S.Hrg.119-115

1[Senate Hearing 119-115]2[From the U.S. Government Publishing Office]34                                                        S. Hrg. 119-11556                     STAKEHOLDER PERSPECTIVES ON FEDERAL7                       OVERSIGHT OF DIGITAL COMMODITIES89=======================================================================1011                                HEARING1213                               BEFORE THE1415                       COMMITTEE ON AGRICULTURE,16                        NUTRITION, AND FORESTRY1718                          UNITED STATES SENATE1920                    ONE HUNDRED NINETEENTH CONGRESS2122                             FIRST SESSION2324                               __________2526                             July 15, 20252728                               __________2930                       Printed for the use of the31           Committee on Agriculture, Nutrition, and Forestry3233[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]3435                  Available on http://www.govinfo.gov/3637                                __________3839                   U.S. GOVERNMENT PUBLISHING OFFICE4061-175 PDF                  WASHINGTON : 20254142-----------------------------------------------------------------------------------4344           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY4546                    JOHN BOOZMAN, Arkansas, Chairman4748MITCH McCONNELL, Kentucky            AMY KLOBUCHAR, Minnesota49JOHN HOEVEN, North Dakota            MICHAEL F. BENNET, Colorado50JONI ERNST, Iowa                     TINA SMITH, Minnesota51CINDY HYDE-SMITH, Mississippi        RICHARD J. DURBIN, Illinois52ROGER MARSHALL, Kansas               CORY BOOKER, New Jersey53TOMMY TUBERVILLE, Alabama            BEN RAY LUJAN, New Mexico54JAMES C. JUSTICE, West Virginia      RAPHAEL WARNOCK, Georgia55CHARLES GRASSLEY, Iowa               PETER WELCH, Vermont56JOHN THUNE, South Dakota             JOHN FETTERMAN, Pennsylvania57DEB FISCHER, Nebraska                ADAM SCHIFF, California58JERRY MORAN, Kansas                  ELISSA SLOTKIN, Michigan5960               Fitzhugh Elder IV, Majority Staff Director61                    Jessica L. Williams, Chief Clerk62                Lauren Santabar, Minority Staff Director63                 Chu-Yuan Hwang, Minority Chief Counsel6465                           C O N T E N T S6667                              ----------6869                         Tuesday, July 15, 20257071                                                                   Page7273Hearing:7475Stakeholder Perspectives on Federal Oversight of Digital76  Commodities....................................................     17778                              ----------7980                    STATEMENTS PRESENTED BY SENATORS8182Boozman, Hon. John, U.S. Senator from the State of Arkansas......     183Klobuchar, Hon. Amy, U.S. Senator from the State of Minnesota....     28485                                WITNESS8687Kim, Ji, Chief Executive Officer, Crypto Council for Innovation,88  New York, NY...................................................     489Behnam, Rostin, Distinguished Fellow, Psaros Center, Georgetown90  University, Washington, DC.....................................     691Massad, Timothy, Research Fellow and Director of Digital Assets92  Policy Project of the Mossavar-Rahmani, Center for Business and93  Government, Kennedy School of Government, Harvard University,94  Washington, DC.................................................     895Sexton, Tom, President and Chief Executive Officer, National96  Futures Association, Chicago, IL...............................    1097Lukken, Walt, President and Chief Executive Officer, Futures98  Industry Association, Washington, DC...........................    1199100                             ----------101102                                APPENDIX103104Prepared Statements:105    Kim, Ji......................................................    38106    Behnam, Rostin...............................................    50107    Massad, Timothy..............................................    55108    Sexton, Thomas...............................................    80109    Lukken, Walt.................................................    86110111Question and Answer:112Behnam, Rostin:113    Written response to questions from Hon. Amy Klobuchar........    94114Massad, Timothy:115    Written response to questions from Hon. Amy Klobuchar........    96116    Written response to questions from Hon. Michael Bennet.......    97117Lukken, Walt:118    Written response to questions from Hon. Amy Klobuchar........   101119    Written response to questions from Hon. John Hoeven..........   102120    Written response to questions from Hon. Raphael Warnock......   103121122  STAKEHOLDER PERSPECTIVES ON FEDERAL OVERSIGHT OF DIGITAL COMMODITIES123124                              ----------125126                         TUESDAY, JULY 15, 2025127128                                        U.S. Senate129          Committee on Agriculture, Nutrition, and Forestry130                                                    Washington, DC.131    The Committee met, pursuant to notice, at 3:33 p.m., in132Room 106, Dirksen Senate Office Building, Hon. John Boozman,133Chairman of the Committee, presiding.134    Present: Senators Boozman [presiding], Hoeven, Ernst,135Marshall, Tuberville, Hyde-Smith, Justice, Klobuchar, Smith,136Lujan, Fetterman, Durbin, Booker, Bennet, Schiff, and Warnock.137138   STATEMENT OF HON. BOOZMAN, U.S. SENATOR FROM THE STATE OF139 ARKANSAS, CHAIRMAN, U.S. COMMITTEE ON AGRICULTURE, NUTRITION,140                          AND FORESTRY141142    Chairman Boozman. Good afternoon. It is my privilege to143call this hearing to order. I thank my colleagues for joining144us today. We are here to talk about digital commodities and145hear from a range of stakeholders on what this Committee needs146to do with respect to legislation.147    It has been reported that the current market cap for the148digital asset market exceeds $3.5 trillion. Approximately 70149percent of digital assets are traded digital commodities, and150roughly 55 million Americans own or use crypto. The U.S.151currently lacks comprehensive federal regulation of the digital152commodity markets, which means a significant percentage of153Americans trade with crypto with very limited federal customer154and market risk protections. This has been referred to as the155digital commodity regulatory gap. While the regulatory gap has156not stifled consumer interest in crypto, we know from past157experiences what can happen when crypto intermediaries operate158outside of a regulated framework. Without clear and159comprehensive digital commodity market regulation, Americans'160economic interests are at risk.161    The lack of comprehensive federal regulation in the U.S.162has created significant regulatory uncertainty among163innovators, developers, and market participants. Not knowing164the rules of the road, U.S. businesses have moved overseas,165leaving U.S. consumers vulnerable. This is why we must act on166digital assets legislation to protect customers and ensure167innovation and growth remain in the U.S.168    I have said it before but will say it again. The CFTC and169only the CFTC should regulate the spot trading of digital170commodities. The CFTC currently has enforcement authority over171these markets. We should build upon that authority, not172distribute it among different regulators. Let me be clear.173Entities that list or facilitate the trading of digital174commodities should not be exempted from CFTC regulation simply175because they are registered with another federal agency.176    The U.S. financial capital markets stand as the deepest and177most liquid in the world. It is largely a byproduct of the178Federal Government's bifurcated approach to regulating those179markets, with the SEC regulating the securities market and the180CFTC regulating the commodity derivatives market. This181longstanding American approach to financial market regulation182was at the core of the Dodd-Frank Act's regulation of the swaps183and security-based swaps market and should be the foundation184upon which we build a comprehensive regulatory framework for185digital assets markets.186    This is not to pit regulators against one another. It is187the opposite. We draw inspiration from the agency's past188regulation of the swaps market as we entrust the CFTC and the189SEC with the authority to collaboratively regulate the digital190asset markets. We must act expeditiously to develop a191comprehensive regulatory framework for the trading of digital192commodities, but we must ensure we get this right. We must also193support our colleagues in the Banking Committee as they work on194a regulatory framework for the trading of digital assets in195securities transactions. As with the CFTC and the SEC, while196there are clear lines of jurisdictions between our Committees,197we are committed to working collaboratively on a comprehensive198bill for the digital asset marketplace.199    I, alongside Ranking Member Klobuchar and all Members of200the Committee, will work in a transparent and bipartisan manner201to develop this regulatory framework. This task requires202hearing from everyone who wants to be heard and for all203Committee Members to work together to create a framework that204allows for liquid and resilient spot digital commodity markets,205strong retail protections, and rules that give American206businesses confidence to continue to innovate and grow in the207United States.208    Today, we will hear from former CFTC Chairman, the head of209the derivative self-regulatory organization, and the head of an210association representing a diverse group of crypto211stakeholders. I look forward to hearing their thoughts as we212contemplate legislation.213    With that, I now turn to our Ranking Member, Senator214Klobuchar, for her opening statement.215216  STATEMENT OF HON. KLOBUCHAR, U.S. SENATOR FROM THE STATE OF217                           MINNESOTA218219    Senator Klobuchar. Well, thank you so much, Chairman, and220thank you to all our witnesses for being here today.221    Over the past decade and a half, as the Chairman just222noted, we have seen the increasing use of and investment in223digital commodities like Bitcoin. What was once a niche market224for early adopters and cryptography enthusiasts is now a225swiftly growing market that is increasingly interconnected with226traditional financial markets and institutions.227    When we met in July of last year, I noted that the market228capitalization of digital assets was over $2 trillion. It is229now more than $3 trillion. The price of Bitcoin then was230$73,000. It is now more than $100,000. Yet oversight and231regulation of this market has not evolved to keep up with the232growth.233    The Commodity Futures Trading Commission has long played a234vital role in ensuring the integrity of our financial and235agricultural derivative markets. That includes protecting236market participants from fraud and manipulation; maintaining237orderly markets; and enabling farmers, ranchers, manufacturers,238and small businesses to hedge against risk. We are honored to239have two former Chairs here with us today.240    As early as 2015, the CFTC determined that digital assets241could be commodities and found that Bitcoin, the largest such242asset, was a commodity. Derivatives on Bitcoin and other243digital commodities have been listed on CFTC-regulated244exchanges, and the CFTC has full regulatory authority over245these products. It has only anti-fraud and anti-manipulation246authority over the underlying spot markets, a regulatory gap247that has resulted in untold losses to customers and the248increasing risk of contagion to traditional financial markets249as digital commodity markets grow in size and are integrated250into the existing financial system.251    If Congress gives the CFTC the authority and the resources252to step in and oversee these spot markets, it would be well253positioned to do so, given its existing role. That role is254overseeing the digital commodity derivative markets and the255enforcement authority it has exercised over the underlying spot256markets. Providing regulatory certainty and oversight to these257markets can encourage responsible innovation and the adoption258of new technologies.259    At the same time, we have to ensure a level regulatory260playing field so that crypto market participants are subject to261standards as rigorous as those applied to traditional financial262institutions. If Congress is to do this, it must do so without263compromising on crucial customer protections with safeguards to264prevent illicit finance and with provisions to address market265integrity concerns. It also means putting in place guardrails266to address conflicts of interest in the digital assets sector,267preventing exchanges and issuers from using their position to268favor affiliated actors or exploit customers. If Congress is269going to establish a new financial regulatory framework, it270must strengthen our system, not weaken it, by putting271safeguards in place to prevent corruption or self-dealing by272federal officials, including those in positions of power who273might sponsor, issue, or profit from digital tokens.274    I look forward to hearing from our witnesses on how they275believe regulation of the digital commodities spot market can276responsibly encourage innovation while ensuring our financial277markets continue to be the safest in the world for market278participants. This is a big job we have, but I look forward to279hearing your testimony and working with you. Thank you.280    Chairman Boozman. Thank you. We will now introduce our281panel of witnesses. I am pleased to introduce Mr. Ji Kim. Mr.282Kim currently serves as President and Acting Chief Executive283Officer of the Crypto Council for Innovation. Mr. Kim has over28415 years of experience in the digital assets sector, and before285being named CEO, served as Chief Legal and Policy Officer for286CCI. Mr. Kim, thank you very much for being here today.287    I think Senator Klobuchar is going to introduce Russ.288    Senator Klobuchar. Thank you very much. We are pleased to289welcome back Russ Behnam. Many of you know him from his years290of service on the Committee staff and most recently as both291Commissioner and Chairman of the CFTC.292    Mr. Behnam is a distinguished fellow at the Psaros Center293for Financial Markets and Policy at Georgetown University's294McDonough School of Business. From 2021 to 2025, he served as295Chairman of the CFTC following his service as a Commissioner.296Before joining the Commission, he was Senior Counsel on this297Committee to then-Chairwoman Debbie Stabenow.298    During his tenure at the CFTC, Mr. Behnam oversaw the299significant expansion of digital commodity derivative markets300and led the agency's enforcement activity in spot markets for301digital assets. We welcome you back to the Committee.302    Chairman Boozman. Mr. Massad.303    Senator Klobuchar. We are also pleased to welcome back304Timothy Massad. Mr. Massad is a research fellow at the305Mossavar-Rahmani Center for Business and Government at the306Harvard Kennedy School of Government where he directs the307center's Digital Assets Policy Project.308    From 2014 to 2017, he served as Chairman of the CFTC.309During his tenure, he oversaw the implementation of Dodd-Frank310reforms in the over-the-counter swaps market, worked to311harmonize cross-border regulation, and led the CFTC in becoming312the first U.S. regulator to take action on cryptocurrencies.313    Previously, he served as Assistant Secretary for Financial314Stability at the U.S. Treasury Department, and that was from3152010 to 2014.316    Mr. Massad, welcome back to the Committee. I am sure you317remember many happy moments here before this Committee. Thank318you for your testimony.319    Chairman Boozman. I am happy to introduce Mr. Tom Sexton.320Mr. Sexton is the President and Chief Executive Officer of the321National Futures Association, the self-regulatory organization322for the U.S. derivatives market. Mr. Sexton joined NFA in 1991323and is on the Commodity Futures Trading Commission Global324Markets Advisory Committee and is a board member of Futures325Fundamentals.326    Mr. Sexton, thanks again very much for being here.327    I would also like to introduce the Honorable Walt Lukken,328former Acting Chairman and Commissioner of the U.S. Commodities329Futures Trading Commission from 2002 through 2010. Mr. Lukken330currently serves as the President and Chief Executive Officer331of Futures Industry Association, a position he has held since3322012. Prior to his time at the CFTC, he served as counsel for333this Committee under Chairman Lugar.334    Welcome back, Mr. Lukken, and thank you for being here.335    Again, we appreciate all of you being here. This really is336a ``who's who'' of the industry, and we are very anxious to337hear from you. Let's start out with you, Mr. Kim.338339 STATEMENT OF JI KIM, CHIEF EXECUTIVE OFFICER, CRYPTO COUNCIL340                  FOR INNOVATION, NEW YORK, NY341342    Mr. Kim. Thank you, Chairman Boozman, Ranking Member343Klobuchar, and Members of the Committee for the opportunity to344testify today on how best to strengthen United States'345leadership in digital asset innovation. I believe this can best346be accomplished through comprehensive federal oversight of347digital commodities. I am pleased to represent the Crypto348Council for Innovation, a global alliance of industry leaders349across the digital asset space.350    I respectfully submit that it is critical for Congress,351following this Committee's leadership, to urgently pass352legislation providing the CFTC with oversight over the trading353of digital commodities. This will provide necessary regulatory354clarity and certainty, protect consumers, and ensure continued355U.S. leadership over digital assets.356    For years, the digital asset industry has requested clear357rules of the road and a coherent federal framework to operate358within the U.S. Such a framework, which is in the national359interest, will benefit users and consumers, foster industry360growth, and strengthen U.S. markets by preventing fragmentation361and regulatory ambiguity. Now is the time for Congress to act362to secure this future.363    Today, roughly 28 percent of American adults, about 65364million Americans, own digital assets. The reasons and benefits365are many. Individuals and businesses use them to make366transactions more efficient. Humanitarian groups use them to367deliver aid in high-risk regions, setting their speed,368transparency, and reliability. Decentralized finance is369expanding access to economic services. Beyond payments,370tokenization of real-world assets, securities, real estate, and371even agricultural commodities has the potential to make markets372more liquid, accessible, and inclusive.373    Given the many benefits and expanding real-world374applications of digital assets, we commend this Committee for375pursuing a legislative framework to guide further development.376From a consumer protection standpoint, clear federal377supervision of market activity is essential. The industry is378committed to building necessary guardrails so that consumers379can participate in marketplaces that are fair and secure.380    With that backdrop, a significant portion of the digital381asset ecosystem, including widely used assets such as Bitcoin382and Ether, function like commodities rather than traditional383securities. These assets are not issued by centralized entities384to raise capital and lack profit-sharing rights. In fact,385courts and regulators, including the CFTC, have affirmed that386such assets fall under the Commodity Exchange Act, depending on387their structure and use.388    Most digital asset trading volume occurs in secondary389markets, where participants treat these assets as store of390value, not as equity stakes. Recognizing the commodity-like391nature of these assets is essential to crafting a regulatory392framework. A comprehensive framework can provide essential393consumer protections, including business conduct standards,394disclosures, segregation of customer funds, minimum capital395requirements, trade surveillance, and more. Digital asset firms396in the U.S. are already subject to AML compliance, sanction397screening, and suspicious activity reporting, and these398requirements should be confirmed and codified in any new399comprehensive framework.400    In addition to its oversight of the digital asset401derivatives market, the CFTC already has enforcement authority402over spot commodity markets, but this must be matched by a403broader federal framework that addresses how Americans use404digital assets today.405    The CFTC is well-situated to play a central role in406overseeing the spot digital asset commodity market. It is a407principles-based regulator with a mandate to deter price408manipulation, ensure financial integrity, protect market409participants, and promote responsible innovation. The agency410has extensive experience in supervising large and complex411markets and maintains a robust enforcement capability.412    The U.S. is in a global race for leadership in digital413asset innovation. It is a true race to the top. We have seen414other jurisdictions, including the EU, the U.K., Japan, and415Singapore, recognizing the importance of this technology by416actively engaging with industry to consider and implement417tailored regulatory regimes.418    While many of the best minds, technology, and resources419still exist in the U.S., we can further establish U.S.420leadership by way of a comprehensive legislative framework.421Indeed, legislation is the most effective way to ensure long-422term stability and guard against future policy volatility that423may otherwise repeatedly shift the goalpost. This important424work, squarely within the domain of this institution, Congress,425and this Committee, will unleash powerful potential, enhance426clarity, ensure consistency, and best protect consumers.427    Thank you again. I look forward to answering your428questions.429    [The prepared statement of Mr. Kim can be found on pages43038-49 in the appendix.]431    Chairman Boozman. Thank you. Mr. Behnam.432433STATEMENT OF THE HONORABLE ROSTIN BEHNAM, DISTINGUISHED FELLOW,434     PSAROS CENTER, GEORGETOWN UNIVERSITY, WASHINGTON, D.C.435436    Mr. Behnam. Chairman Boozman, Ranking Member Klobuchar,437Members of the Committee, thank you for the opportunity to438testify before you today on this important topic.439    Between 2017 and 2025, I served first as CFTC Commissioner,440then Chairman. During that more than seven-year period, I441observed the significant growth of the digital asset market.442While I served at the CFTC, the digital asset market endured443multiple periods of dramatic volatility. Throughout this time,444I publicly stated one consistent message to Congress. Under445U.S. current law, there is a gap in regulation for the digital446commodity asset market. The regulatory gap remains today and447must be filled with targeted legislation. It has facilitated448countless scandals and fraudulent activity, some very small in449typical and criminal form, others massive in profile.450    First and foremost, filling the regulatory gap will provide451the needed customer protections that American investors have452become accustomed to in traditional financial markets regulated453by the CFTC and the SEC. Further, I do not believe public454interest for digital assets will wane. Inaction will only455result in greater risk to our financial markets and investors456through lack of market transparency, fraud, market457manipulation, corruption, and conflicts of interest.458    One common refrain in connection with past legislative459efforts to fill the digital commodity gap suggests that a U.S.460regulatory framework will legitimize the digital asset market,461creating regulatory loopholes. I believe this argument is the462loophole. It has only left for far too long the vast majority463of the digital asset market unregulated and American investors464vulnerable.465    I believe the CFTC is the appropriate regulator to oversee466the digital commodity asset market because of its expertise467regulating commodity markets, including digital asset468derivatives since 2017, and its enforcement experience in the469underlying digital commodity market. Unique characteristics of470digital asset trading, including decentralized finance,471custody, and market structure, demand specific focus to ensure472broader policy outcomes, and all investors deserve access to473material information about a financial asset to ensure an474informed decision.475    Market structure in traditional finance has evolved over476many decades. I urge the Committee to carefully examine how477current unregulated digital asset market structure differs from478traditional market structure and consider where there may be479opportunities for change and where existing market structure480requirements should be preserved.481    The CFTC has a longstanding and productive partnership with482the SEC. In a situation where a regulated digital asset market483participant handles both security and non-security tokens in484the underlying market, separate and exclusive jurisdiction for485each agency is critical. Any regulatory system that includes486deference or exempted authority will be an incomplete effort.487Further, any framework where each agency does not retain its488exclusive licensing authority portends a future of blurred489jurisdiction across digital assets and possibly physical490commodities.491    The CFTC's principles-based oversight model has served its492regulated markets well, striking an appropriate balance between493clear outcomes-based requirements and measured flexibility to494meet those outcomes. In light of the novel nature of digital495assets, market regulators, consistent with a legislative496mandate, could tailor rules to meet the risk and profile,497leaving flexibility to adapt with a changing market landscape498as the digital market itself evolves.499    Second, regulations are only as strong as the agency and500personnel that enforce them. Appropriate funding is necessary501to meet the mandate of any regulatory program.502    Third, a reliable self-regulatory organization has been503critical to the success of the CFTC. The National Futures504Association has served as an effective partner for the CFTC for505more than five decades. An effective legislative effort must506include a role for the NFA.507    Fourth, it is essential that legislation provide508comprehensive authority for anti-money laundering, ``know your509customer,'' and customer identification program.510    Finally, given the broad adoption of digital assets by the511American population, a comprehensive education and outreach512program is critical as well.513    Domestically, federal law enforcement relies heavily on514state and local partners to identify and combat civil and515criminal misconduct, which often targets society's most516vulnerable. I encourage this Committee to ensure state and517local law enforcement remain a key partner.518    The principles and regulatory foundations that make U.S.519capital markets and derivatives markets the deepest, most520liquid, and most resilient in the world provide an effective521model for digital asset market structure. We need to act522thoughtfully but with urgency to fill this gap. I am supportive523of recent steps the U.S. House Committee on Agriculture and524Financial Services have taken in a bipartisan manner to fill525this gap.526    That said, there is more work to be done to ensure527congressional market structure legislation is comprehensive,528does not undermine existing law, and addresses the unique529characteristics of the ecosystem. Today's hearing is a critical530step to achieve that goal.531    I thank the Chairman, Ranking Member, and Members of the532Committee for your focus in this area and look forward to533answering your questions.534    [The prepared statement of Mr. Behnam can be found on pages53550-54 in the appendix.]536    Chairman Boozman. Thank you. Mr. Massad.537538STATEMENT OF THE HONORABLE TIMOTHY MASSAD, RESEARCH FELLOW AND539   DIRECTOR OF DIGITAL ASSETS POLICY PROJECT OF THE MOSSAVAR-540RAHMANI, CENTER FOR BUSINESS AND GOVERNMENT, KENNEDY SCHOOL OF541        GOVERNMENT, HARVARD UNIVERSITY, WASHINGTON, D.C.542543    Mr. Massad. Thank you. Mr. Chairman, Ranking Member544Klobuchar, Members of the Committee, and staff, thank you for545inviting me to testify. The views I express are my own and do546not represent the views of the Kennedy School of Government.547    I hope this hearing gives us an opportunity to rethink how548we should regulate digital assets. The Clarity Act, like many549earlier proposals, has the right goals--address the regulatory550gap, provide clarity--but the wrong approach. We need to keep551in mind a few basic facts.552    First, this is a technology; it is not an asset class. It553will be used in many ways, and the most valuable use cases may554be tokenizing securities.555    Second, we cannot define whether something in digital form556is a security, a commodity, or neither with a few paragraphs in557a statute. Appropriate regulation depends on what the token558represents, whether there is an issuer, whether capital is559being raised, and other factors, and the technology is evolving560rapidly. Therefore, we should not lock in definitions that will561fail to bring clarity, nor should we tie regulators' hands.562    Third, a principal reason for the lack of clarity is our563fragmented regulatory system. We have two market regulators,564neither of whom has jurisdiction to regulate the spot market565for digital assets that are not securities. I believe this566solution should bring the agencies closer together.567    Finally, we are in a different place than the last few568years. The primary regulatory response to date, court cases569that sought to interpret the Howey test, was not sufficient,570but the SEC has already abandoned regulation by enforcement and571is actively working to provide necessary guidance. Congress572should not fight the last war.573    All of these factors argue for a different approach, one574that establishes regulation over the spot market without575rewriting the securities laws and one that mandates the SEC and576CFTC work together, not just on a few rules, but overall577because both agencies have significant stakes and expertise in578these matters.579    Regulation of the spot market needs to draw on the580expertise of both agencies. Classification issues can best be581addressed by the agencies working together to implement general582principles, not prescriptive rules provided by Congress.583Customization of rules to make sure they work for digital584technology in recordkeeping, custody, clearance, and585settlement, or otherwise, must be as consistent as possible586between the agencies.587    Former SEC Chair Jay Clayton, who was appointed by588President Trump, and I proposed essentially this approach two589years ago. We said Congress should mandate that the SEC and590CFTC work together to develop joint rules that would apply to591every intermediary that trades or handles Bitcoin or ETH. That592approach establishes jurisdiction over the market without, as593we said, ``debating classification of each token or Congress594pursuing tortured rewriting of existing definitions of595securities and commodities.'' We added that ``Rewriting596existing law might fail to bring clarity and inadvertently597undermine decades of regulation and jurisprudence as they apply598to traditional markets.''599    Unfortunately, the Clarity Act does the things we warned600against. It will not provide clarity, but it will undermine601regulation. Let me briefly note a few of its weaknesses.602    It addresses classification with a tortured definition that603rewrites existing law.604    It provides exemptions from securities laws such as for605raising funds if one has the intent to build a mature606blockchain system that are unnecessary and will be misused.607    It creates a broad exemption for decentralized finance608activities, which will lead to migration of regulated activity609into an unregulated sphere. Indeed, a large intermediary like610Robinhood or Goldman Sachs could operate a software protocol611for the trading of tokenized securities that would then be612exempt from the Securities Exchange Act.613    It will not require crypto trading platforms to own the614digital assets their customers purchase, and it will permit615them to engage in their own proprietary trading and have other616conflicts of interest.617    Finally, it will provide many opportunities for smart618lawyers to find ways to manipulate its provisions to achieve619lesser compliance burdens for their clients. I was a corporate620lawyer for 25 years with one of the best firms in the world,621and I know how that works. We can and must do better, and I622describe how in my written testimony.623    Finally, I just wish to agree with and underscore the624Ranking Member's comments about the importance of addressing625the activities of government officials in this sector.626    Thank you again for inviting me. I look forward to your627questions.628    [The prepared statement of Mr. Massad can be found on pages62955-79 in the appendix.]630    Chairman Boozman. Thank you. Mr. Sexton.631632STATEMENT OF TOM SEXTON, PRESIDENT AND CHIEF EXECUTIVE OFFICER,633           NATIONAL FUTURES ASSOCIATION, CHICAGO, IL634635    Mr. Sexton. Good afternoon, Chairman Boozman, Ranking636Member Klobuchar, and Members of the Committee. Thank you for637the opportunity to testify at this important hearing to explore638a legislative framework for the federal oversight of digital639commodities.640    Over 50 years ago, Congress enabled the creation of a641Registered Futures Association, or RFA, to support the CFTC's642oversight of the commodity futures markets. NFA is the643industry-wide independent self-regulatory organization for the644derivatives industry and is an RFA. NFA is solely a regulatory645body. We do not operate a market, and we are not an industry646trade association.647    NFA's and the CFTC over 40-year public-private partnership648overseeing the derivatives industry has been a tremendous649success, and we recognize the CFTC's commitment and significant650efforts in promoting the integrity, resilience, and vibrancy of651the derivatives markets. Today, I would like to address three652main points that may be helpful as this Committee continues to653work on market structure legislation for the federal oversight654of digital commodities.655    The first point is to introduce NFA and its critical role656in protecting customers and ensuring the integrity of the657derivatives markets. NFA has a clearly defined mission:658Safeguard the integrity of the derivatives markets, protect659investors, and ensure that NFA members meet their regulatory660responsibilities. We optimize the self in self-regulation. Our661board is primarily composed of representatives from NFA member662firms, and we leverage industry expertise in every aspect of663our work.664    Our activities are closely overseen by the CFTC. The CFTC665provides frontline regulatory oversight of exchanges,666clearinghouses, and swap execution facilities. NFA provides667frontline oversight of our global membership of CFTC-registered668market participants, including FCMs, swap dealers, IBs, RFEDs,669CPOs, and CTAs.670    NFA's primary responsibilities include registering all671firms and professionals on behalf of the CFTC, developing rules672for fair dealing with customers and counterparties, monitoring673members' compliance with those rules, taking enforcement674actions when members violate those rules, offering an675arbitration forum to resolve customer disputes, and providing676investor protection and educational resources.677    The second point is to discuss some key principles for the678effective oversight of digital commodities. NFA firmly believes679that the CFTC is well-equipped to take on the oversight of680digital commodities, given its core principles, regulatory681approach, experience over the years integrating new asset682classes into its oversight framework, and its current683experience gained from having anti-fraud jurisdiction over spot684digital commodities and supervisory oversight of related685derivatives products, including Bitcoin and Ether futures.686    In establishing a federal oversight framework, we recommend687the Committee focus on the following: Number one, clear lines688of jurisdiction. We recommend that Congress provide the CFTC689with exclusive authority over digital commodities and the SEC690with authority over digital securities. We should avoid a691framework in which jurisdictional lines become blurred, and we692have two market regulators writing rules for the same activity.693This will be confusing for market participants, create blind694spots in the oversight of this market, and lead to regulatory695arbitrage.696    Number two, strong customer protections. We advise Congress697to look to the time-tested robust customer protections that698have served the derivatives industry extremely well, which699include customer fund safeguards, customer disclosures,700business conduct standards, and anti-money laundering701protections.702    Number three, flexibility to keep pace with innovation. We703encourage Congress to rely upon the CFTC's significant704experience with innovative products and retain its core705principles, regulatory approach.706    The last point is to underscore that self-regulation707provides many benefits to customers and the industry. As the708derivatives markets have evolved over the years, Congress and709the CFTC have entrusted NFA with additional responsibilities.710Our coordination with the CFTC has resulted in a strong track711record of protecting retail customers and prosecuting retail712trading abuses and fraud. Today, customer complaints and713single-event customer arbitrations followed at NFA, as well as714the CFTC's reparation cases remain at all-time lows.715    Importantly, NFA is adaptive and proactive. We currently716have numerous NFA member firms engaged in spot digital717commodity activities. To enhance oversight of these firms, we718adopted a rule in early 2023 that imposed its anti-fraud, just719and equitable principal trade, and supervision requirements on720them.721    Fifty years ago, Congress had the wisdom to establish a722public-private oversight framework, which the CFTC and NFA have723effectuated to form a strong oversight partnership. We strongly724recommend that Congress, in any market structure legislation,725retain a significant role for an RFA to partner with the CFTC.726    Thank you again, and I am happy to take any questions.727    [The prepared statement of Mr. Sexton can be found on pages72880-85 in the appendix.]729    Chairman Boozman. Thank you. Mr. Lukken.730731  STATEMENT OF THE HONORABLE WALT LUKKEN, PRESIDENT AND CHIEF732 EXECUTIVE OFFICER, FUTURES INDUSTRY ASSOCIATION, WASHINGTON,733                              D.C.734735    Mr. Lukken. Chairman Boozman, Ranking Member Klobuchar, and736Members of the Committee, I appreciate this opportunity to737testify. I am President and CEO of the Futures Industry738Association, which represents the futures, options, and cleared739derivatives markets globally. As was mentioned, I had the honor740of working for this Committee during the passage of the741Commodity Futures Modernization Act of 2000 and was able to go742on to serve as Commissioner and Acting Chair of the agency for743seven years, which included leading the agency during the744financial crisis of 2008.745    The digital asset industry and, importantly, its customers746deserve a proper regulatory framework that will keep these747markets safe, innovating, and growing. The U.S. has two strong748market regulators in the CFTC and the SEC. Collectively; they749can bring digital commodities and digital securities into a750proper regulatory framework. Given my background, I want to751share my views on the Commodity Exchange Act and the CFTC and752why this agency is well suited for the oversight of digital753commodities.754    The CFTC's regulatory framework has five strengths worth755highlighting. The first involves the agency's principles-based756regulation, which ensures the CFTC can keep pace with757technological changes and advancements in market dynamics. This758will be key for the evolving digital commodity markets.759    The second strength is the agency's support of innovation.760The CEA explicitly and uniquely requires the CFTC to promote761responsible innovation in fulfilling its duties. The agency has762done this for 50 years, allowing innovative new asset classes763to be listed, including futures on cryptocurrencies eight years764ago. Today, more than 60 cryptocurrency futures and options765trade on seven CFTC-registered exchanges.766    A third strength is the agency's customer protections,767which have safeguarded investors for years. These require768futures commission merchants, or FCMs, to segregate and confirm769customer balances every day. FCMs, those intermediaries who770serve as agents for their customers, also provide a guaranty771against customer shortfalls. FCMs contribute to a ``break-the-772glass'' default fund at every clearinghouse should a single773clearing member not be able to cover losses. This FCM model of774protections has provided critical resilience and risk775management over the years.776    A fourth strength is enforcement. Strong enforcement in777combination with robust customer protections has shown to be a778powerful one-two punch for the agency. The CFTC has779aggressively used this enforcement authority from LIBOR to780retail forex to energy market manipulation to bring actions781against those who seek to swindle investors or manipulate782prices.783    The last item I will mention is the CFTC's approach to784cross-border trading, given the global nature of traditional785commodities as well as digital assets. The CFTC's cross-border786recognition framework, which it pioneered in the 1990s, strikes787the right balance of protecting U.S. participants while788providing access to markets globally. These five strengths will789enable the CFTC to take on increased responsibilities in790digital commodities and provide these innovative markets with a791sound regulatory framework.792    I also want to highlight a couple of other key stakeholder793recommendations for your consideration. The first involves794recognizing the risk-reducing positions of customers for margin795and capital. Farmers and other end users utilize our markets to796hedge the price risk of assets, whether it is corn, oil, or797financial products. When these offsetting products are798regulated by different agencies, customers may be forced to pay799double margins because of a lack of recognition of these800offsetting trades. FIA supports statutory language that801instructs the CFTC and SEC to allow for cross-margining between802offsetting positions in these respective markets.803    FIA also supports legislative language that instructs804prudential regulators to recognize these offsetting risk805positions through cross-product netting. These two actions will806free up capacity for these growing markets and incentivize807strong risk management.808    The last item I will mention relates to the need for clear809rules around managing conflicts of interest. We support810legislative language that requires the CFTC to conduct a811rulemaking on managing conflicts of interest when entities812combine exchanges, clearinghouses, FCMs, and trading arms all813within the same legal structure. We believe the development of814consistent rules around conflicts will ensure customers can815utilize innovative new structures without facing differing816customer protections due to market structure design.817    Again, thank you for the opportunity to testify, and I look818forward to your questions.819    [The prepared statement of Mr. Lukken can be found on pages82086-91 in the appendix.]821    Chairman Boozman. Thank you. Let's go ahead and start with822our questions. Mr. Behnam, Mr. Lukken, as former CFTC Chairmen,823can you describe why you believe the CFTC and only the CFTC is824the right regulator for spot digital commodity trading? Can you825also speak to concerns with allowing entities to list or826facilitate trading in digital commodities without having to827fully register with the CFTC?828    Mr. Behnam. Thanks, Mr. Chairman. I would say the number829one thing--and there are a few reasons why I have stated this830in the past. You and I have had this conversation. I will start831first with the experience, and this goes back to Chairman832Massad's time in the mid-2010s when we had a determination of833Bitcoin as a commodity, and you started to see enforcement834actions coming out of the CFTC around digital assets. That is a835long time ago, and over that 10-year period, the CFTC has been836at the forefront of enforcement both on the fraud and837manipulation side of crypto.838    Enforcement does not just mean an enforcement action. There839are staff within the agency that are conducting research. They840are doing surveillance of both the derivatives markets and the841underlying physical market itself. The agency has developed,842over this course of time, a really distinct and unique843expertise in the digital asset market.844    The second thing I will say is the expertise in the845commodity market. The CFTC is over 100 years old, the CFTC as846an independent agency is 50 years old, and it understands847commodity markets, and these are very distinguishable from848securities markets, the way the markets are structured, and the849regulation over them.850    Lastly, I will say it is extremely important the CFTC851become the primary regulator of any commodity asset. As you852have noted, two market regulators, it is important we have two853market regulators because they are independently very large,854unique markets that demand different sets of regulation. I855believe if there is any agency that starts to regulate856commodity tokens, it becomes and potentially creates a blurred857line of what is jurisdiction between the CFTC, commodity858markets, potentially physical commodities themselves, and other859regulators.860    Chairman Boozman. Very good. Mr. Lukken.861    Mr. Lukken. I would echo my colleague. I think, really,862three strengths that really give the CFTC unique ability to863oversee the digital commodity markets, as Russ mentioned,864expertise. I mean, the agency for 50 years has been, you know,865developing the ability to look at secondary markets for866commodities, and that expertise, you know, whether it is867surveillance, manipulation of those markets and how best to868ensure that those markets are not taken advantage by those869trying to manipulate prices.870    Regarding cryptocurrencies, as was mentioned, the CFTC871already has experience in this. The CFTC regulates 60 products872currently, futures on those derivatives and all that goes with873it from, you know, all the core principles that go with that874regulatory expertise. They already have experience in the875digital commodity space.876    The second is in their mission. In Section 3 of the877Commodity Change Act, it is unique in that it says that the878CFTC should be promoting responsible innovation as an agency.879That is something that Congress had the wisdom to put in in8801974. That allows these products, as they get listed for them,881to be thinking about ways that it can promote these new882innovative technologies that are coming in. I think that is an883important top-down mission of the agency. They are going to884help these products evolve and develop.885    Then lastly, it is just flexibility. The agency has886principles-based regulation, as I mentioned, but other parts of887the act foresee authority that allows it to carve out certain888things that may not justly be in their jurisdiction, exemptive889authority. I think the CFTC has the tools to exclusively890oversee these markets, but also with some flexibility that will891allow these markets to evolve.892    Chairman Boozman. Very good. Mr. Kim, can you talk about893the importance of avoiding applying centralized intermediary894regulatory requirements to decentralized software and895technology?896    Mr. Kim. Thank you very much, Mr. Chairman. This is a very897important question. Decentralized finance in its purest form898allows individuals to transact with one another peer-to-peer by899the use of software and code without reliance on centralized900intermediaries. Notably, the software and code do not take901control or custody of the funds. Of course, we regulate902exchanges, not the matching engine. We regulate brokers, not903the trading screens. We regulate the centralized904intermediaries, which take control and custody of the funds,905Mr. Chairman. It is important to keep that in mind as we look906to establish a comprehensive framework for the United States to907keep innovation here in the U.S.908    Very briefly, Mr. Chairman, of course, as Congress has been909contemplating a broader market structure framework, the focus910has been on centralized intermediaries that do take control or911custody of funds. Right now, as my colleagues have mentioned,912there is a regulatory gap. There is no federal framework for913the supervision of digital commodities. That means there is no914business conduct standards, no conflicts-of-interest915provisions, no consumer education. It is important, in order916for us to cement U.S. leadership and best protect consumers,917that we address this gap by providing the CFTC with918supervision, Mr. Chairman.919    Chairman Boozman. Very good. Senator Klobuchar.920    Senator Klobuchar. Thank you very much, Mr. Chair.921    I will start with you, Mr. Massad. You talked about the922CFTC having a role and a clear one with regulating digital923assets. Then you also talked about how you and the former Trump924Chair have suggested doing something where the SEC does some of925it and the CFTC does some of it. Mr. Sexton raised this issue926that he is concerned. I do not want to put words in your mouth,927right? That there would be vagary or two, you know, that are928regulating the same thing. Could you talk about how you think929this could work in today's environment in terms of making those930kinds of suggestions or including that in legislation? Because931I found that interesting.932    Mr. Massad. Certainly. The first thing is that Mr. Clayton933and I were suggesting that if we were trying to establish934jurisdiction over this spot market without rewriting securities935laws, without rewriting the definition of security, that is why936we argued for joint rules.937    Second, this is a different market, and I think we have to938recognize that. It is much more retail than what the CFTC has939regulated in the past. I have great respect for the agency's940abilities and expertise, but we need to keep that in mind.941    We also need to keep in mind that this will be an942exception, a very big exception, in that the CFTC does not943regulate other spot markets, and we do not want that exception944to grow. I would not want to see other constituencies come and945say, well, why shouldn't the CFTC regulate this spot market?946    Finally, it is an unusual technology in that you are going947to have things that start out as securities and then become948commodities. That is the reason why they have to work together.949    How would it work? It would involve some joint rulemaking.950It would certainly involve one of the agencies taking the lead,951and I think in terms of implementing rules, enforcing rules,952that could certainly be the CFTC with respect to this digital953commodity spot market. I think it should also involve an SRO, a954self-regulatory organization. I have great respect for the work955of the NFA. I think that could be jointly supervised, as the956Lummis-Gillibrand proposal advocated.957    I think it would be a combination of joint rulemaking,958perhaps a joint SRO. You could even have common Commissioners.959I realize that would be a big step. I have not advocated960merger. I am not advocating merger. I think this is an unusual961situation that we are in, and this is a technology that is962going to have multiple uses, and it is necessary that we963approach it in a way that we have consistency across the board.964    Senator Klobuchar. Thank you.965    Mr. Behnam, Mr. Massad just talked about that concern on966the retail and how uniquely retail this is in terms of all the967people that have purchased this, and it is part of their968savings. What specific approaches would you recommend to ensure969that innovation in crypto does not come at the expense of basic970safeguards and customer protections for the public? Would there971be specific marketing, disclosure rules? What would you see?972    Mr. Behnam. Thanks, Senator. I think it is important to973note--and I have said this many times, probably before the974Committee--yes, in fact, Chairman Massad, I agree with him. A975lot of the market is retail-oriented, unlike the typical CFTC976market, which is more institutionally oriented. We have to look977really at the asset itself, as opposed to the constituency that978is investing.979    Commodities versus securities are regulated in very980different ways. Securities are regulated in a way to bridge981information gaps between an issuer of security and investor982because you have centralized individuals and audited financial983statements that need to be disclosed to investors. That is not984the case with commodities. I do not think you are going to need985to build, and quite frankly, I do not think you can build an986investor disclosure regime at the CFTC like you have one at the987SEC, because you cannot simply disclose something about Bitcoin988that you can about a share of a stock.989    Second, I advocated this. I said this in my testimony. Yes,990the CFTC will absolutely need to increase its ability to get991information out about the risk of loss associated with992investing in digital assets. The CFTC has a very well-built-out993customer education program, but I believe the Committee should994think about investing in----995    Senator Klobuchar. Okay.996    Mr. Behnam [continuing]. that program to further it.997    Senator Klobuchar. Thank you. I will get more from you998personally, so thank you for your ideas.999    Just one last question, Mr. Massad. In considering any1000legislation to regulate these digital markets, we cannot ignore1001the numerous ways that President Trump has sought to profit1002from digital assets and influence. His Trump meme coin offers a1003non-transparent backdoor for those seeking Presidential favors1004or attention, including the recent crypto dinner he sponsored1005that put money directly in his pocket. His World Liberty1006Financial issued stablecoin, USD1, only recently entered the1007market, but it has already skyrocketed to be one of the top1008five stablecoins.1009    What effect do these activities have on the crypto industry1010and on efforts to regulate it? If you and I seem to agree in my1011opening and your comments that this has to be part of any1012regulation.1013    Mr. Massad. I think it is a black eye for the industry, and1014I know a number of people in the industry that have expressed1015that but are afraid to speak out. I think it gives the wrong1016impression of what this sector is about, and that is why it is1017so important to address it through rules on conflicts,1018divestment, and so forth. I hope also I can come back on the1019disclosure point later.1020    Senator Klobuchar. Okay. Well, I am sure I will have a1021second round or someone else----1022    Mr. Massad. Thank you.1023    Senator Klobuchar [continuing]. one of my colleagues will1024ask you. Thank you.1025    Mr. Massad. Thank you.1026    Chairman Boozman. Senator Marshall.1027    Senator Marshall. Thank you, Mr. Chairman. It is great to1028see everybody. Mr. Behnam, welcome back. You look great, so1029life must be treating you well.1030    [Laughter.]1031    Senator Marshall. I will give you my first question. The1032crypto industry seems to use a lot of synonyms. You know, since1033the first time we met, I have been concerned about anti-money1034laundering and know-your-customer rules, that the crypto1035industry be held to the same standard as banks. How can we stop1036these black markets from happening and using this type of1037activity? How should we handle potential deficiencies moving1038forward to address these issues?1039    Mr. Behnam. Thanks, Senator. It is great to see you as1040well. You know, I do think, and as I have said in my written1041testimony, as you and I have discussed over many years at this1042point, whatever efforts the Committee makes around anti-money1043laundering and know-your-customer should be grounded in1044existing law and existing law around both of those things that1045Treasury mostly implements, but the agencies will need to also1046have increased authority around anti-money laundering and know-1047your-customer.1048    Much of this industry is about anonymity. I think why we1049are here today is to bring that anonymity into light, to bring1050transparency around it, and regulation serves that purpose.1051Comprehensive regulation around the entities, the1052intermediaries, will provide the tools that Congress needs and1053the law enforcement agencies to prevent anti-money laundering1054and know-your-customer issues that, unfortunately, support a1055lot of the illicit activity, potentially terrorist activity,1056terrorist financing that I know has been a big issue that you1057have addressed, but something that has to be addressed very1058specifically----1059    Senator Marshall. Certainly, in your estimation, this1060remains a little concern, it is a big concern. How concerned--1061--1062    Mr. Behnam. I think this is a primary concern that needs to1063be top of mind for all of you as you consider legislation, but1064I do not think it is reinventing the wheel. I think a lot of1065the AML/KYC law that has been developed over time is a good1066framework to build off of for this industry.1067    Senator Marshall. Okay. Mr. Kim, I will come to you next.1068It is kind of the same basic question. What specific guardrails1069could be implemented to make sure that crypto markets are not a1070haven for bad actors who want to use crypto for money1071laundering and financing terrorism?1072    Mr. Kim. Thank you for your question, Senator. Countering1073illicit finance is extremely important for the industry. No1074amount of illicit finance is acceptable in any industry or1075technology, including digital assets. As my colleague Mr.1076Behnam mentioned, FinCEN starting from 2013 has required1077digital asset exchanges to have SARS reporting, AML compliance,1078sanction screening, and I believe that providing the CFTC with1079oversight over the spot trading of digital commodities and1080allowing the CFTC to come up with additional necessary rules1081and guardrails to best protect the industry is something that1082would benefit industry, consumers, and that will allow1083innovation to grow in the United States because the only way1084for our industry to keep on growing is to best protect1085consumers.1086    Senator Marshall. Okay. All right. Thank you, Mr. Chairman.1087I yield back.1088    Chairman Boozman. Senator Smith.1089    Senator Smith. Thank you, Mr. Chair, Ranking Member, and1090welcome to the Committee, everyone.1091    I come at this from the basic perspective that people1092should be able to invest their money in any way that they1093choose, and they ought to also be able to count on free markets1094and markets that work well because there is a regulatory1095structure in place that protects them from unfair and rigged1096environments.1097    I am going to just start with you, Mr. Massad, because I1098could tell you wanted to follow up on this issue of sort of1099CFTC versus SEC. I do not think it should be a versus or an1100either/or. I do believe that there is an important role for1101both agencies and also an important--our job here should be1102figuring out how to fill the gaps that exist when it comes to1103regulation regarding crypto assets. Would you just follow up1104about this issue----1105    Mr. Massad. Sure.1106    Senator Smith [continuing]. of disclosure----1107    Mr. Massad. Yes.1108    Senator Smith [continuing]. that was raised?1109    Mr. Massad. Thank you, Senator. I agree with Mr. Behnam1110that generally on commodities we do not worry about a1111disclosure framework in the context of commodity futures. We1112just worry about whether the contract is susceptible to1113manipulation. This is different. It will be different. If you1114look at the Clarity Act, if you look at Lummis-Gillibrand, if1115you look at any of these proposals, they provide for disclosure1116regarding so-called digital commodities. We will have to build1117out some kind of disclosure framework. Again, I am fine with1118the CFTC being the lead authority on overseeing these markets,1119ideally with the work of an SRO. I think the development of the1120rules is going to require cooperation.1121    Senator Smith. Thank you. I appreciate that. That is1122helpful. You know, we do not have legislation here in the1123Senate. As you know, we have the Clarity Act, which the House1124will be taking up as soon as this week, so I want to dive into1125some of the issues on the Clarity Act. We just had a chance to1126speak about this last week in the Banking Committee as well.1127    Here is the first thing. Securities brokers are required to1128get their customers the best possible trade, right? They have1129to look across multiple exchanges. This is not happening for1130crypto trading right now. At best, the law is unclear, as I am1131understanding that. Would you agree with that? Would the1132Clarity Act do anything to address that issue?1133    Mr. Massad. No, I do agree with your point, and no, it1134would not. Again, I think Americans, you know, think that our1135financial markets are well regulated because they are with1136respect to securities and commodities, but this one is1137different. There is no best-execution obligation. There is no1138prevention of conflicts of interest on the part of brokers or1139crypto exchanges.1140    Senator Smith. Is there any reason that a crypto broker1141could not or should not be required to execute trades in the1142best interest of their customers? Is there anything that is1143intrinsic in the technology----1144    Mr. Massad. No.1145    Senator Smith [continuing]. or anything that would make1146that not reasonable?1147    Mr. Massad. Not to my knowledge, Senator.1148    Senator Smith. Okay. It seems to me, I would agree with1149you, that customers deserve to know that when they are buying1150or selling an asset, that their broker is trying to get them1151the best possible execution on their trade and not somehow1152profiting without them knowing about it. I think this is a1153place, colleagues, where we could look at how to improve the1154Clarity Act as we go forward.1155    I want to ask you a bit about tokenized stocks, which I1156think is another very challenging issue. The trading platform1157Robinhood recently announced that it was going to start1158offering tokenized stocks to European investors, I believe.1159These are not actual shares in a company, but they are digital1160assets that, at least in theory, derive their value from the1161real thing, the real stock. They do not provide any ownership1162stake in the company or any rights that would come with being a1163shareholder, for example.1164    Mr. Massad, proponents of these tokens claim that they1165would expand investment opportunities for folks, but I do not1166know that that really tells the full story. I mean, could you1167just address what risks these tokenized stocks would pose to1168investors and to the broader market?1169    Mr. Massad. Yes, Senator. I think it will be a situation1170where there could be a lot of confusion and a failure to1171protect investors. It will not be clear exactly what this1172tokenized thing is. Does it pass through all the rights, or1173does it just represent trading on the price? There could be1174fragmented disclosure. There could be less transparent trading.1175There is a big risk with the decentralized finance exemptions1176in things like the Clarity Act.1177    Senator Smith. You could own a tokenized stock, but you1178would not have any of the protections that you would have if1179you were purchasing a stock with all of the protections that1180the SEC would provide.1181    Mr. Massad. It would depend, again, on what it meant.1182    Senator Smith. Right.1183    Mr. Massad. Again, that is why I think we need, you know,1184some joint rulemaking and some coordination between the1185agencies. It could represent something where it is a pass-1186through, but it might not.1187    Senator Smith. It is open. Just in the seconds I have left,1188how could the Clarity Act provide--I am concerned that there is1189going to be sort of an incentive to move to one regulatory1190structure versus another, which is going to be the best for the1191company and not the best for the investor. Couldn't we address1192that from a policy perspective if we chose to?1193    Mr. Massad. Oh, absolutely, we could. We would not have1194exemptions that encourage that kind of migration of activity.1195That is what we are seeing right now in the Clarity Act and1196some of these other proposals.1197    Senator Smith. Thank you very much.1198    Mr. Massad. Thank you.1199    Chairman Boozman. Thank you. Senator Tuberville.1200    Senator Tuberville. Thank you. Mr. Kim, you touched on this1201very briefly in your opening statement. The EU and U.K. are1202moving quickly to attract, you know, blockchain-based1203innovation. What risk are we at in the United States? What are1204we going to face if we do not get more urgent about what is1205going on? I recently talked to some exchanges, and they are1206freaking out basically about, hey, we have got to do something1207or we are going to have to move out of the country. What are1208your thoughts?1209    Mr. Kim. Thank you very much for your question, Senator. As1210I mentioned in my testimony, it is a global race to the top, so1211other jurisdictions have not been waiting for the U.S. to lead.1212You have the EU, Singapore, Japan, U.K. all looking to attract1213technology resources. I see blockchain development and digital1214assets as the plumbing and infrastructure for the second half1215of the 21st century. We need the U.S. to lead.1216    That said, despite the progress in other jurisdictions,1217everyone is watching the U.S. now. They are seeing the Senate1218having passed GENIUS. They are seeing development of a market1219structure bill, including in this Committee. Even the U.K. is1220actually a really good example, Senator, where they have been1221taking a very modular, patient approach, but recently, they1222announced an all-at-once approach. I believe that there is an1223opportunity for the U.S. to cement its leadership and make sure1224this innovation stays here in the U.S., and that starts with a1225comprehensive legislative framework, as I discussed, Senator.1226    Senator Tuberville. Thank you. Mr. Sexton, do you have a1227follow-up on that? You got anything on that about us dragging1228our feet?1229    Mr. Sexton. Senator, I encourage this Committee and the1230House to continue to work on legislation in this area. I think1231it is very important. I can tell you that from our perspective,1232we have, as I indicated, member firms already engaged in this1233activity. To the extent that the CFTC would be provided with1234not only anti-fraud, but also regulatory oversight over digital1235commodities, I think it would be very helpful as far as our own1236regulatory structure here.1237    Senator Tuberville. Thank you. Mr. Behnam, the U.S. model1238of having two regulators--and we touched on this briefly--only1239works if they are clear jurisdictions. You are very familiar1240with that. Can you talk about the need to clear up, you know,1241this regulatory definition between the CFTC and the SEC?1242    Mr. Behnam. Senator, thanks for the question. It is the1243first and most important step because, from that point, the two1244agencies will be able to really start to develop rules either1245distinctly and uniquely or in a joint fashion. This is1246certainly a new asset that has a lot of characteristics that1247are similar to other assets but also have a lot of1248characteristics that are novel and new and are going to require1249a different way of thinking about, so I do think it is1250critically important.1251    I also think, putting myself in my old shoes, it is1252important that the agencies get a bit of a steer from this1253Committee and Congress because there are lines that I think1254this Committee and the Congress can draw to help the agencies1255start to really define the landscape of what tokens are1256securities and what tokens are commodities.1257    Senator Tuberville. Thank you. I yield back.1258    Chairman Boozman. Senator Lujan.1259    Senator Lujan. Thank you, Mr. Chairman, and thank you for1260holding this hearing and an opportunity to have this particular1261discussion about digital asset market structure. One of the1262concerns I think has been brought up today and that many have1263had throughout the years is what happened with FTX, with1264Celsius, with a few others like Terra Luna when there was a lot1265of concern and devastation. What I have appreciated most1266recently is everyone's willingness to come and have more1267conversations and say, no, there needs to be rules. I1268appreciate the bipartisan nature of how this has been taking1269place as well, so just thank you so much for this particular1270conversation.1271    Now, Mr. Massad, it is widely understood that Bitcoin is a1272commodity, not a security. Now, if I wanted to buy or trade a1273Bitcoin, a meme coin, or another commodity, I could log on to1274an exchange to do that. However, I could also buy and trade1275tokens that look much more like securities on the same platform1276right next to each other. My question is, sir, what are some of1277the differences in the protections for consumers between a1278commodity like a meme coin versus a security like a stock?1279    Mr. Massad. Well, today, they are huge because we do not1280have any regulation of this spot market for so-called digital1281commodities. That is what we need to put into place. Your1282question also really goes to the fact that, you know, when we1283think about how to make that regime work, we are going to need1284things that are unusual for commodity markets. We are going to1285need disclosure rules, as well as trading rules, as well as1286conflict rules, and so forth. That is why, again, I think we1287are going to have to have some coordination between the1288agencies.1289    Senator Lujan. With that being said, is it reasonable for1290customers to be confused about the differences in their1291protections when they are listed next to one another? Does it1292increase the risk of something called rug pulls and pump-and-1293dump schemes, things of that nature?1294    Mr. Massad. Absolutely. For example, under the Clarity Act,1295it is not even clear that those meme coins would be regulated.1296Now, I think they have recently put out a revision that maybe1297they would be, but, you know, we should have a framework where1298anything that is traded on these platforms is subject to the1299regulatory framework. They cannot just list something else that1300is not, and then those rules have to be very clear so that1301customers are not confused. We should not have securities1302trading on the same platform.1303    Senator Lujan. What are your thoughts, your expertise here1304with what Congress needs to do to protect consumers from1305fraudulent schemes while still allowing Americans to access and1306benefit from cryptocurrencies?1307    Mr. Massad. Well, again, we need to put in a good1308comprehensive framework. You know, the measures that are1309proposed so far have some of those elements but not sufficient1310ones. I think they are too lax in a lot of the requirements. I1311think they, you know, do not address conflicts of interest1312sufficiently. I think they undermine securities laws by1313creating some exemptions from those laws. You know, it requires1314a comprehensive framework that will create investor protection1315standards that are comparable to what we have in the securities1316markets today.1317    Senator Lujan. Appreciate that. Mr. Behnam, one issue here1318is that the CFTC does not have clear regulatory authority over1319spot crypto markets. As past CFTC Chair, how would you protect1320consumers from fraud like those rug pulls that I just asked1321about and pump and dumps and meme coins where there are clear1322issuers, unlike other commodities like oil where there is no1323central issuer?1324    Mr. Behnam. Senator, thanks for the question. I do think1325before we get to a point where you are deciding which agency1326has jurisdiction, if we can get lines drawn around definitions1327between commodities and securities, the whole premise and1328thesis behind the commodity tokens is that they are, in fact,1329maybe an issuer at some point in the evolution of the token,1330but when it is trading on a CFTC exchange, it is decentralized1331enough or at some point where it is sufficiently decentralized1332where there is no central institution, group of individuals, or1333individual that is controlling or impacting the price of the1334asset. If it is sufficiently decentralized, which works off of1335a lot of the legal precedent that is built around our1336securities laws and our commodities laws, you really would not1337have that issue where you have individuals pulling off1338manipulative trading activities that could hurt investors.1339    Senator Lujan. Is it fair to say that the definition1340section of this legislation matters?1341    Mr. Behnam. The definition section of any legislation this1342Committee puts out is arguably the most important part of the1343legislation.1344    Senator Lujan. I appreciate that.1345    Mr. Chair, as my time expires, that is one of the issues1346that I and my staff raised during the markups with the GENIUS1347Act as well, and so, I certainly hope that we can pay1348particular attention to the expertise from the staff that we1349have around us and others coming in when we are looking at that1350definition section and just highlight your testimony today.1351    Thank you for the time today, Mr. Chairman.1352    Chairman Boozman. Thank you. Senator Justice.1353    Senator Justice. Thank you, Mr. Chairman, Ranking Member.1354Thank all you guys for being here.1355    Now, from my side, you know, I speak really plainly, okay?1356I would say just this. For God's sakes a living, do we not have1357enough smarts in the room to figure this out? I mean, when it1358really boils right down to it, do we not have the smarts in the1359room to figure it out? I really believe we do. I really believe1360hands down, too, that the upside potential is off the chart.1361Almost every country on the entire globe is scrambling like1362crazy to get a piece of the puzzle. You know, that is all there1363is to it. Why in the world are we so afraid of the dark? Why in1364the world are we so afraid of something that has the potential1365beyond belief, and do we not just figure it out?1366    Now, let me just tell you just this, just two or three1367things. Today, Bitcoin is trading in its own little hemisphere,1368you know, and it is trading at $117,000. Forty-five days ago,1369at the summit in Las Vegas, it was trading at $110,000. For all1370practical purposes, to make it real easy, 7 percent in 45 days.1371Now, lots and lots and lots of folks, whether we want them to1372or we do not want them to, lots of folks are saying, I want in.1373    Now, with all that being said, what we need to do is we1374need to have a framework that allows innovation, period. Do we1375not? Great big b-u-t with Jim Justice saying, great big, we1376have got to have an enforcement arm that protects the consumer.1377Without any question, we have got to protect Toby and Edith.1378Now, I always call Toby and Edith the voters, but Toby and1379Edith want in, but they do not have any idea how to understand1380this. You know what they do? They ask us to protect them. That1381is what they do.1382    They do not ask us to do this to--and I have said this a1383bunch of times, but in my world, I can remember my dad saying,1384just count the egg-sucking cows. You do not need to count the1385legs and divide by four because they are moving their legs all1386the time. You cannot ever, ever figure out how many cows are in1387the field.1388    Now, come on. We are really smart, and we are a country1389that ought to be leading the way in every way. What are we1390doing? Why are we so scared of the dark? Why are we so1391committed to counting the legs and dividing by four?1392    Listen, we passed GENIUS. It is good. Now, we have to some1393way acknowledge legitimacy, market structure. We have to have1394regulated clarity. We have to have clarity. We have got to1395protect Toby and Edith all the time, 100 percent. We have got1396to have real live enforcement that absolutely eliminates your1397bad actors.1398    You are really smart people, super smart people. You have1399got some really smart people here on this Committee. Maybe not1400me, but you have got some really smart people. I am here to1401tell you, we need to move and move now. Now, we are going to1402sit around and twiddle our thumbs, and a lot of people are1403going to have a leg up on us like we cannot imagine. That is1404not doing Toby and Edith right. Toby and Edith want to play the1405game. They want to be involved. They want to be the next1406innovation. They ask us one simple thing, protect them.1407    I am almost out of time. You have got to go real fast, 101408seconds a piece. Tell me, how can we pull it off? How can we1409pull the innovation off? How can we protect them? Real simple.1410    Mr. Kim. I believe that when the U.S. puts its mind to1411something, that we can accomplish great things. I think, like1412you said, Senator, we do need a comprehensive legislative1413framework to allow for responsible innovation, a principles-1414based approach, while best protecting consumers, and I think1415now is the time to do so, Senator.1416    Mr. Behnam. Senator, I think, number one, just we have1417great capital markets and derivatives markets. Start with that1418as a foundation, and then we can figure it out.1419    Mr. Massad. I would say, keep a couple principles in mind.1420Do no harm to the existing markets. Keep it relatively simple1421in the legislation and rely on the expertise of our regulators.1422They do have expertise, and we should draw on it and not fight1423the last war when they were not doing enough, perhaps, to1424customize rules.1425    Senator Justice. Thank you.1426    Mr. Sexton. Use the time-tested structure that has already1427been in place and has been in place for years. The CFTC1428regulates commodities. The SEC regulates securities. Use that1429structure. Congress gives some definitional support to what is1430a security, what is a commodity, and you go from there. It has1431worked in the past. It is simple. It will work again. There are1432SROs underneath that that support the SEC and the CFTC in their1433work.1434    Senator Justice. Thank you.1435    Mr. Lukken. Senator, your description of the volatility of1436Bitcoin reminded me of other commodities like oil, gold,1437production crops that farmers that talk to you all the time are1438dealing with. The CFTC is a natural home for these types of1439commodities that are dealing with volatility, the fact that1440they can trade the derivatives to help to hedge that1441volatility.1442    My advice to this Committee is to give exclusive1443jurisdiction over digital commodities to this agency and to1444give digital securities to the SEC and to give clear lines of1445jurisdiction to both agencies.1446    Senator Justice. I want to thank all of you and thank you,1447Mr. Chairman, because you have led the charge and everything,1448and I am right with you, sir.1449    Chairman Boozman. Thank you. Senator Durbin.1450    Senator Durbin. Thank you, Mr. Chairman. We have said over1451and over again we have securities and commodities, and we have1452got to make careful definition, but I think there is more to1453the story. In the Clarity Act, which will receive a vote in the1454House this week, they created a loophole for crypto tokens1455known as collectibles. That means those crypto tokens will not1456have to register with financial regulators and would benefit1457from a lighter-touch regime. In fact, collectibles are not even1458considered digital commodities in the bill and are basically1459exempt from most requirements.1460    When Coinbase, one of the largest crypto exchanges, went to1461court with the SEC, Coinbase--I believe he is a member of your1462organization, Mr. Kim. Coinbase argued that the tokens listed1463in the SEC's complaint were neither securities nor commodities.1464Coinbase's lawyer argued in court these tokens were like Beanie1465Babies, meaning just trading collectibles. These collectibles1466can involve multi-millions of dollars. Just ask President1467Donald Trump, who listed his own meme coin on exchanges like1468Coinbase and Kraken, two exchanges that are part of the Crypto1469Council for Innovation.1470    President Trump's meme coin has no real use and trades its1471values basically on popularity and hype, just like a Beanie1472Baby. That did not stop President Trump from auctioning off his1473meme coin and giving top investors--get this--access to a face-1474to-face dinner with the President of the United States. Not1475only did President Trump make $315 million in fees by selling1476his meme coin--get this now, too--764,000 unique wallets lost1477money to the President's scheme. Talk about Toby and Edith. All1478the while, crypto exchanges like Coinbase and Kraken claim they1479had a robust listing process and continue to perform due1480diligence, on and on.1481    Mr. Massad, let's start with you. What concerns, if any, do1482you have about a huge exception for collectibles in any crypto1483market structure legislation, number one? Number two, you1484talked about a black eye to the industry, this transaction1485involving the President. I think it is more than a black eye. I1486think it is evidence of corruption. The question, the bottom1487line, as far as I am concerned is, what does the industry do if1488they are afraid of the President when it comes to regulation?1489    Mr. Massad. Thank you for the question, Senator. First, on1490the collectibles, I agree with you. The Clarity Act does1491exclude those as commodities, and I think the rule should be1492that digital commodity exchanges cannot trade anything unless1493they are covered by these rules. What I would suggest to you,1494Senator, is why don't you write all the big platforms,1495Coinbase, Kraken, Gemini, if it is so clear--if the Clarity Act1496is so clear as to what is a digital commodity, ask them to tell1497you of the hundreds of things they list which ones are digital1498commodities and see what answers you get.1499    Senator Durbin. Mr. Sexton, what do you think?1500    Mr. Sexton. Senator, with regard to those types of tokens,1501coins, I can tell you that we approach it from a slightly1502different angle, and that is, we regulate the conflicts that1503may be embedded within our members.1504    Senator Durbin. I will have to ask you to make a brief1505conclusion to your answer so I can ask one other question.1506    Mr. Sexton. Go ahead.1507    Senator Durbin. In 2024, the FBI reported that Americans1508lost $16.6 billion to crypto schemes, 33 percent increase over1509the previous year. The type of scam I am concerned about1510involves a machine called a crypto ATM. Mr. Sexton, do you know1511how many we have in our state of crypto ATM machines?1512    Mr. Sexton. I could tell you I do not know the exact1513number, Senator, but quite a few.1514    Senator Durbin. I can tell you. It is 1,600. What happens1515with a crypto ATM? They put them in grocery stores and shops.1516They are basically the way they victimize senior citizens and1517people in minority communities. Once a victim places their1518hard-earned cash in one of these machines, it disappears into a1519criminal's wallet, almost impossible to get back. Here is how1520it works. Scammers call an unsuspecting victim, tell them they1521owe taxes to the IRS or a penalty for failure to appear for1522jury duty. Not to worry, they can pay it off at a crypto ATM.1523They direct them to the nearest crypto ATM. These people put1524their life savings, in some instances, into the criminal's1525digital wallet. In 2024 alone, scammers stole nearly $2501526million from Americans, and the stories are heartbreaking.1527    This industry ought to wake up to this reality. There is a1528misuse of one of their operative machines to scam people over1529and over again with huge sums of money. Want to be known as a1530reputable industry? Do something reputable like protecting1531consumers. About 15 states have done it. All of them should,1532and we should put something in the federal bill. When the1533GENIUS Act came before the Congress, I wanted to offer this1534amendment. No amendments. Take it or leave it on the GENIUS1535bill. Well, if we have a second chance, whether it was clarity1536or GENIUS returning, let's at least think about the consumers1537for a few minutes.1538    Thanks, Mr. Chairman.1539    Chairman Boozman. Thank you. Senator Booker.1540    Senator Booker. I am grateful. I think, if anything, we are1541hearing in this Committee is the urgency for a market structure1542bill that provides the appropriate regulation. I want to jump1543in right away, though.1544    Mr. Massad, you said something that to me maybe was an1545understatement. I never imagined in my life I would see the1546President of the United States create a digital asset that is1547open to being purchased, a meme coin that could be purchased by1548anybody, anywhere, from our adversaries, our rivals, from1549people trying to curry favor with the United States, from1550people who are looking for military deals, and to literally1551sell seats to a dinner at the White House, at one of America's1552more sacred civic spaces. To me, this amounts to a level of1553galling corruption never, ever before imagined that could1554happen in our country, and we are normalizing it.1555    It is corrupt, it is dangerous, it is an attack on our1556democracy, it is a violation of the Emoluments Clause, and it1557is undermining this industry as a whole. Would you agree with1558me that my language is perhaps more appropriate?1559    Mr. Massad. I would totally agree with you, and I have said1560similar things. The meme coins are a perfect bribery tool1561because they are out there, someone can buy them and,1562therefore, you know, provide essentially money to the1563President, yet still claim, well, I am just speculating on a1564meme coin.1565    Senator Booker. Would you agree that the way our1566Constitution was designed, the legislative branch is supposed1567to provide checks and balances and oversight, and the fact that1568the United States Senate has not had one oversight hearing of1569this corruption is a surrendering of our obligations and duties1570under the Constitution?1571    Mr. Massad. It is shocking to me. I mean, he is making1572billions of dollars, not just from the meme coin, but from his1573own stablecoin. Even the meme coins have been called by the1574creator of Ethereum--the creator of Ethereum has called them a1575bribery tool.1576    Senator Booker. I think it is appalling that Congress has1577laid down. I think it is extraordinarily dangerous----1578    Mr. Massad. I would agree.1579    Senator Booker [continuing]. and I am beyond frustrated1580that we are normalizing this level of corruption in America and1581have the most corrupt President imaginable, who is making1582hundreds and hundreds of millions, if not billions of dollars,1583profiting off of the Presidency at the very national security1584risk that it poses to our country when he can make decisions1585that affect truly the safety and security of our country, as1586many of these countries are trying to curry favor and have1587deals. That does not even begin to mention the Trump hotels and1588all the other things that he is doing that truly undermine any1589idea of what it means to operate in the Presidency with1590integrity.1591    I want to jump really quick, Mr. Behnam, because I am very1592deeply engaged and involved in trying to make sure that we land1593something that could deal with a lot of the challenges. The one1594thing that has not been discussed, as you and I talked about1595this ad nauseum, is the CFTC's capacity to regulate this area.1596Right now, we have seen budget requests for a 2.9 percent1597decrease in funds from its 2024 request and a 5.1 percent1598decrease in personnel, which is on top of cuts made earlier1599this year by DOGE that threatens the CFTC's ability to oversee1600the $120 trillion equity and debt markets it is already1601responsible for, without even adding the growing crypto market1602into the equation as is envisioned. The House's Clarity Act1603would expand the CFTC's jurisdiction without a single1604additional dollar. It will create chaos for retail consumers in1605our markets, I believe both crypto and in traditional finance.1606    Am I right to be outraged that this is how we are starting,1607without understanding the resources that would be necessary to1608do what a lot of us are envisioning?1609    Mr. Behnam. Senator, short answer is yes. I mean, the1610number one priority, if we are going to authorize new authority1611for an agency, the CFTC here, is funding and resources so that1612it can execute those responsibilities.1613    Senator Booker. Well, I will tell you this right now. I1614want to lean in in a bipartisan way and craft market1615regulation. This is what I see right now. I see Senators and1616Congresspeople trading stocks and bonds, people who are1617involved in the crypto world. Again, I have legislation with a1618number of other Senators that really say very clearly that we1619should be doing everything we can as a matter of integrity to1620stop corruption, that we should introduce and pass the End1621Crypto Corruption Act, which would make sure the President,1622Vice President, Senior Executive Branch Members of Congress and1623immediate families, that stops them from financially benefiting1624from issuing, endorsing, or sponsoring crypto assets such as1625meme coins.1626    We have this air of corruption that undermines the1627integrity of Congress and the Presidency at a level of1628corruption we have never seen before. The very regulatory1629bodies that should be overseeing these massive markets is being1630starved of resources to even do the jobs they are doing right1631now. Any serious effort to engage in the kind of market1632structure bill we are having without putting the resources that1633we have discussed in the past, in the bill that we had in the1634last Congress, a bipartisan bill, we had a way of addressing1635this.1636    There are a lot of structural problems I have right now.1637The level and possibility of corruption, of scams, of people1638that could get hurt if we do not do this right, is stunning to1639me, not to mention the very foundations of our democratic1640system so that we do not become some corrupt banana republic1641where Presidents and Senators and Congresspeople can bilk the1642American people by bending the rules, corrupting the rules for1643their own benefit. We have got to do things different.1644    Chairman Boozman. Thank you. Senator Bennet.1645    Senator Bennet. Thank you, Mr. Chairman. Thank you for1646holding this hearing. Thank you to the witnesses for being1647here.1648    Mr. Massad, President Trump earned about $57 million from1649his stake in World Liberty Financial last year, according to1650the most recent disclosure forms. In the last few months, World1651Liberty Financial launched a stablecoin, which was used by an1652Abu Dhabi-backed investment company for a $2 billion investment1653in finance. Just before the inauguration, President Trump1654issued a meme coin, which surged in price in May. President1655Trump hosted a dinner, as has been said, for the 220 biggest1656holders of his Trump coin, further juicing the value of that1657coin. About 80 percent of the tokens are held by Trump-1658affiliated entities.1659    I do not think we should have to wonder if the President of1660the United States is favoring the interests of a foreign nation1661or a private crypto exchange like Binance because he stands to1662personally profit.1663    That is why, last month, I took over the Senate Floor to1664directly add an amendment to a piece of crypto legislation that1665we were considering, the so-called GENIUS Act, which was on the1666Floor of the Senate. My amendment, the only Democratic1667amendment that was pending, would have prevented the President1668and the Vice President from issuing stablecoins. I would be1669surprised to know that there are a smaller percentage than 951670percent of the American people who would not have agreed with1671my amendment. Yet it was thrown out of the bill, and Democrats1672and Republicans voted for that bill without demanding that the1673President and the Vice President, and Members of Congress, not1674issue these currencies.1675    Today's conversation does not only address stablecoins, but1676the entire ecosystem of digital assets, and it is really1677important for us to get it right. I believe, really strongly,1678that the--and I believe, again, 95 percent of the American1679people, if not 98 percent of the American people, would agree1680that the President, the Vice President, a Member of Congress,1681high-ranking officials of our government, should not be in the1682business of issuing any cryptocurrency.1683    Mr. Massad, as a former federal regulator, should federal1684elected officials be prohibited from issuing or endorsing1685digital assets while they are in office?1686    Mr. Massad. Absolutely, Senator.1687    Senator Bennet. What kind of market manipulation might1688result from that? We have had some discussions today about why1689these are like other commodities, like wheat or like--but how1690is it maybe different in this case?1691    Mr. Massad. The meme coins are a perfect example. They have1692been called a classic pump-and-dump scheme by a number of1693commentators. They were issued. People rushed to buy them. He1694made a lot of money off of that, and then the price fell, and a1695lot of people then had losses. You know, he is investing in not1696just a stablecoin. They are now doing things with Bitcoin1697mining and other business ventures. I agree with you totally.1698You should be prohibited from doing those things and required1699to divest.1700    Senator Bennet. Can you imagine any benefit to the American1701people of allowing the President or Vice President to1702speculate----1703    Mr. Massad. None.1704    Senator Bennet [continuing]. in this currency?1705    Mr. Massad. None whatsoever, Senator.1706    Senator Bennet. Yet the U.S. Senate has passed a bill that1707allows them to do it. I offered an--I had an amendment pending1708that said the President or Vice President should not do it. I1709would be shocked if I lived long enough to have an amendment1710pending that would be more popular with the American people1711than the one that I had in there, and yet the Senate threw it1712out before they blithely passed the legislation.1713    Mr. Massad. We have never imagined that a President would1714do these kinds of things, and therefore, you know, we do not1715have the rules in place to prevent it, but we need them now.1716    Senator Bennet. I would think the industry would want these1717rules in place.1718    Mr. Massad. I think they do. They are just afraid to say1719it. I have had a----1720    Senator Bennet. Why are they afraid to say it?1721    Mr. Massad. Because they are afraid that it might hurt1722their business interest. I have had so many people in the1723crypto industry come up and tell me that.1724    Senator Bennet. Well, we are going to have to figure out as1725the elected leadership of this Nation to do better than that1726somehow.1727    Mr. Massad. I would agree, Senator. If you do not do it,1728who will?1729    Senator Bennet. Exactly.1730    Mr. Chairman, thank you very much. I will submit my other1731questions for the record, but I appreciate--I think you shed1732some important light here.1733    Chairman Boozman. Thank you.1734    Senator Bennet. Thank you.1735    Chairman Boozman. Thank you, Senator Bennet. Senator1736Schiff.1737    Senator Schiff. Thank you, Mr. Chairman, and thank you all1738for being here to testify.1739    I think it is very important that we have good, strong, and1740sound regulation of this whole industry to protect consumers,1741to make sure that there are clear and understandable rules of1742the road, that there is some certainty for investors, for1743consumers, that there are protections in case of bankruptcy or1744fraud.1745    I am also deeply concerned, as Senator Bennet just alluded1746to, to the prospect of high Administration officials1747manipulating digital currencies or their ability to influence1748enforcement actions and being very interested in your thoughts1749about how to address these conflicts, potential and real1750conflicts of interest when you have people who are in positions1751of dominant influence like the President or others issuing,1752endorsing, sponsoring their own digital currencies, how we can1753ensure that we either prohibit such actions completely or that1754we make sure that people who are engaging in them are subject1755to laws against market manipulation and self-dealing.1756    Let me start, if I can, Mr. Behnam--good to see you again--1757by asking you, I know you have spoken directly about the need1758to maintain public confidence and integrity in these markets.1759Do you think public officials that have any kind of supervisory1760or influential role should be permitted to issue their own1761currencies or endorse their own currencies or would it be the1762most basic and fundamental provision that that should simply be1763banned?1764    Mr. Behnam. Senator, thanks for the question. Short answer1765is yes, it should be banned. I will say as a former regulator,1766you know, just five or six months removed for seven years at1767the Commission, I took that responsibility very seriously, the1768weight of the responsibility as a regulator over markets and1769ensuring there was no conflict of interest or exposure that me1770or my family had to the markets I regulated.1771    Senator Schiff. Does anyone testifying here today think it1772is okay, good practice, nothing to see here for high1773Administration officials who have influence over these markets1774to be able to issue or promote their own personal stablecoins,1775digital currencies of any kind?1776    Mr. Massad. Just to be clear, Senator, I agree that it1777should be banned, should be prohibited.1778    Senator Schiff. I would go further, the Administration1779officials, I would say ban all those actions from any Members1780of the House or Senate. Anyone disagree with that proposition?1781    Mr. Kim. Senator, I know this has been a discussion among1782policymakers. I just wanted to note that for myself, this is1783admittedly outside my area of expertise, and I see this as a1784decision for Congress. I just wanted to say that respectfully,1785Senator.1786    Senator Schiff. Well, I appreciate that. I hope we will1787make that very decision because I think it is vitally important1788that we regulate this area. I think the current unregulated or1789regulation-by-litigation posture we are in is undesirable for1790everyone, does not protect consumers, does not help legitimate1791actors in the industry, does not provide any certainty or1792ability to plan or predict or invest. At the same time, the1793most basic protections we might put in place to protect1794consumers will be undermined if those that can influence the1795whole market are in business themselves and able to enrich1796themselves.1797    Let me move on from the problems that have been documented1798by the First Family's involvement in this business. In what1799other respects--and I open this up to any of our participants--1800can we help ensure that consumers are protected? Obviously,1801there have been some catastrophic failures of companies in this1802space engaged in fraud. What is the best way to protect1803consumers so that in the event of a catastrophic failure, they1804are protected?1805    Mr. Lukken. Maybe I will start off. I think the first is1806acting. I think the Congress needs to act to fill this1807regulatory gap. This Committee is starting that process of1808doing that. We are going to have to, as was mentioned, make1809sure that we have strong, clear lines between the CFTC and SEC1810on how you think the jurisdiction should go. Importantly, each1811agency brings unique customer protections and important market1812integrity issues that are going to help fix the problems that1813you are identifying. I think you are preaching the choir here.1814Everybody on this panel wants to fill this gap right now, and1815it is up to Congress to act quickly.1816    Mr. Behnam. Senator, I will add in December 2022, I1817testified before this Committee shortly after FTX failed. FTX1818had one entity that was registered with the CFTC. It had a1819number of entities globally, over 125. I said to this1820Committee, of the 125-plus entities, about two or three, two I1821think in Asia and one here in the U.S., LedgerX, which was1822registered and regulated by the CFTC, was viable, well-managed,1823and had value after that bankruptcy. After that fantastic1824bankruptcy, this entity that had regulation, that had1825supervision, that had oversight, had a future because of1826regulation. That is the point that I think is most important1827for this Committee to take away. As much as there are many1828issues to resolve and discuss and deliberate, regulation works,1829and it ultimately will protect customers.1830    Mr. Massad. I would agree with what former Chair Behnam1831said. I think the other entity of the FTX family was one in1832Japan that was also subject to pretty good regulation.1833    Mr. Kim. If I may very briefly, Senator, I agree with the1834need to address the regulatory gap, as I mentioned, by1835providing the CFTC with comprehensive oversight over digital1836commodities. It is just taking us on a slightly different1837angle. I know for CCI, a lot of what we do is consumer1838education, Senator, so we would love to be a resource to you1839and your office. We have different workshops making sure that1840there is scam awareness campaigns. A lot of our members do that1841as well because even though we are here to talk about the need1842for market structure, there is a need to just educate a lot of1843consumers about the fraud and scam out there, and CCI is1844committed to coming up with policy solutions, Senator.1845    Mr. Sexton. Last, to keep it short, Senator, and thank you1846for the question, I agree with all my panelists. Look, this is1847not difficult. There are longstanding safeguards in place to1848protect retail customers. The CFTC and NFA have adopted them1849over the years with regard to derivatives. Those should be1850applied also to the digital commodity markets to protect retail1851customers, safeguarding customer funds, market practice rules,1852business conduct rules, disclosures. There is a whole litany of1853them. I think it is extremely important that this Committee1854look to those time-tested requirements and safeguards, and they1855go a long way to accomplishing what we are trying to do, and1856that is protect retail customers with regard to digital1857commodities.1858    Senator Schiff. Thank you. Thank you, Chairman.1859    Chairman Boozman. Thank you. Senator Klobuchar.1860    Senator Klobuchar. Thank you very much, Mr. Chairman. I1861just have a few questions as promised at the end.1862    I hope that the world watching here sees that we are not1863going to be rolled here on this bill, on the Clarity Act, and1864that you have a lot of Members who want to see a piece of1865legislation that truly protects consumers, people who have1866worked with the industry in the past on our side that are1867interested in working on this but really want to see some1868serious changes and are concerned both about the conflicts1869issue, are concerned, as Senator Booker--I am going to ask my1870first question on this--about the funding issue of how the CFTC1871should do this, and are certainly concerned about the consumer1872welfare and what safeguards should be in place, and there is1873not loopholes that could, you know, drive a truck through here.1874That is kind of where--it is not consensus. We have Members1875with different views on this, but I do think that people should1876take home from this that we are going to want to see some major1877changes.1878    Mr. Behnam, you previously called for additional funding1879and staff for the CFTC to write rules for and oversee these1880markets. How important is it that Congress provide for durable,1881sufficient funding when it comes to these brand-new markets?1882    I think just to combine my questions then with you, Mr.1883Lukken, one of the concerns is we have got derivative markets,1884we have got an economy that is on a roller coaster right now1885because of tariffs and other things. We do not want to1886disadvantage existing markets and market participants in how we1887do this, so it is a little bit the same question, but go ahead.1888    Mr. Behnam. Senator, very quickly, thank you for the1889question. Short answer, it is an absolute priority. If you1890authorize a regulatory program but do not have the funding,1891there is no teeth there. I did a number of estimates internally1892when I was Chair. We came up with about $130 million over the1893first few years to staff up both on the tech side and the1894personnel side.1895    To your last point, and I think this should resonate with1896everyone on the panel and on the Committee, I cannot tell you1897how much personnel time was taken in the last few years of my1898Chairmanship on crypto-related matters. I do not mean that in a1899negative way, but it is zero sum. When you have those people1900working on crypto matters, which are novel, unique, and do not1901have legal precedent, it leads them away from traditional1902markets, which I think we all agree are the core of what the1903CFTC does and the core of what this Committee cares about on1904the ag side, the energy side, the metals, and financials.1905    Senator Klobuchar. Okay, thanks. Then Mr. Lukken.1906    Mr. Lukken. The question is around the funding and impact--1907--1908    Senator Klobuchar. It is pretty much funding because what1909is going to happen if resources are pulled too thin because of1910this major, major challenge coming in----1911    Mr. Lukken. Sure.1912    Senator Klobuchar [continuing]. in a good and bad way, but1913something that is going to have to be accomplished. Then you1914have these other things going on that you have always done at1915the CFTC.1916    Mr. Lukken. Right. No, I think the agency certainly1917deserves full funding, and especially if they are taking on the1918new responsibility of digital commodities, they are going to1919need more funding to make sure that they can administer the1920act. You know, that is something that has traditionally been1921through an appropriations process. I think the Clarity Act1922gives the ability, a transitional fee that happens for four1923years. That, to me, makes some sense. I think if you start to1924put in a permanent tax on the industry, the concern is that you1925may start to impact hedgers, the people who are trying to1926utilize the markets and taxing them instead of appropriating1927that through the appropriations process, so I do have concerns1928with putting in a transaction tax permanently. I think it is1929better suited through the appropriations process.1930    Senator Klobuchar. Mr. Kim, I am just only smiling because1931I am not going to get into the rescissions and what this means1932to many of us when we look at that process, what is before us1933now, and if we can ever trust it. Mr. Kim, so Senator Marshall1934was talking about the need to make sure we protect against1935terrorist use of these commodities. I thought that was a good1936line of questioning, and I just have one thing to add. Are1937digital commodity market participants technologically capable1938of complying with these financial laws? Should Congress tailor1939the laws in any ways to account for unique features of these1940markets or this technology?1941    Mr. Kim. Thank you, Senator. I think the U.S. already has a1942robust AML/CFT program through FinCEN, as I mentioned earlier.1943That said, I believe it is appropriate for the CFTC to be the1944regulator for digital commodities, and once that framework is1945established, Senator, I think there could be additional1946protections as need be. What has been missing, as I mentioned,1947is that regulatory gap right now where the CFTC does not have1948that statutory authority to take a look at centralized1949intermediaries. My testimony has been about the need to address1950that gap to ensure U.S. leadership, Senator.1951    Senator Klobuchar. Some mention has been made of the1952collapse of firms like MF Global and FTX, and it truly revealed1953how customer assets can evaporate when we do not have the1954adequate safeguards. In both cases, customer funds were1955commingled and ultimately lost in cascading failures that shook1956public confidence in financial markets.1957    I will start with you, Mr. Behnam. What mechanisms would1958best guarantee that these assets are safe even if prices of1959collateralized digital assets collapse? How should Congress1960address these practices where firms reuse customer assets for1961their own purposes?1962    Mr. Behnam. Thanks, Senator. Just very briefly, it really1963goes to the core principles and the rules that the CFTC applies1964in regulated institutions. MF Global was unique in the sense1965that it was a regulated entity, and those funds were commingled1966outside and in violation of the segregation rules. Some changes1967were made afterwards, but segregation rules, I think everyone1968would agree with on this panel, are sacrosanct to the CFTC,1969making sure customer money is protected and prioritized among1970house money and other customer money. I think if you replicate1971what rules around customer seg are used for traditional CFTC1972markets in the digital asset market, we will be able to1973accomplish our goals around protecting customer money and1974digital assets.1975    Senator Klobuchar. Okay, thanks. Another question. We know1976that DeFi, decentralized finance, raises novel regulatory1977challenges. How should Congress approach decentralized finance1978platforms in regulatory frameworks?1979    Mr. Behnam. Thanks, Senator. At the CFTC, when I was Chair,1980we had a couple enforcement actions against DeFi protocols. I1981do think there should be and needs to be a unique look at how1982DeFi platforms function relative to centralized platforms, but1983I am a firm believer that there needs to be some mechanism of1984regulation and oversight. DeFi platforms cannot live in a1985regulatory vacuum. There has to be some intersection with a1986regulator and a decentralized platform in order to have1987effective regulation. Otherwise, there will be a race to the1988bottom, essentially a race to DeFi to circumvent regulations.1989    Senator Klobuchar. Mr. Sexton, does the Clarity Act's DeFi1990exception, the exemption that is in there, concern you at all?1991Is it too broad?1992    Mr. Sexton. Senator, thank you. I know that there are1993concerns expressed about the DeFi exception in the Clarity Act.1994I believe that Congress should give some instruction to the1995CFTC as to how to deal with these platforms going forward in1996legislation. Also, I think that the CFTC and the SEC should1997carefully examine together DeFi protocols and determine, as1998Chair Behnam just indicated, how best to look at these1999protocols in the future and possibly come up with some type of2000regulatory oversight over them.2001    Senator Klobuchar. Okay. Do you want to add anything, Mr.2002Massad?2003    Mr. Massad. I think the DeFi exemption that is in the2004Clarity Act is one of its worst features. I think the first2005thing is we have to define what we mean. People use the term2006DeFi. It is not just an autonomous protocol. They are typically2007talking about, you know, situations where you have a business2008that is actually the front end of that or managing that, so2009there are lots of touchpoints for regulation. DeFi should not2010get a regulatory pass. We may need different rules, but we need2011to achieve the same regulatory objectives.2012    One simple way to think about this is if we had a protocol2013that was for the Treasury market and that suddenly became the2014main way Treasurys were traded, we would not say, oh, well, we2015do not need to regulate it. We do not need to worry about it. I2016think the key things are define what we mean, look at the2017touchpoints for regulation because there are typically2018centralized actors acting in that space and develop different2019rules if we need them, but achieve the same regulatory2020objectives.2021    Senator Klobuchar. Okay. Mr. Behnam, the collapse, again,2022of offshore exchanges underscored how quickly gaps in the2023international monetary regulatory frameworks can put U.S.2024customers at risk with trading activity flowing across borders,2025outside the reach of domestic agencies. The challenge, in2026addition to the other ones we laid out here, becomes ensuring2027robust protections for customer funds that are in this truly2028international market. How can the U.S. ensure that customer2029funds are protected in a global market where trading often2030occurs on offshore exchanges beyond U.S. oversight?2031    Mr. Behnam. Thanks, Senator. You know, we have been a bit2032behind other regulators across the globe, and I think that has2033created arbitrage opportunities. Also, these international2034platforms who do not feel like they have a path to registration2035in the U.S. for a variety of reasons are circumventing,2036essentially, what are called VPNs or virtual private networks2037to get access to U.S. customers.2038    I firmly believe that, as the Committee moves forward and2039the Congress moves forward with a market structure bill, if2040drafted correctly and comprehensively, this will bring the2041market within the regulatory fold, and that will provide the2042customers that you are talking about the protections that they2043deserve and that we need to have on a sort of outcomes basis,2044as Chairman Massad said. Regulation, as we take steps, will2045resolve these issues in part and hopefully comprehensively with2046other global regulators.2047    Senator Klobuchar. Okay. Thank you. I will go to something2048else. I see Senator Warnock is here. I want to thank you, Mr.2049Chairman, for having this bipartisan hearing and so everyone2050could listen to the witnesses' ideas, and we look forward to2051working with you and with the rest of the Committee going2052forward.2053    Thank you very much, and consider my last comments my2054closing.2055    Chairman Boozman. Very good, thank you. Senator Warnock.2056    Senator Warnock. Thank you, Chair Boozman.2057    Mr. Behnam, last Congress, when we were considering2058legislation that would provide the CFTC with the authority to2059regulate the spot market for digital commodities, you testified2060before this Committee that the CFTC would need $120 million to2061properly staff up and prepare to supervise and regulate an2062entirely new industry. Do you still agree with your previous2063testimony, yes or no?2064    Mr. Behnam. Yes.2065    Senator Warnock. The President's nominee to replace you,2066Mr. Brian Quintenz, could not confirm that number, but he did2067indicate in his testimony before this Committee that more funds2068would be needed to implement the new authorities for the CFTC.2069Chair Behnam, to your knowledge, has the Trump Administration2070requested additional funding or additional staffing at our2071financial regulators to properly support additional regulatory2072responsibilities?2073    Mr. Behnam. No, it has not.2074    Senator Warnock. In six months, we have seen hiring2075freezes. We have seen staff reductions at the SEC, at the FDIC,2076at the OCC, all while refusing to nominate Democratic2077Commissioners for historically bipartisan boards like the CFTC.2078Chair Behnam, last year, you were consistent that new funding2079would be needed for new staff, staff training, and2080technological upgrades.2081    Let's say a new crypto market structure bill that gives the2082CFTC new regulatory responsibilities is signed into law. Could2083you share what are the risks associated with Congress failing2084to provide the CFTC with sufficient resources to properly2085supervise the digital asset industry?2086    Mr. Behnam. Thanks, Senator. In short, the answer is2087without the tools, which become the resources behind the2088authorization for the program, the program becomes essentially2089useless. There is obviously a lot of talented staff at the2090CFTC, and I know they will work hard to implement the program,2091but we absolutely need resources at the agency to properly2092implement the program.2093    Senator Warnock. Absolutely, I agree with that. Clearly,2094investors of all sizes, if we are going to create a situation2095where capital markets can thrive, investors of all sizes, we2096need to have confidence that regulators are upholding the law,2097protecting consumers, that they have the capacity to do so. I2098look forward to working with my Republican colleagues to ensure2099that the CFTC is properly resourced.2100    Regulatory certainty for the digital asset industry limits2101unnecessary risk, and it can help prevent the collapse of2102another cryptocurrency exchange firm. One thinks of FTX, a few2103years ago. I am concerned that today, a handful of centralized2104firms have come to control multiple stages of the trading2105process. All of that concentrates the risk, creates conflicts2106of interest in my mind.2107    Mr. Massad, good to see you again. Is it routine for2108centralized exchanges to also serve as the custodian of2109customer funds and be responsible for listing, trading,2110clearing, and settling trades? Is this typically what we see?2111    Mr. Massad. Yes, it is. They even have more vertical2112integration than that. Of course, most trading is through those2113intermediaries, not on chain.2114    Senator Warnock. What sorts of risks and inefficiencies or2115conflicts of interest may exist when exchanges are vertically2116integrated like this?2117    Mr. Massad. There are all sorts of conflicts that can2118arise. For example, today, these trading platforms can do their2119own proprietary trading, so they can front-run customer orders2120or misuse customer information. They can have interest in the2121tokens that they list. That is not prohibited either. They can2122have other business ventures. With respect to custody, they can2123be charging separate fees and may not, you know, adhere to good2124custody rules. Even the Clarity Act does not even require these2125platforms to hold the Bitcoin that they say their customers2126own. It does not require that.2127    Senator Warnock. This vertical integration creating2128additional unnecessary risks for customers, we saw this with2129FTX with customers being unable to access their money months2130after the collapse of FTX. I am especially concerned that2131customers may not be getting the best prices on trades, that2132they may be paying higher fees, and more consolidation will2133lead to less competition in the market and create more systemic2134risk like we saw in the case of FTX.2135    Mr. Massad, what provisions do you see in a Senate bill to2136limit the risk that large, centralized firms may have on the2137digital asset market?2138    Mr. Massad. Sure. We need a comprehensive regulatory2139framework that prohibits these kinds of conflicts of interest,2140so no proprietary trading, no interest in the tokens they list,2141no other business ventures that can pose conflicts. We need to2142impose best execution requirements on brokers. We need to2143impose strict custody rules and, you know, either consider2144separate custodians or at least have rules that ensure that2145they really are holding the Bitcoin that they claim or the2146other assets that they claim their customers own, and they are2147segregating it properly, and they are not charging fees for2148that.2149    Senator Warnock. Thank you so very much for your testimony.2150I look forward to working with my Republican colleagues to2151create a Senate bill that contains strong conflict-of-interest2152language so we can safeguard the financial system and protect2153consumers.2154    Thank you very much, Mr. Chairman.2155    Chairman Boozman. Thank you, Senator Warnock.2156    With that, thank you again to all of our witnesses, our2157Committee Members, for their participation in today's important2158hearing.2159    The record will remain open for five business days. Today's2160hearing is now adjourned.2161    [Whereupon, at 5:28 p.m., the Committee was adjourned.]21622163=======================================================================21642165                            A P P E N D I X21662167                             July 15, 202521682169=======================================================================21702171[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]21722173=======================================================================21742175                         QUESTIONS AND ANSWERS21762177                             July 15, 202521782179=======================================================================21802181[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]21822183                                 [all]