Skip to main content

tv   Finance Experts Testify on Cryptocurrency Boom  CSPAN  July 1, 2021 2:30am-4:36am EDT

2:30 am
2:31 am
good morning, everyone. i'm al green. it is my honor to call the oversight and investigation subcommittee to order. the title of today's hearing is america on fire. fire being an acronym for financial independence, retire early. will the crypto frenzy lead to financial independence and early retirement, or financial ruin? without objection the chair is authorized to declare a recess of the subcommittee at any time, without objection members of the full committee not on this subcommittee are authorized to participate in today's hearing. i'd like to note that a mr. brad sherman who is a part of the full committee without objection will be accepted as a participant. with the hybrid format of this hearing, we continue to have some members and witnesses
2:32 am
participating in-person and others on the webex platform. i remind all members participating remotely to keep themselves muted when they are not being recognized. the staff have been instructed not to mute members except where a member is not being recognized and there is inadvertent background noise. members are also remind that had they may participate in only one remote voegd at a time. if you are participating remotely today please keep your camera on and if you choose to attend a different remote proegt please turn your camera off. i now recognize myself for two minutes to give an opening statement. it is my pleasure to open the second in a series of financial
2:33 am
services committee hearings on issues relating to cryptocurrency and digital assets. most of us in this room are old enough to remember these financial calamities that cost so many so much. the 2008 mortgage crisis, the alan stanford ponzi scheme, the bernard madoff ponzi scheme. in each of these cases and others that i haven't enumerated investors and financial institutions suffered severe losses then sought and or received bailouts from the federal treasury. their refrain seems to have been keep the government out of my life until i lose money. so today we ask will there be a bailout of digital asset investors if their investments market value drops to zero? if we believe that such is not
2:34 am
the role of the federal government, should there be an amount or form of reserves required to backstop digital securities should they fail, or instead are today's investors in digital assets entirely reasonable in expecting the federal government to provide a backstop in certain cryptocurrencies should she digital assets become large enough to have a systemic impact on our economy? if so, should there be greater federal oversight and rating agencies to evaluate the risk and performance of these digital assets? today's hearing will consider the answers so these questions and assess the systemic risks to the economy as well as the risk of loss to individual investors posed by recent periods of extreme volatility in crypto assets that are not backed by any form of tangible collateral.
2:35 am
it is now my pleasure to yield to the ranking member whom i must congratulate, mr. emmert, congratulations on your new station in life and we yield to you for five minutes for an opening statement. i do look forward to working with you. >> thank you, mr. chair. i, too, look forward to working with you. i appreciate you holding this hearing today and i thank you -- and i give a big thank you to our witnesses for appearing before the committee. i look forward to all of your testimony. financial technology and cryptocurrency are the future of the global financial system. in general fintech lowers the barriers to entry to the traditional financial system and offering all consumers no matter where they are the ability to access convenient financial services at low competitive costs. cryptocurrency is no exception. as we have seen from the huge
2:36 am
consumer demand for these innovative assets backed by technology that is permissionless, open and private, cryptocurrency allows people to transact with each other in realtime across borders for very little cost in a way that is so transparent and verifiable that it maintains more trust, actually more trust, than traditional financial transactions with a third party intermediary. most importantly cryptocurrency and block chain technology unlock access to opportunity. the open source nature of these technologies offer millions of americans the opportunity to study the underlying code, develop block chain projects and launch their own businesses all without having to ask anyone for permission. that's an incredible opportunity. over the last few years i've been fortunate to meet with many great crypto and block chain innovators, the common refrain
2:37 am
is so they so badly want to develop their block chain ideas in the united states but they don't because of continuing uncertainty with federal regulation and perhaps more importantly the lack of enforcement of existing laws and regulation. they're afraid to launch new projects that, for example, might classify them to be a, quote, money transmitter even though their work has nothing to do with money transmission. still the thought of having to comply with an overburdensome state-based money transmission licensing system in the united states is too much of a challenge for these entrepreneurs to be worth their time or investment so they head overseas where the leg tore compliance is more streamline. i've been told by two co-founders of a company in the midst of develop a block chain network that they wanted to hire american developers but because there isn't a streamlined process at the sec to determine what is a security, they couldn't pay american developers
2:38 am
with their token so they went out and hired a team of developers in europe instead where they can confidently comply with existing regulation. as i mentioned, fintech and cryptocurrencies are the future of finance but we're missing out as a country because american entrepreneurs are still unsure of how to navigate our existing regulatory system. this means high tech jobs are going overseas and capital formation opportunities for every day americans are being missed, all part of the chilling effect that comes when we do not answer the questions that industry leaders and consumers are begging for. questions like what digital assets are a security? what digital assets are a commodity? what digital assets are currency? answering these questions will keep invasion here in america and unlock new opportunities for every american to access. let's be clear that these things
2:39 am
are already regulated but we need clarity in application and enforcement of the existing laws and regulation. there are also areas where we can and should streamline our regulatory framework to ensure that we realize and benefit from crypto investment and innovation right here in the united states. i look forward to learning from the witnesses how we can address these challenges and i yield back the remainder of my time. >> the gentleman yields back. the chair now recognizes for one minute the chairman of the subcommittee on investor protection, entrepreneurship and capital markets, mr. sherman of california for an opening statement. >> thank you so much for this time. those in the cryptocurrency space are naturally pro-crypto. their fortunes, their relevance, their fate depends upon the success of cryptocurrency. cryptocurrency is something you can bet on, but if people had
2:40 am
the animal spirits to take risks i'd prefer them invest in equity markets to support the building of american companies or the california lottery to support the schools in my state. cryptocurrencies are highly volatile so if one person makes a billions and retires at age 45 and nine lose$100,000 coin base makes money, the one millionaire goes on tv and says how wonderful it is and nine others do not retire in dignity but instead become eligible for medicaid. cryptocurrencies can ultimately be successful only if they are successful currencies and evading the know your customer rule is the one thing that cryptocurrencies have as an advantage to the u.s. dollar. cryptocurrencies have the political support of the patriotic anarchists who are rooting for tax evasion. i hope we shut it down.
2:41 am
>> the gentleman's time has expired. the chair now recognizes the chair of the full committee, ms. waters, for an opening statement. the gentlewoman from california. >> thank you very much, chair green. congress and regulators face many challenges as we grapple with how to best regulate cryptocurrencies, including cryptocurrency issuers, exchanges and investments. this committee is committed to providing not only more transparency in this minimally regulated industry but ensuring appropriate safeguards are in place and so we have begun a thorough examination of this marketplace. today i look forward to hearing from our panel about the risk of fraud and market manipulation that can hurt retail investors and regular consumers. furthermore, i look forward to learning about the systemic risks presented by hedge funds
2:42 am
rushing to invest in highly volatile cryptocurrencies and cryptocurrency derivatives. thank you, mr. green, for convening this hearing today and i yield back the balance of my time. >> thank you, madam chair. the chair now recognizes for one minute the vice chair of the subcommittee representative williams of georgia for her opening statement. >> thank you, mr. chairman, and thank you to all of our witnesses for joining us today for this critical conversation. often in congress it's up to us to write the rules of the road while the road is being built. this rings especially true when we talk about the rapid development of digital assets. we have to be sure that the legislative and regulatory frame works governing digital assets keep up with the pace of innovation. what's at stake? ensuring financial innovation is appropriately serving all the people. the people of georgia's fifth district want financial services that are responsible and help them improve their lives and it's our responsibility to make
2:43 am
sure that any financial innovations including in digital assets meet that bar. i look forward to our discussion today, mr. chairman, i yield back the balance of my time. >> gentle lady yields. and thank you, ms. williams. it is now my honor to welcome each of our witnesses and i'm pleased to introduce our panel. we have ms. ever suh a economics analyst for congressional research service. alexis goldstein is the director of financial policy at the open markets institute. christine trent parker who is a partner at reed smith llp. sara hammer who is the managing director of stephens center for innovation in finance at the
2:44 am
wharton school of the university of pennsylvania. peter van falkenberg the director of research at coyne center. welcome to each of you and thank you for being here today. the witnesses will be recognized for five minutes each to give an opening presentation of their testimony. without objection, the witnesses' written statements will be made a part of the record. once the witness has finished their testimony, each member will have five minutes within which to ask questions. for the witnesses in the hearing room, on the table in front of you is a time that will indicate how much time you have left. when you have one minute remaining a yellow light will appear. i will ask you to be mindful of the timer and when the red light appears to quickly wrap up your
2:45 am
testimony so that we can be respectful of both the other witnesses and the committee members' time. without objection your written statements will be made part of the record. once the witnesses finish their testimony each member will have five minutes to ask questions. ms. suh, you are now recognized for five minutes to give an oral presentation of your testimony. >> thank you. chairman green, ranking member em merit, members of the committee, thank you for the opportunity to testify today. my name is eva suh and i'm analyst in financial economics at the congressional research service focusing on capital markets and securities regulation. >> ms. suh, we will allow you to start again. would you kindly depress, there is a button there to turn on your make phone. >> it's on. >> if it's on would you bring it closer to you please. >> yes.
2:46 am
is this better? >> a little bit. could you bring it a little bit closer, please. let's try that. >> how about this way? >> i think that's better, but if you could bring it a little bit closer. as close as -- thank you. >> how about here. >> okay. we will try that. let's see if that works. >> great. >> thank you. >> chairman green, ranking member em merit, members of the committee at the krongs nl research service focusing on capital markets and securities regulation. crs provides congress with analysis that is authoritative, confidential, objective and nonpartisan. any arguments referenced in my written or oral testimony are for the purposes of informing congress, not to advocate for a particular policy outcome. in recent years financial
2:47 am
innovation in capital markets has fostered a new asset class, digital assets, and introduced new forms of fundraising and trading. digital assets which include cryptocurrencies, crypto assets or crypto tokens, among others, are a digital representations of value. the current regulatory landscape for digital assets is perceived by certain industry observers to be fragmented. multiple agencies apply different regulatory approaches to digital assets at the federal and state levels. regardless of the terms used to describe digital assets, depending on their characteristics, some digital assets are subject to securities laws and the regulations that are designed to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation. others such as bitcoin and -- are not considered securities
2:48 am
and generally not directly subject to those requirements. the securities and exchange commission is the primary regulator overseeing digital asset securities, offerings, sales and investment activities. my testimony focuses on issues related to digital asset securities regulation. digital assets increasing presence in capital markets raises policy questions regarding whether changes to existing laws and regulations are warranted. if so, when such changes should happen, what form they should take and which agencies should take the lead. the current innovative environment is not the regulatory regime's first encounter with technology. in the past some technological investments have will he had to regulatory revamps where as others were dealt with through
2:49 am
the existing regime. regulatory oversight generally strives to balance the need to foster financial innovation with objectives to ensure market integrity and investor protection as well. in general policymakers contending with major financial innovations have historically focused on addressing risk concerns while tailoring a regulatory framework that was flexible enough to accommodate evolving technology. current developments that raise policy issues include, first, digital asset exchanges. some industry observers perceive digital asset trading platforms to functional equivalents to securities exchanges in buying and selling dgts but these platforms are not subject to sec regulation, potentially making them less transparent and more
2:50 am
susceptible to manipulation and fraud. second, digital asset custody. custodians provide safekeeping of financial assets. digital assets present custody-related compliance challenges because custodians face difficulties in recording ownership, recovering lost assets and providing audits among other considerations. third, digital asset etfs. etfs are investment vehicles that gather and invest money from a variety of investors. etf shares can trade on securities exchanges like a stock. the sec has not yet approved any digital asset etfs because of market manipulation and the fraud concerns. fourth, stable coins. stable coin is a digital asset designed to maintain a stable value by linking its value to another asset or a basket of
2:51 am
reserve assets as seen in dm formerly known as libera. in policy discussions some suggest applying etf regulatory frame works to certain stable coins, others argue for more disclosure of the underlying reserve assets to expose potential deceptive activities. that concludes my testimony. i look forward to your questions. thank you. >> thank you, ms. su. the chair now recognizes ms. goldstein. you can remember knivesed for five minutes to give an oral presentation of your testimony. >> chairman green, ranking member emer and distinguished members of the subcommittee, thank you for inviting tee moo he to testify. i'm the director of financial policy at the open markets institute where my work focuses on financial regulation and consumer protection. previously i worked as a computer programmer at morgan stanley in electronic trading
2:52 am
and at merrill lynch and deutch bank serving the equity derivatives trading desks. earlier this year the blow up of a single family fund arcagos capital led to 10e billion in bank losses after the firm's bet on a dozen total return swaps imploded. because these derivatives aren't currently reported to the securities and exchange commission on form 13-f banks and regulators alike were entirely in the dark about arcagos's positions until this blew up. the extent of hedge fund and family involvement in cryptocurrencies lives in a similar regulatory blind spot. chairwoman waters has introduced draft legislation to try to discuss some of these issues with form 13-h and i think hedge funds should report their cryptocurrency positions on this form. if a majority of hedge funds with billions of dollars in assets under management begin to
2:53 am
hold significant positions in crypto as certain surveys indicate they are interested in doing, it may produce dire risks for systemic -- for financial systemic risk and may induce future crises as volatile swings in the cryptocurrency markets could lead to things like forced liquidation on their assets. in addition to hedge funds large too big to fill banks in silicon valley venture capital firms are also a growing presence in crypto. vc firms are invested $70 billion in crypto firms so far this year which is more than three times what they invested in all of 2020. if you combine this with the fact in a some cryptocurrencies have a majority of their supply held by a very small number of people, it raises concerns around concentration. to take one example, as of february the top 20 largest dogecoin addresses held half of the cryptocurrency's entire supply. there are broad investor and consumer protection concerns in cryptocurrency that i have
2:54 am
personally observed as a user of crypto exchanges and d-5 platform. in traditional financial markets barring a serious liquidity crisis if you buy something you can generally assume you can sell it back, especially with a stock, but on defy protocols like uni swap anyone can upload a new cryptocurrency token, anyone can add a liquidity pool for it including malicious actors who design tokens that can be bought but never sold. these honey pot tokens are so prevalent that some defy protocols include an explicit warning about them on their website. some crypto investors try to read the smart contracts or code of new coins to look for common pitfalls and avoid scams, but this is an extremely high bar for nonprogrammers. some of the more concerning areas i've seen in defy around platforms that offer derivatives, frankly it reminds me of the over the counter derivatives marketplace before dodd/frank which i worked in as a banker in the late 2000s.
2:55 am
things like the u.s.-based dydx, open which offers options on cryptocurrency and ribbon finance which offers structured products based on crypto. currently cftc commissioner dan burke vits said that unregistered defy exchanges may not be legal under the commodity exchange act. i have also used a defy protocol called pancake swan which advertising eye popping annual percentage rates in exchange for locking a pair of cryptocurrencies into the platform's liquidity pools. they are probably not the right metric to attempt to use for what the crypto community called yields farming adds the rates can vary wildly even on a single day but just to give you one example in early may pancake posted a sweep saying you to get over 100,000 percent apr if you stake or locked in your dogecoin on pancake swap. they later stated that that special rate was only there for 13 days which is questionable to
2:56 am
use for an apr. users complained that the rate offered was nowhere near what they were advertising on twitter yet they tweeted again the same day that, quote, the longer you wait the less pre money you get. end quote. i believe that congress should continue to examine if there are regulatory gaps that require new legislation in order to ensure consumer and investor protection in crypto and avoid systemic risk. regulators should continue to monitor the space and ensure compliance with existing laws. thank you and i look forward to your questions. >> thank you, ms. goldstein. the chair now recognizes ms. parker for five minutes to give an oral presentation of your testimony. >> thank you. thank you, chairman green, madam chair waters, ranking member emmer and members of the subcommittee for the opportunity to appear before you today and thank you to the subcommittee staff for their hard work in putting together this hearing. my name is christine parker and i'm a partner in the new york
2:57 am
office of reed smith. i'm joined by my colleague trevor levine who is brave enough to come to d.c. with me. i focus on trainl the matters. i routinely advice regulated an unregulated in connection with a number of different federal and state regulatory and prudential regimes. at the outset i want to note there are a lot of use cases for block chain and digital ledger technology for which cryptocurrency serves as the fuel. i urge this subcommittee to engage with organizations that are working at the grassroots level to establish industry respond erred voluntary self-regulatory associations for digital asset and crypto markets on a global basis and at the national level because i think there is a lot to be learned from them. i also want to point out if we are going to innovate how we regulate new markets it calls for a new kind of financial regulator. at a minimum we need financial regulate thars reflect the
2:58 am
diversity of retail invest err who are active or want to become active in the crypto markets. as advocates for responsible innovation i don't think the crypto industry has been very good at pushing forward diverse voices but we can and we should and we will do better on that front. however, we are here today to talk about the retail investors who are training in the crypto markets and i know there's been a lot of focus on the recent volatility in these markets and what does that mean for congress, for the regulators and for retail investors? just a quick point. the volatility in the crypto markets is not solely attributed to their lack of regulation. i will point out that crypto exchanges such as gemini and coin base are not regulated like the chicago meshing an tile exchange and the new york stock exchange but they are regulated by the new york department of financial services as limited purpose trust banks, they are subject to amlkyc requirements as any other medical or state regulated bank and the commodity
2:59 am
futures trading commission has anti-fraud and anti-man flags authority over the bitcoin and has actively use that had authority in in space. separately volatility is not unique to the crypto markets. last april the crude oil market went negative and in february natural gas markets were incredibly volatile due to winter storms. there were products offered on exchanges available to retail customers based on market volatility. so some investors are actually seeking out assets that are based on volatility on these very highly regulated exchanges. that being said the question that we are really grappling with today is how do we best protect retail customers who are actively trading in the crypto markets. i think it's somewhat problematic to simply equate the
3:00 am
crypto markets with terrorism, tax evaders and bad actors. every member of the subcommittee has a law abiding constituent who enjoys trading crypto so what is in the best interest of this constituent trading crypto right now? access to crypto markets that operate under a clear regulatory framework with customer protection mandates and opportunities for risk that are commensurate with the suitability of the investor. right now we have an absurd patchwork of regulatory regimes at the state and federal level. we have regulation by enforcement, interpretation, guidance, interpretive guidance and public statements from regulators. one regulator says that a crypto asset is a currency, another says it is a security and the outcome of that is incredibly harmful to retail customers. this lack of clarity stifles innovation in the u.s. and drives retail customers to foreign exchanges. so how do we better regulate cryptos? the cftc and the sec should be
3:01 am
empowered by congress to move quickly to provide retail investors with a broader array of regulated crypto products attractive to market participants but come with the oversight of these regulatory regimes. this should happen now. congress should also direct the sec to immediately create clear workable criteria as to which digital assets are securities and subject to u.s. securities laws and regulations. second, while regulators in new york and miami in particular have been crypto forward regulators and will continue to be leaders in the space, congress needs to pass legislation to to provide for the federal preemption of the state by state licensing requirements for the direct purchasing and sale of cryptocurrency. this will ensure that these transactions are subject to the level of market oversight that we currently have in the futures and securities markets. the logical regulator is the cftc but you must ensure that you fully fund them so they can take on this mandate. thank you for the opportunity to
3:02 am
speak and i look forward to your questions. >> thank you, ms. parker. ms. hammer you are recognized for five anyone else to give an oral presentation of your testimony. >> chair green, ranking member emmer and members of the subcommittee, thank you for the opportunity to testify today. my name is sara hammer i'm managing director of the stephens center for innovation in finance and senior director of the alternative investments program at the wharton school of the university of pennsylvania. i also oversee the block chain laboratory within the stephens center at wharton. digitally i am adjunct professor of law at the university of pennsylvania law school where i keep an upper level course on financial regulation. before i proceed i'd like to note that the views i express today are my own and not the views of the wharton school or the university of pennsylvania. block chain is a shared ledger that facilitates the recording of transactions in a network. today block chain technology
3:03 am
infiltrates, empowers a myriad of institutions, functions and assets in the united states and globally. the use cases for block chain are too numerous to cover in detail here but they include decentralized finance, enterprise block chain, cybersecurity enhancements and even addressing climate change. the subject of today's hearing is cryptocurrency. at the outset it is worth noting that there is no official public data source for cryptocurrency prices, market size or volatility. this lack of data is a significant problem, however, unofficial data sources have estimated that the total value of the cryptocurrency markets may exceed $2 trillion. investors in cryptocurrency include retail, high net worth and institutional investors such as private funds, corporations and endowments. retail investment in cryptocurrency may give rise to
3:04 am
particular concerns about investor protection given the possibility of fraud or business failure, the lack of disclosure and the high level of price volatility. the rec ritz exchange commission is charged with a try par tied mission of protecting invest, maintaining fair, orderly and efficient markets and facilitating capital formation. at the same time the sec faces challenges in applying capital markets and securities regulation to cryptocurrency. chief among these is weather the sec has the authority to regulate a particular instrument. currently the sec evaluates crypto sales through the lens of a test known as the howie test which evaluates whether an instrument qualifies as an investment contract for the purposes of the securities act. while the sec has applied securities regulation to dozens of initial coin offerings based on the howie test there is still
3:05 am
a lack of clarity as to whether it applies to a number of crypto transactions that currently do not comply with sec registration and disclosure obligations. in addition, a number of exchanges that offer trading in crypto including those that meet the definition of a security do not register with the sec. given this, there is a strong need to establish a clear, sufficient and appropriate regulatory framework for cryptocurrency. i turn now to the issue of systemic risk. as discussed,el value of the cryptocurrency market is estimated to possibly exceed $2 trillion and it is characterized by very high levels of price volatility. additionally estimates are that more than 2,000 different cryptocurrencies currently circulate globally. for context estimates of subprime debt prior to the great financial crisis are less than $1 trillion. moreover, since no official data
3:06 am
source exists for crypto markets, financial regulators are at a distinct disadvantage in evaluating their regulatory options. because of the infiltration of crypto into so many institutions, functions and assets, the potential risks must be carefully evaluated in a coordinated fashion. in light of the risks and considerations of crypto, a myriad of agencies, states and international standard setting bodies are implicated. thus, a key question for regulation is how should we proceed? and in what forum? importantly a government authority already exists that could support the development of a clear, sufficient and appropriate framework for regulation of crypto. established in 2010 by the dodd/frank act the financial stability oversight council is the appropriate forum to engage in evaluating and addressing potential systemic risks. convening and coordinating federal rulemaking on issues that touched multiple agency
3:07 am
jurisdictions and consulting with state and foreign regulatory authorities. i believe that by leveraging the authorities of the fsoc to support the development of a clear, sufficient and appropriate framework for crypto we can address concerns about fostering innovation, providing consistency, establishing global reach and balancing our regulatory objectives. thank you. >> thank you, ms. hammer. mr. vanvolkenberg you are recognized for five minutes. >> chairman green, ranking member emmer, members of the subcommittee, thank you for the invitation to speak with you today. my name is peter vanvolkenberg i'm the director of research at coin center which is an independent nonprofit that's focused on cryptocurrency public policy. the bitcoin network has been processing transactions for longer than uber has been offering rides. bitcoin and other
3:08 am
cryptocurrencies have enabled 3.1 billion transactions in the last ten years. securing over $2 trillion in value. if cryptocurrencies were unregulated to this day, would that not be an incredible failure of our regulatory system? as i will outline, it's not a veil lure because over the last ten years cryptocurrencies have been regulated. some of that regulation, of course, does come from the technology itself, the scarcity of bitcoin, a total supply of only 21 million is not reserved by the good will and honesty of the participants on the network, it is secured by a transparent, peer to peer accounting technology, a public block chain, that makes fraud trivially choo ep to detect and absurdly expensive to commit. but much regulation has also come from the federal and state governments. the on ramps and offramps where people buy and sell bit coins for dollars and safe keep them
3:09 am
are heavily regulated. they are state licensed money transmitters or else they are chartered banks and trust companies. before offering any services to americans they must prove minimum capital requirements, post bonds and open their doors to yearly examinations. they are also classified as financial institutions and you the bank secrecy act, they must register, know their customers and share the details of suspicious activities with law enforcement. cryptocurrencies like bitcoin and ethereum are commodities but many crypto assets meet the flexible definition of an investment contract and are, therefore, securities which means their issuance and their trading are regulated by the sec. cryptocurrency derivatives are regulated by the cftc. finally, anyone who markets a cryptocurrency service or tool that is deceptive or fraudulent is liable under various laws
3:10 am
enforced by the cfpb, ftc, sec, cftc and state attorneys general. and the results of all of this regulation speak for themselves. in 2020 only 0.34% of all cryptocurrency transaction volume involved a criminal sender or recipient. despite several high profile hacks of overseas exchanges, no american exchange has suffered a substantial hack or loss of consumer funds. operators of money laundering exchanges overseas have been arrested, sales of unregistered tokenized securities have been targeted by sec enforcement and criminal ransomware rings have been their funds seized. all of this has happened by applying existing laws to the cryptocurrency space. we don't need new regulations. and all of this has also happened while preserving the fundamental value of
3:11 am
cryptocurrencies as open access platforms for financial services and innovation. unlike any other transactions technology that works online, an open block chain network is accessible to people that banks and tech companies would rather ignore than serve. with the rise of central bank digital currencies from authoritarian nations happening in tandem with the rise of bitcoin we are at a decision point as an advanced technological society. are we willing to accept some risks if it means we can eliminate the choke points to economic participation that further inequality and stifle innovation, or would we prefer to strengthen those choke points and outlaw alternatives in the hopes that a powerful elite will smartly choose who should and should not have access to powerful tools and volatile markets. for every transaction that we want blocked, there is another transaction we should celebrate for being unstoppable.
3:12 am
yes, there are some criminals making payments on the bitcoin network because banks won't bank them. there are also pro-democracy activists in belarus and anti-police protesters in nigeria taking donations on the bitcoin network because local banks won't bank them. nonprofits feminist coalition in nigeria raised millions of dollars in bitcoin donations last year, donations they were forbidden from accepting by a corrupt or otherwise uncaring banking sector in their respective countries. in america we don't always agree, but no matter what we are tolerant and expect everyone to have the opportunity to stand up and fight for their own vision of the good. crypto innovation embodies that aspiration. it's rough around the edges but holds some values above all. every node is an equal, no one's voice should be censored and work rather than privilege is what counts in consensus. thank you. >> thank you.
3:13 am
the chair will now recognize the gentlewoman from california, the chair of the full committee for five minutes for questions. >> thank you very much, mr. green. ms. goldstein, earlier this year pricewaterhouse cooper released their third annual survey of hedge funds in the cryptocurrency market. according to the survey cryptocurrency currently accounts for 10% to 20% of all assets under management for one in seven hedge funds. over 60% of the hedge funds surveyed expressed a desire to start investing in cryptocurrencies or to accelerate their existing investments in cryptocurrencies by the end of 2021. hedge funds often manage funds on behalf of mutual funds, pension plans and other institutional investors which affect millions of regular consumers and investors.
3:14 am
ms. goldstein, do you see any systemic risks associated with hedge funds investing heavily in cryptocurrencies? and i'm more interested in this just having listened to the last presenter who talked about the choke point that we should not be so concerned about. what do you think? >> thank you, chairwoman waters for the question. i'm very concerned about the presence of hedge funds in cryptocurrency. i think we've seen with the arcagos meltdown this year that when banks have prime broker relationships with hedge funds or family depends as arcagos was doing risky things it can go down to the -- credit suisse lost billions of dollars. if hedge funds get farther into crypto they don't care about direction, they will go long, they will go short, they can use leverage. there are lots of cryptocurrency exchanges like ftx and many others that allow people to use insane amounts of leverage, 100
3:15 am
times to 1 and hedge funds are the perfect client to use those sorts of leverage. what happens if a huge number of hedge funds who have prime broker relationships with too big to fail banks happen to have in similar crypto positions whether it's long and short and there's massive volatility in the market. they may have to sell some of their other assets, it may lead to margin calls in their noncrypto assets which could lead to in other asset calls, and then lead to recalls ap and that would lead to -- >> and let me ask you, would that rely the general public more transparency as to which hedge funds are more heavily invested in cryptocurrencies, and which of the institutional investors are the counter parties that may be exposed to potential risks? >> chairwoman, they are not to my knowledge, because crypt to
3:16 am
current is not reported to 13f and not seen as a interest, and so the regulators are totally in the dark as to the cryptocurrency amount, and in order to find out who is in the blockchain and to find out who they are, but there no way to figure out who they are. >> ms. hemmer, you spoke to this issue somewhat, so would you give me your knowledge about what kind of oversight do we have now, and what agencies have the responsibility, and what should we have? >> chair waters, thank you for your question. i, too, i have concerns about crypto trading by private funds, one of of the key issues as i discussed in my opening statement is transparency and the availability of data.
3:17 am
in the crypto markets, we have no official public source for data, and the investors are operating based on online web sites, and there are disparities based on what the volatility may be, and in some ways, it is harkening back to the credit default swaps, and that a market that is traded almost exclusively over the counter, and highly unregulated. when the crisis hit, we saw that credit default swaps exasperated the risk. so once we had an official source, and oversight regulator to identify where the risks lay. the same is true for crypto. as ms. goldstein said, it relates to leverage and whether it is appropriate or not to some of the assets, and it is
3:18 am
extremely appropriate. i believe it is important for the fsock to convene and communicate to the market issues is the issue. we are not talking about crypto within the bans, but talking about banking, and taxpayers in a number of ways, and they can be compelled to work together. >> okay. i yield back the balance of my time. >> the chair recognizes gentleman from minnesota who has served on the fin task force. >> this is interesting with the testimony that we have just heard mr. van fallkenberg about this idea of need for
3:19 am
investment, and when people are promised tokens, and is that regulated? >> and a promise based on the issuance of the offerings would be treated in all cases as securities and they involve issuance and trading. >> well, let me keep going, and i want to come back to that one because i want to talk about what the s.e.c. would probably do and why that is a problem. when people make bets, and again mr. van valkenberg with the sale of cryptocurrencies, is that reported? >> these are commodities drif ti -- derivatives and the s.e.c.
3:20 am
has authority over that. >> so it is regulated. so this is going over to the first part of your testimony. can cryptocurrency be transferred without identifying the customer? >> yes, and while this is done without esa regulated, you have to know the customer and it is regulated since to 2013. >> and met do the prices of the cryptocurrencies like dogecoin which is volatile, and as by persons and groups and even manipulated by groups and agencies. is that regulated? >> dogecoin does not qualify as a security. to the extent that line is
3:21 am
unclear, yourself, congressman emmert introduced legislation would clearly delineate the line between securities and commodities, but if we say that dogecoin is a commodity, it is a regulated commodity for regulated purposes specifically in the manipulation context that you phase. the s.e.c. has the authority to investigate under the authority of s.e.c. code. as senator dodd testified, there is a gap here, because unlike specific commodities here like a cattle auction, you are buying it from me, and i am selling it
3:22 am
to you, and so accordingly, it may be reasonable to extend to these entities, and again, to follow gensler's recommendations is another piece of legislation that you introduced last congress with, sorry, represent, former representative conway introduced and you sponsored would be for guardrails for representation where these people are trading these commodities at the spot rail. >> and i introduced the clarity act for the s.e.c. and token issue to swiftly determine when and if a token is a security. in the short time that we have left, i do believe that we have the regulatory framework, and the laws in place, and people don't get to run in this country under the radar if they are complying with kyc and all of the regulations out there. and would you agree, mr. van
3:23 am
valkenberg, the real issue is that as we can do some work as congress on the margins to clean some of this up, the real issue is the application of the existing regulation and law has not been consistent, and little enforcement and present so that people in this area know what is right and wrong. >> i think that is right, and there is a certain wisdom for the open protection in this country which our laws have the broad and flexible standard and however they only work if the controversies end up in court, and the judges make clear application to the laws. we have seen decisions by the judges, and administration with guidance that is not as clear as it should be, but the underlying laws are sound, and should be applied. >> thank you.
3:24 am
>> the gentleman's time has expire and the gentleman recognizes the gentlewoman from south carolina mrs. adams for the questions. >> thank you. thank you, chair green, and ranking member emmers as well. there is a great deal of interest with respect to the congress regulatory frame with respect to the cryptocurrency. vi heard plenty of discussion from my colleagues about not only who should regulate the cryptocurrencies, but how to regulate the entities, so as you alluded to in the statement, many of the discussions have centered around the roles of of the s.e.c. and the cftc. so, how are the crypto currency markets currently regulated and
3:25 am
how is this current proficient laws proposed? >> that is an excellent question, and like you i come from the commodities side when i look at the markets, and bitcoin and eth are the framework of the commodities, and so at the spot level, the cash level, you know, the ctc has not been active in that space of sort of the robust market oversight they provide to the futures exchanges, and that is because of the function of the commodity markets, and they sort of arose from the commercial entities coming together to buy and sell their pork bellies and orange juice and wheat and products so that
3:26 am
we don't have a sort of form of commodity, and so bitcoin is intangible commodity and novel application of the laws and the systems that have existed for almost 100 years. so what i would recommend, and what i think that makes sense is the ctfc is a robust and experienced market regulator. i think that it makes sense to draw digital assets spot products. so i am not talking about the other physical commodities and not talking about the financial commodities, but digital asset spot commodities, and makes sense to pull it within the market oversight framework and apply the sort of the market conduct and market surveillance requirements that are imposed on the cme and i.c.e. to these spot markets. >> thank you, ms. parker, because i want to move on and get another question. thank you so much.
3:27 am
so ms. sue, i want to say that protecting on the consumer protection, and in my opinion, we have spent too much time focussing on what happens on twitter, but when it comes to the crypto currency, and about twitter being front and center, and in january we watched bitcoin spiked with each tweet. we watched it fluctuate in the month thereafter, and so let me ask you, what are the most concerning in investors in cryptocurrency in the marketplace, and how can those risks be mitigated most effectively by the regulators? ms. su? >> yes, i think that from the investor protection perspective, if you are looking at the capital markets related concern, there are three groups of primary risks that we consider.
3:28 am
market volatility is definitely front and center, and the traditional way to handle it is through disclosure, and investor description, and by that you provide the material information about the risk, and the investors would go into the risk taking in an informed way. they would price the risk accurately. similarly with the investor protection regarding restriction, and if you deemed the instrument to be highly volatile and highly risk to the financial cushion that certain investors have, you may exclude those investors from such investments. the higher risk -- sorry, the other risks related to -- >> go ahead. >> and the fraud and the scams that you handle it through the rulemaking enforcement, and reporting, and then the third
3:29 am
category which people usually like paying particular attention that is safekeeping functions like the lost password and you are fully aware of like 20% of the certain digital asset was lost due to the lost passkey. >> custodian. >> yes, the custodian service. >> yes, thank you very much. i am out of time, and i will yield back mr. chairman. >> the gentle lady's time has expired. the gentleman from georgia mr. loudermilk is recognized for five minutes. >> thank you, mr. chairman. and this is a very important hearing that we are having here, and very important thing to look at, and one of the important things that happens here is that
3:30 am
they draw a line early on, and it is something that they don't understand or a fear factor, and i have seen it with the crypto currency, and that is the case here, and sometimes here we can't see the for estfor the trees, and that is what is happening here. the part that we are missing out is the blockchain lining. and i have been advocating that we utilize or at least look at using blockchain technology as a solution to the crypto, not crypto, but to the cybersecurity issues here in this nation. when you are considering that the federal government, and we have had cyber attacks and loss of people's personal data inadvertently disclosed and caused a lotf issues, it is not that pa -- that hard to do when
3:31 am
you consider my personal information and other people's personal information resides in the government. so there is duplication of my social security number, and address and date of birth resides, and it is exposed one link. and so in the service, i was a veteran, and so i was in the v.a. and in the social security administration, and there were 44 data points that my information resides and all it would take is the breach of one of them. and with the blockchain, that could be the solution of the security problems that we have
3:32 am
in this nation. hammer, is tha that you would agree with? >> thank you for the question, and yes, that is something that we work with on a day-to-day basis at wharton. blockchain is decentralized technology, and there is no single point of failure. so it is several spot, and with each new block in blockchain, the previous blocks are stored, and this is a fully industrialized block. and so this is going to have a security implication. each block can have a user profile, and that is going to
3:33 am
protect the data by decentralizing it. >> technology involves public key, and private key structure. and so this key can be used for authorities, and a different key can be used for home security systems, and to prevent hackers breaking into your home security system or to prevent hackers from getting into your cybersecurity options. so i fully al gree many areas for blockchain technology, and
3:34 am
this is the technology that powers crypto, but the technology, itself, it has many applications, and we behoove ourselves to consider those possibilities. >> and that is the challenge of whatm what come some would consider the consideration of blockchain. and in the time that we have remaining, do you have potential concerns of a central bank agency? >> thank you, congressman, for the excellent question. i know that digital bank currency is something that is studied across the country by many academics and not-for-profits. it is important to understand that the central bank currency could take several forms, and it could be blockchain power and not blockchain powered and run along a traditional database. but there are concerns about
3:35 am
some of issues around privacy and whether it allows a decentralized system, because having a central digital bank could be a target for hackers, but at the same time i recognize -- >> the gentleman's time has expired. would you kindly give the rest of your answer in writing and submit it. >> absolutely. >> and when i have my time i may give her the opportunity to finish with my time. the gentlewoman from georgia, ms. williams, the vice chair of the subcommittee has five minutes. >> thank you, mr. chairman. my top priority in congress is that those marginalized remain involved in the consideration. this means that those with
3:36 am
marginalized are going to have access with those who are involved in. ms. hammer, how can you be communicating with those investing for the first time to be avoiding predators? >> thank for the question. protection is a key issue. i refer to several key agencies is in erisa in the department of labor is something that we think about in these markets. investors have different risk profilessh and different periods of time that you can think of, and not every asset is available
3:37 am
for every vehicle. today, we are seeing the crypto currency amming inst younger investors through feel strongly that coordination from fsoc is important through consumer protection and that we have the data and the resources to evaluate what is happening in the market. without a official data source, we are in the dark of what the proper regulatory framework should look like. >> thank you. it is important that we ensure protection with digital assets, but also to make sure that we taking care of the economy. and so given this, given that these can be changing value rapidly, what can be done as
3:38 am
these assets change rapidly? >> well, thank you, congresswoman. a key consideration for system race is under 120 of the dodd fran/frank act. the fact is that the crypto currency has intill -- infiltrated many costs. and not only do several investors hold crypto in their fun, and we have seen it in the banks, and we have permitted custodians operating as we have 50 different states looking at
3:39 am
the myriad of states. there 50 different states looking at the myriad of tools. this can be innovative, but the main thing is that we have a race to the top, and not to the bottomment there are some things that shoeb smart a ledge e slay tiff -- legislative study amongst the coordinated committees. >> so knowing that we need this, i am thinking of the committees around congress that could ensure the benefits for financial inclusion for more people. and are there any considerations that you have in mind for congress that specifically speak to those two areas.
3:40 am
>> thank you congresswoman, for that point as well. i think that financial inclusion is crucial when we think about crypto, and as we digitize the economy, the reality is that some people are included more and some people may be included less. i think that is part of the research that we do at the wharton school. there are 1.7 billion people that are unbanked. i think that having prior tis around these assets would be important, but i also think that clarity in the space and international coordination is key, because the technology going back to the uses to technology has many beneficial functions for other in other and
3:41 am
this may make crypto an important method for them to run their businesses, and run their families. >> thank you, my time has expired. >> the jenltle lady's time has exwired. the chair recognizes mr. kustoff. i noticed that you were speaking when the time expired. >> yes, thank you. we were discussing crypto currency, and i think that there may be privacy with the iterations that targeting can tame. one of the key priorities that we foe on in our work related to
3:42 am
fintech and in general the log general and this is a topic that is related to crypto a well. >> okay. vice president quarrels and the fed monday, and i will characterize expressed some skepticism with regard to currency, and we talked about not stiflely, and do you personally have concerns if we move slowly and say that the chinese accelerate, can you play that out what happens over 12 months, 24 months or five years? >> thank you, congressman, for the question, and i know it is a important topic as we think
3:43 am
about one-year or three year or i think is that how it is answering how to improve our offense infrastra uk chur and system. we live in a world today where it is taking days to clear and settle a payment. we live in a world where we have counter parties trading, and antiquated counter party and we should be doing everything that we can to minimize the exposure, and using all of the tools at our dispose sure. i think they clarity is used everyday with what we should be
3:44 am
doing, too. they need clarity in the law, and this an area where they don't have it in the law. my belief is that we should be working in a coordinated fashion to provide that. >> thank you, mrs. hammer. mr. van voelkenberger, if i could with you. inflation is a concern for people across the country, and certainly in my district in western tennessee. in a interview recently, you talked about or you advocated that essentially a consumer want to buy bitcoin, because it is a way to balance the investment portfolio against the threat of inflation, and could you expound on that please? >> yes, the intuition here is fairly straight forward. it is the first digital commodity and operates like gold, except it is coke and as
3:45 am
to the investment of gold in a certain stability, we seek that stability for our previous ichbs tugss. so as part of that diversed portfolio, one might be interested in owning some bitcoin, and american industries, and overseas balance s should we see et being. >> andt being. it being. >> and you may have answered this, but would you advocate for that for the average investor? >> well, we have guardrails in place for the market that make it a safe bet as long as we have good investor education, with si always a perennial problem, but if you go to american-run
3:46 am
companies that are directors of the financial protukts and safer, and so from to a person who has purchased bonds and a robust regulatory structure around them to protect them. >> thank you, and i yield back. >> the gentleman yields back, and now the chair recognized with that i yield back. >> thank you with that. and we all know that coin consumes enough energy to power a small nation. and the electricity index is one of the most cited currency indexes, and it is sitting to and idz consume shun of 66.24 terawatt hours. that is actually one-third of the consumption of google, and
3:47 am
the other crypto currency campus miles, and not a precise estimate, and the upper bound is as high as 59 terra hours, and as the bitcoin as usage increases, continue the use it. so as we can better ta uk to you mr. velkenberg, to increase the use of it. >> so, i agree -- and there is an ek eco. i agree that the cambridge day is the best shot now looking at this question, and what we have the benefit of is knowing the peer-to-peer ledger is telling the us, and it is not shared and
3:48 am
all of the work that the miners # utilized and that the government is not going to block certain transactions ash and it is a vibrant transaction that the miners can not rm fol -- in the form of a cartel, and they can use a cartel has a censorship usage. >> i am sorry, i need to get to the next point. >> it is an estimated fife more times than bitcoin, and granted that the traditional financial sector moves more money, but it is worth noting that bitcoin usage does not scale per
3:49 am
transaction, and most of the costs are the fixed costs of setting up an open peer-to-peer networks that are going to take those transactions into the system with a meaningful financial system that is resistant using 1/5 of the current financial system if we were to move more. >> and thank you. mrs. goldstein, is this compatible with the future? >> thank you, congresswoman for the case. it depends on the crypto currency, and depends which intensity i would use. and this is the bit koip and the one that bitcoin uses and the one that ethereum is using, and the one they are trying to mo away from. that is because it is typically a lottery system, and they can use for to 2.65 bitcoin reward
3:50 am
that is utilized every ten minutes, and some people describe it as solving for a math problem reward. but as more cryptocurrency and when crypto was high, and bitcoin reached the highs in may, we found 343 terawatt hours which is more of the consumption than argentina and norway, but the answer is depend, but the work in hours is compatible. >> there a recent study out of china says that if you don't
3:51 am
curb for bitcoin mining they could see 130 million tons of kor bonn for year. so my point is that carbon crisis is here, and we need to do everything to reduce carbon crisis, and to what i saw in my own community. i appreciate this committee, and i yield. >> the gentle lady yields, and i recognize the gentleman from south carolina for ten minutes. >> some of my colleagues have painted a broadcast danst shar la tans and ban on crypto currencies in the u.s. if we could for a moment and take a deep breath and remember
3:52 am
the words of president obama who said that blockchain is a fine information gathering tool, and that it could be potentially revolutionary technologies, and make sure they are not squandered. so mr. van valkenberg, are cooler heads prevailing or have hotter heads won out? >> we have met with all of the regulatory agencies that have some jurisdiction over crypto currencies, and i have been ak -- acquainted with a group of
3:53 am
people that have been working at this level, and so we have seen cooler heads prevail for a long time. we have had reasonable legislation from the money laundering activity that we have seen in a long time. and law enforcement said they prefer the investigation and the open blockchain because there is a ledger rather than tubously -- rather than continuously held information. >> and we have heard that gamestop has not come out to say it, but i find it insulting that many members of the committee
3:54 am
are not believing that their patrons know what they are doing when they invest. i won't patronize you, but do they have a role in knowing what they are doing. let's not stop and think about that. >> there is a common misconception that it is regulated. however, we have seen the s.e.c. and others at the state and federal level be federally active of the services that are provided by the crypto currencies, and can you describe the current state of crypto currencies in the united states, and the regulations that the crypto currency companies have to comply with? >> thank you, congressman, for the excellent question. it is definitely covers many of issues that we have discussed here today in the laeg toir framework. the real city that crypto, and
3:55 am
crypto companies receive different types of regulatory system. this is how the system works. the internal revenue service issued a notice in 2014 that crypto would be treated as property, but if you are paid in crypto for your work, it is treated as income, and taxed as such. the securities and exchange commission may regulate the crypto if it meets howie test unless it is eligible for an exemption. in some cases, it may be regulateded by the ftc, and there are many types of companies that interact in the crypto world now that have different authorities such as national trust charter from the office of the comp troll over the state. and so we have a number of states introducing their own
3:56 am
regulatory frameworks. and so we need interregulatory frameworks to lead that within the high level. epsoc has a mandate through dodd/frank to prevent systemic risk, and in addition it has the ability to form a technical or advisory committee including one that would work with the states. in addition, the epsoc is charged with setting policies is that are international in nature. the best way to address this is through international settings. >> so, do you believe that the federal agencies have the tools necessary to coordinate their
3:57 am
efforts around crypto or do you believe it is going to require chain action? >> i believe that that we have a lack of clarity in the regulatory work. i believe that we need public data sources. in order to create this, we need a map. and to have a map we need to have data of where is the crypto and where the -- >> i am sorry, my time has expired. i appreciate the answer. with that, i yield back. thank you. >> the gentleman from illinois, mr. garcia is now recognized for five minutes. >> good morning to everyone. thank you chairman green, and ranking member hammer for this
3:58 am
hearing, and i believe that we are falling into the trap that we are not able to understand this. and that representing crypto market will make you rich. it is $2 million matters, and that you will get quick. i watched my neighbors last their moments, and i am glad that we have not faced another crisis like this yet, but i am worried about the future. the fact is that we don't know the ritzk that crypto currenies are extremely volatile. we know the largest banks are figuring out ways to get into them, but we don't know how
3:59 am
concentrated the ownership is, and we don't know how exposed the hedge funds are, and in short, we know that krip show is pose. to alexis and so ms. goldstein, it seems that many of the proponents are honest, and they want to get around the regulation. how much of appeal is just regulatory arbitrage instead of real innovation. >> thank you for the question, congressman, i come to this as the perspective of someone who worked for merrill lynch prior to the 2008 crisis, alshged to the over the counter, and the trading was opaque. there is all of the u.s. base
4:00 am
has know your county, and this is true. vi come, across the there are a number of ways to evade the so-called safeguards in place. and what does the ftc commissioner dan richenberg said in a speech of the unregulated areas are being done being unlever. >> yes, the crypto current he is and so the leverage is so low that it can wipe you out
4:01 am
quickly. so with the arbitrage that is why they are successful to datement and the regulators should look at the enforcement abilities to see what can be done about that. >> thank you. i think that you just got to the second question that i was going to ask you, and that what are the most important things that regulators can do to keep crypto from threaten the financial system. >> well, congress, i will take a charge of that the u.s. has warned and germany has warned, and they are looking like equity stocks, and other swaps that
4:02 am
crashed the family fund. and they need to put a warning on the website saying that they are not registered with the fc, and in some way, the u.s. regulators are behind the international regulators to put out a warning. that is one thing they can do, and another thing is to look at the rev raj and why this access to leverage in the stock market abho and the regulators to pursue a market to pursue to see what the crypto agencies are to get a handle on what they are to get a handle on the systemic crypto currencies are. >> thank you very much, and with that, i yield back, chair. >> and with that, the chair recognizes the gentlewoman from texas ms. garcia for five minutes for questions. >> thank you, mr. chairman, and
4:03 am
thank you for calling this hearing with a topic that is on the minds of so many of us. and we must understand what the topic place and future may look like us. and with the potential to bring it back into our account, 12.7% of latinos, and 13.8% of black households compared to 2.8% of white households. while crypto is a new frontier, we have to be cautious to let us protect the consumer available risks, and we must bring the financials to the fray. we must not allow a system to grow that puts this to a few
4:04 am
lawmakers, and we need to protect the consumers from abuses. this is including the sovereignty of the u.s. dollar. we cannot allow anyone to compete with the u.s. dollar. wo ut a dollar to represent the primary of the market. so i would lrs suggest that it is going to destabilize global markets. so the u.s. memory brought it to us in cash and domestic form. and so there a risk of these coins to undermine the dollar. the world economic forum has warned the member countries of the risk, and the risk has elevated form, so they can offer
4:05 am
access, and still protect the sovereignty of the currencies. last congress i introduced a bill to recognize the stable coins as securities and pegging them to a currency without proper regulation like facebook has done with dm is a step worward, but it does not address the risks. ms. goldstein, i want to start with you, how urgent is the need of stabilizing the coins and protecting the u.s. dollar. >> congresswoman, thank you for the question. i think that stable coins is important for the regulators looking to them. latesha james is looking to them, and bit operates tether, and they have recently reached a settlement so you can't buy tether and that led to who are they backed by? they had to disclose cash
4:06 am
protects, and other digital assets. there was reporting in the financial times who asked for one of the commercial parties of the commercial paper, and they said they had not done any business with business connect, and so who are they doing business with. and this is an opportunity to make sure that something is based on something, and it is not protected, and this is done on the denomination of the u.s. dollar, a one way to approach that is to have the central bank produce digital currencies. >> thank you, right. and you know, we hear from some well, you can't do that, and it is not about regulation, and owe want do that as a government, and regulate. because we have to al low for
4:07 am
innovation. >> and do you see that we allow for innovation, and ale lou that to occur, but balance the sovereignty of the dollar, and balance for the needs of the consumer? >> congresswoman, yes, i believe we do, and i plooe we should win it. and people who cannot break the buck or they have lost their funds, and so it is not existing problems in the financial systems, and there are problems with the money market mutual funds, and they are going to plug themselves with the ability to strike a balance with the consumer, and the balance. i don't believe they are in conflict. >>ly put my timing down to three
4:08 am
seconds, and so i will yield back. >> the gentle lady recognizes back. the chair recognizes mr. gonzalez for five minutes. >> thank you, mr. chairman, and thank you now the panel. in a way i am encouraged for the hearing today, and there more broad agreement today in the majority of the panel that we do need clarity, and clarity with respect to how we are pushing a lot of the innovation overseas, and i hope that we get that clarity. ms. parker, i want to start with your clarity. you say that this is going to push projects overseas, right? yes. right. and it is something that you highlight that it is a bad
4:09 am
outcome for americans? >> that is correct. >> and you also say that regulators are hesitant to get involved when relevant members, your word, relevant are hostile to crypto, and certain members would be qualified as relevant. >> relevant but not hostile. >> but some potentially. assuming that the regulators are listening, and i did not want to push you in that box, but i would encourage you to listen to full committee, and not quote relevant members who say ridiculous things like people should invets in the california lottery inzed of sipt si, and if possible to lose money, and some will make money, and some will lose money, and whatever that is thing is, it should be factor.
4:10 am
and also people who suggest that because there are money launders, and people who use crypto currencies, and there are, they suggest it should be banned. and i would like to site a statistic with katy hahn is that 99.5% of the laundering goes unprosecuted. 99%. so whether we should allow the laundering along the lines as compared to what? compared to fiat. we are at 99.5 volatile, and
4:11 am
because it is highly volatile, it is systemic risks, and we should ban it, because it is highly volatile. here are some bubbles. 2011 went from $31 to $2. 2013, 13 to 2.65. 2015 from $65 to 22 and then in the last year, we have seen it going from $the,000 down to now, to step in and save the crypto currencies or anything like that? >> we have heard that it is not backed, it does not have promises, or somebody needing to bail out the price of gold, who
4:12 am
would you pay? >> exactly. and with the final or my final minute, i would like the talk to you about a minute that is so can you compare lock chain, and crypto currencies to the early neighborhood. >> yes. so you can use a service that could only be performed by a big company. so as netlick had us rekwi to individual entities a. and that is something that people will get excited about for the right reasons, and bad for the other
4:13 am
and so with that, i yield back. >> the gentleman yields back. the gentleman from california, mr. sherman, who is also the chair of the investor committee and entrepreneurship and capital investments is recognized for fife minutes. >> especially after the last gentleman's comments, i have a lot the say, and i will use my five minute togs say them. of course, as i pointed out in the opening statement, and allowing me mr. those who live in the crypto world and those caught up in making it successful. and while we are told that they are fun and useful, and maybe somebody in my would be the
4:14 am
automobile, and you could use it to buy an automobile, and make the drug dealers life so easily to use their money to buy a automobile. and it is to faciitate buying an automobile, and make sure that one is not cheated for another. so you have to be air -- and the blockchain, and that does not mean you have to be for the crypto currency and for that $10,000 bill that would make the
4:15 am
lives of our constituency easy. china is going to protect their economy and currency and protect their collection system. if we fail to keep up with china, we will fall behind. the biggest threat to ethereum is bitcoin, and the biggest is doshcoin. then you have cat coin, dog coin, and hamster coin. there is an unlimited number of potential cryptocurrencies. compare that to sovereign currencies. there are a limited number of nations, but even then, there are four or five big economies. the uruguay peso will never replace the u.s. dollar, but will ethereum replace bitcoin? will hamster coin replace ethereum? by the way, if people are going to take the time, effort, and
4:16 am
intelligence to create new cryptocurrencies, will they have a back door so they can have a few trillion dollars of their own? we're told it's impossible from the same people who say it is impossible from 2017 to 2020, $19 million worth of bitcoin and ethereum were double-spent, counterfeiting the hamper-free currencies. we are going to have one cryptocurrency after another, and those cryptocurrencies will have less and less protection. i want to commend rashida khaled for talking about the effect on our planet, and i ask unanimous consent to put in the record this article from the "wall street journal," detailing how whole coal plants that have been mothballed, no longer being used, are being put back online just to create electricity to mine bitcoin. >> without objection, the
4:17 am
article will be in the record. >> a witness says traditional systems use five times as much energy. it is to do 500 times more transactions. everything that's purchased on this planet at the retail level is purchased with a sovereign currency. so it's -- the five times is a tiny percentage. we're told that cryptocurrencies can be a hedge against inflation. we know that currencies are supposed to be a store of value. well, the dollar does erode in value, perhaps a quarter of a percent a month. you can buy treasury inflation protected securities and be fully protected from inflation. or you can say that you're trying to get a good store of value, so you're going to invest in cryptocurrency which can lose a quarter of the value if there is a joke on "snl," as there was
4:18 am
recently. it was a nearly one quarter drop. we're told that we're going to have a know your customer. know your customer at the level you're investing and trading. bitcoin is supposed to be a currency. you transfer it to your individual wallet, and there it's totally anonymous. yes, the records are maintained forever, anonymously. with that, you have the perfect tool for those who are underpaying their u.s. taxes by a trillion dollars a year, concealing $3 trillion a year in income, and that means perhaps $30 trillion that has to be hidden every decade. only with cryptocurrencies with -- can we evade the effort to evade the tax laws. that's why -- >> the gentleman's time has expired. >> i yield back. >> chair requests the gentleman
4:19 am
place his question in writing for the record. the chair will -- >> thank you. >> -- move to the gentleman from ohio. mr. davison for five minutes for questions. >> i thank the chairman. appreciate this hearing. we've come a long way in congress just for having this hearing. thank you. thank you for the colleagues who have taken the time to prepare for it. some know the topic very well and some are just getting acquainted with it. and some, no matter how well-acquainted, will remain hostile to the idea. look, i won't spend long on mr. sherman's remarks, but china is building the creepiest surveillance toll in history. we should not emulate them. the fact that china is doing that is why we should be embracing decentralized, distributed ledger technology that is more secure and does protect privacy. we could go further to defending freedom and restoring our fourth
4:20 am
amendment constitutional protections in the financial sector by embracing the potential of this technology, not by being hostile to it. the third party doctrine annihilated the concept of privacy. we absolutely should keep the country safe. i am reminded of proverbs 26:4, so i won't spend longer on his comments. ms. sue, your testimony is the only one that i saw that discussed tether at length. i'd like to delve into that for a moment. ms. goldstein, you spoke around the same topic. last month, tether revealed a breakdown of its reserves in their disclosure. we learned 50% of reserves are held in unspecified commercial paper of unknown quality. i looked at a few constant net asset value funds or liquidity funds held by larger banks to see how their composition compares to tether's. while these funds are not a part of the crypto market, they are targeted for investors with
4:21 am
surplus cash deposits who seek liquidity from investments. they serve a similar function to tether or other stable coins. what i found when i looked into these liquidity funds is commercial paper accounted for 25% to 30% of their underlying reserves in the net asset value funds. additionally, we know the quality of those commercial paper holdings is disclosed. ms. sue, based on tether's disclosure, should there be further disclosure regarding its underlying concerns? composition. >> i think it was the first disclosure ever, and the new york attorney general's office took actions in investigating the case prior to its mandated disclosure as part of the settlement agreement. and the -- some of the argument focused around the earlier problem of full backing and whether the disclosure would
4:22 am
come out to match that early promise. >> definitely a relevant piece. easy to break the buck when you hold structure credit with none disclosed quality for the structure credit. where they're at in the position is really important. it may not be a stable coin. ms. parker, in your written testimony, you said that the sec is not comfortable approving traditional regulated products based in crypto, such as a bitcoin etf. even though it would, quote, provide more transparency in the crypto markets. you go on to say, quote, because of this hesitancy, there are a lack of regulated products that are commercially attractive to market participants. ms. parker, can you expand on how regulated commercial products like a bitcoin etf and other traditional regulated products would bring additional consumer protection elements to the cryptocurrency system? >> thank you, congressman. that is a great question. my point really is that they're not the sort of bitcoin etfs,
4:23 am
the leverage products, the margin products that are available on foreign exchanges that u.s. customers are routinely accessing through the internet with a vpn that provides, frankly, too much leverage. you know, they're likely inappropriate for most retail customers. so my point is, to sort of stop that phenomenon. let's counter with, you know, having u.s.-regulated exchanges, security exchanges, futures exchanges, a list of regulated products that have some form of margin, some leverage, that's available to retail customers, that's appropriate for their sort of credit and suitability for their trading experience. so let's have this as a u.s. alternative to the foreign exchanges that u.s. customers can access because it is just a website. let's have, you know, the bitcoin futures, the margin products, the leverage spot products that u.s. customers are desperately -- retail customers
4:24 am
are desperately seeking at the overseas exchange. let's have it in the u.s. >> thank you for that. i appreciate it. great point. some regulation would be good. i'd love to talk more, but this is the point of the token taxonomy act that's from the origins and would provide some regulatory clarity for what is a security and what is not. wouldn't do anything with the etfs but it would provide a basis for it. if we can get to that, we can do a better job of protecting consumers. generally when we are protecting consumers, we provide some regulatory clarity. we've had a great hearing on spax. currently, nothing with bitcoin. thanks a lot. my time expired, and i yield. >> gentleman's time has expired. the chairman recognizes himself for five minutes. dear friends, i do have some consternation, and my consternation emanates from 2008, when i, as a member of this very committee, sat down on
4:25 am
a lower part of the desk, and i was here when then secretary paulsen appeared. he sat right out in front. i remember cleaver was to my left, i believe, and scott was to my right. the secretary wanted $700 billion. he had approximately, i thought, five pages asking for $700 billion. i've since read that it was three pages. be that as it may, $700 billion to bail out what were called exotic products at the time. $700 billion. well, as you can well imagine, my constituents were up in arms. they were calling me by the hundreds, demanding that i vote against a $700 billion bailout. being the good steward that i
4:26 am
am, i voted against it. as i stood in the courtroom, and i could see the calculation of votes, there also was a monitor, television monitor, and i could see the monitor indicated that the vote was failing. the stock market was directly proportional to what was happening with the vote. as the bill failed, the stock market was going down. the next day, my constituents were calling by the hundreds, what is wrong with you? you voted against the bailout. my 401(k) is now at risk. i learned an important lesson. do what you think is in the best interest of your constituents, even when they may disagree. this hearing is taking place because i think it's in the best
4:27 am
interest of my constituents that we get a better understanding of what we're dealing with. i remember secretary banacky, i have a statement from him i'd like to read, and i'll do it quickly. here's what he said, he said, this is chairman, the former federal reserve chairman, that the $182 billion bailout of american international group made him angrier than anything in the recession. they took risks with products like hedge funds -- i'm paraphrasing -- while using cash from people's insurance policies. he said the government had no choice but to bail it out. we know aig was the glue holding the world together. the global order together. this is of concern to me, and, ms. hammer and ms. goldstein, if
4:28 am
i can get to both of you, i'd like your comments on my concern. you mentioned fsoc. i don't know how that will help us with a living will, for example. this is of concern to me. who do we manage a thing that, if it fails, it'll bring a sizable portion of the economy with it? you can be so big that if you fail, you'll hurt the economy. ms. hammer, let's start with you. >> mr. chairman, thank you so much for your question, and i fully agree with your statements about the importance of evaluating potential systemic risk where taxpayer dollars are concerned. i often speak in my law class about the difference between an emergency response and a proactive policymaking
4:29 am
framework. and the problem with an emergency response is that it's inherently backwards looking. you create what's known as an emergency state relationship between the actors. we have the opportunity through the fsoc and dodd/frank section 220 to create a proactive policy framework for cryptocurrency. that means gathering and evaluating data, coordinating the agencies, creating a committee that could consult with the many states that are legislating in this area as we speak, and consulting with international standard-setting bodies. and you mentioned living wills, mr. chairman. that is an important point because there are many aspects of our regulatory framework that still need to be ferreted out and relate to cryptocurrency. i strongly believe that's the place to start, and we have resources to do it. by putting together our collective minds, we can tackle this problem.
4:30 am
>> thank you. my time has expired. apologies, ms. goldstein. if you would submit comments for the record, i would greatly appreciate it. dear friends, i thank the witnesses for their testimony and for devoting the time and resources to share their considerable expertise with the subcommittee. your testimony today will help to advance the important work of this subcommittee and of the u.s. congress in understanding and addressing the risk and opportunities inherent in widespread investment in digital cryptocurrencies. the chair notes some members may have additional questions for the potential which they may wish to submit in writing. five days members have to submit written questions to the witnesses and to place their responses in the record. members have five legislative days to submit extraneous materials to the chair for
4:31 am
inclusion in the record. i remind members to submit questions to the email address provided to your staff. dear friends, the hearing is now adjourned. witnesses, i'd like to come down and thank you personally.
4:32 am
4:33 am
4:34 am
4:35 am


info Stream Only

Uploaded by TV Archive on