American Innovation and the Future of Digital Assets Aligning the U.S. Securities Laws for the Digital Age”

1[House Hearing, 119 Congress]2[From the U.S. Government Publishing Office]34                 AMERICAN INNOVATION AND THE FUTURE OF5                      DIGITAL ASSETS ALIGNING THE6                U.S. SECURITIES LAWS FOR THE DIGITAL AGE78=======================================================================910                                HEARING1112                               BEFORE THE1314                  SUBCOMMITTEE ON DIGITAL ASSETS, FINANCIAL15                   TECHNOLOGY, AND ARTIFICIAL INTELLIGENCE1617                                 OF THE1819                    COMMITTEE ON FINANCIAL SERVICES20                     U.S. HOUSE OF REPRESENTATIVES2122                    ONE HUNDRED NINETEENTH CONGRESS2324                             FIRST SESSION2526                               __________2728                             APRIL 9, 20252930                               __________3132                           Serial No. 119-153334       Printed for the use of the Committee on Financial Services3536[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]3738                            www.govinfo.gov3940                                __________4142                   U.S. GOVERNMENT PUBLISHING OFFICE4359-987 PDF                  WASHINGTON : 20254445-----------------------------------------------------------------------------------4647                 HOUSE COMMITTEE ON FINANCIAL SERVICES4849                    FRENCH HILL, Arkansas, Chairman5051BILL HUIZENGA, Michigan, Vice        MAXINE WATERS, California, Ranking52    Chairman                             Member53FRANK D. LUCAS, Oklahoma             SYLVIA R. GARCIA, Texas, Vice54PETE SESSIONS, Texas                     Ranking Member55ANN WAGNER, Missouri                 NYDIA M. VELAZQUEZ, New York56ANDY BARR, Kentucky                  BRAD SHERMAN, California57ROGER WILLIAMS, Texas                GREGORY W. MEEKS, New York58TOM EMMER, Minnesota                 DAVID SCOTT, Georgia59BARRY LOUDERMILK, Georgia            STEPHEN F. LYNCH, Massachusetts60WARREN DAVIDSON, Ohio                AL GREEN, Texas61JOHN W. ROSE, Tennessee              EMANUEL CLEAVER, Missouri62BRYAN STEIL, Wisconsin               JAMES A. HIMES, Connecticut63WILLIAM R. TIMMONS, IV, South        BILL FOSTER, Illinois64    Carolina                         JOYCE BEATTY, Ohio65MARLIN STUTZMAN, Indiana             JUAN VARGAS, California66RALPH NORMAN, South Carolina         JOSH GOTTHEIMER, New Jersey67DANIEL MEUSER, Pennsylvania          VICENTE GONZALEZ, Texas68YOUNG KIM, California                SEAN CASTEN, Illinois69BYRON DONALDS, Florida               AYANNA PRESSLEY, Massachusetts70ANDREW R. GARBARINO, New York        RASHIDA TLAIB, Michigan71SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York72MIKE FLOOD, Nebraska                 NIKEMA WILLIAMS, Georgia73MICHAEL LAWLER, New York             BRITTANY PETTERSEN, Colorado74MONICA DE LA CRUZ, Texas             CLEO FIELDS, Louisiana75ANDREW OGLES, Tennessee              JANELLE BYNUM, Oregon76ZACHARY NUNN, Iowa                   SAM LICCARDO, California77LISA McCLAIN, Michigan78MARIA SALAZAR, Florida79TROY DOWNING, Montana80MIKE HARIDOPOLOS, Florida81TIM MOORE, North Carolina8283                      Ben Johnson, Staff Director8485                                 ------8687 SUBCOMMITTEE ON DIGITAL ASSETS, FINANCIAL TECHNOLOGY, AND ARTIFICIAL88                              INTELLIGENCE8990                    BRYAN STEIL, Wisconsin, Chairman9192TOM EMMER, Minnesota, Vice Chairman  STEPHEN F. LYNCH, Massachusetts,93BILL HUIZENGA, Michigan                  Ranking Member94WARREN DAVIDSON, Ohio                BRAD SHERMAN, California95JOHN W. ROSE, Tennessee              BILL FOSTER, Illinois96WILLIAM R. TIMMONS, IV, South        JOSH GOTTHEIMER, New Jersey97    Carolina                         AYANNA PRESSLEY, Massachusetts98MARLIN STUTZMAN, Indiana             RITCHIE TORRES, New York99BYRON DONALDS, Florida               SYLVIA R. GARCIA, Texas100ZACHARY NUNN, Iowa                   BRITTANY PETTERSEN, Colorado101TROY DOWNING, Montana                SAM LICCARDO, California102MIKE HARIDOPOLOS, Florida103TIM MOORE, North Carolina104105                        C  O  N  T  E  N  T  S106107                              ----------108109                        Wednesday, April 9, 2025110                           OPENING STATEMENTS111112                                                                   Page113Hon. Bryan Steil, Chairman of the Subcommittee on Digital Assets,114  Financial Technology and Artificial Intelligence, a U.S.115  Representative from Wisconsin..................................     1116Hon. Stephen F. Lynch, Ranking Member of the Subcommittee on117  Digital Assets, Financial Technology and Artificial118  Intelligence, a U.S. Representative from Massachusetts.........     3119120                               STATEMENTS121122Hon. French Hill, Chairman of the Committee on Financial123  Services, a U.S. Representative from Arkansas..................     4124125                               WITNESSES126127Mr. Rodrigo Seira, Special Counsel, Cooley LLP...................     5128    Prepared Statement...........................................     7129Ms. Tiffany J. Smith, Partner and Co-Chair of the Blockchain &130  Cryptocurrency Working Group, WilmerHale.......................    10131    Prepared Statement...........................................    12132Mr. Jacob Werrett, Chief Legal Officer, Polygon..................    23133    Prepared Statement...........................................    25134Ms. Alexandra Thornton, Senior Director, Financial Regulation,135  Center for American Progress...................................    33136    Prepared Statement...........................................    35137138                                APPENDIX139140                   MATERIALS SUBMITTED FOR THE RECORD141142Hon. Warren Davidson:143    White House's Executive Order on Digital Assets..............    80144    Amendment to the Amendment in the Nature of a Substitute to145      H.R. 2392..................................................    86146    H.R. 148, the Keep Your Coins Act of 2025....................    88147148                 RESPONSES TO QUESTIONS FOR THE RECORD149150Written responses to questions for the record from Representative151  Maxine Waters152    Mr. Rodrigo Seira............................................    91153154                      AMERICAN INNOVATION AND THE155                   FUTURE OF DIGITAL ASSETS ALIGNING156                      THE U.S. SECURITIES LAWS FOR157                            THE DIGITAL AGE158159                              ----------160161                        Wednesday, April 9, 2025162163             U.S. House of Representatives,164                    Subcommittee on Digital Assets,165                          Financial Technology and,166                           Artificial Intelligence,167                           Committee on Financial Services,168                                                    Washington, DC.169170    The subcommittee met, pursuant to notice, at 10:01 a.m., in171room 2128, Rayburn House Office Building, Hon. Bryan Steil172[chairman of the subcommittee] presiding.173    Present: Representatives Steil, Hill, Huizenga, Davidson,174Rose, Timmons, Stutzman, Donalds, Nunn, Downing, Haridopolos,175Moore, Lynch, Waters, Sherman, Foster, Gottheimer, Garcia, and176Liccardo.177    Also present: Representatives Flood and Casten.178    Chairman Steil. The Subcommittee on Digital Assets,179Financial Technology, and Artificial Intelligence will come to180order.181    Without objection, the chair is authorized to declare a182recess at any time.183    The hearing is titled ``American Innovation and the Future184of Digital Assets Aligning the U.S. Securities Law for the185Digital Age.''186    Without objection, all members will have 5 legislative days187within which to submit additional material to the chair for188inclusion in the record.189    I will now recognize myself for 4 minutes for an opening190statement.191192    OPENING STATEMENT OF HON. BRYAN STEIL, CHAIRMAN OF THE193   SUBCOMMITTEE ON DIGITAL ASSETS, FINANCIAL TECHNOLOGY AND194 ARTIFICIAL INTELLIGENCE, A U.S. REPRESENTATIVE FROM WISCONSIN195196    Good morning, and welcome to the first digital assets197market structure hearing for this Congress. Last week, we198successfully passed the Stablecoin Transparency and199Accountability for a Better Ledger Economy (STABLE) Act of 2025200out of this committee, marking a significant step forward in201advancing the first half of President Trump's digital asset202agenda. Today, we will resume our efforts on advancing the203second half of the agenda: comprehensive digital asset market204structure legislation.205    Recently, Chairman Hill and House Agriculture (Ag)206Committee Chairman GT Thompson outlined their vision for207digital asset market structure legislation in an op-ed titled,208``A Blueprint for Digital Assets in America.'' In that piece,209the chairman emphasized the transformative potential of digital210assets and the urgent need for a clear, regulatory framework,211one that fosters innovation, development, and market structure212legislation.213    The chairman also outlined six core principles. The United214States has been a global leader in financial innovation,215balancing market growth with investor protection. However, as216digital assets and blockchain technology gain prominence, the217Biden-Harris Administration's hostile approach drove the218digital asset ecosystem to jurisdictions with already219established frameworks. Now we have an opportunity to correct220course and make the United States the epicenter of this221ecosystem.222    Our goal today is to examine what aspects of the ecosystem223are implicated by securities laws and analyze the challenges of224applying these laws. Let me be clear, the House Financial225Services Committee recognizes that digital assets have use226cases beyond financial markets. At the same time, the committee227feels strongly that there is a role for the U.S. Securities and228Exchange Commission to play in the digital assets ecosystem.229    For example, the committee believes that issuers raising230capital through the sale of new digital assets should fall231under the jurisdiction of the Securities and Exchange232Commission. Issuers should be required to disclose relevant233information that helps users understand the unique234characteristics of the digital asset networks they are235investing in.236    Today, we will explore how we can modernize our securities237law to better accommodate the unique characteristics of digital238assets. This includes examining classifications of digital239assets, the adequacy of current disclosure requirements, and240the applicability of various requirements for intermediaries.241    It is crucial for this committee to enact legislation that242provides clear guidelines for issuers and market participants,243facilitates capital formation, and maintains the integrity of244both the digital asset ecosystem and the traditional finance245system. Through this process we must ensure that American246innovators and entrepreneurs can thrive at home.247    We are fortunate to be joined today by a distinguished248panel of esteemed experts in securities laws, digital assets,249and financial technology. Their insights will be invaluable as250we deliberate on these complex issues and consider how best to251address technology and legislation. Thank you for your time and252for being with us today, and I look forward to your testimony.253    The chair now recognizes the ranking member of the254subcommittee, Mr. Lynch, for 4 minutes for an opening255statement.256257 OPENING STATEMENT OF HON. STEPHEN F. LYNCH, RANKING MEMBER OF258 THE SUBCOMMITTEE ON DIGITAL ASSETS, FINANCIAL TECHNOLOGY AND259      ARTIFICIAL INTELLIGENCE, A U.S. REPRESENTATIVE FROM260                         MASSACHUSETTS261262    Mr. Lynch. Good morning. Thank you, Mr. Chairman. I want to263thank you, and I want to thank our witnesses for their264willingness to help the committee with its work.265    On the heels of last week's markup hearing which considered266stablecoin legislation, the committee is now quick to move on267to fulfilling the crypto industry's next request: addressing268the crypto market structure.269    This hearing includes ``aligning the U.S. securities laws270for the digital age'' in its title. I interpret this to mean271lowering regulatory standards and removing securities laws that272protect consumers and investors which are viewed as obstacles273to the crypto industry.274    The United States has had a long, outstanding history of275robust securities laws designed to protect investors, encourage276competition, and ensure financial stability. At a time when our277country faces high inflation and President Trump's reckless278tariffs send our markets into a tailspin, this committee should279be working to preserve market integrity, not grant an industry280wish list.281    Just this week, crypto prices dropped in line with the282stock market dips following tariff announcements. Bitcoin's283price plummeted to under $77,000, down more than 10 percent284from its high last week. If these speculative products resemble285in their activity traditional security products, they should be286treated the same way.287    For the last several years, the crypto industry has288launched a campaign against the Securities and Exchange289Commission (SEC) claiming it has been unfairly targeted and290that it is unable to comply with securities laws. Rather than291adjust their practices or acknowledge that their products do292come under the jurisdiction of existing securities laws, the293industry has fought to elect and appoint crypto-friendly294policymakers.295    As we speak, crypto firms are fighting amongst themselves296to craft legislation that favors their business models and297ensures they can maximize their profits. It is also notable298that, under the Trump Administration, the SEC has dropped299almost every lawsuit against some of the worst offenders in the300crypto industry. These include Crypto.com, Ripple, Kraken,301Gemeni--Gemini, excuse me, Finance, Coinbase, Robinhood, and302Uniswap. I assume that under the nominated Chair, Paul Atkins,303who has advised several crypto firms, the SEC will continue in304this direction. These are companies that have a proven history305of irresponsible, illegal, and predatory practices.306    Yesterday, the U.S. Justice Department announced it is307disbanding the National Cryptocurrency Enforcement Team, which308had been charged with combatting fraud and illicit finance.309This is deeply concerning. Cryptocurrencies have been in310existence for 17 years but still lack any meaningful use cases.311Crypto assets are only needed to trade crypto. They are312speculative products similar to securities that can make a313handful of investors and firms handsome returns.314    These products also come with a myriad of risks, including315investor loss, lack of adequate disclosures, volatility and316more. Regulatory investors saving for retirement or pension317funds that serve retired teachers, firefighters, and nurses318should not be exposed to these risky products.319    While promises of faster payment and greater financial320inclusion have remained unfulfilled, the only proven use cases321have been for money laundering, terrorist financing, and322illicit finance. I remind my colleagues that the crypto winter323following the collapse of FTX, BlockFi, and several others was324not too long ago. Despite multiple incidents in which crypto325firms have failed, my Republican colleagues seem determined to326pass legislation that would essentially legalize crypto crime327and allow President Trump to add to the $350 million he has328already made off his own meme coin.329    We cannot continue to ignore the clear conflicts of330interest between the President's personal crypto ventures and331his support of industry friendly legislation. This committee332has a long history of advancing policies that protect333consumers, investors, and our financial stability. We should334not undermine those practices by allowing the crypto industry335to write its own rules.336    Thank you, Mr. Chairman, and I yield back.337    Chairman Steil. The gentleman yields back.338    The chair now recognizes the chair of the full committee,339Mr. Hill, for 1 minute.340341  STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE ON342    FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS343344    Chairman Hill. Thank you, Chairman Steil. I appreciate the345opportunity to have our good panel before us today.346    Last week, the committee took an important step in347delivering real legislative certainty for payment stablecoins348by advancing Chairman Steil's STABLE Act. It is incumbent upon349us to build on that momentum and continue working toward a350comprehensive, regulatory framework that establishes clear351rules of the road for digital asset markets. I want to352acknowledge this committee's strong bipartisan efforts to bring353clarity and stability to the digital asset ecosystem.354    In the 118th Congress, we made significant progress with355the passage of the Financial Innovation and Technology for the35621st Century (FIT21) Act, which aimed to establish clear, fit-357for-purpose Federal standards for digital assets. Since then,358the committee has engaged with a wide range of stakeholders359from government agencies to leaders in the ecosystem to360identify ways market structure legislation can be further361refined and strengthened. We are actively working to release a362legislative discussion draft that reflects that feedback from363members and market participants.364    I look forward to hearing from our witnesses today and365working with my colleagues to get this across the finish line366this year.367    Thank you, Chairman Steil. I yield back.368    Chairman Steil. Thank you, Chairman Hill.369    Today, we welcome the testimony of Rodrigo Seira, Special370Counsel at Cooley, where he serves as outside counsel to371digital asset focused startup and investment funds.372    Ms. Tiffany Smith is a Partner at WilmerHale, where she is373a member of the Securities and Finance Service Department and374Co-Chair of the firm's Blockchain and Cryptocurrency Working375Group.376    Mr. Jake Werrett is the Legal Officer at Polygon Labs, a377software development company building blockchain378infrastructure.379    Ms. Alexandra Thornton, who is the Senior Director for380Financial Regulation, for Inclusive Economy at the Center for381American Progress.382    We thank you for taking the time to be here. You will each383be recognized for 5 minutes to give an oral presentation of384your testimony.385    Without objection, your written statements will be made386part of the record.387    Mr. Seira, you are now recognized for 5 minutes for oral388remarks.389390    STATEMENT OF RODRIGO SEIRA, SPECIAL COUNSEL, COOLEY LLP391392    Mr. Seira. Thank you, Chair Steil, Ranking Member Lynch,393and members of the subcommittee, for the opportunity to testify394before you today. I am appearing here today in my personal395capacity and not on behalf of my firm or any client.396    My testimony will make three interrelated points. First,397crypto represents a new technological paradigm that will398reshape how we interact and organize in the digital age.399Second, in my opinion, the current securities law framework is400not fit for purpose in regulating crypto and attempts to force401crypto into this regime without significant overhaul are402counterproductive. Third, we have an opportunity to develop a403new regulatory framework that protects crypto consumers and our404capital markets while allowing crypto to flourish. My goal here405today is to help us capitalize on this opportunity.406    I have always been fascinated by the forces that bring407groups of people together or push them apart, which is how I408find myself here today speaking about crypto. At its core,409crypto is a social coordination technology that enables410individuals to organize, interact, and collaborate based on411rules enforced by transparent code rather than intermediaries412or centralized policies.413    While many of crypto's early use cases have been financial,414crypto is a general-purpose technology with countless415applications. Crypto provides new ways for individuals to be416economically rewarded for their contribution to networks and417other public goods, opening the door to people around the418country that lack the traditional advantages of capital and419credentials.420    Regulation, technological development, and the flows of421financial capital are tightly intertwined and interact in a422recurring pattern throughout history. As new technological423paradigms such as crypto emerge, they operate on the fringes of424the old regulatory regime where they attract capital which can425lead to a speculative frenzy. This frenzy often ends up in a426rupture that exposes the need for a regulatory realignment.427    We are living through that moment now. It is clear that the428current securities regulatory framework is not a viable option429to regulate crypto and fails to achieve its stated policy430goals.431    Critics often portray the crypto industry as a collection432of willful law breakers refusing to follow straightforward433rules. Fraud and abuse have undoubtedly occurred in crypto, as434they have in any emerging technology sector. However, the idea435that crypto projects can simply come in and register with the436SEC is demonstrably false.437    I believe that if promoters are raising capital to438fundraise for a new business enterprise by preselling crypto439assets, those fundraising transactions should be subject to the440securities laws. In practice, however, virtually no crypto441projects have successfully registered their tokens under442Federal securities laws and lived to tell the tale. Projects443that tried to comply with SEC's current regulatory requirements444expended significant resources and effort, only to fail or445survive in a state of regulatory uncertainty.446    Moreover, registration is not a simple, one-time process.447Registering a token in the same manner as stock triggers an448ongoing obligation to operate as a publicly reporting company449subject to extensive requirements like Exchange Act reports,450proxy rules, tender offers, and more. Even if a project manages451to register a token, its ability to trade is severely452constrained. Tokens that are registered as securities can only453be traded on national securities exchanges, through ATSs, or454broker-dealers over-the-counter, all of which impose455significant additional regulatory burdens or intermediaries and456are fundamentally incompatible with the disintermediated457trading models that crypto enables.458    The SEC disclosure framework, designed in the 1930s to459regulate companies issuing securities like stocks and bonds, is460intended to ameliorate information asymmetries and agency461problems that develop between security issuers and the462investing public. This regime is relevant when applied to463initial fundraising transactions described above or to tokenize464securities.465    However, certain types of crypto assets, such as the native466tokens of decentralized networks, differ from securities in467fundamental ways. Network tokens can persist independent of any468corporate issuer; network tokens confer technological abilities469in the network rather than legal claims against an issuer; and470network tokens often accrue value based on network utility and471market forces rather than a company's profits.472    As applied to network tokens, the current securities473disclosure forms focus on irrelevant corporate and financial474information while ignoring critical crypto-specific aspects475like governance mechanisms, network design, tokenomics,476cybersecurity, and network utility of the assets. As a result,477forcing crypto into the traditional securities disclosure478regime is harmful to the very public securities laws that are479intended to protect because it fails to provide purchasers with480the material information they need to determine the value and481risks of their crypto holdings.482    FIT 21, which passed with broad bipartisan support by the483House last year, marked a significant step towards regulatory484clarity in the digital space. It would provide much-needed485clarity for participants to foster innovation within a486structured regulatory environment.487    Thank you. I look forward to your questions.488489    [The prepared statement of Mr. Seira follows:]490    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]491492    Chairman Steil. Thank you very much, Mr. Seira.493    Ms. Smith, you are now recognized for 5 minutes.494495    STATEMENT OF TIFFANY SMITH, PARTNER AND CO-CHAIR OF THE496    BLOCKCHAIN AND CRYPTOCURRENCY WORKING GROUP, WILMERHALE497498    Ms. Smith. Subcommittee Chair Steil, Ranking Member Lynch,499and distinguished members of the----500    Chairman Steil. The microphone may still not be on there,501Ms. Smith.502    Ms. Smith. Is it working now?503    Chairman Steil. You might have to point it directly. The504microphone is very directional.505    Ms. Smith. Better now?506    Chairman Steil. No. There is a little red light.507    Ms. Smith. Yes, it is not coming on.508    Chairman Steil. Maybe you can borrow one of your509colleague's mics.510    Nothing like a hearing about technology to have little511technology errors. Congress is at the forefront of technology512yet again.513    You are now recognized, Ms. Smith, if that works.514    Ms. Smith. Thank you.515    Chairman Steil. Thank you.516    Ms. Smith. Subcommittee Chair Steil, Ranking Member Lynch,517and distinguished members of the subcommittee, thank you for518the opportunity to present at today's hearing.519    My name is Tiffany J. Smith, and I am a Partner at the law520firm WilmerHale and Co-Chair of the firm's Blockchain and521Cryptocurrency Working Group. The views I share today are my522own and do not represent those of my colleagues, my law firm,523or our clients.524    I would like to start by commending the subcommittee for525the important and necessary work it is doing to provide526regulatory clarity to the digital assets industry in the U.S.527markets. A critical starting point is understanding the current528state of securities market structure to evaluate the changes529that may be necessary. While the SEC has taken steps within its530jurisdiction to provide regulatory clarity, I believe that531congressional action is also necessary to have true regulatory532clarity for the digital assets industry.533    I would like to briefly highlight three topics, which I534cover in more detail in my written testimony. First, Federal535securities law compliance challenges for digital assets;536second, SEC-specific digital asset guidance; and third, why537congressional action is necessary.538    First, the decentralized nature of certain digital assets539presents unique challenges to Federal securities law540compliance. Broadly speaking, the Federal securities laws,541including the Securities Act of 1933 and the Securities542Exchange Act of 1934 are, in their current form, challenging to543apply to digital assets and digital asset market participants.544    At the same time, a diverse set of market participants in545the United States, including crypto native and traditional546financial services firms implementing merging technologies,547have significant interests in achieving regulatory clarity.548Indeed, the lack of regulatory clarity has led to the549expenditure of significant resources to determine how to comply550or, in other cases, defending enforcement actions. Some551entities have decided to discontinue product offerings, cease552operations in the United States, or for highly regulated553financial services firms in particular, some have decided not554to offer digital asset products altogether.555    With concrete action to provide clarity for the industry,556Congress can help ensure that this industry can flourish and557thrive in the United States, while ensuring market integrity558and the protection of investors and consumers alike.559    Second, putting aside the guidance that was recently issued560in 2025, the SEC has not issued specific guidance related to561digital assets since 2020. I believe it is critical to provide562concrete guidance to market participants in the near term. This563guidance should do two things.564    First, help market participants identify the circumstances565when a digital asset is offered and sold as a security so566market participants can understand when the Federal securities567laws apply.568    Second, when these laws do apply, provide guidance to569market participants on how to comply with the Federal570securities laws given the differences between digital assets571and traditional securities. Any formal guidance or rulemaking572must take into account these key differences, including the573specific risk related to digital assets that may not be of574concern for traditional securities, so compliance is feasible,575and regulation is effective.576    Third, notwithstanding the progress that the SEC's Crypto577Task Force is making, the SEC and other Federal agencies have578jurisdictional limits such that agency action alone is not579sufficient to provide regulatory clarity for digital assets. A580patchwork approach across agencies and States has created the581regulatory uncertainty that currently exists. A comprehensive582and clear regulatory framework for digital assets is needed,583something that these agencies cannot undertake.584    This Congress has the opportunity to help steer the path585for digital assets for years to come and help ensure586responsible development of digital assets in the digital asset587marketplace.588    Thank you for your leadership on these important issues. I589look forward to our discussion.590591    [The prepared statement of Ms. Smith follows:]592    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]593594    Chairman Steil. Thank you very much, Ms. Smith.595    Mr. Werrett, you are now recognized for 5 minutes.596597    STATEMENT OF JACOB WERRETT, CHIEF LEGAL OFFICER, POLYGON598599    Mr. Werrett. Chairman Hill, Ranking Member Waters, Chairman600Steil, Ranking Member Lynch, and members of the subcommittee,601thank you for inviting me to speak with you about digital602assets and blockchain technology.603    My name is Jacob Werrett. I am Chief Legal Officer at604Polygon, a software development company that builds blockchain605infrastructure.606    Today, I invite you to imagine a world where access to607financial systems is permissionless, without respect to one's608ability to pay fees or maintain balances. To imagine a world609where a simple $100 payment to your grandmother in Tokyo does610not require a $40 bank fee from you and a $41 bank fee from611your grandmother, netting only $19 after a 3-day delay.612    Imagine a world where title companies and title insurance613become obsolete, saving consumers $7 billion annually. Imagine614a world where your online funds can be custodied by you on your615terms, and if your funds are leveraged or traded, it will not616be by an intermediary that captures the value; it will be by617you. Imagine a world where your identification and your618healthcare records can be locked in a vault and custodied by619you, and seemingly daily requests to confirm your identity or620your creditworthiness can be displayed in limited fashion on621your terms via cryptography.622    In short, I invite you to imagine a world centered around623technology that already exists today. Each of these624applications and many more have already been developed in625various stages. The question is not whether this technology is626the future; the question is whether the United States itself627will be a part of that future. While other countries have628developed and adopted frameworks to entice innovators, we have629not. We should act swiftly and thoughtfully to empower software630developers to innovate inside the United States.631    Turning to decentralized finance, or decentralized finance632(DeFi), technological decentralization is among the most633transformative advancements in modern memory. The internet634illustrates the critical value of decentralization, which is635itself a network of decentralized servers and websites636infinitely scaleable, owned by independent actors across the637globe coordinating to connect and reveal information.638    Blockchains are likewise networks of decentralized639validators owned and controlled by independent actors across640the globe, coordinating to connect and validate transactions.641Similar to the revolutionary advent of decentralized642information on the internet, decentralized blockchains643facilitate global coordination, enabling self-custody, user644governance, and transparency.645    Perhaps greatest of all and inextricably tethered to the646founding principles of our Nation is the power of digital asset647holder self-governance to decide day-to-day activities such as648fee structures, user fairness, grants, and leadership.649Decentralization is inherently democratic. Decentralized650technology facilitates self-governance and allows individuals651the freedom to control their own property. In short,652decentralization is uniquely American.653    As we contemplate policy that will govern this innovation,654I urge you to consider three points. First, we should not allow655legislation enticing innovation for blockchains offshore to656outpace legislation enticing innovation inside the United657States; second, we should not assume that archaic security658structures cannot be refreshed to address innovative659technologies; and, third, we should not allow stablecoins660pegged to foreign assets or foreign currencies to outperform661stablecoins pegged to the U.S. dollar.662    Decentralized blockchain technology is built for the663people, by the people, and of the people. We look forward to664working with you in collaboration and with the members of this665committee to achieve these common goals. Thank you.666667    [The prepared statement of Mr. Werrett follows:]668   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]669670    Chairman Steil. Thank you very much, Mr. Werrett.671    Ms. Thornton, you are now recognized for 5 minutes.672673  STATEMENT OF ALEXANDRA THORNTON, SENIOR DIRECTOR, FINANCIAL674            REGULATION, CENTER FOR AMERICAN PROGRESS675676    Ms. Thornton. Thank you.677    Thank you, Chairman Steil, Ranking Member Lynch, and678members of the subcommittee. Thank you for the opportunity to679comment on digital assets and the U.S. securities laws.680    Congress seems determined to pass legislation creating a681light regulatory regime for stablecoins and now other digital682assets, the topic today. Significant risks are at stake. First,683the digital asset markets have not functioned well so far, with684massive asset value swings, billion-dollar losses to investors685from hacks that are ongoing, and billions more from frauds. At686the same time, these markets have fueled incredible profit687margins for trading firms and compensation for their688executives. These are not simply the growing pains of a nascent689industry but rather the result from the absence of longstanding690market protections.691    Congress and regulators have been down this path before.692The Commodity Futures Modernization Act of 2000 exempted swaps693from its regulatory regime for the over-the-counter derivatives694market, where financial contracts are traded directly between695two parties without a centralized exchange. Those markets696remained opaque, expanded by trillions of dollars and697ultimately contributed to the great financial crisis which698devastated the U.S. financial system and the economy.699    Lack of transparency and lack of regulatory oversight700resulted in an inefficient market in which end users were701prevented from making informed trades and dealers could702increase their profits. What the crypto industry now seeks is703eerily similar and, if enacted, could cause serious harm not704just to crypto investors but also to the tradeable--also to the705U.S. financial system.706    Second, President Donald Trump and his Department of707Government Efficiency have been crippling the regulators that708protect investors and borrowers from scams and manipulation and709that ensure the stability of the U.S. financial system,710including the SEC and the Consumer Financial Protection Bureau711(CFPB). These actions raise enormous risks and uncertainties712that cry out for a cautious approach to any new regulatory713regime for an industry plagued by scams, thefts, and hacks.714    With this in mind, I have outlined in my written testimony715some hallmarks of healthy capital markets, and I strongly urge716the committee to ensure that any new rules for crypto look a717lot like the existing rules for U.S. capital markets. I will718highlight a few.719    First, regulation of asset creators should match the720asset's tradeable life. The securities laws in the Commodity721Exchange Act do not regulate definition of an asset but722generally regulate the offering and trading of securities and723commodities and related disclosures, meaning reporting.724    The initial disclosure of physical commodities, say, a725metric ton of aluminum at the time a derivative is created on726it, should remain accurate for the entirety of its tradeable727life. The aluminum holder does not vote to suddenly transform728the aluminum into nickel, for example. So the disclosure regime729for a physical commodity is tailored to when it is most useful730to the investor at the time of the offering.731    For securities, the characteristics and risks of the asset732change significantly over the securities' tradeable lifespan as733companies grow, contract, develop new businesses, merge, and734have spinoffs. The securities tied to them may change735fundamentally. That is why the securities laws require public736issuers of securities to make initial disclosures and ongoing737disclosures throughout the tradeable lifetimes of their738securities.739    Second, capital market intermediaries perform different740functions, and each function must be effectively regulated.741These players include broker-dealers, investment advisers,742exchanges, and many more. Each has different incentives and743responsibilities, and each is in natural conflict with the744next.745    Nearly all of these functions exist in the trading of746digital assets, but top industry players have often merged747functions together. They may remove some potential burdens and748cost, but it also eliminates the longstanding checks and749balances and profit motives and offsetting conflicts of750interest that promote fair competition and protect investors in751market integrity. Moreover, a significant amount of crypto752trading occurs off the blockchain. Crypto rules should apply753both off chain and on chain.754    Congress also should take extreme care to avoid upending755the traditional securities markets upon which the United States756relies. This could come up in an attempt to create a regulatory757regime based on the definition of the asset in question rather758than on the market function.759    Such harm could also arise with tokenization of securities,760whereby a corporate bond or stock has an associated token. If761the token is not subject to the securities rules, there would762be two assets that look economically similar and would trade763together, but one would be free of effective regulation. A764situation ripe for abuse and risks that could blow up the765existing stock and bond markets. The result might look766something like the Archegos disaster, in which an investor767seeking to manipulate the markets took massive positions in768several companies by purchasing assets on margin through the769use of derivatives, which effectively hid the investor's770identity.771    Position reporting rules now prevent this situation in772public and private securities markets, but without similar773rules in crypto markets, there would be no need for fraud to774accomplish this since identities can be hidden on and off the775blockchain. Congress has neglected to put in place a776sufficiently robust regulatory framework before, and that has777ended very poorly.778    Thank you. I look forward to answering your questions.779780    [The prepared statement of Ms. Thornton follows:]781   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]782783    Chairman Steil. The gentlewoman yields back.784    Ms. Smith, is your microphone up and running?785    Ms. Smith. Yes, it is. Thank you.786    Chairman Steil. All right. We appreciate the quick work by787the team at the Chief Administrative Office (CAO). Duly noted788by the Chairman of the Committee on House Administration.789    I want to begin--I am going to now recognize myself for 5790minutes for the purpose of asking questions.791    I want to stage set, because I think it is really important792that we are talking about why we are Crafting legislation for793digital assets market structure a little bit in the first794place.795    I want to start with you, Mr. Seira, if I can. I want to796walk this through in three stages. Who is involved in that797early phase to get projects off the ground, are there founders,798engineers, lawyers, investors, community leads? Is that kind of799the broad structure of who is involved?800    Mr. Seira. Thank you for the question.801    When I usually get the first call or email, it is from a802couple of developers that have a new idea to develop a new803protocol. The first decisions that we go through are, where are804we going to form a legal entity, what structure is it, is it in805the United States or elsewhere. The second question is usually,806how are we going to finance this, right. There are two basic807approaches. Most projects will raise funds from venture capital808funds; other projects try to do more grassroots fundraising809where they try to distribute tokens. However, the current810regulatory regime makes getting those tokens into a distributed811token holder base close to impossible.812    Chairman Steil. Okay. So, then, let us say you navigate813through that. I am going to let that hang for a second and now814let us shift into the issuance phase. Talk to me about how this815is different than traditional securities, kind of think about--816let us maybe start with centralized intermediaries, digital817assets space, how does that play out?818    Mr. Seira. I think in the context of securities, it is819usually thought of as a fundraising transaction, right. It is820like some promoter wants to do a business and then they raise821capital from the public to go and do that business. In the822context of crypto, the token issuances are largely823permissionless and are usually intended and set up for capital824raising to distribute the governance and the token holders--to825the token holder base.826    Chairman Steil. How is the recording different between827securities and digital assets?828    Mr. Seira. Most digital assets are native to blockchain,829right, so it is an entry on a ledger. Most securities today are830digital securities and custodied by big custodians like831Depository Trust & Clearing Corporation (DTCC) and reflected in832brokerage accounts.833    Chairman Steil. Talk to me about how long the process can834take in traditional securities and in digital assets.835    Mr. Seira. In traditional securities, it really depends on836whether you are doing a registered offering or an exempt837offering. A registered offering, which is commonly known as an838initial public offering (IPO), is a--close to a year's-long839process where an issuer would pay a firm like mine or Ms.840Smith's hundreds of thousands of dollars, maybe millions of841dollars, and then fill out a form that has--refers to a bunch842of other forms and includes voluminous disclosure, and then get843that approved by the SEC.844    If you are doing an exempt offering, you can do that much845quicker, usually a matter of a couple of weeks. In the context846of crypto, that can be almost instantaneous and permissionless.847    Chairman Steil. Let us build on that. Let us go to the next848phase, if I can.849    I will go to you, Ms. Smith. When we think about the850secondary market, traditional finance (TradFi) rely on dealers851and brokers. Digital assets rely on what, Ms. Smith?852    Ms. Smith. Digital assets rely on either centralized853platforms or decentralized protocols.854    Chairman Steil. How is the timing different between855traditional securities and digital assets for those to be--for856those settlements to occur?857    Ms. Smith. As far as settlements go, most securities858transactions settle on T-plus-1 to the next day. Digital asset859transactions typically settle immediately.860    Chairman Steil. What are the trading hours between digital861assets and traditional securities?862    Ms. Smith. Traditional securities trade--the markets are863open from 9 to 5 in the U.S. Digital assets trade 24/7864globally.865    Chairman Steil. Which is more opaque? Which provides more866visibility, the traditional securities model or the digital867asset model that is available on the blockchain?868    Ms. Smith. Arguably, the digital assets model, which is869available via the blockchain, as you stated in your question,870would be more visible because you can view everything that is871happening on the blockchain.872    Chairman Steil. I want to use this kind of as a stage873setting. What we are seeing is significant difference between874traditional securities and digital assets, which builds on this875need for a framework to be put in place from a legislative876side.877    Let me come to you, Mr. Werrett, because you have a lot of878experience with looking at some of these nonfinancial projects879on the Polygon network. Briefly, can you just explain your880thoughts on why a one-size-fits-all approach may not work?881    Mr. Werrett. Yes. So many projects----882    Chairman Steil. Your microphone may not be on.883    Mr. Werrett. Yes. So many projects provide, for example,884the ability to register and log the titles for real estate885abdicating--or make it unnecessary to have title companies886review titles and make sure transfer is correct or healthcare887records or your own identification can all transfer on the888blockchain.889    Chairman Steil. Thank you very much. I think all of your890testimony shows the need for market structure legislation from891Congress.892    I now will yield to the gentleman, Mr. Lynch, the ranking893member, for 5 minutes.894    Mr. Lynch. Thank you, Mr. Chairman.895    Two days before his inauguration, President Donald Trump896launched his Trump meme coin. A Financial Times analysis897estimated that Trump's meme coin earned $350 million from sales898and fees in the 3 weeks after it was launched. Early traders899made millions while a much larger number of investors lost more900than $2 billion after the coin crashed. A few weeks after that,901the Trump SEC stated that meme coins are not subject to the902SEC's regulatory oversight, and that neither meme coin903purchasers nor holders are protected by the Federal securities904laws because they are not considered securities.905    Do any of the witnesses have a problem with that?906    Do you see a problem with that, Mr. Seira?907    Ms. Smith?908    Mr. Werrett?909    Mr. Seira. I mean, without commenting on any specific910project----911    Mr. Lynch. Why? Do you see an inherent problem in that912arrangement?913    Mr. Seira. Again, without commenting on any specific914project, I think there is nothing inherent----915    Mr. Lynch. All right. I am going to reclaim my time.916    Ms. Thornton, additionally, in March, the SEC also917announced that crypto mining does not fall under securities918laws and therefore will not be regulated by the SEC. Just a few919days after that, members of the Trump family launched a bitcoin920mining firm. These are clear examples of conflicts of interest921and President Trump leveraging the Office of the President for922financial gain by launching crypto ventures outside of the923oversight of critical agencies.924    Mr. Werrett, can you imagine--can you imagine a problem925with those arrangements?926    Mr. Werrett. Yes. I think--thank you for your question, and927I will say----928    Mr. Lynch. Okay. That is all. I am happy to hear that.929Happy to hear that.930    Ms. Thornton, could you discuss how you believe931policymakers should respond to this rejection of conflict of932interest standards, especially at the White House?933    Ms. Thornton. I am not an expert on the President, his934personal involvement or anything like that, so I cannot comment935on that, but I can say that there have been a number of things936that the Trump Administration has done that have favored937crypto. They include many that you mentioned but also letting938go of many enforcement staff, dropping many cases against939crypto. The Department of Justice (DOJ) just announced that it940was planning on dropping some crypto cases just this morning.941    These ideas of a crypto reserve or incorporating942cryptocurrency in blockchain into routine spending and943accounting practices at agencies, all of these things are very944concerning because they will introduce an enormous amount of945risk into the Federal Government and, of course, the U.S.946financial system.947    Mr. Lynch. Thank you.948    Ms. Smith, the President issued an executive order against949your firm because you had done some work in the past that they950were unhappy with. I know your firm has sued the Trump951Administration for their executive order for doing that. Do you952feel any pressure in terms of being asked by my Republican953colleagues to come here and testify on behalf of the majority954with the fact that the President of the United States issued an955executive order that you had to defend against in order to956carry your mission out as a law firm, and a very good law firm957if that matters?958    Ms. Smith. Thank you for the question. I am here to testify959about digital assets in my personal capacity.960    Mr. Lynch. You have no comment in terms of the presidential961executive order against your firm, the firm--you are a partner962there, are you not? Are you a partner there?963    Ms. Smith. Yes, I am a partner.964    Mr. Lynch. Okay. So----965    Ms. Smith. I am here today to testify in my personal966capacity, not as a partner of WilmerHale.967    Mr. Lynch. Yes, I am asking a personal question. The968executive order has gone after your firm, where you are a969partner, directly after you, because he was unhappy with the970work that your firm did in the past. You had to sue the971President of the United States to defend your firm, and I972applaud that. I think it was wrongful, but this is a unique973opportunity for you to describe the circumstances that you find974yourself under and how that pressure against an outstanding law975firm that has done a lot of good work over its history--I am976giving you the opportunity to defend yourself.977    Ms. Smith. Respectfully, I am not here to talk about978WilmerHale.979    Mr. Lynch. That is unfortunate.980    Mr. Chairman, I yield back.981    Chairman Steil. The gentleman yields back.982    The gentleman from Arkansas, the chairman of the full983committee, Mr. Hill, is recognized for 5 minutes for questions.984    Chairman Hill. Thank you, Chairman. I appreciate that.985    I want to say to my friend from Massachusetts that if we986want to make sure that both stablecoins and digital assets are987well regulated, well overseen, subject to the full force of988both State and Federal law enforcement and supervision, that we989need to come together and pass our stablecoin legislation as990well as the revised version of a market structure bill that we991are setting out on today with this good hearing. Appreciate992both Mr. Lynch and Mr. Steil's work.993    I would also say, as it relates to meme coins, this is not994some breaking news thing. The decision to say that meme coins,995which do not have any utility and are just deemed collectibles996by some was Gary Gensler. The Gary Gensler SEC approved that997meme coins were not securities at the same time that Gary998Gensler and the former SEC were not overseeing in any way,999shape, or form how to protect Americans from FTX's offshore1000mischief.1001    So the key thing about this is that we are trying to get1002this right on a bipartisan basis, bicameral basis here on the1003Hill to have both a dollar-backed stablecoin legislation and a1004market structure legislation. I thank both my ranking member1005and chair for their work on this.1006    One thing that we are exploring today is the SEC's1007terminology around digital assets that has been so1008inconsistent, particularly under Chairman Gensler. Just to1009illustrate this point, the SEC has used the word crypto tokens,1010crypto security tokens, crypto assets, crypto asset securities,1011digital asset securities, and digit digital asset securities1012that are investment contracts.1013    This past February, SEC Commissioner Peirce outlined a1014potential taxonomy to clear up some of this confusion for the1015past 4 years. Her ideas were broken into four buckets. First,1016crypto assets that are just securities because they have the1017intrinsic characteristics of a security; secondly, crypto1018assets that are offered and sold as part of an investment1019contract even though the crypto asset itself is not a security;1020thirdly, tokenized securities; and, finally, the fourth1021category she outlined were all other crypto assets, which are1022not securities and not transacted pursuant to a securities1023transaction. So this second and fourth category is at the heart1024of where the subcommittee worked all last Congress on FIT 21.1025    Ms. Smith, can you describe the distinctions between these1026categories to help the committee in its work?1027    Ms. Smith. Sure. So the first category--sorry. So would you1028like clarification on the second and fourth or all of the1029categories?1030    Chairman Hill. Yes. Well, start with the second and fourth1031on the work that we are doing, but you can comment on the1032balance, yes.1033    Ms. Smith. The second category is for an asset that is1034offered and sold, an investment contract that is not a security1035itself. This has been a lot of work has because that is where1036most clarity is needed. Since 2017, the SEC has been applying1037the Howey test, which is a three-part test to determine whether1038or not a digital asset is a security. Because the actual asset1039is not a security, so in a securities transaction there have1040been lots of questions under which it becomes a securities1041transaction. A lot of work has been in that particular area,1042because that is where questions arise.1043    The last category, all other crypto assets, would include1044assets such as bitcoin, an asset that is uncontroversially not1045a security. There has been a lot of work in that area because1046there is no Federal regulatory authority for--that has1047authority over that particular market, so there have been1048questions about who should have that regulatory authority.1049    Chairman Hill. That is the work that Congress has done on1050where those tokens should be treated as under the purview of1051the SEC or the Commodity Futures Trading Commission (CFTC). Is1052that what we were trying to work on?1053    Ms. Smith. That is correct, sir.1054    Chairman Hill. So bitcoin is not a security, so you view it1055would be, if it is in its--we are trying to have a spot market1056for bitcoin that would be under the CFTC's regulatory1057authority. Is that right?1058    Ms. Smith. That is the open question.1059    Chairman Hill. Open question, yes. That is sort of the1060direction that we took with the House Agriculture Committee in1061the last Congress, and this will be a key question for Chairman1062Steil as we go forward.1063    Mr. Werrett, Polygon Labs is leveraging its use case data1064base to showcase real-world applications of its technology. Can1065you highlight an example for us, and then maybe you could1066submit some more for the record?1067    Mr. Werrett. Thank you for your question.1068    Yes, so one example would be Privado ID, which provides an1069opportunity for a person to work with the issuer of1070identification or an organization that certifies information,1071such as maybe as a graduate school. That organization uses an1072application programming interface (API) link to essentially,1073like, transact for that person's wallet through zero-knowledge1074proof and show essentially and verify that thing exists. My age1075is X. My birthday is Y.1076    Chairman Hill. Give us some examples so that we can show1077the utility in the use of blockchain, and I yield back to the1078chairman.1079    Chairman Steil. The gentleman yields back.1080    The gentlewoman from California, Ms. Waters, the ranking1081member of the full committee, is recognized for 5 minutes for1082questions.1083    Ms. Waters. Thank you very much.1084    Before I get started, I would like to thank Ms. Smith for1085being here representing WilmerHale law firm. I would like to1086send a message to your law firm that I appreciate fighting back1087against Trump who is attempting to strip the law firm from1088their security clearances. Many of our law firms are weak and1089spineless, and they are succumbing to his threats, and they are1090cutting deals that are not in the best interest of this country1091or the people. So I thank you for being here.1092    Let me just start by saying, I must highlight, over 2 days,1093Americans lost $6.6 trillion due to Trump's failed tariff1094policies. As Americans wonder how they will afford retirement1095or afford groceries, Trump is sitting pretty. In 1 year, he has1096doubled his wealth through various crypto schemes and is using1097the power of the President to make himself richer.1098    Ladies and gentlemen, members of this committee, you know1099that Mr. McHenry and I worked in a bipartisan way to try to1100come to some consensus about the guardrails that were needed to1101protect our investors as it relates to crypto, but this1102committee is helping Trump. Last week, this committee voted to1103take Trump--make him the king of crypto by passing legislation1104that lets him corner the market on stablecoins, kick George1105Washington off the dollar, and make his own stablecoin U.S.1106legal tender, instead of stopping this grift. You enable it,1107Mr. Chairman. We need to stop Trump before he takes any steps1108further on crypto legislation.1109    In just 1 year--Ms. Thornton, I would like to direct this1110towards you--President Trump has doubled his wealth from $2.31111billion to $5.1 billion. His fraudulent meme coin lost1112investors $2 billion while he and his family pocketed at least1113$350 million. His complex well of companies and revenue,1114including the Trump meme coin, his decentralized finance1115platform, World Liberty Financial, pending stablecoin and1116bitcoin mining venture, have all massively contributed to his1117wealth.1118    I am deeply concerned that these ventures have created an1119avenue for interested parties, whether they are allies or1120adversaries, to anonymously transfer money to him and his inner1121circle. At the same time, it is no coincidence that the Trump1122Administration's Securities and Exchange Commission has issued1123guidance saying meme coins, stablecoins, and crypto mining are1124not securities and therefore are not subject to the agency's1125oversight and investor protections.1126    Additionally, this week, the Department of Justice1127dismantled the National Cryptocurrency Enforcement Team and1128directed the Market Integrity and Major Frauds Unit to cease1129crypto enforcement and not charge regulatory violations in1130cases involving digital assets, such as violations of the Bank1131Secrecy Act.1132    What will these conflicts of interest and dismantle1133enforcement mean for investors, especially if the SEC is not1134overseeing Trump's marred crypto businesses?1135    Ms. Thornton. Thank you for the question, Congresswoman1136Waters.1137    I am not an ethics lawyer, so--expert, so I cannot comment1138on that personally about President Trump, but it is definitely1139true that this industry continues to have thefts, frauds,1140hacks, and that should be very concerning because it raises a1141lot of risks. Unfortunately----1142    Ms. Waters. Excuse me.1143    Ms. Thornton. Sure.1144    Ms. Waters. Do you think the President of the United States1145should own crypto and meme coins and interfere with us while we1146are negotiating on stablecoins and trying to get guardrails? Do1147you think the President should be doing that?1148    Ms. Thornton. The Commission is an independent branch of1149government that should do what it needs to do, and it has1150oversight over this area of legislation. It is very important,1151because many of the functions that the other folks on this1152panel have talked about are also functions in securities law.1153There are many similarities between what happens in the crypto1154business and what happens in other----1155    Ms. Waters. Do you understand that Mr. McHenry and I were1156getting very close to some agreement on having guardrails when1157we have been interfered by the President of the United States1158of America? Do you know that?1159    Ms. Thornton. I was not aware of the interview, but I was1160aware of the legislation, yes.1161    Ms. Waters. Thank you very much. I yield back.1162    Chairman Steil. The gentlewoman yields back.1163    The gentleman from Michigan, the vice chair of the full1164committee, Mr. Huizenga, is recognized for 5 minutes.1165    Mr. Huizenga. Thank you, Mr. Chairman.1166    I know this is the Subcommittee on Digital Assets,1167Financial Technology, and Artificial Intelligence, but it feels1168today like it is the committee of ironies and befuddlements.1169First irony is that Gary Gensler, while he was head of the1170CFTC, declared that anything that was digital was clearly a1171commodity. Now, he should know; he is the smartest guy dealing1172with crypto assets, that he knows, but then again, when he1173became Chair of the SEC, suddenly everything magically turned1174into a security.1175    Now, you have to understand, Washington likes to declare1176things either fish or fowl. We want very clear lines on things.1177Turns out that crypto assets are actually more of a platypus.1178It has a lot of characteristics, and it depends on where it is1179as to how it should be regulated.1180    Mr. Chairman, the second irony in all this is that seems to1181me that the Center for American Progress is rather ironically1182named, since it does not seem very progressive on this. I have1183to tell you, nothing says progress like a, quote, cautious1184approach that stopped short of pushing into new frontiers.1185    The third thing, Mr. Chair, is that some here on this1186committee believe it is far better for the general public and1187America writ large to do nothing, to sit back and just watch1188the realities of the world pass us by. Now, how dumb can we1189possibly be? We know that these are issues that we have to1190address.1191    Now, I am going to get to my questions, and I actually1192changed my question based on our subcommittee ranking member's1193insinuation in his opening remarks that the crypto industry1194was, quote, writing their own rules.1195    Mr. Werrett, Ms. Smith, Mr. Seira, do you believe that is1196the case? I mean, if you guys are writing your own rules, you1197are doing a terrible job at it, because, Ms. Smith, you1198mentioned in your comments about a patchwork of regulations1199that exist across the country. If an industry--it just seems to1200me, if an industry was writing its own rules, you guys would1201have your act together or are you actually asking us to get our1202act together? I am curious.1203    Mr. Seira.1204    Mr. Seira. I think this Congress has a real opportunity to1205pass legislation that will address the core issues that1206everybody here cares about, which include consumer protection1207and the ability of crypto founders and entrepreneurs to be able1208to keep this technology here at home.1209    Mr. Huizenga. Ms. Smith, I am going to kind of move on to1210this a little bit, but feel free to ask--answer that about1211writing your own rules, but I am going to roll it into this.1212The SEC's response to digital assets often have resulted in1213using enforcement measures against many of the companies that1214you have worked with, some 100 in total, I believe. I am1215curious, can you describe a few of the rulemakings that came1216out of the Gensler SEC that--and what were their impacts on the1217digital asset ecosystem?1218    Ms. Smith. During the Gensler SEC, there were a number of1219rulemakings that happened to mention digital assets, so it was1220a broader topic. For example, they covered the definition of1221exchange. The purpose was to modify the rules with respect to1222the Treasury markets, but they also mentioned digital--they1223also mentioned digital assets, and there were implications for1224DeFi protocols. That rule was proposed but not finalized. Had1225it been finalized, commenters to that rule mentioned that it1226would have resulted in them going offshore, because DeFi1227protocols, as the name suggests, do not have a central1228intermediary that can comply with compliance requirements.1229    Mr. Huizenga. Sticking with you, last week during our1230debate on stablecoins, I said that Congress and regulators1231should recognize the unique nature of these innovations and1232establish a regulatory framework that targets the activity and1233not the technology. Can you describe the importance of Congress1234using rules for the custody of crypto assets in the legislation1235that it moves?1236    Ms. Smith. Thank you for the question.1237    With respect to custody, the rules anticipate that there is1238physical custody, meaning there is a paper asset. That is1239obviously not the case for digital assets, and so the rules1240need to incorporate how you can have good custody, meaning1241possession or control of an asset, that only exists in digital1242form.1243    Mr. Huizenga. Thank you.1244    Mr. Werrett, in my last 30 seconds here, you noted in your1245testimony that your company developed software for blockchain1246infrastructure and aggregated networks. Does the importance of1247the underlying technology which you described in your testimony1248get lost in this kind of debate?1249    Mr. Werrett. Yes. The technology is important. Self-custody1250is crucial to decentralized blockchains, decentralized1251protocols. It is the entirety of it. It would be great if this1252committee could protect that right to own property and to1253control one's own property on chain.1254    Mr. Huizenga. I yield back.1255    Chairman Steil. The gentleman yields back.1256    The gentleman from California, Mr. Sherman, the Ranking1257Member of the Subcommittee on Capital Markets, is recognized1258for 5 minutes.1259    Mr. Sherman. Yes. I will point out, normally a hearing on1260capital markets would be in that Capital Markets Subcommittee.1261I would also point out that meme coins were determined by the1262SEC not to be securities only after Gary Gensler left, and that1263decision was made under the Trump Administration.1264    I will agree with a lot of the pro-crypto folks here who1265have said it is kind of silly that we are determining how to1266regulate crypto based on a 1940s case involving orange groves1267interpreting a law written in the 1930s. We ought to have, if1268we could write it, a good crypto regulation law designed for1269this century. The problem is that all the money and power in1270this town is on one side.1271    There is no lobby for effective enforcement of our tax laws1272or enforcing our sanctions laws or dealing with drug dealing. I1273fear that while determining what our policy should be by having1274brilliant lawyers look at magnifying glasses and footnotes from1275the 1940s, looking at a case and determining on that basis how1276to regulate crypto is an absolutely absurd thing for a society1277to do. Passing a bad law would be even worse.1278    Mr. Huizenga says that your industry would not like a1279patchwork. Many industries would like a patchwork, because then1280they pick which patch they want to be in. If we had a system1281where any crypto entity could go to Wyoming, and then Wyoming1282would say, well, we are going to leave this at the county, if1283you just find one county in somewhere in Wyoming that will give1284you everything you want and you give them some jobs and some1285economic activity that is significant to that county.1286    I want to focus--I also want to say that there is really a1287battle inside crypto that has not quite broken out yet between1288the old coins and the new coins. Most of our testimony here is1289in favor of making it easier to create new coins. I think that1290what will be the undoing of crypto is more crypto. I am on the1291side of the new coins versus the old coins, although we really1292should have people investing in businesses that employ people1293and build things in the United States.1294    We have some brilliant lawyers here, and I want to focus on1295really easy legal questions, since I stopped practicing law1296last century.1297    Mr. Sherman. Mr. Seira, if--and I realize you are not1298representing your firm here, but you are a lawyer. If a1299powerful politician in this State or that State came to your1300firm and said, we are going to prevent your firm from1301practicing law in our State unless you give me a million1302dollars, would that be legal?1303    Mr. Seira. Thank you for the question.1304    Like I said in my opening, I am here in my individual1305capacity, and I am----1306    Mr. Sherman. You are individually a lawyer, a pretty good1307one. Can you give me an answer?1308    Mr. Seira. Thank you. I would like to contribute to the1309conversation about how we need to come up with a new regulatory1310framework for keeping----1311    Mr. Sherman. I know, but you are here in Congress, and this1312is my time, and I am asking you a question, which is your1313obligation to answer. Can you answer?1314    Mr. Seira. Yes, sir.1315    Mr. Sherman. So that would be illegal?1316    Mr. Seira. I am not an ethics expert, but that sounds1317coercive, yes.1318    Mr. Sherman. Okay. If instead of a million dollars going to1319the politician, the million dollars was going to some political1320organization the politician was aligned with, would that change1321the answer?1322    Mr. Seira. I am not clear on the question. I am sorry.1323    Mr. Sherman. The question is a powerful politician comes to1324your firm and says, we are going to make it impossible to1325practice in our State, unless the firm gives a million dollars1326to a political organization aligned with that politician.1327    Mr. Seira. I cannot comment on the legality of that. I am1328not a--I am a corporate lawyer.1329    Mr. Sherman. This is 1L stuff here. You choose not to.1330    Ms. Smith--and I want to ask you both. You could be giving1331us testimony that was adverse to the interests of Donald Trump1332coin. Then your whole firm could find that it is disqualified1333to do anything, and you lose all the security clearances.1334    How can you assure us that your testimony is not affected1335by the knowledge that you could have a billion dollar--that the1336issues we are discussing here could have a billion-dollar1337effect on a President willing to disqualify firms that1338displease him?1339    Ms. Smith.1340    Ms. Smith. As I mentioned, I am here today in my personal1341capacity, so my testimony----1342    Mr. Sherman. Right. We need to know that you are1343representing what you really believe and not fear of Trump. Can1344you do that?1345    Ms. Smith. My testimony is in my personal capacity, so I am1346representing my own views today.1347    Chairman Steil. The gentleman's time has expired.1348    The gentleman from Ohio, Mr. Davidson, the Chair of the1349Subcommittee on National Security, Illicit Finance, and1350International Financial Institutions, is now recognized for 51351minutes.1352    Mr. Davidson. Thank you, Chairman. I thank our witnesses1353for coming here to talk about the digital assets space today,1354and I intend to devote my time to talking about digital assets,1355the subject of today's hearing.1356    If we have learned anything from the last several1357Congresses, the next market structure bill must explicitly1358include a bright-line test, so that whether Gary Gensler is1359looking at it, or Warren Davidson is looking at it, or someone1360else is, they know this is intended to be a security or it is1361intended to be something other than a security.1362    The FIT 21 Act did do that, but I hope it does a little1363more than that, because some things we intend to tokenize1364securities, and we need to give a path for the SEC to do that1365and provide guidance for how to tokenize a security. Some1366things will be intended to be tokenized commodities, and we1367need to provide that guidance. The last bill went a long way to1368doing that.1369    Frankly, the void that I hope we fill is yet another1370committee of jurisdiction here in Congress, is Energy and1371Commerce, because some things are really Federal Trade1372Commission (FTC)-regulated utility tokens, and they are really1373different things.1374    The idea that you can jam everything into either this or1375that, the reality is it is more segmented, just like the real-1376world assets are more segmented today. Hopefully we will keep1377making progress on the bill.1378    I wanted to talk first about one of the most essential1379things to the entire industry, whether it is meant to be a1380means of payment, like our stablecoin bill, or these other1381tokens that are out there in the market, self-custody is1382incredibly important.1383    I would like to submit three documents for the record. One1384is the White House's executive order on digital assets.1385    Chairman Steil. Without objection.13861387    [The information referred to can be found in the appendix.]13881389    Mr. Davidson. The other is an amendment protecting self-1390custody I offered related to stablecoins. Of course, this1391relates to stablecoins. I am going to talk about why similar1392language is essential for market structure.1393    The other is the underlying bill, which is the Keep Your1394Coins Act, which is broadly applicable.1395    Chairman Steil. Without objection.13961397    [The information referred to can be found in the appendix.]13981399    Mr. Davidson. All right. So those things, in essence--we1400must have ironclad protections for self-custody. We do not have1401to theorize that people want to wreck the industry. We are1402listening to colleagues here. They spent about 10 hours during1403the stablecoin bill trying to stop us from passing a stablecoin1404bill. The ranking member opened up, basically, with Elizabeth1405Warren's anti-crypto army rants about the segment--sector, and1406we know that regulator after regulator, as recently as January,1407tried to make self-custody nearly illegal, like the CFPB's1408self-custody rule.1409    Mr. Werrett, can you comment on the need for legislation to1410prevent Federal regulators from issuing any rule or regulation1411that would impair an individual from maintaining custody?1412    Mr. Werrett. Yes. Thank you for your question.1413    Self-custody is at the core of decentralized finance. It is1414at the core of decentralized blockchains. Custodying one's1415assets is also a core principle of our Constitution, to control1416and own your property and to not be deprived of life, liberty,1417or property.1418    In pairing, as you asked, someone's right to own and send1419their own asset, digital assets are--at their base form are not1420commodities or securities. Both the commodities and securities1421laws have frameworks that explain what it takes to make an1422asset into one of those other categories. Absent of that, they1423are just property. They are just assets.1424    I would think that lawmakers need to balance risks against1425benefits. Here, the benefit of owning and controlling one's1426property, significantly I would argue, outweighs the risks of1427possible misuse, i.e., like----1428    Mr. Davidson. Thank you for that. I think that is really1429the tension. Of course some of my colleagues, they want, just1430to keep it safe, the government to be the real custodian. That1431is the premise behind this Central Bank Digital Currency.1432Everything about transactions becomes permissioned and kind of1433their check-down position is, well, we will use a third-party1434institution, and the future they promise is an account-based1435crypto.1436    So that is the law. If we do not take action and we do not1437overtly protect self-custody, regulators in some future1438regulatory environment will infringe upon it. That is where the1439word ``impair'' is so important versus ``restrict.'' If it just1440says they shall not restrict it, they can put every condition1441in the world on it, which effectively bans it, and that is what1442a lot of those folks seek. We have to win this fight.1443    I yield back.1444    Chairman Steil. The gentleman yields back.1445    The gentlewoman from Texas, Ms. Garcia, is recognized for 51446minutes.1447    Ms. Garcia. Thank you, Mr. Chairman and thank you to all1448the witnesses for being here today.1449    On Monday, Deputy Attorney General Todd Blanche sent a memo1450to the Justice Department staff directing prosecutors to1451limit--limit their pursuit of certain cryptocurrency crimes.1452Instead, prosecutors were told to narrow crypto investigations1453to focus on drug cartels and terrorist groups.1454    The memo also disbanded the National Cryptocurrency1455Enforcement Team, which was established in 2022 to combat fraud1456and illicit finance in the new industry. The Enforcement Team1457has investigated and coordinated multiple cases, including a1458case against Binance and its founder who pleaded guilty to1459violating money laundering laws.1460    Deputy Attorney General (AG) Blanche said the Justice1461Department is not a digital assets regulator. Well, if they are1462not, then who is, and what does that leave?1463    The Securities Exchange Commission under the new1464administration has already dropped--dropped more than a dozen1465cases against cryptocurrency firms. All these actions are1466taking place as the Trump crypto cartel continues to launch1467crypto ventures that are conveniently--conveniently just1468outside of critical agencies' oversight.1469    Ms. Thornton, as Trump continues to leverage the Office of1470the President to further enrich himself and his billionaire1471buddies, what actions can Congress take to rein in these1472obvious--obvious conflicts of interest that even the average1473American can see?1474    Ms. Thornton. I think that, basically, the Department of1475Justice and the SEC should do what is in their mission. That1476involves prosecuting crimes that happen, and they should be--1477broaden their view of what crimes happen based on the facts and1478circumstances.1479    The SEC should not be making its enforcement team smaller,1480as it has done. It should have even more people there given the1481risks that we are imposing on the financial system now and are1482likely to if stablecoin and market structure crypto legislation1483passes. I think it is very important for the SEC to be gearing1484up, not cutting back, and also the DOJ.1485    Ms. Garcia. Thank you. Ms. Thornton, do you agree?1486    No. I am sorry. It is so far, I cannot really read it. My1487eyesight is not that great.1488    Ms. Smith. Ms. Smith.1489    Ms. Garcia. Yes, ma'am.1490    Ms. Smith. I think, so today, we are here talking about1491regulatory clarity. I agree that if you have regulatory1492clarity, it is good for market participants, facilitates1493innovation, and protects investors.1494    Ms. Garcia. What should we do about the obvious potential1495of interest? As I said, the average American can see--and I am1496sure that you can, since we have both been through law school.1497We both probably took ethics. I know I did.1498    Ms. Smith. I am not an expert on ethics law, so I cannot1499comment on the ethics of it, but I can tell you that regulatory1500clarity----1501    Ms. Garcia. You did take ethics in law school?1502    Ms. Smith. Yes.1503    Ms. Garcia. Based on your knowledge of ethics as you1504learned in law school, what do you think?1505    Ms. Smith. I think it is a complicated question that I do1506not know all the facts, so I would like to know them before I1507opine. I can tell you, if we had regulatory clarity, it would1508alleviate some of the ethical concerns that we have.1509    Ms. Garcia. All right. Thank you.1510    Now, we have all heard about Trump's meme coin. I will not1511go through all the details again, except for the fact that the1512coin earned $350 million, and the people who lost money lost a1513lot.1514    Meme coins can decrease investor confidence and trust1515significantly. A significant crash like this would historically1516have been investigated and regulated by the SEC. However, a1517staff statement on February 27 clarified that meme coins1518purchasers are holders and not protected by Federal securities1519laws.1520    Again, Ms. Thornton, what is the ripple effect of this1521clarification, and what impact will it have on the larger1522enforcement and oversight of cryptocurrencies, especially1523oversight over meme coins?1524    Ms. Thornton. I think that it would basically create a1525loophole. If you use a meme coin, you do not have to follow the1526laws, the securities rules and if you do not, maybe you do.1527Using a meme coin would then become a loophole. That is what I1528imagine would happen from that.1529    I forget the second part of your question.1530    Ms. Garcia. Just that what does that do to confidence for1531further investments?1532    Ms. Thornton. Obviously, investors could not--would not1533have all the protections that the securities rules provide. It1534would be just sort of out here unregulated, and we have seen1535time and time and time again what happens. Through history we1536have seen examples of what happens. The people who lose are the1537people who buy the meme coins, who invest. They are the ones1538who tend to lose. The people who create them often profit or1539enrich greatly.1540    Ms. Garcia. Always about winners and losers.1541    Ms. Thornton. Yes.1542    Ms. Garcia. Thank you. I yield back.1543    Chairman Steil. The gentlewoman's time has expired. The1544gentlewoman yields back.1545    The gentleman from Tennessee, Mr. Rose, is recognized for 51546minutes.1547    Mr. Rose. Thank you, Chairman Steil, and thank you, Ranking1548Member Lynch, for holding this hearing.1549    As my time is limited, I will dive right in. Thank you to1550the witnesses for being with us.1551    Last year, I had the privilege of attending the bitcoin1552conference in Nashville, Tennessee, my home State, and very1553near my district. President Trump there expressed his ambition1554to establish the United States as the, quote, ``crypto capital1555of the planet and bitcoin superpower of the world,'' close1556quote.1557    Ms. Smith, could you outline specific steps the Securities1558and Exchange Commission and, for that matter, Congress should1559take to support this vision and foster a conducive environment1560for cryptocurrency growth and innovation?1561    Ms. Smith. Thank you for the question.1562    First, Congress should clarify when the SEC has1563jurisdiction and who has jurisdiction when the SEC does not,1564meaning the spot commodities markets.1565    Second, when the SEC--when it is clear about its1566jurisdiction, as it is already doing with the Crypto Task1567Force, needs to clarify how the rules apply to digital assets1568securities because those assets have some fundamental1569differences from traditional securities.1570    Mr. Rose. Thank you.1571    Mr. Seira, I would like to ask you, basically, the same1572question. What specific steps should the SEC and Congress take1573to foster a conducive environment for cryptocurrency growth and1574innovation.1575    Mr. Seira. I think it starts with a recognition that the1576status quo is not working for U.S. consumers or industry. In1577terms of legislation they need to pass, I think market1578structure would be key. We have a regulatory gap, like Ms.1579Smith identified, in spot markets of digital commodities that1580are currently unregulated. I think Congress needs to step in1581and clarify when exactly digital assets become digital1582commodities and who is going to regulate that spot market.1583    Mr. Rose. I assume you are familiar with the market1584structure legislation that this committee passed in the last1585Congress. If you were rating that on a 100 percent scale, how1586close did we get to having the right mix there, in your1587opinion?1588    Mr. Seira. It is a very complicated subject, and I think1589reasonable minds can disagree. I think FIT 21 would be a great1590step forward overall. I think it can do more on a couple of1591factors. If I maybe offer some suggestions, I think the dual1592market that it creates for tokens could be regulated both by1593the SEC and CFTC would introduce some complexity. I think1594fixing that would be helpful. I think it could also do more to1595bring activity that has gone offshore back onshore. I think1596overall, it is a great step forward and would bring much needed1597clarity.1598    Mr. Rose. Thank you. I appreciate it.1599    Ms. Smith--and we have already kind of delved into this--as1600you know, most traditional financial instruments fall under the1601jurisdiction of either the SEC or the CFTC, depending on their1602nature. For certain complex or hybrid instruments, both1603agencies may assert oversight, creating dual registration or1604compliance obligations.1605    In your view, can the digital asset ecosystem be cleanly1606divided between regulators or will effective oversight likely1607require coordinated multiagency involvement going forward?1608    Ms. Smith. That is a very good question. I think it is too1609early to tell because we do not have clear jurisdictional1610bounds between CFTC and SEC jurisdiction, we have regulatory1611uncertainty. It is unclear whether or not, if we had that1612certainty, whether there would still be an overlap or whether1613you can clearly define who has jurisdiction when.1614    As you noted in your question, there are assets like1615securities indices and securities futures which are regulated1616by both regulators. I think until we have that initial clarity,1617it is too early to determine the amount of coordination that1618would be necessary.1619    Mr. Rose. Mr. Seira, in your testimony, you highlight the1620nightmarish difficulty of registering under Federal securities1621laws for crypto projects. In fact, you state, quote, Virtually1622no crypto projects have successfully registered their tokens1623under Federal securities laws and lived to tell the tale, close1624quote.1625    Mr. Seira, can you expand on why it is so difficult for1626crypto projects to successfully register under the Federal1627Securities Law, and what steps would you recommend that1628Congress take to fix the problem?1629    Mr. Seira. Sure. I will start by clarifying that I think1630that if you are selling crypto assets as part of a fundraising1631transaction, I think those transactions should be covered under1632the securities laws and should be either registered or exempt.1633Most of them today are exempt.1634    The real issue that projects have had I think is twofold.1635One is the disclosures that the securities laws currently1636require do not surface the material information that purchasers1637of these digital assets need. Issuers are basically forced to1638disclose information that is not helpful.1639    Second, there is no real off-ramp or no real way to1640distinguish the initial capital raising transactions from1641transactions in those digital assets once the network is1642decentralized and not under the control of any----1643    Mr. Rose. Thank you. Mr. Chairman, my time has expired. I1644yield back.1645    Chairman Steil. The gentleman yields back.1646    The gentleman from Illinois, Dr. Foster, who is the Ranking1647Member on the Subcommittee on Financial Institutions, is1648recognized for 5 minutes.1649    Mr. Foster. Thank you, Mr. Chair, and to our witnesses.1650    As we think further about the regulatory finality for1651crypto assets, we are going to be struggling with the same1652three issues we have been struggling with the last decade; that1653is, anonymity, finality, and prevention of criminal activity.1654    Until we get our arms around these, we need, I think,1655frankly, the same Senate considerations that have taken many1656decades to develop in our regulated financial markets, and we1657are going to make the crypto markets a success. We are going to1658have to come to terms with those three issues.1659    Our regulated markets have become the envy of the world,1660and that position has only strengthened as we strengthen the1661oversight of those markets. There are reasons why people do not1662like to trade in Chinese markets, just to pick on China again.1663    Then, this stability has been driven, in large part,1664because investors believe that bad actors will be held1665accountable for fraud, market manipulation, and other abuses.1666This committee has struggled with how to create similar trust1667and digital assets, and I believe the vast majority of these1668issues come down to these three issues of anonymity, finality,1669and prevention of criminal assets.1670    In 2024, the blockchain analytics from Chainalysis1671identified nearly 74,000 tokens issued that were likely1672associated with pump-and-dump schemes and estimated more than1673$51 billion in crypto was received by illicit addresses,1674including those associated with scammers, criminal1675organizations, sanctions evaders, and other bad actors, but our1676regulated markets continue to do very well.1677    In contrast, just consider for a moment the Non-Fungible1678Token (NFT) market, the crypto NFT market, which has sort of1679collapsed in a heap of wash trades, front-running, and other1680market abuses. So I wonder--I have been thinking of how we can1681actually rescue that. What are the things we are going to have1682to do to make the NFT markets, for example--how do we, in those1683markets, prevent front-running and all the other ancient1684frauds.1685    This collapse was driven by lack of regulation. If you look1686at, what is it about our regulated markets that really makes1687them work well, the starting point is you cannot be truly1688anonymous. You need a trader ID if you are going to trade1689nickel futures. All right. It is because you do not--when you1690are trading those, you do not need to know who is on the other1691side of the trade, but you need to know that if that person1692does something illegal--market manipulation or something--there1693is a regulator that will be able to see that this trade that1694you thought was a fair market price was, in fact, a wash trade.1695They will identify that and drag you into--drag them into court1696and make them accountable.1697    Until we get that--and I do not think there is any hope1698that things like the NFT markets will really be able to survive1699and thrive.1700    For the last decade, I have been asking, is there any way1701in a truly anonymous, self-hosted wallet system to prevent wash1702trades, for example? Does anyone--I have been asking that. The1703answer has been no for a decade. Unless any of you have new1704information, it is still no and that is a fundamental problem1705we have to fix.1706    I believe there are ways to do this, and it would be1707interesting to hear your reaction to a proposal that would1708essentially allow a kind of NFT, for example, that would have1709license plates on all participants. You can think of it as an1710automobile license plate where you are driving down the1711highway, you do not know--have no idea who it is, but you know1712they have a valid license plate. If they do something illegal,1713that can happen. That means you have to register your wallets1714with a regulator who can see the true identity and thereby1715detect front-running, wash trades, the whole list of market1716abuses.1717    My question to everyone on our panel: If such a thing was1718an option for someone issuing NFTs into a market, would that1719have a chance of making more of a success of the NFT market,1720for example? Ms. Thornton?1721    Ms. Thornton. Yes. I think it depends. The information has1722to go in all directions. Currently with securities, we have1723tapes, alternative trading systems, and all kinds of things1724that help you know what orders are being placed by whom, how1725much. It is hard for me to tell based on what you said whether1726so-called license plates would achieve all of that, but I do1727think there needs to be a central place where everyone can see1728what is being traded, by whom, how much.1729    Mr. Foster. Ms. Smith?1730    Ms. Smith. I agree with Ms. Thornton that is a--it is a1731complicated question to unpack. I do think, to one of her1732earlier questions, there are types of data analytics that do1733give some--not direct identity but give you some idea of who1734owns particular wallets.1735    Mr. Foster. Unless they can identify that it is a wash1736trade, that these are the same beneficial owner behind both, it1737will not work. I believe that is true and my time is up. I1738yield back.1739    Chairman Steil. The gentleman yields back.1740    The gentleman from Iowa, Mr. Nunn, who is also the Vice1741Chair on the Subcommittee on National Security, Illicit1742Finance, and Institutions, is now recognized for 5 minutes.1743    Mr. Nunn. Thank you, Chairman Steil.1744    I believe not only is this an important hearing to hold but1745to evaluate where we are going in the future. We all know over1746the last decade innovators have built a powerful decentralized1747network that is transforming how our country operates. Digital1748assets are going to open the door to endless possibilities for1749anyone in both the financial and, candidly, the nonfinancial1750services, and provide possibilities for economic growth1751domestically produced right here in the United States.1752    I am proud that, last week, Chairman Steil led meaningful1753steps toward clarity by passing the STABLE Act. Today, we turn1754our focus to the broader digital asset market.1755    As a member of both the House Ag Committee and the1756Financial Services Committee, I have had the privilege of1757working with both the CFTC and the SEC for the last 2 years. In1758my home State of Iowa, we know world commodities very well:1759corn, soybean, hogs. The CFTC does a great job of these things.1760Equally, in downtown Des Moines, we have our banking industry1761that knows very well: stocks, bonds, and things that the SEC1762does very well in.1763    Unfortunately, we have had an SEC Chairman for the last 41764years that believes everything, maybe other than bitcoin,1765should be traded like an SEC stock or commodity--or a stock,1766something that is a vast overreach of regulatory power by the1767SEC and actually stifles innovation.1768    Last Congress, we passed a bill to provide a clear1769jurisdictional guidance for both the SEC and the CFTC.1770    I would like to begin today with you, Ms. Smith. Can you1771explain how the SEC currently determines what qualifies as a1772security and some of the challenges to this approach, and how1773we can maybe clarify that through legislation, starting with1774this committee?1775    Ms. Smith. Today, since 2017, the SEC has been using the1776digital assets test as defined in Howey to define when a1777digital assets transaction is a securities transaction. That1778test, from a 1946 case, is a three-part test. One of the issues1779with using that test is that market participants found it1780difficult to apply.1781    In 2019, the SEC issued guidance providing some direction1782as to how to apply that test to digital asset transactions.1783Nonetheless, market participants still found it challenging to1784apply.1785    The second issue with using that test is that how we apply1786sub-primary market transaction, meaning a transaction between1787an issuer and an investor. It does not apply to secondary1788market transactions, transactions between two different1789investors, and that is the bulk of the transactions that occur1790in crypto platforms today.1791    Mr. Nunn. Thank you, Ms. Smith. That is a good one-on-one1792on this. What we saw last time using this Howey test is that1793good innovators in this space came to the SEC with their ideas,1794with their recommendations, and their SEC Chairman went into1795good faith meetings and used that information to aggressively,1796I would say, go after innovators in this space.1797    Mr. Seira, you were at one of these meetings. Could you1798talk to us about how your experience went trying to share1799information with the Federal Government?1800    Mr. Seira. I am sorry, but I am not going to comment on any1801specific meetings or any advice that I gave to my clients.1802    Mr. Nunn. Would you say that the government was helpful1803with providing clarity to you or did they use information that1804you may have provided to further make it difficult for you?1805    Mr. Seira. I am not specifically clear about what meeting1806you are referring to. I can speak in general terms and say that1807it has been a frustrating experience for entrepreneurs that1808have tried in good faith to comply with the laws and have found1809that it is not really a viable option.1810    Mr. Nunn. Mr. Werrett, I am going to turn to you then. When1811we talk about American innovation in this space, are we ceding1812this opportunity to other nations, other innovators offshore1813because the Federal Government has made it difficult for those1814domestically to be competitive?1815    Mr. Werrett. Thank you for your question.1816    Yes. One of the big issues is, without clarity, it is clear1817that a digital asset is not a security without something more1818on the day that it is created. You can wrap it in a security,1819potentially. You can wrap it in promises that cause others to1820rely on those promises and expect profits based on the efforts1821of others. Absent that, it is not a security.1822    Now, the issue is it is, again, not a security at the1823outset, but innovators look to backstop their actions by, like,1824relying on Reg S, for example. Reg S causes innovation to move1825offshore. It causes these tokens to be pushed offshore. That1826causes the protocols and the use of the protocols offshore. So1827innovation plus the use of this technology is all being pushed1828offshore and that is one reason why, of many.1829    Mr. Nunn. Ms. Smith, I want to use the last seconds here.1830The CFTC maybe has a different approach. You opened up with how1831we do on the SEC side. How has the CFTC looked at approaching1832regulating commodities like bitcoin or Ether?1833    Ms. Smith. The CFTC has jurisdiction over the futures and1834derivatives markets. It does not have jurisdiction over the1835spot market, and so they do not have the ability today to make1836rules or regulations for that market.1837    Mr. Nunn. Thank you, Mr. Chair. We need to fix and close1838that gap. I yield the remainder of my time.1839    Chairman Steil. The gentleman yields back.1840    The gentleman from California, Mr. Liccardo, is recognized1841for 5 minutes.1842    Mr. Liccardo. Thank you, Mr. Chair and thanks to all the1843witnesses for helping to guide us and inform us.1844    Mr. Seira, I appreciate the fundamental concern I think1845that all of the witnesses have shared, which is a need for1846regulatory clarity. You point out in your written testimony--I1847think you said something similar verbally--that current1848securities disclosure rules are really focusing on irrelevant1849information.1850    Also in your written testimony, you identify what you1851believe might be relevant as we think about crypto regulation:1852governance mechanisms, network design, tokenomics, which I1853cannot say I fully understand but I look forward to getting up1854to speed on, cyber security, network utility of assets.1855    Is the CFTC equipped to regulate disclosure of those1856features of digital assets to ensure that those disclosures are1857full and fair and accurate?1858    Mr. Seira. Thank you for your question.1859    I think the core point that I am trying to get across is1860the securities laws framework are designed under the premise1861that the value and existence of a security is dependent on an1862issuer. In many contexts, for tokens that relate to1863decentralized networks where there is no issuer that is1864controlling the token, that premise is false and it is not1865surfacing the right information.1866    I think we would have to update the disclosure regimes1867under either the SEC or the CFTC to be able to fully account1868for this. The issuer-centric model has a wrong focus and a1869wrong approach to really get at what consumers of these digital1870assets need to be protected.1871    Mr. Liccardo. Regardless, then--and I certainly understand1872and appreciate the point you are making. CFTC would need1873substantial--I mean, this is not the same as regulating pork1874bellies. Clearly, it would need perhaps more expertise, more1875staff, et cetera. Is that right?1876    Mr. Seira. I think that is right. The CFTC has not1877historically regulated retail markets. It has been more of a1878regulator of sophisticated markets, but I think with the right1879funding and the right team, I do not see a reason why they1880would not be able to do it.1881    Mr. Liccardo. Ms. Smith, I also want to express my1882appreciation that WilmerHale has taken what I would regard to1883be an ethical response to the administration's efforts to force1884law firms to capitulate, so thank you to your firm.1885    I appreciate your call for regulatory clarity, and I would1886agree that we do not want regulation by litigation.1887    We have seen, though, in just the last 24 hours, as was1888earlier suggested, an announcement from the Deputy Attorney1889General that the National Cryptocurrency Enforcement Team would1890be disbanded. We had earlier announcements from the Department1891of Justice that the Market Integrity and Major Fraud Unit would1892no longer handle criminal cases involving crypto.1893    Is it fair to say that there are significant criminal uses1894of cryptocurrency that we should be concerned about?1895    Ms. Smith. I think that there may be criminal uses in1896crypto, but there are criminal uses in all types of financial1897markets.1898    Mr. Liccardo. You say there may be. You do not believe that1899there are criminal uses today of cryptocurrency?1900    Ms. Smith. There are some criminal uses, but my broader1901point is that they are not unique to crypto.1902    Mr. Liccardo. Agreed, but there are certainly aspects of1903crypto, particularly with regard to anonymity, that may1904facilitate criminal activity more easily. Is that fair to say?1905    Ms. Smith. I am not sure if I would agree with that1906statement.1907    Mr. Liccardo. For example, North Korean hackers using1908Tornado Cash, just to take one of many examples. Anonymity is,1909in fact, a tool that helps criminals, is it not?1910    Ms. Smith. It is a factor. On the other hand, there have1911been instances where there have been hacks and the hackers have1912been identified because of the blockchain transactions.1913    Mr. Liccardo. Undoubtedly, if there are criminal uses or1914perhaps fraudulent uses which maybe--may cross over the line to1915criminal activity, a rug pull, pump-and-dump scheme that is1916clearly intended to defraud, someone should investigate and1917prosecute those criminal cases, should they not?1918    Ms. Smith. Yes, those cases should be prosecuted.1919    Mr. Liccardo. SEC, CFTC, none of those agencies have1920criminal prosecutorial authority, do they?1921    Ms. Smith. I do not believe so.1922    Mr. Liccardo. So it would have to fall on the DOJ, Justice1923Department, would it not?1924    Ms. Smith. Yes, or perhaps other regulators.1925    Mr. Liccardo. We need the Department of Justice to step up.1926    All right. Thank you. No further questions.1927    Chairman Steil. The gentleman yields back.1928    The gentleman from Montana, Mr. Downing, is recognized for19295 minutes.1930    Mr. Downing. Thank you, Mr. Chairman, and thank you to the1931witnesses for being here.1932    As a former Securities Commissioner for the State of1933Montana, Gary Gensler's name has come up a bunch of my life in1934issues what I really saw as, in some instances, a lack of1935guidance and, in some instances, just a hostility towards1936digital assets.1937    I just want to start out because there have been some1938comments about meme coins in this chamber. I just want to point1939out that meme coins are a product of the Gensler SEC and its1940failure to provide the digital asset industry with clear1941guidelines around what makes a digital asset a security.1942    I also want to point out that under the former Chair1943Gensler, the SEC routinely asserted that everything other than1944bitcoin is a security and issued enforcement actions against1945legitimate projects seeking to build or facilitate markets in1946digital ecosystems, underpinned and maintained by digital1947assets.1948    For some, creating digital assets with no stated value or1949profit potential was one available path to operate without the1950SEC breathing down their backs.1951    Again, about this guidance, Gary Gensler, had he worked1952with the industry and with Congress to put out guidance1953identifying the aspects of digital asset projects that would1954implicate the securities laws, there is a good chance we would1955not have seen such explosive growth of meme coins in relation1956to other projects with practical utility. I just wanted to1957start with that.1958    I am going to transition quickly, before I get into1959questions, on blockchain. I am really excited about the1960potential of blockchain. I think in terms of fraud elimination,1961proof of ownership--there are so many--the immutable nature,1962the distributable nature. I am really excited about it. These1963benefits should not be limited just to tech hubs.1964    I am going to start with Mr. Werrett. Can you explain what1965benefits blockchain technology can bring to rural areas?1966    Mr. Werrett. Thank you for your question.1967    Yes. Blockchain technology allows users to custody their1968own funds and send payments to others without the use of1969intermediaries. Rural areas do not have the same access to1970banks. They do not have the same access to payment structures1971and systems and so that is a significant benefit.1972    Another benefit would be, for example, in a past State that1973I lived in--most States keep their property records State by1974State and, oftentimes, it is even in paper form. Having1975property titles kept on a chain where they can be audited and1976tracked and then also would eliminate the need for title1977companies and structures that in a lot of rural areas they do1978not have access to.1979    Mr. Downing. Thank you.1980    Switching, Ms. Smith, much of the debate on digital assets1981has been whether they should be classified as securities and1982what should be classified as commodities. We have already1983talked a little bit about the Securities Act of 1933 and of the1984Howey test that supposedly provides a clear definition of an1985investment contract. Regulators have relied on this 19461986Supreme Court decision.1987    One thing I want to ask you is, how should Congress seek to1988address the differences between assets that are inherently1989securities and digital assets that are not inherently1990securities but may be offered as part of a securities1991transaction?1992    Ms. Smith. The first part of providing clarity is just what1993you stated, that the issue of whether or not the underlying1994asset is a security itself or so pursuant to investment1995contract has been something that has been misunderstood over1996the years. That is a key question where clarity is needed.1997    Mr. Downing. All right. Thank you.1998    Moving on, Mr. Seira, the SEC, under former Chairman1999Gensler, pursued an aggressive enforcement regulatory agenda2000that sought to extend the SEC's authority over the integrity of2001the digital asset ecosystem. Treating every digital asset as a2002security regardless of its purpose risks the United States2003forfeiting its leadership in financial technology. I think2004about United States being leaders here. Rather than ensuring2005the United States remains a hotbed for innovation, Gary Gensler2006seemed more focused on waging an ideological crusade against an2007industry he fundamentally distrusted.2008    Can you think of a single action taken by the SEC under2009Gary Gensler that made the United States a more attractive2010place to innovate?2011    Mr. Seira. I do agree with your premise that Chair Gensler2012focused on enforcement, and I think that had an effect to draw2013a lot of the activity outside of the United States.2014    Mr. Downing. Thank you. I have run out of time. Mr.2015Chairman, I yield.2016    Chairman Steil. The gentleman yields back.2017    The gentleman from Illinois, Mr. Casten, is recognized for20185 minutes.2019    Mr. Casten. Thank you, Mr. Chair.2020    There is something very surreal about this hearing. We are2021sitting here in the wake of a massive collapse in global2022equities around the world triggered by a really dumb decision2023from the White House. You have Jamie Dimon saying today that we2024are approaching a recession. Massive sell-off of Treasuries and2025the Financial Services Committee, the committee of2026jurisdiction, and historians are going to look back and say,2027What did we do today? This is what they are going to read2028about.2029    They are going to read that a bunch of good lawyers,2030members of the bar in good standing, ducked every single2031question about whether they could defend basic ethics because2032they did not want to make a bully angry.2033    I am not going to dwell on that. Others have done it. I2034would point out only that bullies only back down if you punch2035them back. If you disagree with that point, you should ask my2036Republican colleagues what their cowardice has bought them.2037    Let us talk about crypto because that is what we are doing2038today.2039    Since ``Liberation Day,'' as the President called it, we2040have seen a collapse in global equities. We have also seen a2041collapse in crypto. Bitcoin and Ethereum are down 9 percent. We2042have seen margin calls at institutional investors that have2043caused people to run out of crypto. In one 24-hour period after2044liberation day, $401 million of bitcoin was converted into2045dollars, $340 million of Ethereum.2046    Ms. Thornton, do you agree with the point that many of the2047crypto advocates have made that crypto is a hedge against2048instability in markets.2049    Ms. Thornton. No, I would not agree with that.2050    Mr. Casten. If you were facing a liquidity squeeze, could2051you pay your bank in crypto or would you want dollars.2052    Ms. Thornton. You would want dollars.2053    Mr. Casten. I am reminded of the old Robin Williams joke2054that cocaine is a sign that--is God's way of telling you you2055have too much money. When liquidity is short, people are2056running away from this asset class.2057    Ms. Smith, in the exchange with Mr. Steil earlier, he had2058asked you if the blockchain makes transparency more likely. You2059agreed with that. I noted he used the singular. How many2060blockchains are there?2061    Ms. Smith. There are multiple----2062    Mr. Casten. More than one?2063    Ms. Smith. Yes.2064    Mr. Casten. More than 10?2065    Ms. Smith. I do not know the exact number, but I would say2066more than 10.2067    Mr. Casten. Mr. Werrett, I know you have your Polygon2068blockchain. How many blockchains--what is your guess? How many2069do we have?2070    Mr. Werrett. Thousands.2071    Mr. Casten. Thousands. Okay. Within your Polygon2072blockchain, you can--people can run from chain to chain. They2073can bounce on, you can buy Polygon, you can move it into some2074other chain, correct?2075    Mr. Werrett. Correct.2076    Mr. Casten. That is a really good way to hide your paper2077trail, right? Because you need a bunch of additional details to2078figure out--you have to have exact details, the time stamps,2079everything else. Do you guys track that to make sure that the2080bad guys are not hopping chains?2081    Mr. Werrett. Thank you for your question. So----2082    Mr. Casten. I am just wondering yes or no right now. Do you2083track that to keep the bad guys from chain hopping to hide2084their trail?2085    Mr. Werrett. Yes.2086    Mr. Casten. Do you shut things down when people do bad2087things?2088    Mr. Werrett. The answer is that there are established2089companies--TRM, Chainalysis, Elliptic----2090    Mr. Casten. I am not asking what other people do.2091    Ms. Smith said that the blockchain--singular--creates2092transparency. We have now acknowledged that there are hundreds2093of blockchains. When you hop a chain, it is harder to track,2094right? That is the opposite of transparency.2095    Mr. Werrett. It is not harder to track. All blockchains are2096discoverable and auditable. You are right that you can move2097from one blockchain to another blockchain.2098    Mr. Casten. Would you support more rigor around making sure2099that we block people from moving? Because the North Koreans2100seem to really like chain hopping. When we see these hacks, the2101Bybit hacked, they said, what--$300 billion immediately2102disappeared because they were able to hop a chain, and all of a2103sudden it was untraceable. We had Chainalysis in here the other2104day. They could not do it.2105    Mr. Werrett. My understanding is that on all blockchain--2106blockchains are auditable and blockchains are visible to the2107public. That is----2108    Mr. Casten. Look, there is the story--the amount--there is2109this massive ratio of theoretically legit cases--theoretically2110legit use cases for crypto offset against the massive number of2111actual illegal activities. Every time we ask a question about2112why they are using these illegal activities, they say, well,2113the blockchain makes everything traceable but it is anonymous.2114Well, yes, it also is anonymous and we defunded the damn2115police, as Mr. Liccardo ably pointed out.2116    Ms. Thornton, if you were a bad actor, you were a child2117trafficker, a drug trafficker, a North Korean nuclear smuggler,2118are you happier or sadder since Donald Trump has taken office?2119    Ms. Thornton. I can just answer that I would be happy today2120seeing that crypto is being favored so much in the Trump2121Administration.2122    Mr. Casten. Thank you. I yield back.2123    Chairman Steil. The gentleman yields back.2124    The gentleman from Florida, Mr. Haridopolos, is recognized2125for 5 minutes.2126    Mr. Haridopolos. Thank you, Mr. Chairman. I appreciate2127everyone being here today.2128    I know these are interesting times, and your valuable2129expertise is very much appreciated as we get under the hood.2130Especially as new members of the committee, it has been very2131helpful to understand different people's perspectives and how2132we improve the marketplace so that people who choose to invest2133in crypto technology and currency, et cetera, have a better2134understanding of how we might create a regulatory structure2135that gives them peace of mind. Also if you are a company, of2136course, knowing how you will be regulated.2137    As I try to keep up with the moving parts here, it is very2138frustrating to me if I was thinking--I always try to think of,2139if I was in your shoes or if I was in a company's shoes trying2140to get into this marketplace and do the right thing, the last 42141years has been a lot of confusion and frustration as they have2142attempted to work with the government to try to come up with a2143regulatory model only to be hit by, let us just say, some2144unique reactions by the government, which caused even more2145chaos, or at least confusion, and in some cases, charges--or at2146least situations where they feel like the government was not2147there to assist but just kind of playing a game with them.2148    With that in mind, I wanted to get into the disclosure2149regime at the SEC. Obviously, a disclosure regime is designed2150to protect consumers. The idea that if you are going to invest,2151you want to have the confidence that they have been vetted in2152such a way that they can go and make these decisions with2153confidence.2154    Let me start with Mr. Seira, if I could. Can you describe2155what the existing disclosure regime actually looks like2156currently at the SEC?2157    Mr. Seira. Yes and thank you for the question.2158    The existing SEC disclosure regime is intended to2159ameliorate information asymmetries between the issuers of2160securities on the one hand and the investors on the other.2161    Unless an offer of sale of securities qualifies for an2162exemption, every offer of sale needs to be registered. This2163process entails an issuer filling out a form that, again,2164refers to very many other forms and calls for voluminous2165information that the SEC has to approve. It includes things2166that are related to the issuer, right. It is things like2167financial information, operational results, information of the2168executives of the issuer, which drive the value of the2169security.2170    Mr. Haridopolos. Ms. Smith, if we could maybe follow up2171with this questioning. This current regime, to me, is hard to2172follow. To me, if I was running a company, I would not know2173exactly how to kind of get through this morass.2174    What would be the qualities of a regulatory regime being2175put in place by the SEC that you think would help consumers2176make better decisions should they choose to get into this line?2177    Ms. Smith. Because of the differences between digital2178assets and traditional assets, I think a more tailored2179regulatory regime would be helpful. An example of this is what2180happened with asset-backed securities. The SEC came up with a2181tailored regulation disclosure for that particular asset class.2182    Mr. Haridopolos. In some of the proposals you have seen in2183years past--and, of course, we are working on our bill today--2184are those found in the bill today that you think are moving in2185that right direction?2186    Ms. Smith. I think we are moving towards the right2187direction, but I think the engagement that the SEC Crypto Task2188Force is doing today and currently with the industry is2189important and necessary to make sure that the disclosure regime2190is fully comprehensive of the key elements that would be2191important to consumers.2192    Mr. Haridopolos. With that, Mr. Chairman, I will yield2193back.2194    Chairman Steil. The gentleman yields back.2195    The gentleman from South Carolina, Mr. Timmons, is2196recognized for 5 minutes.2197    Mr. Timmons. Thank you, Mr. Chairman. I want to thank the2198witnesses for joining us today.2199    The tokenization of real world assets has the potential to2200fundamentally transform our financial systems. More2201importantly, it offers a powerful tool to reduce waste, fraud,2202and abuse in government operations. I have had countless2203meetings with innovators who have developed technologies that,2204if implemented at scale, could reshape how we think about2205blockchain and payment systems.2206    This is a long-term effort, but it begins with Congress2207getting this legislation right. We must provide blockchain2208innovators with the space to build, supported by clear and fair2209guardrails. This is what true international leadership in the2210digital asset space looks like: crafting legislation that2211ensures a level playing field and encourages innovation right2212here in America.2213    Mr. Werrett, beyond financial applications, can you2214highlight any use cases being built on the Polygon blockchain2215that, if adopted by the Federal Government, could significantly2216improve efficiency across various sectors?2217    Mr. Werrett. Yes. We spoke earlier about Privado ID, which2218provides services to allow someone to intake and provide access2219to their ID but in a way that is protected by cryptography.2220When you are asked to verify your age, you are asked to verify2221your identity, that can be done, essentially, through this2222noncustodial wallet that is burned or imaged into that wallet--2223the confirmation that you are who you say you are.2224    Another is the movement of titles of property across the2225blockchain. Healthcare--allowing your healthcare records to be2226custodied by you instead of having to ask one doctor to send2227another doctor x-rays and then get specific requests fulfilled,2228but instead you can actually have control of your healthcare2229records, and also control in a self-custody wallet of your2230assets or your crypto. So, yes, numerous.2231    Mr. Timmons. Really, all of those things involve reducing2232or removing intermediaries. It is very exciting, even something2233as simple as voting. I mean we have this issue with knowing who2234people are and them being who they say they are. The technology2235can solve these challenges and really create a lot of2236efficiencies.2237    A follow up to that question: How might the upcoming market2238structure legislation support or potentially impact the future2239integration of blockchain technology in the government systems?2240    Mr. Werrett. Thank you for your question.2241    I think a market structure bill is a great start. It is2242very encouraging to see this legislative body taking crypto2243seriously and trying to solve for blockchains. I think that a2244few of the things that need to be addressed are the Howey test2245issued by the Supreme Court in the 1940s should be refreshed,2246not abolished but refreshed, given a gloss or--there should be2247an additional test that looks at the decentralization of a2248project.2249    It is relevant, right. Whether something is a security or2250not deals with whether there is a promise, whether there was2251reliance on that promise, and whether there is an expectation2252of profits based on the efforts of others. That goes to the2253center of what--is this a centralized--is there a centralized2254intermediary or a centralized promoter or manager that is2255running this project that the investor is relying on to provide2256information.2257    It makes sense that this topic of decentralization would be2258a part of the securities analysis. That is one way.2259    Mr. Timmons. That leads into my next question perfectly.2260    Ms. Smith, in your testimony, you stated that the2261decentralized nature of certain digital assets presents unique2262challenges to Federal securities law compliance. Could you2263explain why decentralization makes it more difficult to apply2264U.S. securities laws to the digital asset ecosystem.2265    Ms. Smith. Sure. Decentralization at its core assumes there2266is no central intermediary. The Federal securities laws are2267based on there being the presence of a central intermediary. In2268some respects they are a little bit inconsistent. That is why2269regulatory clarity is necessary.2270    Mr. Timmons. Thank you for that. When you talk about2271decentralization, are you referring to the blockchain network2272that these projects are built on, the digital asset project2273itself, or both?2274    Ms. Smith. That is a great question. I am referring to2275both. As Mr. Seira explained, some token projects themselves2276are decentralized, and then once the token is issued, they can2277trade on a decentralized protocol. It is both the issuer and2278then the mechanism for trading.2279    Mr. Timmons. Thank you. One of the more complex issues in2280securities law today involves NFTs and how they can be2281effectively and fairly regulated here in the United States.2282That is why my colleague, Congressman Ritchie Torres, and I are2283working on the New Frontiers in Technology Act to establish2284clear and equitable guardrails for NFT creators operating2285within our borders.2286    We have seen the SEC take the position that some NFTs are2287securities. In extreme cases, like the Stoner Cats example,2288instruct artists to destroy their own work. That is deeply2289concerning, and we need to ensure that this technology is not2290subject to shifting political winds depending on which party is2291in power.2292    I appreciate the work of this committee. With that, Mr.2293Chairman, I yield back.2294    Chairman Steil. The gentleman yields back.2295    The gentleman from North Carolina, Mr. Moore, is recognized2296for 5 minutes.2297    Mr. Moore. Thank you, Mr. Chairman, and thank you to the2298witnesses today for this testimony. It has been very2299informative.2300    Digital assets have demonstrated the ability to be the2301foundation of a new decentralized digital ecosystem.2302Unfortunately, our regulatory posture just has not kept pace.2303Instead of clarity and consistent rules, innovators have been2304met with ambiguity and enforcement first approaches. Rather2305than providing a roadmap for compliance, agencies during the2306last administration largely offered roadblocks, pushing talent2307and capital overseas.2308    Mr. Seira, you were asked a question earlier by Mr.2309Haridopolos that I want to follow up on: that had to do with2310the--in the existing security laws which--foundation was never2311designed to account for decentralized open source systems2312powered by millions of users, validators, and developers, et2313cetera, worldwide.2314    We talked about--he asked you a question about the2315registration with the SEC, and you went through that. It seems2316that the former Chair, Mr. Gensler, took an expansive view of2317the jurisdictional authority over the digital asset ecosystem.2318    In terms of the registration, if you--and I do not know2319that you had a chance to really delve into more of it. What2320suggestions would you have, if any, in terms of ways to improve2321that registration system?2322    Mr. Seira. I think for distributions of digital assets that2323are fundraising transactions, those fall under the securities2324laws and should be either registered or exempt. I think as a2325general matter, registered offerings--so IPOs--have gone down a2326lot over the last 10, 15 years. There was something like 7,0002327public companies in the 1990s. We are about 4,000 right now.2328That is because of compliance costs of being a public company2329and the associated liabilities with the disclosures.2330    I think making it easier for companies to go public and2331making the information that those companies have provided more2332useful to consumers and investors would be a great step2333forward.2334    Mr. Moore. In terms of moving forward on that, would you2335feel comfortable at some point submitting a detailed roadmap? I2336want to invite, frankly, the other witnesses as well to that2337same thing--a detailed plan that could be shared with the2338administration as they move forward that this committee could2339also have.2340    Mr. Seira. Yes. I would be happy to.2341    Mr. Moore. Same with the other witnesses?2342    Ms. Smith. Yes.2343    Mr. Werrett. Thanks. Happy to work with your staff, yes.2344    Mr. Moore. Okay.2345    Ms. Thornton. [Nonverbal response.]2346    Mr. Moore. Okay. Great.2347    This was referenced earlier, where Mr. Gensler would come2348before the committee in prior years and assert that everything2349other than bitcoin is a security and that projects simply2350needed to come in and register. I think, Mr. Seira, you have2351referenced this.2352    Ms. Smith, I would say there--how is your response? Do you2353think it is really that simple, or would you--do you think2354these other projects are simply putting their heads in the sand2355to avoid regulation? What are your thoughts on that?2356    Ms. Smith. I agree with Mr. Seira. It is difficult because2357of the differences between traditional assets and digital2358assets. That is why regulatory clarity is needed.2359    Mr. Moore. The proposals that I am hoping you all will2360submit to us as well would detail--would maybe offer some new2361language that we would be able to work with the administration2362on. Thank you for that.2363    With that, Mr. Chairman, I yield.2364    Chairman Steil. The gentleman yields back.2365    The gentleman from Florida, Mr. Donalds, is recognized for23665 minutes.2367    Mr. Donalds. Thank you, Mr. Chairman. I want to thank all2368the witnesses for being here.2369    Mr. Seira, in your testimony, you explain that certain2370types of crypto assets, such as the native tokens of2371decentralized networks, differ from securities in fundamental2372ways. Can you explain what a native token--what a native token2373of a decentralized network is, and describe why it is2374fundamentally different than a security?2375    Mr. Seira. Yes. Thank you for the question.2376    The taxonomy of digital assets is still being worked out,2377but I think the easiest way to understand it is to first2378understand what I mean by decentralized networks.2379    As people, we all like to organize in groups, and most of2380those groups are hierarchical and centralized. Decentralized2381networks are just another way to organize as a group, but2382instead of being centralized and hierarchical, they are spread2383out.2384    Tokens are basically a tool that enables participants in2385these networks to have economic incentives, and therefore it2386either incentivizes or can penalize certain types of2387activities. The key concept here is that these tokens in2388decentralized networks are not deriving their value from any2389specific centralized issuer. They do not even derive their2390existence from a centralized issuer.2391    For example, Satoshi, the pseudonymous founder of bitcoin,2392disappeared and bitcoin has continued to exist and thrive. That2393could not happen in the context of a security, right. If a2394company goes bankrupt, you cannot think of a share of stock2395persisting after that. So they are fundamentally different.2396    Mr. Donalds. Let me ask you this question. Are all digital2397assets native tokens--are all digital assets native tokens of2398decentralized networks, and what functions and roles do these2399other types of digital assets serve?2400    Mr. Seira. No. I think digital assets encompass a wide2401range of uses. Hester Peirce, for example, Commissioner Peirce,2402put forth her taxonomy, and there have been other taxonomies. I2403think meme coins are different. I think NFTs are different. I2404think you can also have things like tokenized securities, just2405a share of stock on blockchain rails, which should not be2406treated any differently than if it was on a piece of paper.2407    Mr. Donalds. Mr. Werrett, can you describe blockchain uses2408and applications outside of the crypto ecosystem, such as the2409tokenizing of real-world assets?2410    Mr. Werrett. Yes. Thank you for your question. I can speak2411about real-world assets. Was that your question?2412    Mr. Donalds. Yes.2413    Mr. Werrett. Yes. Yes, sure. So real-world assets are2414difficult to sometimes transfer or to lend against or to trade,2415and so the tokenization of real-world assets allows--for2416example, a piece of real estate can be fractionalized, let us2417say, into 10 different fractions, and then those 10 owners of2418that one piece of real estate then can have a reflection of2419that asset memorialized on the blockchain, and then that title2420can be transferred from owner to owner or it can be lent from2421one owner to another. That is one example of the tokenization2422of a real-world asset.2423    Mr. Donalds. To simplify it, I would say, for people who2424watch this hearing, is it safe to say that tokenizing real-2425world assets is essentially a more efficient form of a limited2426partnership where you might have a general partner but then you2427have a suite of limited partners who have a piece of that2428investment?2429    Mr. Werrett. Yes.2430    Mr. Donalds. Is that a fair----2431    Mr. Werrett. Yes, that is--exactly, that is another example2432of a way to tokenize an investment in a fund, for example. Your2433ownership in that fund could be reflected by a token on the2434blockchain, and then you could lend against it, or you could2435transfer it via the blockchain.2436    Mr. Donalds. Ms. Smith, how will the current accredited2437investor rule impede retail investing in tokenized securities?2438    Ms. Smith. I am going to unpack the question a little bit.2439    Mr. Donalds. Of course.2440    Ms. Smith. Retail investors are not accredited investors,2441so they cannot participate in any offerings that are restricted2442or private placements. Separately, tokenized securities, that2443market is still developing--so if we are talking about2444tokenizing public shares, then presumably those would be2445available to retail investors.2446    Mr. Donalds. What if we were in a position to tokenize2447restricted offerings?2448    Ms. Smith. If you tokenize restricted offerings, assuming2449that the token behaved like the actual underlying stock, it2450would be restricted to retail investors as well.2451    Mr. Donalds. What is the limiting principle would that2452create, if you have a more efficient way to fund restricted2453offerings but retail investors are limited because of the2454accredited investor rule?2455    Ms. Smith. The restriction would be the accredited investor2456rule, right. You would make the offering more efficient, but2457because the rule which goes to the offering, because it is a2458securities transaction, retail investors would still not be2459able to participate.2460    Mr. Donalds. All right. Chairman, I know I am over time.2461This is one of the reasons why I think the time has now since2462come to get rid of the accredited investor rule or make some2463modifications to expand the ability for investors at the retail2464level to be engaged in all forms of finance.2465    With that, I yield back.2466    Chairman Steil. The gentleman yields back.2467    The gentleman from Nebraska, Mr. Flood, who is also the2468Chair of the Subcommittee on Housing and Insurance, is2469recognized for 5 minutes.2470    Mr. Flood. Thank you, Mr. Chairman.2471    One of the reasons digital asset market structure2472legislation is so important is that it is not just important to2473digital assets--is that it is not just important to digital2474assets used for speculative purposes. There is a whole group of2475blockchain applications, many of which are not primarily for2476financial or capital raising uses.2477    Under former SEC Chairman Gensler, the rigid interpretation2478of securities law, with no allowance for reexamination or2479serious thought put into this technology, it was stifling2480creation and innovation with blockchain technology. Thankfully,2481with President Trump's victory, those days are over. We now2482have an administration that is going to work to regulate2483blockchain and digital assets, not seeking to destroy them.2484    We also have a place to start with legislation for this2485Congress. Chairman McHenry and then-Subcommittee Chairman Hill2486set a great foundation with FIT 21. Now we need to work with2487the new regulators and the new administration to put together2488legislation that can be passed into law.2489    Ms. Smith, in your testimony, you touched on some of the2490challenges applying traditional custody standards for2491securities to digital assets. Can you highlight ways in which2492traditional custody is at odds with digital assets and identify2493certain aspects of custody regulation that can and should apply2494to this space?2495    Ms. Smith. Thank you for the question.2496    Traditional custody rules are premised on there being a2497physical asset. There needs to be physical stock certificates.2498That is no longer the case, but the rules were drafted when2499that was the case, and so there is some tension with native2500digital assets and physical assets, which do not exist for2501digital assets.2502    With respect to the framework for custody, what is key to2503any framework is the separation between customer assets and2504proprietary assets. Customer assets should be segregated so2505that, if the firm goes bankrupt, they can be easily2506identifiable and given back to the customers.2507    Mr. Flood. Next, I would like to highlight some of the2508nonfinancial uses for blockchain technology that are really2509exciting.2510    Mr. Werrett, I recently read Chris Dixon's book, ``Read2511Write Own,'' with great interest last year. Can you describe2512what a potential Web 3.0 future would look like, particularly2513taking into account how it might affect social media and media2514more broadly?2515    Mr. Werrett. Yes. Thank you for your question.2516    Now, in our current infrastructure with Web 2 the internet2517evolved essentially from central companies providing2518information, then it evolved to a state where like YouTube and2519Wikipedia and different platforms, social media platforms gave2520folks the ability to contribute their own information. The2521problem is all of that information contributed in a2522decentralized way was funneled through centralized actors, who2523then tapped into privacy and used that information for their2524own gain. Also, this is not--this is similar to how banks use2525our money. Banks also, like central intermediaries, use our2526money to lend against or whatever.2527    Anyway, the nice thing about Web 3 is it unlocks that need2528for an intermediary. Folks can lend to one person and to the2529other through their noncustodial wallets that they have full2530control over. You control and own your own assets. They are not2531held by an intermediary. Just like on YouTube and Web 2, this--2532and Web 3, but in Web 2, your videos are held by YouTube. The2533blockchain allows you to host your own videos, host your own2534information, host your own--essentially, everything on the2535blockchain and the title to that property is held there and2536controlled by your wallet.2537    Mr. Flood. Following up, this is more of just, help me2538understand, what are decentralized physical infrastructure2539networks, and what role could they play in the future?2540    Mr. Werrett. Yes. Decentralized networks, for example,2541are--you think about the internet as a lot of different servers2542that are decentralized, and they work together to--they are not2543owned by one company, but all of these different servers2544communicate with each other. Computers communicate with each2545other, and that is how blockchains work and the various2546distributed validators.2547    A single blockchain can have hundreds of validators in it,2548and those validators work together in a decentralized way2549across the globe to validate transactions. Once they are kind2550of burned onto that blockchain, block by block, they build a2551ledger together in a unified way, though they are decentralized2552in their validating work. That is a decentralized network.2553    Mr. Flood. Thank you so much. I have no more time left. I2554yield back.2555    Chairman Steil. The gentleman yields back.2556    With no further members in the queue, I would like to thank2557our witnesses for their testimony today.2558    Without objection, all members will have 5 legislative days2559to submit additional written questions for the witnesses to the2560chair. The questions will be forwarded to the witnesses for2561their response. Witnesses will, please, respond no later than2562May 14.25632564    [The information referred to can be found in the appendix.]25652566    The hearing is adjourned.25672568    [Whereupon, at 12:09 p.m., the subcommittee was adjourned.]25692570                                APPENDIX25712572                              ----------25732574                   MATERIALS SUBMITTED FOR THE RECORD2575[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]25762577                                 [all]