federal regulators. I think that the bill, 
as noticed as of this Friday, makes very significant progress 
in establishing the very strong Federal floors on the reserve 
requirements, reporting requirements, redemption disclosures, 
co-minglings, not allowing that. And then, very specifically, 
it allows the Fed and the Federal banking regulators to deal 
with the rules around capital advocacy, core risk management 
rules, safety and soundness requirements, the kind of fitness 
of management, many of the fundamental things, and that becomes 
the floor that any State regulator needs to meet. But States 
would be allowed to issue payment stablecoin licenses and to 
supervise firms under that Federal floor, and I think that is a 
good compromise for States like New York, which have really led 
the way in stablecoin regulation in the United States.
    Ms. Velazquez. Thank you for that answer.
    Mr. Kaplan, what is your view? How do you view the role of 
the Federal Government vis-a-vis the States when it comes to 
regulation of stablecoin issuance?
    Mr. Kaplan. Under the draft bill, I think there are 
potential issues when it comes to the fragmentation and the 
different regulatory regimes. Essentially, a stablecoin could 
be licensed at a State level, but what happens if that 
stablecoin is used outside the State? Isn't it used in 
interstate commerce then, and therefore shouldn't there be 
Federal oversight?
    I think the most-appropriate way to ensure that investors 
and the public are properly protected, particularly when it 
comes to stablecoins, which arguably pose the largest and most 
systemic risk, is to have proper Federal oversight that is 
uniform, that would prevent any sort of regulatory arbitrage 
where issuers would choose one State versus another because 
they are more friendly towards the approval process.
    Ms. Velazquez. Okay. Thank you for that answer.
    Mr. Allaire, and Mr. Kaplan, if you both believe Federal 
oversight is important, do you believe it is important to have 
ongoing supervisory and examination authority for the State 
license issuers at the Federal level?
    Mr. Allaire. I believe that the Fed needs to be able to 
continue to enhance rules over time. In particular, the bill 
stipulates core areas around capital adequacy, risk management, 
and safety and soundness. The importance of those is paramount, 
and Federal regulators need to be able to look at what is 
evolving in the market and evolving on the whole and be able to 
make recommendations around that.
    So, this is not a static, one-time thing. I think that 
these are going to be dynamic markets and technology changes, 
and that will require that we be able to look at those on an 
ongoing basis.
    Ms. Velazquez. Very short answer, Mr. Kaplan?
    Mr. Kaplan. I think that there is specifically, on the 
State level, potential issues when it comes to the idea that 
the State can unilaterally expand the list of eligible reserve 
assets without restriction at any time. Expanding the 
underlying assets that could basically stabilize the 
stablecoin, and to include and introduce additional risks which 
will increase the chance of that stablecoin losing its peg.
    Ms. Velazquez. Thank you. Mr. Kaplan, one of the central 
tenets of our banking system is the separation of banking and 
commercial activity. The Republican-led stablecoin legislation 
we are discussing here today seems to fail to recognize this 
separation for stablecoin issuers, which would allow non-
commercial businesses to own a stablecoin issuer. Can you 
explain the harm to both consumers and perhaps financial 
stability that could arise from failing to clearly define this 
separation?
    Mr. Kaplan. Consolidation of consumer and banking 
activities can lead to conflicts of interest and potential 
systemic risk. Essentially, the lack of a strong framework with 
proper regulatory oversight for the entities involved, 
particularly when they are comingling consumer- and financial-
based activities, presents additional levels of conflict and 
potential exposure to the underlying customers either on the 
consumer side or----
    Mr. Hill. Thank you. The gentlewoman's time has expired.
    Ms. Velazquez. Thank you. I yield back.
    Mr. Hill. Thank you.
    The gentleman from Florida, Mr. Posey, is now recognized 
for 5 minutes.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Allaire, you began your testimony today talking about 
China's currency. Do you see any comparison between that and 
the central bank digital currency that the President has 
proposed in his Executive Order?
    Mr. Allaire. I'm sorry. I could not hear the last part of 
your question because the door opened.
    Mr. Posey. I said, do you see any similarity between the 
Chinese program and the central bank digital currency that 
President Biden included in his Executive Order?
    Mr. Allaire. Thank you for the question, Congressman Posey. 
I think what the Chinese government has pushed forward with is 
an entirely state-run and state-administered digital currency 
program. It has with it significant embedded surveillance 
capabilities, and it is clearly something that the Chinese 
government seeks to export around the world as part of its 
desire to grow the role of the yuan internationally.
    I believe your reference to the Executive Order from 
President Biden was around studying a central bank digital 
currency in the United States. Our view is that a similarly-
designed retail government-run and government-administered 
central bank digital currency is not needed in the United 
States. But we do believe that there are critical improvements 
to be made in the core infrastructure of the dollar itself, 
within the Federal Reserve System, what people sometimes refer 
to as wholesale infrastructure for this, and clearly, central 
banks around the world are all exploring that.
    But I think this separation between those institutions that 
are delivering financial services directly to end customers and 
the government is a kind of air gap that is important to 
preserve for privacy, security, and market competition reasons.
    Mr. Posey. You can understand the concern of some people 
that if private digital is competing with government digital, 
guess who is going to win? It is never going to be a level 
playing field, and more levels of regulation is not going to 
help. We know that for 10 years, the SEC was informed about the 
biggest fraud in history. So, more regulation is not going to 
fix the fraud that we endured.
    And there is also concern that when you have a central bank 
digital currency, like China has, the government knows every 
penny that you spend. They can slow down your flow of funding, 
they can cut it off, or they can take everything that you have. 
And I can understand the legitimate concerns that some people 
have about that.
    How should investors evaluate the liquidity risk of digital 
assets compared to banks?
    Mr. Allaire. Specifically on stablecoins, what this bill 
does is specify a very narrow base of important, high-quality 
liquid assets that must be held on a fully-reserved basis, the 
most-liquid dollar instruments in the world. And a digital 
dollar that is held to those reserve standards is dramatically 
safer than bank deposits. Bank deposits hold one-twelfth of the 
deposits, and the remainder is lent out. We see risks from 
fractional reserving. And the mixing of that lending behavior 
and payment system behavior has, let's just say, bitten 
American consumers and businesses many, many times 
historically.
    This bill, I think, helps to define and create the safest 
digital dollar in the world, which is what the American 
government should be getting behind and making that an 
important export product on the internet.
    Mr. Posey. How should the regulations for stablecoins 
compare to the capital regulations for banks and money market 
funds?
    Mr. Allaire. In the stablecoin bill, there are 
recommendations for Federal regulators to look at capital 
adequacy, to evaluate key activities around the risks of an 
issuer, and I think that is appropriate. There should be 
capital buffers to deal with it. But unlike a bank, which is 
rehypothecating and lending and fractionally reserving, these 
are very, very narrowly held, so the liquidity requirements, 
and therefore the capital buffer requirements, are likely going 
to be significantly lower. That is left to regulators to 
determine as opposed to being highly prescriptive in the bill, 
but I think it is a very important and necessary piece for this 
to ultimately go into effect.
    Mr. Posey. Thank you. Mr. Chairman, my time has expired, so 
I yield back.
    Mr. Hill. The gentleman yields back.
    The gentleman from California, Mr. Sherman, is recognized 
now for 5 minutes.
    Mr. Sherman. Thank you. This seems like the 12th hearing we 
have had on crypto this year. I am still waiting for a hearing 
on diversity, equity, and inclusion in this room this year. But 
all of these hearings seem to start with the idea that we are 
falling behind. But America is behind Peru in cocaine 
cultivation, and we are behind the Cayman Islands in nefarious 
hidden financial transactions; we do not always need to catch 
up.
    We are told that we now have a 160-page bill, and I am sure 
a lot of work has gone into that bill, but it comes down to the 
one sentence, and the one reason why Sam Bankman-Fried prowled 
the halls of this building, and that was to get the SEC out and 
put a patina of regulation in.
    Then, there is the proposed stablecoin bill that goes to 
the lowest State denominator. And what State, if they could 
have $1 billion to provide health care for their own citizens 
who might die, would not cut that deal and just provide 
whatever patina of regulation the industry wanted? And if North 
Dakota will not do it, South Dakota will.
    So, we will have achieved Sam Bankman-Fried's objectives. 
The least we could do is let him out of jail to come here and 
celebrate this legislative success.
    When billionaires tell you that they are working to hurt 
your country, you should believe them. The head of Coinbase, 
Brian Armstrong, tells us that he views crypto as a new global 
reserve currency. And we see from others that this is the way 
major figures in the crypto industry see crypto: as a way to 
undermine American sanctions.
    The role of the U.S. dollar allows us to have the, ``Know 
Your Currency,'' rules. Crypto says it is hidden money. It is 
in the name. Undermine our sanctions rules, provide a tool for 
tax evaders, but most importantly is what Mr. Brian Armstrong, 
CEO of Coinbase says, and that is to displace the dollar 
partially or completely as a reserve currency.
    We are told that we need clarity. We have clarity. The SEC 
realizes it is a security, as Mr. Kaplan does as well. The 
industry is here to: first, they are in court spending tens of 
millions of dollars to undermine that clarity; and then, they 
are in Congress spending God knows how much to undermine the 
clarity that we could have with tough regulation from the SEC, 
which is what is currently called for in our laws
    I have a question for Ava Labs. Avalanche Labs attempts to 
highlight their use of technology to focus on innovation, but 
still peddles unregistered securities to retail investors. The 
Avalanche token went from a market cap of $40 billion to $4 
billion.
    Mr. Sirer, did Ava Labs file a registration statement with 
the SEC? Has Ava Labs sold unregistered Avalanche tokens or a 
future right to Avalanche tokens in order to raise capital?
    Mr. Sirer. Congressman, we have complied with every 
regulation to the best of our abilities, and we are----
    Mr. Sherman. Did you file a registration statement or not?
    Mr. Sirer. When we did our token sale, we filed an 
appropriate----
    Mr. Sherman. Did you file a registration statement or not?
    Mr. Sirer. I do not know the correct answer to that. I am a 
technologist, so I do not know the answer to that. I don't 
believe that we did.
    Mr. Sherman. That would certainly surprise me. I mean, 
Taylor Swift turned down millions of dollars and responded to 
the community by saying that crypto is an unregistered 
security, and she would turn down millions of dollars to not be 
associated with it. Some people in this room are not willing to 
make that statement.
    Mr. Kaplan, are you able to comply with SEC regulation and 
carry on your business?
    Mr. Kaplan. Yes, sir.
    Mr. Sherman. You filed a registration statement?
    Mr. Kaplan. We filed through the licensing process.
    Mr. Sherman. Through the licensing, so, you got a license 
from the SEC?
    I would just say that we have had a lot of witnesses come 
before us, but I don't believe we have had one who came here to 
talk about how, if this works, it undermines the power of the 
American people.
    Mr. Hill. The gentleman's time has expired.
    Mr. Sherman. I yield back.
    Mr. Hill. I thank the gentleman from California.
    The gentleman from Missouri, Mr. Luetkemeyer, who is also 
the Chair of our National Security Subcommittee, is recognized 
for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I want to quote from an article in the Wall Street Journal 
last week entitled, ```Crypto communism' Has a New Meaning: 
China seeks to infiltrate the U.S. financial system, and the 
SEC and FINRA seem oblivious.'' In this article, it talks about 
Prometheum as an American company, but according to SEC filings 
it is a, ``strategic partner and joint venture with Shanghai 
Wanxiang Blockchain Inc., and its affiliate, HashKey. The 
former company is a spinoff of Wanxiang Group, which has deep 
ties with the Chinese Communist Party.''
    Wanxiang Group was founded in 1969, and the founder passed 
away recently, and an official press release commented that, 
``the comrade always listened to the party and followed the 
party.'' That group is now led by that gentleman's son, Lu 
Weiding, and the press release goes on to say that, ``he will 
carry forward the practices of the deceased founder and always 
listen to the party and follow the party.'' I can tell you from 
being on the House Select Committee on the Chinese Communist 
Party, that that is a chilling statement, when we have an 
American company that is in bed with the Chinese.
    Mr. Kaplan, what percentage of your company is owned by a 
Chinese entity?
    Mr. Kaplan. I think, approximately 20 percent.
    Mr. Luetkemeyer. Twenty percent of it. How much influence 
do they have over your company?
    Mr. Kaplan. They have the same rights as other 
shareholders.
    Mr. Luetkemeyer. How much access do they have to 
intellectual property?
    Mr. Kaplan. Wanxiang has no access to any Prometheum code 
or technology or systems service or customer data.
    Mr. Luetkemeyer. If they are on the board of directors and 
have access to all of your data, from the standpoint of being 
an investor, how do you answer that question like that?
    Mr. Kaplan. The bylaws were changed in the filing that was 
filed with the SEC in November 2021, and they basically limit 
who has access to data, including directors.
    Mr. Luetkemeyer. Okay. Where is the data stored right now?
    Mr. Kaplan. In the United States.
    Mr. Luetkemeyer. So, your headquarters is here, and your 
data is stored here. It is not stored anywhere in China?
    Mr. Kaplan. Not at all, sir.
    Mr. Luetkemeyer. Okay. You have a designation as a digital 
asset security broker-dealer, and as such, you have a lot of 
personally identifiable information on your clients, do you 
not?
    Mr. Kaplan. Correct.
    Mr. Luetkemeyer. Okay. Do the Chinese have access to any of 
that information or any other technology at this point?
    Mr. Kaplan. Absolutely not, sir. I want to point out that 
Prometheum is an American-born, American-bred, and American-
controlled company, and there is basically no foreign influence 
or control over Prometheum or any of its systems, its code, its 
servers, or its customers' data.
    Mr. Luetkemeyer. I am glad you could read that, but that 
does not impress me because I sit on the Committee, and I can 
tell you any company that is either owned by or involved with 
the Chinese Communist Party and/or government is influenced by 
them. That is the only way they operate.
    What safeguards do you have in place to make sure they do 
not get access to anything in your company?
    Mr. Kaplan. Sir, we have had both a Committee on Foreign 
Investment in the United States (CFIUS) inquiry and an SEC 
investigation where we were required to give all 
communications----
    Mr. Luetkemeyer. To what benefit do the Chinese then 
involve themselves in your company? If they cannot access 
information, if they cannot access your technology, what is the 
benefit to them of investing in your company?
    Mr. Kaplan. The belief in the business idea that digital 
assets are securities and need to be properly regulated as such 
and traded on intermediaries that are properly registered under 
the securities laws.
    Mr. Luetkemeyer. Do you think that perhaps they are getting 
some information just by being around your business that could 
be helpful to them?
    Mr. Kaplan. I do not believe so, sir.
    Mr. Luetkemeyer. Why did you take them on as a partner? Why 
can you not have an American partner instead of a Chinese 
partner? What is the benefit of having a Chinese partner in 
this business?
    Mr. Kaplan. As anyone who has started a startup knows, when 
you are young and small as an entity and a large, established 
entity seeks to have a relationship with you, you look for the 
opportunity. If there had been an American opportunity, we 
probably would have taken it.
    Mr. Luetkemeyer. That is troubling because, you see, this 
is exactly how the Chinese work their way into our various 
companies in this country. They see an opening, because there 
is a need there for the company to grow, for money, for 
expertise, for technology, and they are standing there with 
their hands out being willing to add that to the portfolio or 
give to whatever you want to do here. And as a result, then 
they have their hands on you. It is very disturbing to see that 
is what is going on here.
    I am just worried that this is a situation where we have 
the SEC giving you one of the first digital asset security 
broker-dealer's licenses, and where is the SEC on this, I 
wonder?
    But anyway, I see my time is getting short, so with that, 
Mr. Chairman, I will yield back.
    Mr. Hill. The gentleman yields back.
    The gentleman from New York, Mr. Meeks, who is also the 
ranking member of the House Foreign Affairs Committee, is 
recognized for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman. I think most of you 
know I am from New York, and I think you are all aware that the 
New York Department of Financial Services (DFS) has created 
what I believe is a best-in-class licensing regime for virtual 
currency businesses, and I am very, very proud of that. The New 
York DFS is the only prudential regulator with virtual asset-
specific authority in these United States of America. Under the 
leadership of Superintendent Adrienne Harris, DFS ensures that 
consumers and markets are protected, and New York continues to 
be the financial center of the entire world. They have 
assembled the largest team of expert virtual currency 
regulators in the nation and have taken the strongest 
supervisory and enforcement actions of any regulator.
    Mr. Allaire, whom would you consider to be Circle's primary 
regulator?
    Mr. Allaire. Thank you for the question, Congressman Meeks. 
We are regulated similarly to virtually every other major 
electronic payment innovator in the United States. We are 
regulated by many different State regulators throughout the 
U.S., similar to PayPal, Apple Pay, Venmo, Cash App, and 
others. So, we are an electronic stored value money 
transmission application, which requires us to be licensed in a 
filing with the Treasury Department, with Bank Secrecy Act 
(BSA) and mail requirements with the U.S. Treasury, as well as 
licensing and supervision throughout the United States. We also 
have international supervisors that are central banks and 
market supervisors.
    We are also a BitLicense company. In fact, we were the very 
first company in the world to receive the New York BitLicense. 
In 2015, we contributed to the development of that licensing 
regime. And we follow New York's reserve and disclosure 
requirements for stablecoins, which we would agree are some of 
the best available to the market today.
    Mr. Meeks. I just want to make sure that I am clear--does 
Circle currently possess any type of virtual currency license 
in the domestic jurisdictions?
    Mr. Allaire. Yes. We have a BitLicense, the New York 
virtual currency license which they pioneered in 2015. Other 
States also have specific enhancements to their money 
transmission statutes that deal with virtual assets and 
interactions between the banking system and virtual assets. A 
number of large States do that already today. We are also 
supervised by international banking regulators such as the 
Monetary Authority of Singapore, the UK Financial Conduct 
Authority (FCA), and others.
    Mr. Meeks. So, you acknowledge that States like New York 
have been leaders in this space, and you agree that they have a 
vital role to play. Is that correct?
    Mr. Allaire. I absolutely agree.
    Mr. Meeks. Can you speak to why the existence of a State 
pathway is not a race to the bottom?
    Mr. Allaire. I believe payment stablecoins, as identified 
by the Presidential Working Group and by the G20 as well, have 
the potential to be very large scale, much larger scale in use 
than many other payment technologies. And for that reason, it 
has been recommended by the U.S. Treasury, the White House, and 
others that there be national standards set for payment 
stablecoins. And I think that is exactly what, on a bipartisan 
basis, we are seeing happen here in Congress.
    And what is really key there is that there is a federally-
defined floor, that we do have the ability for Federal 
regulators to define what that floor is so that there cannot be 
a race to the bottom. I believe the best States should be able 
to issue licenses and supervise firms according to this Federal 
floor. And I think that is exactly what the legislation in 
front of us considers today.
    Mr. Meeks. Thank you. Let me jump to Mr. Garrison. Mr. 
Garrison, your assessment that the lack of clear rules of the 
road puts the United States at a competitive disadvantage 
deeply resonates with me. It is something that I have been 
talking about a lot. Like you, I hear regularly from U.S. 
companies that the lack of regulatory clarity at the Federal 
level is causing them to consider moving out of the United 
States and seek to be regulated in other jurisdictions around 
the world.
    So, I would like to give you an opportunity to expand on 
this and share some of your observations in this area, and what 
are some of the potential near-term and longer-terms impacts of 
industry participants leaving the United States?
    Mr. Garrison. The regulatory uncertainty is tremendously 
difficult for people as they want to grow businesses. And when 
they seek legal counsel and when they come to people like me, 
they are willing to spend money to comply with the law. They 
just simply need to know what the rules of the road are, so it 
becomes incredibly frustrating when there are no clear rules of 
the road, and all you know is that an enforcement action may be 
hanging over your head, but there is no actual way to comply.
    Mr. Hill. The gentleman's time has expired. I thank the 
gentleman from New York.
    The gentlewoman from Missouri, Mrs. Wagner, who is also the 
Chair of our Capital Markets Subcommittee, is now recognized 
for 5 minutes.
    Mrs. Wagner. Thank you, and I want to thank Chairman 
McHenry and our Chair of the Digital Asset Subcommittee, Mr. 
Hill, for their efforts to develop a much-needed framework that 
provides clarity to market participants, promotes innovation, 
and protects investors.
    This hearing is timely, and the legislation that we are 
discussing today is critical to ensuring the United States 
remains the leader in technological and financial innovation. 
While Congress has been working toward developing a legislative 
framework, SEC Chair Gensler continues to regulate by 
enforcement. The SEC is actively policing digital asset markets 
through enforcement without clear authority from Congress and 
without providing a clear regulatory roadmap for digital asset 
firms.
    Meanwhile, the Commodity Futures Trading Commission (CFTC) 
has brought enforcement actions as well, including with regard 
to digital assets over which the SEC claims jurisdiction.
    Mr. Allaire, although the collapse of FTX did not involve 
payment stablecoins, one of the most-egregious stories to come 
out of it was the co-mingling of customer and firm assets. 
Following your review of the draft legislation, does this draft 
fix the problems that we saw in FTX, so that we can provide 
increased protections to Main Street investors?
    Mr. Allaire. Thank you for the question, Congresswoman 
Wagner. In both the payment stablecoin bill and in the draft 
market structure bill, I do believe that those co-mingling 
issues are absolutely addressed, and I think that is a critical 
issue that you have identified, and obviously a core to whether 
you are holding funds backing a stablecoin or you are holding 
digital assets that are on behalf of investors and users.
    Mrs. Wagner. Absolutely. Last week, the SEC issued an 
enforcement action against Coinbase, alleging that they were 
operating as an unregistered broker-dealer exchange and 
clearinghouse. This action came after several requests from 
Coinbase, including a petition for rulemaking to amend the 
securities laws so that they could actually come in and 
register with the agency.
    Mr. Garrison, in your view, does this inaction on valid 
requests from the SEC, followed by harsh penalties against 
Coinbase, inhibit companies making good faith efforts to 
register, thus preventing job creation and economic growth 
within the stablecoin market, sir?
    Mr. Garrison. It certainly does. The lack of a regulatory 
framework makes operating a digital asset business in the U.S. 
very difficult, so allowing digital asset markets to operate 
within the acknowledgement of certain realities such as 
instantaneous settlement of trading of digital assets that may 
be represented by securities alongside non-securities at the 
same time are important things to acknowledge, and I think this 
bill does a good job of identifying that and telling the SEC to 
start putting a regulatory framework in place.
    Mrs. Wagner. Okay. Mr. Garrison, the proposed legislation 
requires the SEC to modernize a number of its rules to account 
for the realities of digital assets, including rules governing 
alternative trading systems and broker-dealers. Would you 
describe how these rules could be updated to accommodate 
digital assets and what impact these modernizations will have 
on the digital asset ecosystem?
    Mr. Garrison. The secondary trading rules need to be 
updated to acknowledge that not all intermediaries are 
necessary, which is one thing that digital assets make 
possible. So, those are rules that, by the way, even at the end 
of these enforcement actions, if the SEC is successful, these 
rules still have to be updated to allow for these realities of 
the technology to occur.
    So, it is something that the SEC can do now, and the good 
thing about this bill is it requires them to act now as opposed 
to waiting until after the enforcement action----
    Mrs. Wagner. My time is short, Mr. Garrison. Development in 
the blockchain space is accelerating rapidly, yet existing 
regulations make it difficult for everyday investors to 
participate in initial offerings. The new exemption in the bill 
allows participation of non-accredited investors, up to a 
certain limit. How will this access benefit retail investors?
    Mr. Garrison. Improving investor choice is an important 
part of investor protection, as well as the key characteristics 
here of----
    Mrs. Wagner. Are there protections too, sir?
    Mr. Garrison. Yes. The disclosure requirements are included 
in the bill, the individual investment limits, the aggregate 
offering limits. There are limits on secondary trading from 
insiders as well.
    Mrs. Wagner. My time has expired, but I would be interested 
in any other protections that you think should be added to the 
legislation.
    I thank the Chair, and I yield back.
    Mr. Hill. The gentlewoman yields back.
    The gentleman from Massachusetts, Mr. Lynch, who is also 
the ranking member of our Digital Assets Subcommittee, is 
recognized for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    Mr. Kaplan, I am going through the bill itself, and it is 
remarkable that the Commodity Exchange Act actually reads out 
of the law four major pieces of legislation that have been 
intrinsic to strengthening our markets--the Securities Act of 
1933, gone; the Securities Exchange Act of 1934, gone; 
Investment Company Act of 1940, gone, does not apply; the 
Investment Advisors Act of 1940, does not apply; the Sarbanes-
Oxley signoff of annual reports, gone. As a matter of fact, 
annual reports are gone.
    All of these bills were put in place right after the stock 
market crash in 1929, and because we had 9,000 banks in this 
country go out of business, fail, Congress, with the support of 
Wall Street, amazingly, at the time, came back and said, how do 
we restore the trust of investors in Wall Street, in the stock 
market, in our banks? And we came up with this menu of bills 
that tried to restore confidence, since our financial system is 
built essentially on trust. And we got trust by providing 
public information to those investors right up front, to build 
confidence in their investments.
    You have been able to follow those rules in establishing 
Prometheum. What do you think the consequences will be if new 
companies have the choice of either being regulated or, as SEC 
Chair Gary Gensler has pointed out, operating like the Wild 
West? And especially if it is a State-by-State model, where you 
can go to a State like New York, which has an established 
regime and somewhat of a regulatory framework, or you can go to 
some other State that is very loosely regulated. What do you 
think the consequences of those choices will be on the markets?
    Mr. Kaplan. The American public will be harmed. 
Essentially, what we have seen is that the Wild West crypto 
financial services ecosystem focused on revenues at the expense 
of customers' best interests. The way forward, the best way, 
really, the only way forward is the application of the Federal 
securities law to ensure that investors are protected.
    As you mentioned, sir, the major Acts when it came to the 
securities laws were passed after the 1919 crash. We learned 
our lessons then. Regretfully, we did not understand them in 
2022. But now, in hindsight, it is totally clear that the best 
way forward and the best way to protect the public is literally 
the application of the Federal securities laws.
    I want to point out that there has been discussion about a 
lack of regulatory clarity, and that is just not true. The SEC 
put the industry on notice in July 2017, in the DAO Report. The 
SEC has released compliant frameworks for the trading and 
custody of digital assets. Those who argue that there is a lack 
of regulatory clarity, need a lack of regulatory clarity 
because they cannot be compliant under the existing clarified 
regulations.
    Mr. Lynch. Mr. Kaplan, the SEC has brought 130 enforcement 
actions and has won every single one of them. After each and 
every one of those enforcement actions, there is a written 
decision as to why that individual company was found to be in 
noncompliance. Is that instructive to the next company coming 
along? Is that instructive to you as a new startup?
    Mr. Kaplan. There has been clear indication, whether it is 
on the release, the enforcement side, or the statements coming 
out of the SEC, that the Federal securities laws applied and 
that those seeking to operate compliantly in the space when it 
comes to digital asset financial services need to comply with 
them. Basically, there is no confusion here. Essentially, the 
industry has chosen to ignore the clear statements, the 
enforcement actions, and the releases by the SEC because they 
were best-served by not being regulated under the Federal 
securities laws.
    Mr. Lynch. Thank you. We have a few seconds left. What are 
the steps for registering and coming into compliance under 
existing laws? Is it onerous or is it balanced?
    Mr. Kaplan. The steps are difficult, they are a little 
complex, and they take time, but they need to, because when you 
are dealing with customer funds and assets----
    Mr. Hill. The gentleman's time has expired. I thank the 
witness. I appreciate my ranking member and his questions.
    And I will now recognize the gentleman from Kentucky, Mr. 
Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman. Let me start with Mr. 
Garrison and follow up with Mr. Kaplan's testimony. It seems 
that Mr. Kaplan is making the argument that everything except 
Bitcoin is a security. I want you to amplify your testimony in 
reference to this, what I think is Mr. Kaplan's testimony. In 
your written testimony, you talk about how the application of 
existing security laws--which Mr. Kaplan says are perfectly 
applicable in this new, innovative marketplace--to digital 
assets is not always clear. And amplify your analysis of how 
Howey does not really cover everything in the current modern 
world.
    Mr. Garrison. Yes. We always start with the statute on the 
analysis of, what is a security? The statute is quite clear in 
the list of instruments. Digital assets are not there. Then the 
question becomes, is it an investment contract? The Supreme 
Court, in the Howey case, put forth a test. It said a contract, 
transaction, or a scheme where there is an investment of money 
and a common enterprise with a reasonable expectation of profit 
from the efforts of others is the security.
    Now a digital asset, at times, can, in fact, be sold 
pursuant to an investment contract, which does not mean that 
the digital asset itself evidences the security for all of 
time. That set of promises that may have been launched as a 
project is getting off the ground and developing the network 
for the first time, and raising money to do that, that is 
selling a token pursuant to an investment contract. But over 
time, tokens operate differently. They are not equity 
securities. They are not your traditional stocks or bonds or 
notes. People purchase them for a number of different reasons, 
but one of the reasons is they want to use it on the platform 
itself, on the network itself.
    At some point in time, when the network is fully 
decentralized and fully functioning, that digital asset does 
not bear the characteristics of the security, and the 
application of securities laws would be so overly burdensome 
that it would render the use of the network moot.
    Mr. Barr. In summary, what do you make of Mr. Kaplan's 
argument that existing securities laws are all we need?
    Mr. Garrison. I disagree with the position. I think 
securities laws are a piece of the puzzle, but I think there is 
a large piece of the puzzle that is missing.
    Mr. Barr. Let me follow up with a question about custody. 
It is essentially for any market structure legislation to set 
rules for the custody of digital assets so that consumers can 
have confidence that their digital assets actually are where an 
intermediary says they are. Digital assets raise several novel 
issues when it comes to custody that must be addressed.
    Mr. Garrison, would you discuss some of the key questions 
when it comes to the application of the SEC's requirements for 
custody of digital assets?
    Mr. Garrison. With respect to custody of digital assets and 
the SEC, there are a number of different questions relating to 
the intermediaries that may hold digital assets, typically 
broker-dealers, sometimes investment advisors.
    Generally, one of the questions that comes up, and the core 
becomes, how do you demonstrate exclusive possession of a 
digital asset? The way digital assets work is you have private 
keys, and of course, the private key may be shared with others 
and may be charted and put into different groups, so a lot of 
the securities regulations or debates going on in securities 
regulation is how do you actually show exclusive control.
    Now, the industry has a number of solutions that they think 
are sufficient, and the SEC has been talking about it and 
refusing to come to a conclusion since, I want to say, about 
2018, on the subject.
    Mr. Barr. Here again, the status quo is unacceptable. It is 
stifling innovation. The banks tell us that not just the SEC 
but also the bank regulators are discouraging State custody of 
digital assets, and that is stifling innovation here in the 
United States. We have to fix that.
    My final question to Mr. Allaire is related to China. Can 
you touch on how the United States can build out our stablecoin 
regime to elevate the United States' leadership in this space 
without jeopardizing Americans' access to freedom, privacy, and 
apolitical private capital, and talk about that in contrast to 
what we see in China with the Chinese digital yuan, which has 
embedded surveillance features?
    Mr. Allaire. Thank you for the question, Congressman Barr.
    Mr. Barr. And could you also touch on how a regulatory 
framework for a dollar-denominated stablecoin is an effective 
alternative to a CBDC or a digital dollar that would preserve 
the dollar's dominance globally?
    Mr. Allaire. My time is very short. In short, I believe 
private sector innovation with strong regulation at the 
national level for digital dollars, which is what this bill 
provides, is the best path to compete with China right now.
    Mr. Barr. Thank you. And it is a longer answer, but I 
appreciate the answer. I yield back.
    Mr. Hill. The gentleman's time has expired.
    The gentleman from Texas, Mr. Green, is recognized for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the ranking 
member as well. And I thank the witnesses for appearing.
    I think a good many topics have been covered quite 
thoroughly, so I would like to go into another area that I am 
interested in, and that is diversity. I believe that this 
industry ought to have diversity, and I would like to ask you 
if you agree with me. If you think that this industry should be 
diversified in terms of people who are involved, at all levels, 
if you think it should be diversified at all levels would you 
kindly extend a hand into the air?
    [Show of hands.]
    Mr. Green. Okay. Let the record reflect that all of the 
witnesses believe that we should have diversity at all levels.
    Are there women who are capable, competent, and qualified 
to testify at a hearing like this one today? If you think so, 
raise your hand, please.
    [Show of hands.]
    Mr. Green. Let the record reflect that all of the witnesses 
believe that there are women who are capable, competent, and 
qualified to testify at a hearing such as this.
    If you identify yourself as a person who is not--N-O-T--not 
a male, raise your hand.
    [Pause.]
    Mr. Green. Let the record reflect that no hands have been 
raised, so I assume that all of the witnesses identify 
themselves as males.
    I must tell you, I find it quite amazing that as far as we 
have come, we still have a way to go. I do not fault you. I 
really do not. But I do fault my colleagues. Not one female 
among the persons who are on this panel, not one. I am amazed 
because they know that I am going to point it out, because I do 
this quite regularly.
    I am also amazed because this could end if the news media 
would make an issue of it, and just note that we are not 
allowing women to have the opportunity to demonstrate that they 
are capable, competent, and qualified.
    Do any of you have children? If you have children, raise 
your hand, please.
    [Show of hands.]
    Mr. Green. If you have a daughter, raise your hand, please.
    [Show of hands.]
    Mr. Green. Okay. Let's start with the gentleman at the far 
end. Sir, would you like to see a female on this panel?
    Mr. Allaire. Absolutely.
    Mr. Green. Do you think your daughter would benefit from 
having a female on this panel?
    Mr. Allaire. I do.
    Mr. Green. When you came in and noticed that you had all 
what facially appear to be men, did it give you any degree of 
consternation?
    Mr. Allaire. I would like to see more diversity in all of 
these panels.
    Mr. Green. So would I. We have come so far, yet we have so 
far to go, it seems.
    Mr. Kaplan, do you have any women in your business?
    Mr. Kaplan. Yes, sir.
    Mr. Green. Are women as smart as men?
    Mr. Kaplan. Arguably smarter.
    Mr. Green. I agree.
    What about you, Mr. Sexton? Any women in your business?
    Mr. Sexton. Absolutely, sir. NFA is 40 percent women, 60 
percent men. I have two women behind me who are fully capable 
of testifying at this hearing, who helped prepare me for this 
hearing. I also have a daughter who would, I am sure, 
thoroughly enjoy testifying before you.
    Mr. Green. Thank you. Just to validate what you said about 
two women behind you, would you feel it an imposition to just 
have them raise their hands? Would that be an imposition?
    Mr. Sexton. I am certainly sure that they could raise their 
hands, sir. Thank you.
    Mr. Green. All right. Ladies, women, if you would, raise 
your hands.
    [Show of hands.]
    Mr. Hill. I'm sorry. The gentleman's time has expired.
    Mr. Green. Okay. My time always expires, but I will be 
back.
    Mr. Hill. Not always. The 5 minutes goes by fast.
    The gentleman from Minnesota, Mr. Emmer, who is also the 
Majority Whip of the House, is recognized for 5 minutes.
    Mr. Emmer. Thank you, Mr. Chairman. I want to thank 
Chairman McHenry for holding this important hearing today, and 
I want to thank all of the witnesses for your testimony.
    We are convening to discuss a remarkable piece of draft 
legislation on digital asset market structure. It is a product 
of joint committee collaboration, which, here in Congress, does 
not happen often, and it is drafted thoughtfully and 
intelligently. I want to commend Chairman McHenry, Chairman 
Thompson of the Agriculture Committee, and both of their teams 
for all of their hard work.
    Crypto will thrive with or without the United States. What 
we seek to do today in discussing this draft is to establish if 
the next iteration of the internet is going to be designed by 
Americans, and for Americans, or if it is going to emulate the 
values of some other country. It must be the former, not the 
latter.
    American digital asset innovators and entrepreneurs 
desperately need regulatory clarity, regulatory certainty, 
regulatory confidence, and regulatory competitiveness, the four 
C's. Instead, as a product of Congress ceding its power to the 
administrative state since the mid-1990s, this Administration 
has been able to abuse its regulatory powers toward the digital 
asset ecosystem to the detriment of the American people.
    We have an SEC Chair who flip-flips before Congress, 
telling us last year that he needs legislation to regulate the 
digital asset industry, and telling us this year that he has 
changed his mind. He actually does have the authority, in his 
own mind, the statutory authority to regulate this space. I 
would disagree. But obviously this sends mixed signals.
    The SEC and the CFTC, the two primary regulators, are 
constantly at odds on whether digital assets are commodities or 
securities. This sends, again, mixed signals to stakeholders. 
This Administration weaponized the recent bank crisis to de-
bank the digital asset community, deploying an Operation Choke 
Point-style assault on this legal industry.
    We have enforcement actions almost every week alleging that 
different tokens are securities or different actions fall under 
SEC jurisdiction. Yet, the SEC has failed to produce a single 
rule or regulation to help the unique digital asset industry 
come into compliance, a failure of the administrative state.
    Congress needs to step into the driver's seat and pass a 
bill that provides regulatory clarity, certainty, confidence, 
and competitiveness. I believe the McHenry-Thompson bill could 
get us there. It would set up a dual registration framework 
that would allow projects to crowdfund and give tokens a 
mechanism to move from issuance to decentralization.
    However, the way it is currently drafted conflicts 
philosophically with how I consider this asset class. 
Fundamentally, I do not believe digital assets themselves are 
ever securities. Instead, I believe digital assets can be 
obtained through a securities contract. The distinction between 
an investment contract and the asset of the investment contract 
underpins my 8 years of legislative work in this space, and it 
is a basis of my bill, the Securities Clarity Act, which I was 
fortunate to have Mr. Thompson on as a co-sponsor last 
Congress.
    Primarily, while I know this is not the author's intention, 
my concern is that the McHenry-Thompson bill, as drafted, 
currently sets up a framework where one fungible digital asset 
can be both a security and a commodity at the same time. On its 
face, that is not possible. For one thing to have two distinct 
classifications, that is not possible. That is because the SEC 
does not clearly distinguish the asset from the investment 
contract. In current law, securities inherently include 
commodities.
    Let's go back to Howey. The orange groves themselves were 
obviously a commodity, but they were obtained through a 
securities contract. Nonetheless, the SEC considered those 
orange groves a security rather than the asset of a security, 
but it did not consider all other orange groves a security.
    The SEC does this today with digital assets, which, if 
continued, makes it impossible for digital assets to be in 
compliance with the law and to be used for their utility. Chair 
Gensler gave a speech just last week discussing his belief that 
the asset of the investment contract is itself the investment 
contract, which is completely bogus.
    For the text to achieve what the authors wanted to achieve, 
which is to enable a framework in which a project can crowdfund 
and still create an asset that can be used for its utility, 
then the text needs to clearly assert concepts established in 
the Securities Clarity Act, that a token is separate and 
distinct from an investment contract. This will allow the bill 
to provide the necessary regulatory clarity, regulatory 
certainty, regulatory confidence, and regulatory 
competitiveness to ensure that the next iteration of the 
internet is designed by Americans, for Americans.
    Again, thanks to our witnesses for being here, and thanks 
to Chairman McHenry and Chairman Thompson for your work in this 
framework. I yield back.
    Mr. Hill. The gentleman yields back.
    The gentleman from Connecticut, Mr. Himes, who is also the 
ranking member of the House Permanent Select Committee on 
Intelligence, is recognized for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman, and thank you to our 
witnesses. I would like to thank Chairman McHenry and Ranking 
Member Waters for starting down this path. It is evident that 
we have a bunch of work in here, and that we have a bunch of 
work yet to do.
    I am going to use my time just to try to elucidate one 
issue that has come up a lot today and that is the issue of 
comingling. There is a lot that needs to be done in this bill 
but we are all pretty attuned to commingling, given the fact 
pattern around FTX. I was told that the bill permitted 
commingling.
    Mr. Garrison, you said the bill did not permit commingling. 
So, I went back to the language of the bill and what I find 
when I look at it is on page 105, ``commingling prohibited. 
Money, assets, and property of a customer described in Clause 
One shall be separately accounted for and shall not be 
commingled.''
    Then, we move down a few lines to, ``Exceptions,'' where it 
reads, ``Notwithstanding subparagraph (a), money, assets, and 
property of customers of a digital commodity exchange described 
in subparagraph (a) may for convenience, be commingled.'' 
Elsewhere in the bill there is an exactly parallel construction 
where it says that all assets shall be segregated unless they 
cannot be segregated if separately accounted for.
    It would appear that as written, the language is that there 
can be commingling provided that it is done for convenience. I 
can't find anywhere in the bill that defines for whose 
convenience or what convenience means.
    Mr. Garrison, since you made the statement earlier, and 
because of your experience, I am wondering, does that language 
give you confidence that there will not be commingling?
    Mr. Garrison. If I remember correctly, and I don't have the 
exact language of the bill in front of me, I think there was a 
specific carveout for a very limited activity. So, to the 
extent that there was a carveout for a very specific activity 
that it is very clear there is a purpose for, then I think that 
would make sense.
    Mr. Himes. I don't mean to provoke here, but I have read 
this 10 times now and it says that, ``for convenience,'' is the 
one condition that must be met for commingling to occur. That 
is pretty clear here.
    I am not a lawyer but that troubles me. You are a lawyer. 
Does it trouble you?
    Mr. Garrison. I would agree. ``For convenience,'' should be 
tightened up.
    Mr. Himes. Okay.
    Mr. Kaplan, I wonder if you have any views on this, since 
you have been seeing things slightly differently than Mr. 
Garrison?
    Mr. Kaplan. Commingling is a fundamental issue that is 
necessary to deal with and to regulate properly in order for 
crypto innovation to continue to occur in the United States. 
The best way to prevent against commingling is the application 
of the Federal securities laws, which have reporting 
mechanisms, ongoing reporting mechanisms, proper oversight, and 
a plethora of other devices to ensure that the entities that 
are holding customers' assets do not commingle them with the 
assets of the firm, particularly Rule 15c3-3, the customer 
protection rule which has been established and has essentially 
led to the capital markets on the custody side being able to 
continue to thrive and grow.
    Mr. Himes. Okay. Just to drive this point home, I think we 
have agreed that perhaps the language as written is a bit broad 
or the exceptions are a bit broad.
    Do any of our witnesses have any objections if we use the 
language associated with prohibitions on commingling and 
custody accounts and that sort of thing to prevent commingling 
inside this bill?
    Would there be an objection to that as a concept?
    [No response.]
    Mr. Himes. Okay. I hear none. Thank you very much. And I 
yield back, Mr. Chairman.
    Mr. Hill. The gentleman yields back.
    The gentleman from Georgia, Mr. Loudermilk, is recognized 
for 5 minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman.
    Mr. Garrison, in your written testimony you point out that 
SEC staff has taken a position that digital assets may or may 
not be securities, depending on the condition of their 
underlying network, but do little more to clarify the 
thresholds of which a network is decentralized enough for the 
asset to be a digital commodity.
    Given that almost every market participant has asked for 
clarity as to when digital assets are commodities or 
securities, why do you think it is important to look at the 
underlying network as opposed to the digital asset itself?
    Mr. Garrison. I believe that looking at the underlying 
network is important because it will show the regulator, and it 
will show anybody using the network, who actually is in charge.
    If the network is decentralized and everybody comes on 
equal terms and the rules are being built by a decentralized 
group, a number of people outside of just a core number of 
folks who started the program, then that should give you more 
comfort that this is a decentralized network, not something 
that is simply run by a centralized group of people.
    Mr. Loudermilk. Okay. Thank you. Do you think it is 
important that there are clear thresholds of decentralization 
that could be used to make this security vs commodity 
distinction?
    Mr. Garrison. Yes, I do.
    Mr. Loudermilk. What do you believe is a good measure of 
network decentralization to help in making that distinction?
    Mr. Garrison. I think there are a number of factors that 
you can look at, one being, does any person or group of persons 
have unilateral authority to change the code itself? I think 
that is something that jumps out. Can they block or prohibit 
people from interacting with the code on their own?
    Another is concentration of ownership of tokens. If there 
are governance rights associated with a token, and a central 
group or a central entity can always decide the outcome, then 
that would indicate centralization as well.
    Mr. Loudermilk. Okay. Thank you for that.
    Mr. Kaplan, your company recently received the first-ever 
approval as a Special Purpose Broker-Dealer (SPBD) for digital 
assets. Since then, you have publicly proclaimed that there is 
obviously a way forward for crypto in the United States. 
However, while your company was approved, most of your would-be 
competitors are still waiting for their approval.
    You have already begun discussing Prometheum as an, ``SEC-
registered platform,'' even though, respectfully, your firm 
does not command the same recognition as countless other 
platforms that are more familiar to consumers.
    It seems that you are keenly anticipating the increase in 
market share that will come with SPBD approval. Given that you 
are the only SPBD for digital assets around, do you really 
think experience can speak for market participants as a whole?
    Mr. Kaplan. I do think it can. Previously, they were 
frameworks for the compliant trading and custody of digital 
assets under the securities laws. But until someone was 
approved, you can argue that there was no pathway forward, that 
there was no clear path.
    But that argument is now moot, and essentially others, I 
believe, in the industry can follow that example of compliance 
under the securities laws, and understand that there can be 
success at the end of that endeavor and basically put those 
practices into place in order to achieve compliance.
    Mr. Loudermilk. Okay. In your written statement for this 
hearing you claimed that it was clear that a joint development 
agreement with Shanghai, if I pronounce this right, the 
Wanxiang Blockchain, a company that has known ties to the 
Chinese Communist Party, was not viable as early as December of 
2018.
    You also claimed that after that realization, you began 
independently developing your platform. However, in June of 
2021 SEC filings, you claimed that you were still conducting 
development activities with these Chinese strategic partners. 
If you realized you needed to stop working with them in 2019, 
why did it take you until October or November 2021 to formally 
terminate the agreement?
    Mr. Kaplan. I would have to check the exact statement, sir, 
but my understanding is that the investment occurs at the end 
of 2018 and maybe early 2019 and, therefore, the year time 
period thereafter is not in 2019, in my understanding.
    Mr. Loudermilk. Okay. As you know, an alternative trading 
system cannot facilitate trading for unregistered securities 
unless they have a valid exemption. To date, how many tokens 
have received these exemptions and how many of these are major 
tokens?
    Mr. Kaplan. I believe a significant number of the top 50 
market cap tokens have gone the exceptive route.
    Mr. Loudermilk. Okay.
    Mr. Chairman, I see that I am running out of time, so I 
will submit my remaining questions for the record, and I yield 
back.
    Mr. Hill. The gentleman yields back.
    The gentlewoman from Massachusetts, Ms. Pressley, is 
recognized for 5 minutes.
    Ms. Pressley. Thank you. This hearing is billed as a chance 
to make progress on cryptocurrency but I would like to know, 
progress for whom? In my opinion, Congress should not be doing 
the work of wealthy investors in advancing toothless and feeble 
legislation that can make the problem of an unregulated crypto 
industry worse.
    Mr. Kaplan, can you give an estimate of approximately how 
many cryptocurrencies exist?
    Mr. Kaplan. Thousands.
    Ms. Pressley. Okay. According to a recent Forbes article, 
there are over 22,000, and many more are bound to be created. 
While there are differences among them, crypto tokens do share 
similarities. For example, cryptocurrency generally has a low 
barrier to entry. If someone has a smart phone, they can simply 
download an app, connect a bank account, and become a crypto 
investor. This helps explain why cryptocurrency has become so 
popular, because it is so accessible.
    While a lot of folks want to highlight the innovation and 
opportunity that crypto offers, I am laser-focused on making 
sure that the innovation and opportunity does not come at the 
expense of financial ruin for those who do not have MBAs or 
Wall Street experience or generational wealth to invest.
    Data shows that low-income Black and Latino adults invest 
in crypto at higher rates than White adults.
    Mr. Kaplan, for years experts have warned of bad actors in 
the crypto market. Do you agree a seemingly normal crypto 
investment can really be nothing more than a scam?
    Mr. Kaplan. I think that a lot of platforms utilize the 
advantages of the internet with the association of innovation 
in order to democratize scams to the general public because 
they were not properly regulated and did not have proper 
disclosures and often had nefarious----
    Ms. Pressley. Reclaiming my time, I will take that as a, 
yes.
    Mr. Kaplan. Yes, ma'am.
    Ms. Pressley. Okay. Congress has learned important lessons 
on how to regulate our economy and complex investments to 
protect investors from scams. When regulating something as 
high-risk and volatile as cryptocurrency, we should be 
comprehensive, not restrained. Public disclosure which clearly 
establishes investor rights, and stringent administrative 
oversight are critical aspects of our securities laws but they 
are overwhelmingly lacking in proposals put forth by my 
colleagues across the aisle.
    Comprehensive regulation matters. Just look at the recent 
economic turmoil. When FTX crashed late last year, billions of 
dollars, not millions, not thousands, but billions of dollars 
were lost, and earlier this year, Signature Bank, which had 
deep ties to the crypto industry, collapsed, putting more than 
$100 billion at risk.
    In order to protect investors in crypto, it simply does not 
make sense to start from scratch or create a weak regulatory 
system. We need to use best practices and further empower the 
SEC and Federal watchdogs to oversee this industry. If we 
don't, the consequences can certainly go far beyond crypto.
    Mr. Kaplan, in your opinion, if there is a loophole created 
where non-crypto firms could take advantage of lax regulation 
on a secondary market to sell stock under the guise of 
blockchain, would they do it? Yes or no?
    Mr. Kaplan. I anticipate they would.
    Ms. Pressley. Okay. So if Congress is going to regulate 
cryptocurrency, we must make sure the solution is not worse 
than the problem. Thank you. I yield back.
    Mr. Hill. I now recognize the gentleman from Ohio, Mr. 
Davidson, who is also the Vice Chair of our Digital Assets 
Subcommittee and the Chair of our Housing Subcommittee, for 5 
minutes.
    Mr. Davidson. Thank you, Mr. Chairman. Thank you to our 
witnesses, and I am excited, because it took a long time to get 
to this hearing. It has taken a long time to get to draft text 
and I wish everyone could understand all of the legislation. We 
can explain it to everybody, but we can't understand it for 
everybody. But I appreciate that so much innovation is 
happening in our country. I hope we can keep some of it here 
and that we can get this legislation done.
    I have had bipartisan legislation on this subject since 
2018, the Token Taxonomy Act. It has been fully bipartisan for 
years, and I just think how many of the calamities that people 
point to could have been prevented or solved if we had done our 
job as Congress and provided legal clarity.
    Mr. Garrison, there is a saying that beauty is in the eye 
of the beholder. But should whether something is a security or 
not be in the eye of the beholder or should it be pretty clear 
to everybody that this is a security, and that is not?
    Mr. Garrison. It should be very clear and that would 
provide certainty that would allow businesses to operate and 
investors to do so in a protected manner.
    Mr. Davidson. And I think the point of a bright-line test 
is incredibly important and it should be clear for the 
investors, for the innovators, it should be clear for the 
regulators, too, and even SEC Chairman Gensler can't decide, 
after all this time, whether or not it is a security. We just 
had him here in April for hearings, and he couldn't answer the 
question.
    So if the existing framework and existing laws are fully 
adequate, why can't the Chair of the SEC answer that? It will 
tell you it is not clear enough, and we spend a lot of time 
here talking about how things could be treated as not 
securities. But could it be that somebody wants to create a 
token that does represent a security?
    Mr. Garrison. Yes, and that does occur today.
    Mr. Davidson. Right. So, when you think about the framework 
that we are putting together, even if, in the cases, oh, with 
the existing law, you could possibly find a way to do it, 
couldn't we create a market structure that would be more clear 
for everybody? How would you register a token and make it a 
security and be fully regulated as a security?
    Mr. Garrison. Absolutely. There is nothing preventing the 
SEC from updating the regulations to allow for tokenized equity 
securities or stock or bonds.
    Mr. Davidson. Yes. I would add there is nothing preventing 
Congress from doing that either, so one of the things that we 
talk about is the importance of self-custody.
    Dr. Sirer, some of your observations that you have made 
include that privacy is an important protection, but when you 
look at the people who looked at FTX, there was clear fraud. 
The people who had self-custody used the platform to be able to 
conduct a transaction. Then, they offloaded the custody of 
that. They were protected. So, could you highlight how 
important self-custody is?
    Mr. Sirer. Absolutely. The failure of FTX was a failure not 
of crypto but of traditional custodians, and the decentralized 
exchanges that performed much of the same functionality as FTX 
did not fail and in fact survived quite well through market up 
and downs.
    Mr. Davidson. Thank you. I think it is just incredibly 
important that we protect self-custody. The Keep Your Coins Act 
does that, and I hope that we can get to that kind of principle 
in both the stablecoin bill and the market structure bill.
    I want to get to stablecoins, but I think it is important 
to address something Mr. Himes said.
    Mr. Sexton, the commingling limitations, I don't think he 
actually applied correctly, because there are, in current law 
due to Dodd-Frank, differences in how we treat futures versus 
swaps in terms of funds; you can't commingle with house funds 
but you can commingle with the funds of customers. When you 
think about legally separate operating commingling frameworks 
provided for swaps under Dodd-Frank, would you please explain 
how that works?
    Mr. Sexton. There are different frameworks with regard to 
assets and the protections of those assets with regard to swaps 
and the segregation accounts that we have in the futures world.
    So, it is very complex. It is pursuant to the CFTC's 
regulations, and when you have a customer segregated account on 
the futures side, generally, we say that you cannot commingle 
the house. But the house could top that off with sufficient 
funds to have excess funds in that segregated account also to 
make sure that they at all times have sufficient funds to pay 
off liabilities to customers.
    Mr. Davidson. Yes. That is existing law; it is not like 
this is some loophole that creates some exception. It is just 
meant to capture the existing law and existing framework.
    And as much as I would love to get to the stablecoin market 
and the importance of it, I will have to submit some questions 
for the record on that.
    My time has expired, and I thank you all.
    Mr. Hill. The gentleman's time has expired. I appreciate 
that.
    The gentlewoman from Texas, Ms. Garcia, is now recognized 
for 5 minutes.
    Ms. Garcia. Thank you, Mr. Chairman, and thanks to all the 
witnesses who are here today.
    As we all know, then-Chairwoman Waters led meaningful, 
productive, and truly bipartisan negotiations on stablecoin 
legislation last Congress. I would like to start by 
highlighting my frustration with the stripping of some very 
important provisions from those earlier negotiations, working 
against the bipartisan progress that then-Chairwoman Waters and 
other Members of Congress worked on last year.
    With that said, I am relieved that some of the more-radical 
proposals by my Republican colleagues were not offered and are 
no longer in play, and I hope that this hearing can lead to a 
productive discussion on this very important issue.
    I was just discussing with the ranking member when we all 
got started, what, now 3 years ago, maybe 4, that this has been 
a long journey, and it is great that we are here today to 
hopefully put a ribbon on the whole thing.
    Mr. Kaplan, I would like to begin by asking you about an 
issue that I have been engaged on for a long time and have some 
very strong concerns about. The Democratic compromise draft of 
the stablecoin bill includes language preserving the separation 
of banking and commerce, which protects from unhealthy 
consolidation of economic power.
    In simpler terms, it would prohibit non-financial 
commercial businesses like Facebook or Wal-Mart from owning a 
payment stablecoin issuer, which would ultimately prevent 
massive private companies from being able to control even more 
of their consumers' lives.
    In the 116th Congress, I introduced a bill to address 
exactly this problem because I believe that allowing private 
companies to be stablecoin issuers is very dangerous. This 
protection, however, is notably absent from the bill that the 
Republicans are proposing today.
    Mr. Kaplan, can you please highlight the kinds of customer 
harm that could come from huge companies issuing their own 
coins? Why is this separation important?
    Mr. Kaplan. The potential for conflicts of interest when a 
company has both commercial and financial interests both 
offered to the same customers is significant. Furthermore, the 
systemic risk and potential contagion risk associated with an 
entity that has a stablecoin is significant. The potential 
implications of a stablecoin losing its peg could have knock-on 
effects and contagion risks that would affect the larger 
financial market, and it is essential that we hold those who 
are issuing stablecoins to the highest standards and that we 
properly segregate those activities from other business 
activities.
    Ms. Garcia. Thank you.
    In carrying on with important provisions that the 
Republicans stripped from Chairwoman Waters' version of this 
bill, I would like to touch on the importance of diversity and 
financial inclusion in the crypto space, which this bill fails 
to even mention. This nation has a long history of building 
financial institutions and systems that are accessible and 
exciting for the wealthy and mostly White consumer, and 
inaccessible and exclusionary for everyone else.
    This nation continues to deal with credit inequity, lending 
inequity, banking inequity, and financial literacy inequity, 
and as was clearly pointed out by my colleague and friend from 
Houston, there is also witness inequity.
    And still, in front of our eyes, it appears that we are 
repeating our mistakes of the past and building a financial 
system that only makes the rich and privileged richer and more 
privileged.
    Mr. Kaplan, can you please speak about the importance of 
building financial inclusion language into regulatory 
legislation?
    Mr. Kaplan. It is essential for any industry to make sure 
that it is able to be afforded and available to all segments of 
society, and as such, it is important that there is diversity 
and inclusion.
    Ms. Garcia. Can you give us an example of what you think we 
need to add to make sure that happens within this legislation?
    Mr. Kaplan. I don't have a specific example off the top of 
my head. I think that it is essential that there is a mention 
such that the policy of diversity and inclusion is made sure to 
be understood and integrated into the crypto industry and the 
larger financial industry as a whole.
    Ms. Garcia. Thank you. How can crypto-based companies work 
to better include low-income and minority communities in the 
crypto space? How can they best reap the benefits of a 
functional, well-regulated crypto industry for which we are all 
striving?
    Again, Mr. Kaplan?
    Mr. Kaplan. What we saw with FTX and the like was that they 
used the internet under the guise of innovation in a 
speculative new investment instrument in order to basically 
allow the general public and certain segments of society on----
    Mr. Hill. The gentlewoman's time has expired.
    I recommend that the witness expand on his answer in 
writing. And I now turn to the gentleman from Tennessee, Mr. 
Rose, for 5 minutes.
    Mr. Rose. Thank you, Mr. Chairman, and thanks to our 
witnesses for taking the time to be with us today.
    I want to dive right in. The Democratic talking point that 
Chair Gensler's approval of this one Special Purpose Broker-
Dealer license does not mean that the current system is 
working. Why? Because an alternative trading system (ATS) 
cannot facilitate trading for any unregistered securities not 
offered under a valid exemption.
    Additionally, Chair Gensler, and the Democrats, and 
apparently, Mr. Kaplan, allege that nearly all tokens are 
unregistered securities. This approval does nothing for retail 
investors and the general public.
    Mr. Garrison, isn't it correct that there currently aren't 
any registered digital asset securities with real customer 
demand and liquidity? For example, can an ATS offer Solana or 
Cardano, which the SEC has recently alleged are unregistered 
securities, to retail non-accredited investors on its ATS 
today?
    Mr. Garrison. No, they cannot.
    Mr. Rose. And, Mr. Garrison, would the outcome be different 
under the market structure legislation that we have coming 
forward?
    Mr. Garrison. Yes. The legislation would allow an ATS to 
list and trade structured digital assets alongside payment 
stablecoins, alongside digital commodities. Each of those would 
be regulated under different regimes but an ATS regulated by 
the SEC would allow all those products to trade.
    Mr. Rose. Thank you.
    Mr. Garrison, can an ATS currently offer both digital asset 
securities and digital asset commodities alongside each other 
on the same platform for retail trading?
    Mr. Garrison. No, they cannot.
    Mr. Rose. And would the outcome be different under the 
market structure legislation?
    Mr. Garrison. Yes, it would be.
    Mr. Rose. Thank you.
    Mr. Garrison, Prometheum has been approved to custody 
digital assets under a Special Purpose Broker-Dealer framework 
that the SEC issued in 2020. Under current law, digital assets 
may be classified as securities or commodities.
    Can a Special Purpose Broker-Dealer custody both digital 
asset securities and digital asset commodities on behalf of 
retail investors?
    Mr. Garrison. No.
    Mr. Rose. Mr. Garrison, given this fact, what impact, if 
any, does the SEC's approval of this Special Purpose Broker-
Dealer license have on retail traders?
    Mr. Garrison. Not a significant impact.
    Mr. Rose. And, Mr. Garrison, the SEC has indicated that 
they expect digital assets to be registered by a promoter or, 
``a promoter sponsor or other third party,'' that, ``provides 
essential managerial efforts that affect the success of the 
enterprise.''
    The problem is that certain digital assets are open source 
peer-to-peer digital currencies that are transferred through a 
decentralized public ledger that is maintained by a network of 
computers operated by individuals who, apart from possibly 
transferring digital assets to one another at some point in 
their lives, may never interact.
    Take Dogecoin. Mr. Garrison, who exactly is the SEC 
expecting would come in and register Dogecoin?
    Mr. Garrison. I do not know.
    Mr. Rose. Mr. Garrison, in 2021 SEC Chair Gensler said 
regarding the regulation of digital assets, ``There are some 
gaps in this space. We need additional congressional 
authorities to prevent transactions, products, and platforms 
from falling between regulatory cracks.''
    He now says the securities laws are clear, that he doesn't 
need additional authority from Congress.
    Mr. Garrison, do you agree with Chair Gensler version one, 
whom we might call, ``Dr. Jekyll,'' that he needs more 
authority from Congress to regulate crypto?
    Or do you agree with Chair Gensler version two, ``Mr. 
Hyde,'' that the Federal securities laws are 100 percent clear 
and no relief is necessary to regulate digital assets, 
securities, and crypto platforms seeking to support them?
    Mr. Garrison. I am not sure that I agree with either 
version. I believe the SEC has the authority to regulate 
digital assets that are sold pursuant to investment contracts 
in a clearer way than they have. But I do also disagree that 
the securities laws' application to the sale of digital assets 
is certainly not clear.
    Mr. Rose. And shifting gears, Mr. Allaire, given the 
Federal Reserve's incompetence during the most-recent turmoil 
in the banking sector, are you confident that they will be able 
to regulate stablecoin issuers under this bill?
    Mr. Allaire. Thank you for the question, Congressman Rose. 
I believe that the bill does a very good job of very clearly 
establishing the core standards that are important for a 
stablecoin to function, so I believe Congress is doing its job 
in identifying that and----
    Mr. Hill. The gentleman's time has expired.
    Mr. Rose. Thank you. I yield back.
    Mr. Hill. The Chair now recognizes the gentleman from New 
York, Mr. Torres, for 5 minutes.
    Mr. Torres. Thank you, Mr. Chairman.
    Before we get to the substantive question of what to do 
with crypto, we as a country have to answer a more fundamental 
question: Who among us should get to decide the future of 
emerging technologies like crypto and blockchain? Should it be 
Chair Gary Gensler, an unelected bureaucrat who answers only to 
himself, or should it be the United States Congress, whose 
Members are elected by and therefore accountable to the people?
    Mr. Allaire, do you believe as I do that an Act of Congress 
would be the most-democratic means by which to decide the 
future of digital assets?
    Mr. Allaire. Thank you for the question, Congressman 
Torres.
    I do agree, and in fact, the Presidential Working Group 
specifically asked Congress to act urgently on this matter over 
a year-and-a-half ago. So, I believe it is critical that 
Congress does take control here.
    Mr. Torres. There are crypto companies like Circle that 
strive to be compliant with the law, and then there are crypto 
companies that seem intent on willfully evading the law. And, 
yet, Chair Gensler appears to see no difference at all between 
the two. He treats them all as one and the same. His 
enforcement has been indiscriminant in nature, which brings me 
to the lawsuit against Coinbase.
    Mr. Garrison, if the SEC sincerely thought that Coinbase 
was operating an unregistered securities exchange, then why on 
earth would the SEC approve Coinbase as a public company?
    Why would the SEC not, at a minimum, require Coinbase to 
disclose its status as an unregistered securities exchange as a 
material risk to the investing public? Do you see a 
contradiction between the SEC's 2021 approval of Coinbase as a 
public company and the 2023 enforcement action against 
Coinbase?
    Mr. Garrison. I do see a contradiction. As part of the 
filing review process, making a filing effective under the 
securities rules requires a public interest finding. Typically, 
a public interest finding is a very loosely defined term but 
you might argue that an act by the company that is inconsistent 
with securities laws might be not in the public interest.
    Mr. Torres. And I want to interject. The SEC made the 
following statement in the Coinbase lawsuit. It said that 
declaring effective a Form S-1 registration statement does not 
constitute an SEC staff opinion on endorsement of the legality 
of an issue as underlying business. When it comes to S-1 
registration, the SEC is asserting that it has no opinion on 
whether an issuer is complying with the very laws that the SEC 
is charged with enforcing.
    That strikes me as strange. It is almost as if, suppose the 
SEC would approve the Mafia as a public company, and then say, 
but we have no opinion on the underlying legality of the 
business. As a lay person, that just strikes me as absurd. So, 
am I missing something or----
    Mr. Garrison. No, I think that is where the public interest 
finding comes in, and I think perhaps the other side of that 
coin is that----
    Mr. Torres. No pun intended, right?
    Mr. Garrison. ----you don't want the SEC to take 
responsibility for what is in any filing, which is what I think 
some of that language is getting at as well.
    Mr. Torres. In an interview with New York Magazine, Chair 
Gensler said that everything but Bitcoin is a security. Of the 
more than 200 listings on the Coinbase exchange, the SEC 
lawsuit only identifies 13 as unregistered securities, and 13 
out of more than 200 seems to contradict the Gensler doctrine 
that everything but Bitcoin is a security.
    Do you see a contradiction there?
    Mr. Garrison. Yes. It would be nice to have clearer 
insights into what tokens, what digital assets the SEC believes 
are securities instead of seeing them piecemeal through 
enforcement actions.
    Mr. Torres. The digital market structure discussion draft 
provides for a safe harbor and I see the need for a safe harbor 
that protects good-faith crypto companies from arbitrary and 
capricious enforcement actions.
    But what about bad-faith crypto companies? How do we 
prevent bad-faith crypto companies from exploiting the safe 
harbor to prevent legitimate enforcement actions?
    Mr. Garrison. Included in the market structure bill are the 
typical anti-fraud protections that exist in both the 
securities and commodities laws. So whether a digital asset is 
sold through the new SEC exemption, the SEC's robust anti-fraud 
authority would also apply there, and on the CFTC side, if a 
digital commodity was sold or manipulated in a fraudulent way, 
the anti-fraud provisions of the Commodity Exchange Act would 
apply as well.
    Mr. Torres. And then, a quick question about the 
applicability of securities law to secondary market 
transactions. Has there ever been a single statute or a single 
rule or regulation or a single court case that expressly 
affirms that the Howey Test applies to secondary market 
transactions?
    Mr. Garrison. No.
    Mr. Torres. Are you sure?
    Mr. Garrison. To the best of my knowledge, yes.
    Mr. Torres. Are you positive?
    Okay. My time has expired.
    Mr. Hill. The gentleman's time has expired. As you can see, 
there is a vote on the House Floor. It is the Chair's intention 
to continue until there are approximately 200 on the non-voting 
screen. We will then recess and reconvene immediately after 
votes.
    I now recognize the gentleman from South Carolina, Mr. 
Timmons, for 5 minutes.
    Mr. Timmons. Thank you, Mr. Chairman.
    Mr. Garrison, getting back to the exemption that 
Congresswoman Wagner covered earlier, the new exemption in the 
bill allows participation of non-accredited investors in 
primary issuances of digital assets.
    You started talking about the protections that the market 
structure bill provides for retail investors in primary 
offerings. The exemption as I read it provides that a non-
accredited investor is permitted over a 12-month period to 
purchase digital assets issued in a primary sale that equal 5 
percent of the person's net worth or 5 percent of their annual 
income. Rough math--for a person with $990,000 of net worth or 
$190,000 in annual income would be $49,000 or $9,500 of annual 
investment, depending which is greater.
    My question is, in your view, is the exemption as laid out 
in the discussion draft a good balance of retail investor 
access to this new asset class and traditional consumer 
protections?
    Mr. Garrison. I believe it is a good balance. Personally, I 
am opposed to individual limitations on investments generally, 
but I recognize that reasonable people can disagree on that, 
and I think this approach in the market structure bill really 
borrows from Regulation Crowdfunding, which has these 
individual investor limits, as does Regulation A, and I think 
that has proven to be a protection that can be valuable in 
these exemptions.
    Mr. Timmons. Thank you for that. A common way for a project 
to distribute digital assets to its users is through broad 
distributions in order to support the development of its 
network.
    Mr. Garrison, again, how does this proposed legislation 
treat digital assets distributed in this manner and why does 
this treatment more accurately correspond to how the digital 
asset markets operate?
    Mr. Garrison. Sure. The market structure bill acknowledges 
that some digital assets are created through the normal 
functioning of the network itself, whether that is through a 
validating transaction or staking or anything like that, and it 
just makes clear that the securities laws are not needed to 
protect those activities. Those activities are separate. They 
are not securities transactions. And it more clearly separates 
the transactions that are in need of consumer investor 
protections from those that are not in need.
    Mr. Timmons. Thank you for that.
    Mr. Garrison, again, in the proposed legislation there are 
tests for decentralization in functionality of the blockchain 
network. Would you share your views on this construct in the 
legislation?
    Mr. Garrison. Yes. I think this is a really great first 
effort in trying to put a construct around how decentralization 
can occur. It is an issue that has really been difficult for 
those in the industry to come to terms with because there are 
no third-party standards that we can look at to say, this is 
how networks are decentralized.
    For example, when I worked for SEC Commissioner Peirce, and 
she created her token safe harbor proposals, there were a lot 
of ideas in there of, how do you show decentralization, and a 
lot of different ideas came to the foreground. Some of them 
include looking at the ownership of the tokens of the network, 
are they concentrated in any one particular group or not?
    Another is just the functionality of the network, who is 
contributing to the code. I think in the early days of a lot of 
networks, you see some key contributors that are responsible or 
perhaps have a key they can write and change code as needed on 
an emergency basis.
    Over time, those things typically go away. Those are good 
indicators of decentralization. What is the number of 
participants in the network, both end users of validators, 
miners, whatever the protocol may be?
    There are a lot of different factors you can consider, and 
I think this bill does a good job of really drilling down and 
saying, what are the key ones that matter, and it really keeps 
coming back to this idea of unilateral control: Does a person 
or a group of persons have control over this network.
    Mr. Timmons. Thank you. One last question, Mr. Garrison. 
Some have alleged that the proposed legislation creates light 
touch regulation for digital assets. However, the bill seeks to 
apply the same rules for current SEC- and CFTC-registered 
intermediaries with adjustments as needed for the unique 
characteristics of digital assets.
    In some instances, the requirements of digital asset firms 
are more onerous than traditional intermediaries. Would you 
discuss how the bill applies equal or stronger standards to 
digital asset firms?
    Mr. Garrison. The bill brings digital assets into the SEC- 
and CFTC-regulated universes. Currently, digital asset 
transactions are not covered here, so the SEC would oversee the 
initial issuance in certain situations through the new 
exemption, and the SEC would also oversee normal securities 
trade through ATSs. So, all of the protections from an ATS 
would also apply here.
    Mr. Timmons. Thank you for that. Mr. Chairman, I yield 
back.
    Mr. Hill. The gentleman yields back.
    It is a pleasure to recognize the gentleman from Illinois, 
Dr. Foster, for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman, and thank you to our 
witnesses.
    I would like to start with what I consider the two 
foundational questions in this that are not, I don't believe, 
really addressed in this draft.
    The first one is to answer the simple question, if we wish 
to prevent ransomware and all kinds of illicit activities, is 
there any way to do that if we allow self-custody of assets or 
is it pretty much a binary thing? Either we are going to allow 
self-custody and live in a world with ransomware and so on or 
not. Is there any alternative to that third path?
    Mr. Sirer. Congressman, it is entirely possible to control 
these systems at the ingress and egress points. So, it is 
entirely possible to preserve self-custody and all the benefits 
that come with it.
    Mr. Foster. But how does that work actually? If you go and 
take your dollars and you put them into the systems you are 
developing, then they go off and become self-custody. They are 
used for human trafficking or you name it, ransomware, you name 
it, and then someone comes back after having passed this 
through anonymous currencies that are better than Bitcoin for 
avoiding truly anonymous alternatives that are being developed 
and actually exist to some degree today, and then they pass it 
through these anonymizing techniques, and then they present 
something that has been self-custodied to your system.
    It seems like you are just the last leg in a complicated 
money laundering scheme, and tell me why that is not really 
technically the case?
    Mr. Sirer. That is technically not the case because the 
sets of tools we have for tracking and tracing money flows are 
incredibly sophisticated. Chainalysis and TRM Labs-type 
companies are quite able to trace even those anonymizing 
transactions and trace the flow of funds. If you look at the 
recoveries that law enforcement has done in recent years with 
the aid of these increasing----
    Mr. Foster. Yes, but those are Bitcoin-type things that 
they are tracking. And you rapidly get into declassified 
discussions in briefings that I have had on this.
    But a bunch of smart people are working very hard and 
effectively to really make these anonymous. I think they are 
more likely to succeed than the mouse is likely to not survive 
the cat in this case. And I don't think that today, you can 
guarantee that won't be the case, so I think that's the first 
thing, and we should continue this technical discussion 
offline.
    The second thing is that if we wish to prevent market 
abuses, things like front-running or wash trades, there are 
estimates that more than half of all Bitcoin transactions are 
actually wash trades, for example.
    If we wish to prevent that, is there any alternative to 
having some regulator somewhere that sees the true identity 
behind the participants on both sides of every trade? How do 
you prevent wash trades if there is not such a regulator 
somewhere?
    Mr. Sexton, how this has been handled with the Trader ID 
mechanism and the like?
    Mr. Sexton. It has, and it is key that if you are going to 
prevent those types of trading abuses, you have to know who is 
on both sides of a trade.
    Mr. Foster. A trusted regulator must know, must be able to 
see who is on both sides of the trade?
    Mr. Sexton. Correct.
    Mr. Foster. Right. The traders don't need to know who is on 
the other side. In fact, it is not good for them to know who is 
on the other side in the typical instance.
    But when you see something that looks abusive, you have to 
go and, first off, know who the people are, and you also have 
to make sure that the Trader ID is, for example, biometrically, 
so you don't have one person operating multiple Trader IDs. 
That is a major no-no in your industry.
    Mr. Sexton. If you bring this into a regulated environment 
under the National Futures Association (NFA) and the CFTC 
intermediaries need to know who their customers are, and if you 
have exchanges or trading platforms, they need to know who is 
going to be on the opposite side of those trades. That is the 
bedrock of the regulated environment that we have today under 
the CFTC.
    Mr. Foster. Yes. But if you have, for example, the ability 
to make derivative bets and have a spot market over here, a 
regulator has to see the True IDs of both the spot market 
participants and everyone who is making derivative bets on the 
basis of those spot prices. It seems as though this is 
something that spans the current jurisdictions of the SEC and 
the CFTC.
    Mr. Sexton. You have to have cooperation between regulators 
so that they know what a market user is doing in both the spot 
markets and in the futures markets.
    Mr. Foster. Right, and this actually has to work 
internationally if you are talking about crypto assets that are 
traded internationally as well. So, it is an even more 
complicated thing. You have some sort of solution 
internationally in the options market.
    Mr. Sexton. International cooperation is also essential.
    Mr. Steil. [presiding]. The gentleman's time has expired. 
The witness can provide additional comments in writing for the 
record. I now recognize myself for 5 minutes for questions.
    Mr. Garrison, I want to follow up on Congressman Emmer's 
comments earlier. According to SEC Commissioner Hester Peirce, 
a digital asset may be offered and sold initially as a security 
because it is wrapped in a transaction involving an investment 
contract. But the asset may later be emphasized and sold 
outside of an investment contract.
    I think a key point is to think about how our legislation 
should categorize different types of digital assets regardless 
of their classification when first issued.
    Can you elaborate on this principle and then comment on how 
the proposed legislation addresses this?
    Mr. Garrison. A digital asset, when it is sold pursuant to 
an investment contract, does not constitute the security. Under 
the Howey Test and 77 years of case law, courts have come up 
with an analysis to determine when a transaction contract or 
scheme may be sold in a manner that is, in fact, a securities 
transaction.
    This is very different than the test for what is an equity 
security, what is a stock, what is a bond, and the case law 
makes it quite clear that the object of the investment 
contract, whether it be the orange groves in the original Howey 
case or there are some fun exotic cases about chinchillas and 
whiskey receipts.
    The chinchillas themselves are not securities, so in 
applying that logic to the digital asset space, the distinction 
becomes even more important as one learns more about digital 
assets and understands why one holds a digital asset to operate 
or to function and participate on a network, and once those 
functionalities are realized for the digital asset, you start 
to realize that there is no actual central party that maybe was 
making promises at the time of the initial sale for fundraising 
but later in time a fully decentralized functioning network.
    There is no central party. There is no one that would be 
the equivalent of an issuer in a securities offering.
    Mr. Steil. Thank you for providing that distinction. Let me 
shift gears to you, if I can, Mr. Kaplan. There is a little bit 
of confusion around the circumstances and disclosures 
associated with Prometheum, their filings for the alternative 
trading system and Special Purpose Broker-Dealers.
    In your testimony, you noted that you terminated all co-
development work and strategic relationships with your Chinese 
affiliate in late 2021. When did Prometheum take full control 
of the product development?
    Mr. Kaplan. Prometheum realized that its endeavors with 
Wanxiang were not going to bear fruit, and that, in conjunction 
with the ongoing decoupling that was occurring in the larger 
geopolitical sphere, led to the decision to terminate that 
relationship. I believe the termination agreement is October 
2021.
    Mr. Steil. October 2021. Thank you.
    Did the SEC or FINRA at any point raise a concern about the 
relationship between Prometheum and the Chinese firm?
    Mr. Kaplan. We had both a CFIUS inquiry and an SEC 
investigation where we were required to submit all 
communications with any foreign entity for review to the SEC, 
and basically, we were told that after a period of time, the 
SEC closed the investigation.
    Mr. Steil. Thank you.
    Has Prometheum ever had to adjust its policies and 
procedures at the request of HashKey or representatives of the 
Chinese government?
    Mr. Kaplan. No.
    Mr. Steil. Okay. I appreciate your testimony there. I want 
to just echo the concerns raised by some of my colleagues. Our 
regulators have done everything in their power to push digital 
asset business overseas. They seem to be quite comfortable 
giving a stamp of approval to a firm with the relationships 
back to China.
    To me, this underscores the need for clarity and consistent 
regulation in the industry structure. Cognizant of my time, I 
am going to come back to you if I can, Mr. Garrison, just for a 
second.
    Mr. Rose brought this up a little bit, but I think it is 
worth hitting the point home before we go into recess. There 
has been some hyperbole in particular about how the bill is 
described. Do the modifications upend securities law, as some 
have suggested?
    Mr. Garrison. No, it does not. It borrows from existing 
provisions and securities laws.
    Mr. Steil. Okay. And I have 40 seconds, so I am going to 
jump back to Mr. Allaire.
    Stablecoin legislation attached to this gives the Fed a 
backstop authority over State-chartered payment stablecoin 
issuers. Can you describe why the backstop is important and 
what the Fed can and can't do with it?
    Mr. Allaire. Thank you for the question, Congressman Steil.
    I think it is critical. I think the first is really the 
fundamental standards around what can be in reserves, the 
reporting and disclosure requirements, the need to separate 
these assets. Those are part of that kind of Federal framework.
    Additionally, setting standards under Section 4 around 
capital adequacy, risk management, safety and soundness, and 
others they can, obviously, also enforce against those.
    Mr. Steil. Thank you.
    Cognizant of the time, and cognizant that we are now under 
200 votes, pursuant to the Chair's previous announcement, the 
committee will stand in recess until the conclusion of votes.
    [recess]
    Mr. Flood. [presiding]. The committee will come to order. 
The Chair now recognizes Mr. Nickel for 5 minutes.
    Mr. Nickel. Thank you so much to our chairman and ranking 
member. Thank you so much, Congressman Flood, as well, for 
being here today, and thank you to our witnesses. I know it has 
been quite a long day, so thanks for joining us.
    I am happy with the progress our committee is making on 
stablecoin legislation. The most recent draft includes many of 
my suggestions like protecting State regulators, adding 
consumer protections, and ensuring banks can safely hold 
digital assets in their custody.
    I hope that we can all come together and put politics aside 
and reach bipartisan agreement on this legislation. Not only is 
passing a stablecoin bill essential to protecting consumers and 
encouraging innovation, but it is also vital to providing much-
needed regulatory clarity.
    The SEC's regulation by enforcement, which we have seen 
ramp up in the last week, is going to send digital asset 
companies offshore to places like the Bahamas, where Americans 
will have no protections. Additionally, as I have said before, 
stablecoin legislation can reinforce the dominance of the U.S. 
dollar as the global reserve currency, all while making it 
stronger, more accessible, and more competitive.
    Mr. Allaire, my first question to you. Can you please 
describe the privilege the U.S. is afforded because the dollar 
is the dominant global reserve currency?
    Mr. Allaire. Thank you for the question, Congressman 
Nickel. As is often referenced, the dollar presents the United 
States with an exorbitant privilege, and that is in many forms, 
I think that privilege is around low borrowing costs for the 
government, for households, and for businesses. I think strong 
preference in commerce and trade internationally helps grow 
opportunities for people and businesses here, as well as the 
execution of soft power around the world. And in an environment 
today, where that is being challenged, it is more important 
than ever that the U.S. make every effort to strengthen dollar 
competitiveness, and I would agree with you that the stablecoin 
bill is a significant step towards increasing dollar 
competitiveness.
    Mr. Nickel. Thanks so much. And in your testimony you said, 
``Currency competition is real and is increasingly defined by 
technological competition. Perhaps, no nation understands this 
better than China.''
    Mr. Allaire, as we are designing stablecoin legislation, 
how should we think about currency competition? Would the most-
recent draft of the stablecoin bill ensure that the U.S. dollar 
remains competitive, safe, and accessible?
    Mr. Allaire. I think it would be a huge step forward in 
that. The United States competes with highly competitive 
technology companies, financial companies, and open, free, and 
fair markets in a rules-based system. That has served us 
incredibly well in the development of the internet. It has 
served us incredibly well in the realm of payment technology 
innovation. And I think for an innovation like stablecoins, it 
can also be the leader globally.
    Critically, stablecoin legislation, as currently submitted 
to the committee, does, in fact, create, I believe, the safest 
digital dollar in the world. It creates a mechanism to ensure 
that there is a competitive market for the issuance of that by 
banks and nonbanks, and that those firms can compete in that 
technological competition with constantly-upgradeable 
blockchain infrastructure and be competing with state-driven 
actors such as China.
    Mr. Nickel. Thanks so much.
    Mr. Garrison, moving on to you, I would like to talk about 
the Majority's market structure bill, which I am still 
reviewing. I am encouraged to see that we are making progress, 
but I do have some concerns with this current version of the 
bill, which I understand is just a starting point. Whether you 
love crypto or hate crypto, you should support market structure 
legislation. It is what safeguards consumers while updating our 
securities laws to work with modern technological innovations. 
And frankly, burying our heads in the sand just is not an 
option here.
    Mr. Garrison, can you please explain the dangers of 
congressional inaction on digital asset market structure? 
Specifically, how would consumers be harmed without clear 
regulations that encourage companies to remain here in the 
United States?
    Mr. Garrison. If the status quo were to continue, I think 
it would harm investors and consumers, it harms the 
participants in the digital asset ecosystem, and it ends up 
harming the U.S. economy. There is a lack of a Federal 
regulator over the spot markets for digital assets right now, 
as we speak, so anyone trading on a digital asset platform in 
the U.S. is at the mercy of the platform's own controls and 
procedures and processes and compliance with other laws----
    Mr. Flood. The gentleman's time has expired.
    Mr. Nickel. I yield back.
    Mr. Flood. Thank you, Mr. Nickel.
    I now recognize myself for 5 minutes.
    I would like to start by reading a question from a comment 
letter that Prometheum sent in response to the SEC's December 
2020 Special Broker-Dealer Framework: ``The definition of a 
digital asset security, as used in the proposal, is a digital 
asset that meets the definition of a security under the Federal 
securities laws. This definition puts a burden on the industry 
to determine which digital assets are securities. As a result, 
we believe that clarity is needed to understand the regulatory 
framework they must comply with.''
    That was in a letter dated April 26th, from Prometheum, 
specifically signed by Benjamin S. Kaplan, co-CEO of the 
company. I offer this into the record, without objection.
    [This letter can be found as an appendix to the written 
testimony of Mr. Aaron Kaplan, on page 00 of the appendix.]
    This concern, which Prometheum themselves raised in 2020, 
probably sounds familiar for those who track this committee 
closely. It is the exact same concern we have heard from 
witnesses in front of this committee before. Can a broker-
dealer register if they do not know which assets are a security 
and which are not? Further, it makes the same argument that 
other firms have made, that the lack of clarity from the SEC 
puts an undue burden on the industry.
    Mr. Kaplan, in your testimony you were very confident that 
no new legislation is needed in the digital asset space to 
clarify this question. What has changed between the date of 
this letter, in 2021, when your firm called for clarity, and 
now? What has changed?
    Mr. Kaplan. Over the 2-plus years since that time, there 
have been additional enforcement actions and statement by the 
SEC, which have clarified any questions that we had in regard 
to the designation of a digital asset as a security.
    Mr. Flood. Mr. Kaplan, Prometheum's website says that 
Prometheum's ATS supports, ``many tokens that mostly trade on 
crypto exchanges.'' I would like to dig in on that just a 
little bit. Can Prometheum customers trade in Ether? If your 
answer is yes, please explain how?
    Mr. Kaplan. Not currently.
    Mr. Flood. Can Prometheum customers trade in Bitcoin? And 
if your answer is yes, please explain how.
    Mr. Kaplan. No.
    Mr. Flood. Just for the audience at home's benefit, Ether 
and Bitcoin make up more than 60 percent of the digital asset 
market.
    Mr. Kaplan, given that Ether and Bitcoin make up more than 
60 percent of the digital asset market, if the current system 
is working, why can't your customers trade the most-popular and 
widely-used digital assets?
    Mr. Kaplan. Regulation and new ATSs and custodians should 
take a, ``crawl, walk, run,'' approach, and essentially they 
will proceed to add additional assets and abilities as time 
goes on. I would like to point out when the----
    Mr. Flood. I am going to reclaim my time. Mr. Kaplan, did 
Prometheum receive any additional exemptive relief from the SEC 
that has not been publicly shared?
    Mr. Kaplan. No.
    Mr. Flood. Thank you, Mr. Kaplan.
    Prometheum's Special Purpose Broker-Dealer license does not 
address the core issue. There is not a consistent definition of 
a digital asset security within current law. This point was 
made obvious when Chair Gensler could not say definitively 
whether Ether is a digital asset security, when asked by 
Chairman McHenry in this very room a couple of months ago. In 
other words, that same question that Prometheum themselves 
raised in their 2021 comment letter is still unanswered. That 
is why legislation is needed. That is the problem that the 
chairman's bill works to solve.
    To testify in front of our committee that your company's 
charter, which only allows for trading in a very small subset 
of assets, is evidence that no legislation is needed just does 
not make sense. If anything, the fact that Prometheum's 
customers cannot trade some of the most-popular digital assets 
is an illustration of the broader problem, Mr. Kaplan.
    I yield back.
    With that, the gentleman from Iowa, Mr. Nunn, is recognized 
for 5 minutes.
    Mr. Nunn. Thank you, Mr. Chairman, and I think we are well 
said on the rule of having clarity in this space, which is what 
Chairman McHenry is aiming to do.
    I want to thank the Chair for the comments here. I sit on a 
second committee, the House Agriculture Committee, and it also 
has oversight of digital assets. I had the pleasure of talking 
with CFTC Chair Benham about his thoughts on market structure 
and what we are discussing today. His thoughts on this 
legislation were that a much-needed change was in order to give 
clarity to the digital asset ecosystem.
    Right before CFTC Chairman Benham testified, however, we 
saw his counterpart, SEC Chair Gary Gensler, charge Coinbase 
with listing digital tokens he deemed to be securities. Chair 
Gensler went so far as to say that, ``We do not need more 
digital currency. We already have digital currency. It is 
called the U.S. dollar. It is called the euro. It is called the 
yuan.''
    Let's make one thing very clear, that the rest of the world 
is already attuned to: Chair Gensler's blockchain innovation 
and technology is here to stay. It is thriving, and the U.S. 
market needs to be able to appreciate it. This lack of 
consensus among our Federal regulators, however, on the 
appropriate regulatory treatment of digital assets is what we 
need to discover and why we are here today.
    The inconsistent treatment by Federal regulators 
underscores the urgent need for Congress to pave clear rules of 
the road for both market participants and investors. If 
Congress does not act, and lets Federal agencies continue to 
engage in territorial disputes and empire building, this will 
have a grave national impact, both on our trade as well as our 
national security.
    From this sentiment, Europe, the UK, and Singapore have all 
marched out as leaders in this space. They have worked 
effectively within their jurisdiction. In fact, the Markets in 
Crypto-Assets Regulation (MiCA) is real. Venture capital 
investment in Europe in crypto projects is up to 1,000 percent 
in 1 year alone, investments that could have been happening in 
U.S. markets. To my home State of Iowa, these represent real 
tangibles. They are American jobs. They are future investment. 
To America, it means innovation that is fleeing offshore. That 
is why this legislation that the chairman has brought forward, 
I believe, is highly important.
    Mr. Garrison, your former boss, SEC Commissioner Hester 
Peirce, explained how a digital asset may be offered as a sold 
initial security based on the initial transactions offered in, 
but the digital asset may later be offered outside this 
investment contract. You spoke with my colleague here earlier 
today. Highlight specifically how this proposed legislation 
would address that?
    Mr. Garrison. The market structure bill would address that 
by providing a clear exemption for issuers that would like to 
sell a digital asset pursuant to an investment contract. So if 
you want to build a network and sell the digital asset that is 
required for the network, this bill would allow an exempt 
transaction for up to $75 million within a 12-month period. It 
would allow for individual investment limitations for non-
accredited investors to purchase them. There would be robust 
disclosure requirements. The disclosure requirements would be 
tailored to the needs of token purchasers of digital asset 
purchasers. And it would place restrictions around activities 
that people want to engage in, in the U.S., but currently 
cannot.
    Mr. Nunn. This would provide a clear framework. Absent this 
legislation, we would be like Coinbase, and have to come to 
Chairman Gensler on a, ``come and register,'' approach, meaning 
that everyone would have no clear guidance but would have to go 
and have a sniff test done by the SEC, which at this point has 
been only punishing--no carrot, no incentive, no guidance. Is 
that correct?
    Mr. Garrison. Yes.
    Mr. Nunn. Mr. Sexton, the proposed legislation that we have 
been discussing imposes significant consumer protections, 
requirements that all digital commodities intermediaries 
register with the CFTC would have to be met, most notably, the 
segregation of customer assets. What are your thoughts on 
customer protections provided for in this legislation?
    Mr. Sexton. Thank you for your question. The customer 
protections provided in this proposed legislation mirror the 
customer protections that have been in place for years with 
regard to the regulated futured markets. Customer assets, 
capital disclosures, Congressman, you can go down the list 
within the bill, but those have been in place for years.
    Mr. Nunn. Would the NFA have the ability to implement these 
new standards for the CFTC?
    Mr. Sexton. We totally have that ability to work the CFTC 
to do so.
    Mr. Nunn. So for the consumer, for the process, for the 
providers, and for the national security of the United States, 
this legislation makes very good sense.
    Mr. Flood. The gentleman's time has expired.
    Mr. Nunn. Mr. Chairman, I yield back.
    Mr. Flood. The gentleman yields back.
    The gentleman from South Carolina, Mr. Norman, is now 
recognized for 5 minutes.
    Mr. Norman. I thank each of you for your testimony and for 
a long day, so I will be brief.
    Mr. Kaplan, in your testimony you state that, ``Prometheum 
provides Americans participating in the crypto Web3 space with 
the investor protections of the Federal securities laws.'' What 
assets do you plan to offer?
    Mr. Kaplan. Digital asset securities.
    Mr. Norman. But you have a limited offering on that, do you 
not?
    Mr. Kaplan. I believe that a certain number of the top 
tokens qualify as digital asset securities.
    Mr. Norman. What percentage?
    Mr. Kaplan. Thirty? Forty?
    Mr. Norman. Which would be----
    Mr. Kaplan. Possibly a lot more. And as Chairman Gensler 
has said, the overwhelming majority of digital assets, arguably 
everything besides Bitcoin, is potentially a security.
    Mr. Norman. But you would have a pick of 60 percent that 
would be not regulated under the----
    Mr. Kaplan. Those numbers are guesses, at best. I would 
have to look into it more deeply. It is my belief that almost 
every smart contract-based network token was issued with the 
intention to raise capital from the general public, with the 
intention of the investor to make money in the common 
enterprise from the efforts of that common enterprise.
    Mr. Norman. I get that. I guess I just--your claims that 
you are providing investor protections really would not be all-
inclusive, at all.
    Now with your company, what bothers me about Prometheum is 
the Chinese 25-percent ownership. I think I heard when you were 
questioned by another Congressman that there is no Chinese 
investor with 25 percent that sits on your board. Is that 
right?
    Mr. Kaplan. There is no Chinese investor in our company 
that has 25 percent, sir. I said, 20 percent.
    Mr. Norman. So, they have 20 percent.
    Mr. Kaplan. Correct.
    Mr. Norman. Currently?
    Mr. Kaplan. Correct.
    Mr. Norman. Is that not a problem for this country to open 
up the type of information that you would be giving? It shocked 
me that FINRA and the SEC approved this.
    Mr. Kaplan. Prometheum went through a series of SEC 
inquiries and CFIUS investigations. We changed our bylaws. We 
terminated any agreement. There is no code, nothing done from 
China that is involved in Prometheum in any capacity.
    Mr. Norman. But they sit on your board, with a vote, that 
owns 20 percent.
    Mr. Kaplan. Sir, I believe there are many Chinese who sit 
on boards of certain companies in America.
    Mr. Norman. I am talking about Prometheum, that just got 
approval from the SEC and from FINRA.
    Mr. Kaplan. And there was a full examination by CFIUS into 
our interactions, plus the SEC. We had to send all 
communications in to any foreign investor. Essentially, they 
examined everything we had previously done, and based on their 
examination, they thought it was okay. They closed that 
investigation.
    Mr. Norman. Okay. Well, I doubt your claim is true. That 
would not qualify for protection from the Federal securities 
law that you are offering, with this type of an investment 
group.
    Mr. Garrison, you are, I think, an SEC alum?
    Mr. Garrison. Yes.
    Mr. Norman. Are you aware of the bicameral bill that 
Senator Tillis has, and I think it is Senator Gillibrand, that 
prohibits Chinese entities from acquiring U.S. digital asset 
companies? You worked at the SEC. What is your opinion of this 
bill?
    Mr. Garrison. I am not familiar with that exact bill.
    Mr. Norman. It stops Chinese companies from investing in 
Prometheum.
    Mr. Garrison. I believe the national security concerns 
should be taken into account in any digital asset legislation 
and regulation.
    Mr. Norman. Do you agree with the bill or not? Is that 
something you would----
    Mr. Garrison. Yes, in general broad terms. Again, I have 
not read the bill. But yes, that is----
    Mr. Norman. Okay. It just prohibits Chinese----
    My time is about up, but if we do not realize now what 
China is doing to this country, and the information that is 
divulged, being on a board of the size of this company and the 
private information, for a company that is pretty much 
overtaking this country, or attempting to, I think it is a sad 
day in this country that this is what is happening. And the 
protections are not there, and you basically know it.
    I yield back.
    Mr. Flood. I would like to thank all of our witnesses for 
being here and for their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    I will ask our witnesses to respond no later than July 10, 
2023.
    This hearing is adjourned.
    [Whereas, at 6:46 p.m., the hearing was adjourned.]

                            A P P E N D I X


                             June 13, 2023
                             
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