▶ 0:15:50Sen. Lummis: I would like to call this meeting of the subcommittee to order. I will speak on the agenda, the ranking member and two members of the subcommittee. This has been a long time coming, so I'm delighted to get started.
▶ 0:16:13Sen. Lummis: I will make an opening statement, and I will invite the ranking member to make an opening statement, and then we will introduce our witnesses. The hearing now being in order, thank you, everyone, for being here, on the inaugural subcommittee on digital assets hearing.
▶ 0:16:34Sen. Lummis: I'm really grateful to senator scott for creating this subcommittee, and as I said, I look forward to working with you, to pass bipartisan legislation on bitcoin, stable coin, and digital assets. We want to promote responsible innovation and protect consumers. We sure have come a long way since I first arrived in the senate.
▶ 0:17:03Sen. Lummis: Many members of the senate were still trying to wrap our heads around what is a bitcoin, what is a digital asset, what is a stable coin, so now we've arrived at the point where we can move forward. We are on the precipice of finally creating a bipartisan frame work for both stable coins and market structure.
▶ 0:17:28Sen. Lummis: I hope we can get both pieces of legislation through this year, including the lummis-jell-o brand financial act, -- lu mmis-gillibrand financial act, but we will start with a stable point, and on stable coin, I'm optimistic the senate banking committee will mark up senator hagerty's legislation.
▶ 0:17:58Sen. Lummis: It is called the genius act. Chairman scott and senator gillibrand and I are all cosponsors. The act means the dollar for the digital age creates additional demand for U.S. state -- U.S. debt p.m. Also pleased that the legislation creates parity between federal stable coin charters.
▶ 0:18:27Sen. Lummis: Turning to market structure, I'm excited to work with chairman scott, our subcommittee members, chairman boozman, chairman french hill over in the house, chairman thompson, to draw the line between security on a non-investment contract commodity and to create a path for digital assets exchanges to register with the commodity
▶ 0:18:58Sen. Lummis: Trading commission. This industry needs clear rules for the road that I can follow while simultaneously promoting both responsible innovation and protecting consumers. So with each of our witnesses today are committed to these goals, and I'm really grateful to be here and share your expertise on these topics. First we have lewis cohen, partner at cahill gordon & reindel.
▶ 0:19:29Sen. Lummis: Mr. cohen is an expert with differentiating between insecurity and a commodity. Can't wait to hear about you -- from you about that. We've been wrestling with that for months. Next is jonathan jachym, global head of policy and government relations at kraken. Thank you for being here and sharing your expertise.
▶ 0:19:59Sen. Lummis: Third, john amos ra, chief legal officer at lightspark. Ms. massari is one of the original thought leaders on stable coin policy and understand how stable coins operate. Finally, we are honored to have tim massad as a witness. He was chair of the commodity futures trading commission from 2014 to 2017 and is a research fellow at the harvard kennedy school of government.
▶ 0:20:23Sen. Lummis: I'm personally thankful to each of you for working with me and my staff over the years and providing great feedback on legislation and providing it over and over as we try to move this subject forward. We are thrilled to have your today, and I'm looking forward to having an in-depth conversation about the intricacies of stablecoin market structure policy. Ranking member gallego, you are recognized.
▶ 0:20:52Sen. Gallego: Good afternoon. Thank you for holding the steering and starting of our work on the committee with a bipartisan focus. I look forward to our continued work together on this issue. Thank you also to our witnesses for an issue of growing importance, how congress can deliver bipartisan legislative solutions to promote U.S. competitiveness while protecting consumers in ensuring the integrity of our financial system.
▶ 0:21:19Sen. Gallego: The rapid development of digital assets, blood changed technology -- block chain technology, and the crypto economy presents opportunities and significant challenges. These innovations can enhance financial inclusion, streamline transactions, and spur economic growth. At the same time, they raise concerns about consumer protection, financial stability, and the proper role of government within these emerging technologies.
▶ 0:21:46Sen. Gallego: We in congress have to strike the right balance, which we sometimes do, fostering safe and responsible innovation and reduce fraud and systematic risk. This is not about us picking winners or losers for industry, it's about creating a stable and predictable regulatory environment that allows legitimate enterprises to thrive and grow while protecting the interests of the american people and consumers.
▶ 0:22:17Sen. Gallego: First, let's talk about responsible and safe innovation. Digital assets are a fast evolving sector. Innovation should be encouraged, and it must be safe, transparent, and accountable. Without robust oversight, that actors can exploit loopholes, undermine trust in the system and causing harm to his consumers and investors.
▶ 0:22:42Sen. Gallego: We must ensure that digital assets obey existing laws on money laundering, tax evasion, and it was a finance is good at the same time, we must be ensure that we are encouraging innovation that is productive and useful to everyday americans. The growth of things like meme coins on everything from trump to doge to peanut these coral are not about helping communities gain access to the financial system.
▶ 0:23:11Sen. Gallego: I hope to hear from our witnesses on how we can incentivize good behavior and mitigate risks while still relying on digital assets -- still allowing digital assets and the economy to develop it we need to have clear rules of the road. Today, regulatory framework is insufficient, in my opinion.
▶ 0:23:32Sen. Gallego: The framework should provide clarity and consistency well into the future to allow operators to operate with companies in a short regulators adjust this effectively. We must ensure the rise of digital assets does not come at the expense of safety and the soundness of our traditional banking system. Stablecoins and other digital assets which link to the broader sector could pose risks.
▶ 0:23:58Sen. Gallego: We must ensure the use of digital assets does not lead to risks, to depositors or the government backs up or the banking system. Finally, consumer protection must be made at the heart of our effort. I became interested in crypto because I heard from many of my constituents, especially from young black and latino men that are excited about what the technologies can offer to them in terms of access and investment opportunities that largely they've been shut out of.
▶ 0:24:24Sen. Gallego: What they don't want, though, is to be the victim of a fraud or dangerous loss. Digital assets can and should be a place for bipartisan collaboration. Both parties showed interest in fostering innovation, protecting consumers, and maintain the strength of our financial system. By working together, we can craft legislation that can submit america's leadership in the new digital economy.
▶ 0:24:54Sen. Gallego: Thank you and thank the chair peters look forward to working together and hear from our witnesses.
▶ 0:24:58Chair Lummis: Thank you, Mr. gallego. We will hear from our witnesses, starting with lewis cohen. We look forward to sharing your expertise in why there are gaps in existing security fraud.
▶ 0:25:17Chair Lummis: I would love to hear your views on how congress should appropriately draw the line between securities, commodities, and anything else you would care to share with us, Mr. cohen, the floor is yours.
▶ 0:25:31Mr. Cohen: Thank you. The network? Yeah. Sorry. Thank you, chair lummis, ranking member of the lego, and members of the subcommittee. -- ranking member gallego, and members of the subcommittee. I'm a partner at the law firm cahill gordon & reindel.
▶ 0:25:59Mr. Cohen: As a practitioner, I have over 20 years of experience working both traditional finance and the blockchain sector. This experience has allowed me to witness firsthand both the promise as well as regulatory challenges of this technology. Today, I offer testimony in terms of the legislative framework involving the use of digital assets.
▶ 0:26:24Mr. Cohen: For the last several years, innovation and the digital assets sector has raised ahead of a legal and policy framework defined decades ago for traditional finance, resulting in divergent regulatory purchases, inconsistent agency pronouncements, and a fragmented legal landscape, throttling american competitiveness. Perhaps most critically, this uncertain regulatory environment has left consumers and users of digital assets at risk.
▶ 0:26:53Mr. Cohen: A clear, tactical, and flexible federal and statutory regime is urgently needed to address activity involving digital assets in both the primary and secondary market. The U.S. securities laws, formed in the wake of the great depression come rely on the bedrock concept that every security has an identifiable issue, such as a corporation that can be held accountable while ongoing disclosures to investors.
▶ 0:27:26Mr. Cohen: Almost none widely traded in the U.S. today create a legal relationship with a business entity that may be considered the assets official. Unlike security, which ceased to exist if the securities issuer has been dissolved, digital assets, once created, continue to exist and circulate in perpetuity on global, decentralized networks.
▶ 0:27:49Mr. Cohen: However, without an issuer that can be required to register and disclose information, current laws struggles to address secondary trading of these assets. This creates unnecessary confusion as to the line between securities transaction, which are the appropriate subject of oversight, and more conventional commodity-like activity.
▶ 0:28:12Mr. Cohen: Nevertheless, our securities law was designed to this address -- to the address with the supreme court has call novel, uncommon, or irregular devices. Recognizing that fundraising schemes to purchase an item, expecting profit of the effort of the promoter, our securities transactions. Even where the items sold is not itself a security.
▶ 0:28:39Mr. Cohen: Over the years, these contract transactions have involved all sorts of items, purchased not for use but rather for the resale at a hoped-for game. These ancillary assets have included even postage equipment. That included my 2022 paper.
▶ 0:29:07Mr. Cohen: Many digital assets have similarly been sold as ancillary assets to raise capital to develop a blockchain based project. With an understanding of the distinction between fundraising activity that results in a securities transaction and a nonsecurity, ancillary assets sold in that transaction, the basis of a sensible regulatory framework is enhanced.
▶ 0:29:35Mr. Cohen: Fundraising transactions involving digital assets that need to be registered with the sec, exempt from this. However, a change in law these to be changed to require sellers of ancillary assets to provide ongoing disclosures.
▶ 0:29:55Mr. Cohen: These disclosures with the subject of oversight and securities law antifraud rules, once the related ancillary asset could be initially sold and become widely traded. These disclosures have ceased, and the entrepreneurial efforts of the fundraising community are no longer essential to maintain the value of the digital asset.
▶ 0:30:21Mr. Cohen: This framework, set out in the lummis-jell-o lummis-jell- -- lummis-gillibrand act, would implement a clear dividing line would end the is or isn't it debate when digital assets themselves are concert -- are secure.
▶ 0:30:50Mr. Cohen: Thank you again for the opportunity to share these perspectives, and I look forward to your questions.
▶ 0:30:55Chair Lummis: Thank you, Mr. cohen. Next, jonathan jachym, deputy general counsel and global head of for kraken digital asset exchange. We look forward to hearing for you on how the lack of legal clarity has impacted businesses, digital asset trading practices, and how digital assets should be regulated. The floor is yours.
▶ 0:31:22Mr. Jachym: Chairman lummis, reg a member of the lego, distinguished members of the subcommittee, thank you for the -- ranking member gallego, distinguished members of the subcommittee, thank you for allowing me to testify today. I am the global head of policy and government relations at kraken. Kraken was started in san francisco and has grown into one of the world's largest and most trusted generosity exchanges.
▶ 0:31:52Mr. Jachym: Today, we serve over 15 million customers around the globe. We have over $40 billion in assets on our platform. We've executed over $600 billion and -- in transactions last year. Kraken plays a diverse role across three main areas of the market. First, we operate as a centralized exchange for the market along with other intermediary services.
▶ 0:32:21Mr. Jachym: We support development into digital assets. This includes the world's leading benchmark providers and financials, which includes institutional custody on an innovative and robust wire removal framework. Finally, our google wallet and blockchain inge serves as our platform for innovators.
▶ 0:32:46Mr. Jachym: I would like to commend and thank chairman scott for establishing this important subcommittee and chairwoman lummis for her discussion on bipartisan policy. The first draft of comprehensive market legislation were introduced in the senate over three years ago. A lot has happened since then.
▶ 0:33:12Mr. Jachym: We've seen fraud, poor management, and business failures. We've experienced misguided attempts to regulate our market through enforcement action rather than sound policy development. This has pushed innovation, investment, and market activity offshore. But through these challenges, we also saw bipartisan work in congress continue. Last june, the house passed the market structure bill with strong bipartisan support.
▶ 0:33:43Mr. Jachym: Ranking member gallego, we thank you and your former colleagues for presenting that historic effort. This collaboration across parties and across chambers has built a strong foundation to finalize and deliver market structure legislation to the president's desk. Bipartisan support for this crypto policy is no longer a distant goal in the horizon.
▶ 0:34:07Mr. Jachym: Congress should act decisively this year to establish the essential foundation for market regulation. Today, nearly 90% of activity for digital asset markets for intermediaries like kraken. It is the critical foundation to set a level playing field in areas of consumer protection, security, market integrity.
▶ 0:34:35Mr. Jachym: Many other markets have already taken this important first step. Innovation in our industry evolves rapidly. Emerging areas in our market will require further study, input, deliberation, before arriving at policy conclusions. Solving every single policy issue should not delay, a basic regulatory foundation for centralized market here in the united states. This critical first step must have been here in congress.
▶ 0:35:08Mr. Jachym: Effective market regulation should include spot market authority to register and oversee centralized secondary market transactions, effective disclosure rules, and clear jurisdictional cooperation between the sec and ftc. Jurisdictional lines and statutes should be clear, effective, and durable.
▶ 0:35:31Mr. Jachym: We commend this administration for bracing innovation in establishing this working group on digital assets, and we also committed the leadership at the sec and ftc for quickly moving forward and we support this important work on the new journey ahead. The crypto industry is diverse and includes developers, centralized protocols, institutional and retail customers, and many others.
▶ 0:36:03Mr. Jachym: Each playing a very important role in expanding this area of innovation appeared our industry will continue to work hard for consensus and support a bipartisan package of a market structure bill this year. Thank you again for the opportunity to testify. I look forward to your questions and our discussion.
▶ 0:36:22Chair Lummis: Thank you, Mr. jachym. Now, jai massari, chief legal officer of lightspark, I'm so delighted you are here. You are so knowledgeable on market structure, which we started in this committee.
▶ 0:36:44Chair Lummis: I want to skip questions about the use case, people who don't work with them on a regular basis, and I know it makes stablecoins valuable to the economy, the manner in which stablecoins operates, and all of the legislative approaches to stablecoin legislation, so we are very much looking forward to your testimony. Thank you very much for being here. The floor is yours.
▶ 0:37:10Ms. Massari: Thank you, chairwoman, for that very kind introduction. Thank you, ranking member gallego, and members of the subcommittee. I'm really happy to be here speaking on this topic today. On co-founder and chief legal officer of lightspark.
▶ 0:37:31Ms. Massari: Before lightspark, I advised a wide range of stablecoin issuers and crypto firms. If iwe need strong, bipartisan support to regulate stablecoins. They will provide clarity, protect american consumers and markets, and help bring the united states back to the cutting edge of innovation.
▶ 0:38:00Ms. Massari: These new laws must be based on a strong, fundamentals that reflect the best views of the benefits and risks of stablecoins in the crypto market as they should exist, not only based on the industry as it exists today. Today, we can email, text, or call each other instantly. No matter what brand of phone, the computer we are using.
▶ 0:38:27Ms. Massari: Payments can and should work the same way. Stablecoins can help make this a reality. They enable a 24/7 bank transfer and dollar value to anyone online. They are uniquely suited for online, when they are properly regulated. My comments today will put this on three fundamental aspects of stablecoins, with recommendations.
▶ 0:38:53Ms. Massari: Some of these points are already well addressed and are being considered by the subcommittee and should be kept at the forefront as the bill moves through congress. The first fundamental is that the true innovation of stablecoins is digital cash. Always on noncredit money.
▶ 0:39:18Ms. Massari: Lake bank appointed -- like bank deposits, the money is not fcic insurance and credit worthiness of the issuer. Someone using a stablecoin to pay or accepting a stablecoin for payment should not care which stablecoins are being used. This is not true today. The markets distinguish between them.
▶ 0:39:45Ms. Massari: Stablecoins are digital cash, and they are achieved through the following mechanisms. Stablecoins must be backed 1:1 with high-quality liquid assets, carefully calibrated capital buffers, and liquidity requirements. Issuers must be available, for example, for dollars, and a resolution of bankruptcy, reserve assets could be segregated and beneficially owned by a stablecoin holders.
▶ 0:40:16Ms. Massari: These assets should be paid out in an orderly manner. The second fundamental is that stablecoin issuers should compete based on innovative. This requires getting it done right can reserve requirements that are too permissive would be disincentive to stablecoin to compete and innovate.
▶ 0:40:47Ms. Massari: Over time, overly conservative reserve requirements make a stablecoin assurance attractive only to the whitest market participants or those who can subsidize stablecoin issuance with others. In addition to striking the right balance, stablecoin legislation should promote diverse competitiveness, and should allow for issuers of different types, banks and affiliates as well as nonbanks, with different kinds of business
▶ 0:41:18Ms. Massari: Models, to establish minimum operational and compliance requirements for all. In further conflict of interest or other concerns about affiliates, affiliate transactions, and should impose, and enhance standards to all issuers for access to federal reserve payment systems.
▶ 0:41:42Ms. Massari: This approach will create a more competitive multi-issuer world and incentivize issuers to compete for utility rather than on the reserve side. Third, we should use stablecoin legislation to deliver a level of approach to financial compliance and privacy.
▶ 0:42:01Ms. Massari: The industry has new compliance today, including chain analytics and technologies to freeze and block stablecoin transactions, to meet requirements for a long supply of stablecoin issuers and those providing money transmission services using stablecoins.
▶ 0:42:21Ms. Massari: Similarly, the industry developing these tools to address privacy considerations raised by transactions, which can reveal sensitive information that consumer and business payments. This is critical to advance new and better technologies, better, more efficient, more informative, the more costly financial crimes and privacy concerns.
▶ 0:42:47Ms. Massari: While these technologies were designed to benefit stablecoin use, they can also be leveraged more broadly, and crypto and traditional financial services. Stablecoin legislation has a strong and clear standards and should also provide the time, flexibility, and incentives to develop new and better ways to address these.
▶ 0:43:11Ms. Massari: Thank you again to the subcommittee, chair lummis, ranking member gallego, and the hard-working staff who are dedicated to giving stablecoin a crypto markets their time. I would be happy to answer any questions.
▶ 0:43:23Chair Lummis: Thank you, Ms. massari. Our last witness is tim massad,, research fellow at harvard kennedy school, and very helpfully to this discussion, former chair of the commodity futures trading commission under president obama.
▶ 0:43:44Chair Lummis: We are very much looking forward to your view on potential approaches for stablecoin and market structures legislation, and your efforts on crypto protection, we'd love to hear your thoughts on the lummis-gillibrand payment stablecoin act.
▶ 0:44:05Mr. Massad: Thank you very much. Subcommittee chairwoman lummis, subcommittee ranking member gallego, members of the subcommittee staff, I'm honored to be here. These views are my own and do not represent the views of any entity.
▶ 0:44:21Mr. Massad: It was in 2015 that the -- 2014 that the cftc under my leadership declared bitcoin a commodity, and ever since then, for over 10 years now, I've been writing about the need to strengthen regulation in this area and bring clarity. Everyone wants clarity. We can all agree on that.
▶ 0:44:38Mr. Massad: But you can have clarity with bad rules peer we need to create a framework that encourages responsible development of this technology, as the ranking member said, and not one that just leads to more speculative activity and abuses that we see in far too much of today.
▶ 0:44:58Mr. Massad: I'm happy to focus on stablecoins, the most useful applications of this technology today, and I plugged the subcommittee for prioritizing it -- I applaud the subcommittee for prioritizing it. . It has many things I support, tokens, conservative, and limit on the financial actions, but there are many areas where it is insufficient.
▶ 0:45:22Mr. Massad: It is substantially weaker in many respects than the mckinley waters proposal that was negotiable between house republican and democratic members last fall, and it is substantially weaker than what europe and other jurisdictions have put into place. First, the basic credential requirements need to be strengthened, which includes how to reserve what is invested and whether regulators have sufficient authority to establish rules regarding capital liquidity and others.
▶ 0:45:55Mr. Massad: In addition, the state authority for situations whether a substantially similar state framework and an issuer below 10 million in market cap. That is a good concept, but I would lower the threshold and require states to still follow the minimum federal standards.
▶ 0:46:17Mr. Massad: Second, the legislation does not address the bankruptcy of the stablecoin issued, which means the standard bankruptcy process would likely apply, which would likely take a long time. The fact that the proposal gets over a priority claim is good but does not assure them a full recovery, even at the end of that process. Ideally, the legislation should create a debt -- designated resolution processes that returns money to holders quickly and itemizes collateral damage.
▶ 0:46:47Mr. Massad: Third, the jenny fact does not do enough to reduce the crimes and sanctions. It's good that it is subject to the bank secrecy act, or bsa come up with the bsa focuses on intermediaries.
▶ 0:47:05Mr. Massad: Stablecoins can be transferred without going through a centralized intermediary, whether on a cell posted wallet or on an automated commit a centralized platform, and they could be transferred to centralized platforms in jurisdictions that don't require with the rules. We need to extend the regulatory perimeter and be more creative in tackling the challenges as I discussed in my testimony. Fourth, it does not have strong enough enforcement.
▶ 0:47:40Mr. Massad: The legislation should have a clear enforcement mechanism, strong, criminal, and civil penalties, and an explicit extra territoriality provision. Fifth, the proposal does not address questions of composition and power, including limits on affiliate relationships and take not -- and transactions, and how to ensure a level playing field, including on giving them access to the central bank infrastructure.
▶ 0:48:09Mr. Massad: I urge the subcommittee and congress to get stablecoin legislation in place first and defer for now market legislation for several years. For four years, the crypto industry has called on the ftc and the cftc to develop rules and guidance and stop legislating by enforcement. That is now happening.
▶ 0:48:30Mr. Massad: The ftc has lost a crypto task force to tackle these issues peer we should let them make progress. Many of the market structure proposals made to date, and my mind create more confusion than clarity regarding when a digital as it is a security, commodity, or neither, and they have the potential to undermine our securities law, particularly true of proposals that focus on
▶ 0:49:01Mr. Massad: Decentralization. That term is used to describe a lot of things that are not decentralized. There are almost always some areas of control. As I distrust in my testimony, there are other ways for congress to pass as I discuss in my testimony, there are other ways for congress to pass rules without rewriting security laws at this time.
▶ 0:49:29Mr. Massad: With respect to the subcommittee chair, I joined the many voices expressing opposition to a bitcoin strategic reserve. Thank you, and I'm happy to take your questions.
▶ 0:49:41Chair Lummis: Thank you to our panel. We will begin with questions of the chair recognizes herself for five minutes. Mr. cohen, I'm going to begin with you. From a legal perspective, why are most additional assets not properly classified as securities today?
▶ 0:50:02Mr. Cohen: Thank you, chair. This is a really important question, and it has flummoxed many in the space, lawyers, judges, and regulators alike. What characterizes the security is the legal relationship between an issuer and the investor, so when you think about, for example, a shared stock, there is a legal relationship, not necessarily a contractual relationship, but a legal relationship that identifies who the issuer is good a security is not the piece of paper it is printed on, the
▶ 0:50:34Mr. Cohen: Digital asset, or any other representation, it is a relationship that the law of whether that is debt or equity. The vast majority of digital assets that are traded right now simply do not give in that relationship with any other person. The reason this has become so important for me securities perspective is that there's no one who can actually take permanent responsibility for that asset.
▶ 0:50:59Mr. Cohen: This is why it is been so challenging when we think of, for example, the ether token, there is in either foundation, but if it wound itself up, the token would continue to exist. This is like any other asset.
▶ 0:51:14Chair Lummis: So to constitute a security, has the how we test historically required some kind of written or legal relationship after failing an asset?
▶ 0:51:25Mr. Cohen: Senator, the howey test has historically been on something commercial in nature, I'm selling you something, what have you, and it turns out the actual activity going on that is recognized is really more of an investment.
▶ 0:51:49Mr. Cohen: I did not want those chinchillas, where I really wanted was to make a return based on your managerial, entrepreneurial efforts. Many digital assets are sold in the same way, however, in none of those cases, zero exactly, has any court stated that that kind of relationship makes some asset that is not itself a security but is an embodiment of a securities transaction peers of the law has not recognized or placed on nonsecurity assets
▶ 0:52:20Mr. Cohen: Some characteristic of being a security simply because they were sold in digital assets. In the paper I mentioned, we reviewed every appellate case on howey, from the howey case onward, and you can see that it reaches that conclusion.
▶ 0:52:46Chair Lummis: Thank you. Mr. jachym, setting up a framework for digital asset to register, how do we stand?
▶ 0:52:57Mr. Jachym: Thank you for the question. Behind but in a strong position to catch up quickly. We see progress, we see in other jurisdictions, major jurisdictions move forward with legislation, finalize rules, and, you know, we work with policymakers to put forth in place, which is why it is so critical, after many, many years of hard work and congress that
▶ 0:53:30Mr. Jachym: We move forward with this market structure bill.
▶ 0:53:36Chair Lummis: Thank you. Ms. massari, why do stablecoins make stablecoins -- make them faster?
▶ 0:53:48Ms. Massari: It is an important question about crypto. The way I think about stablecoins is they are a new, fast money. They had can be transacted online 24/7 with anyone who can access the crypto world. They can also be transacted only online.
▶ 0:54:13Ms. Massari: No complicated clearing mechanism needs to happen to make sure that transactions are settled behind the scenes, so bank deposits, other forms of electronic money. It is really a new form factor for money that can work as digital caste, -- additional cash, and it can be done 24/7.
▶ 0:54:36Chair Lummis: How does the act put in place factors for stablecoin?
▶ 0:54:49Ms. Massari: I think it goes a long way to put in elements that will make stablecoin good money. Probably the most important act, and that makes stablecoins good money, capital liquidity requirements with those assets, they are aspects that are really important, and then I think the
▶ 0:55:27Ms. Massari: G.e.n.I.U.S. act goes a long way to how they must be chartered and registered.
▶ 0:55:30Chair Lummis: Thank you, panel. I recognize Mr. gallego for five minutes.
▶ 0:55:38Sen. Gallego: Thank you, madam chair. One of the main reasons congress must act to ensure the U.S. remains competitive in this pace, especially internationally, particularly important we avoid regulatory arbitrage, present operates globally in jurisdictions with established digital asset regulation. What elements of the international framework should congress consider incorporating to ensure U.S. competitiveness?
▶ 0:56:13Mr. Jachym: Thank you for the question. There are two luminal components. One is regulation is centralized, this is the most fundamental basic step. I've been involved in market regulation most of my career. There are very common components.
▶ 0:56:33Mr. Jachym: There are a unique risks and opportunities for digital asset markets, but when you talk about registration, disclosures, rules around market integrity, rules around operational resilience, those are all fundamental components of market regulation. We've seen this jurisdictions put that in second place. The other component has been complicity.
▶ 0:57:01Mr. Jachym: Rather than attempt digital rulebook, this puts it in many markets, and that is fundamental to the discussion today, when we talk about the path forward here in the united states, the jurisdictional lines, the oversight needs to be simple in order to be durable and be on par with the rest of the world.
▶ 0:57:29Sen. Gallego: Ms. massari and Mr. massad after, what can we do to approach digital legislation?
▶ 0:57:39Ms. Massari: Thank you for the question. I think it is really informative to look at those who have gone before us. I mentioned in my comments we need to think about what the industry should look like, not only what it looks like today, but also some jurisdictions that have gone very quickly, whether it is legislation, stablecoins, markets, they have moved too soon and have been slightly backward looking.
▶ 0:58:08Ms. Massari: How you think about stablecoins, we think about those real opportunities and what makes them different, the importance of better monitoring payments. The aim that way is to be forward-looking, and I'm not sure that that has happened.
▶ 0:58:27Sen. Gallego: Mr. massoud.
▶ 0:58:29Mr. Massad: Thank you. I think there's also a lot we can learn. I think some of these jurisdictions that have gone ahead of us have put in some very good measures, europe I think has overall a much stronger customer protection framework than is in the g.e.n.I.U.S. act.
▶ 0:58:53Mr. Massad: The authorities have greater discretion to specify the necessary rule on a variety of requirements, stress testing, diversification requirements, and europe has said stablecoins don't pay interest, can't pay interest. This is something we should be thinking about.
▶ 0:59:10Sen. Gallego: Can or cannot?
▶ 0:59:12Mr. Massad: Cannot. That raises a lot of issues. You do not want to allow the payment of interest but at the same time exempt them from doing securities checks. In the market structure area, under the nikko framework, yes, they created this framework for crypto assets, but they made it very clear that the crypto asset does not include the definition, very similar to our securities
▶ 0:59:43Mr. Massad: Definition. They are facing the jurisdictional questions, they are just inherently hard, so I think maybe we can learn from where they are on that.
▶ 0:59:52Sen. Gallego: Some bills have also used bankruptcy process to resolve user claims, issuer sales. It can take years. Ms. massari, you actually talked a little about about this in your opening statements.
▶ 1:00:10Sen. Gallego: What mechanisms should we consider that if these stablecoin issuers fail, users can still get the money back quickly while others go through the bankruptcy process, so essentially for that person that is holding a lot of it, they don't have the bandwidth nor the reserves until the process finishes.
▶ 1:00:28Ms. Massari: This is a really important question. Thank you for asking it. I think Mr. massad also touched on it. This point is not only important out of a matter of fail Ms. dash of fairness for stablecoin users, if something goes wrong, a stablecoin issuer, but instead, fundamentals that can make the money good money --
▶ 1:00:56Sen. Gallego: You can build confidence.
▶ 1:00:58Ms. Massari: Exactly. Build confidence that, you know, is something that happens, they can get their money back, just like we do for bank revolutions by the fdic, the priority, to ensure that depositors can have access to the deposits as soon as possible. The concept is the same it is important. I think priorities of reserve assets for issuers is part of it and is an important part of this.
▶ 1:01:26Ms. Massari: The result of that could still be an extended process of bankruptcy. I think a stablecoin should provide clear rules under which stablecoin holders own assets, the bankruptcy resolution of the issuer, so it is not part of the bankruptcy estate, and they could be paid out very quickly. I think a mechanism like that will serve better in the value of the money as well.
▶ 1:01:59Sen. Gallego: Thank you.
▶ 1:02:02Chair Lummis: Thank you. The chair recognizes Mr. hagerty for five minutes.
▶ 1:02:09Sen. Hagerty: Thank you, senator lummis. I appreciate your leadership on this and for holding the hearing today. Welcome to all of our witnesses here. I'm just going to provide a broad set of statements here. Let me touch on my view in terms of the need for a body of legislative frameworks for digital assets. For me it is overwhelmingly clear, the lack of clear rules has stifled innovation and sent to off shore.
▶ 1:02:38Sen. Hagerty: It is also weaked consumer protectionsned -- weakened consumer protections that americans with expect. The solution, a bipartisan solution, is to provide what innovators and our financial markets crave. My colleagues and I have already taken concrete steps to developing policies that advance this mission.
▶ 1:03:08Sen. Hagerty: I'm proud to sponsor bills alongside senator lummis, jill and grant, and others, a common sense -- jill legrand -- g illibrand, and others, a common sense framework. They improve transaction efficiency, strengthen the dollar status, all while driving demands.
▶ 1:03:37Sen. Hagerty: I'm optimistic we will advance this legislation and demonstrate that a common sense framework is a bipartisan priority. This progress will build momentum and other crucial areas such as market structures for digital asset. The same is true of having no regulation, bad actors pushing innovation beyond our store. We need regulatory clarity of digital assets to both protect consumers and to be a leader.
▶ 1:04:07Sen. Hagerty: Thank you, madam chair.
▶ 1:04:09Chair Lummis: The chair recognizes Ms. smith.
▶ 1:04:16Sen. Smith: Thank you, madam chair, ranking, and thank you to all of our panelists for being here. I appreciate the opportunity to learn about and share your thoughts about what we need to do to provide a robust and reasonable regulatory framework, especially for stablecoin. I want to focus my questions on kind of better understanding how consumer protections should work for stablecoin and how they might work under the g.e.n.I.U.S. act in particular. Mr.
▶ 1:04:46Sen. Smith: Massad, let me ask you, under current law, financial institutions are subject to the bank secrecy act, so that these financial institutions are required to actively work to detect and prevent money laundering, terrorism financing, and other illicit uses of our financial system. So I want to understand how this would work under the g.e.n.I.U.S. act. As I understand it, the g.e.n.I.U.S. act would extend these obligations under the bank secrecy act to issuers of payment stablecoins, is that how you understand it?
▶ 1:05:14Mr. Massad: That is correct.
▶ 1:05:18Sen. Smith: Under this legislation, what would happen, one, if a payment stablecoin is issued on a public blockchain, what happens to those bank secrecy act obligations once the stablecoin is issue?
▶ 1:05:29Mr. Massad: Thank you for the question, senator. The challenge is that those stablecoins can be transferred without going through a centralized intermediary. Our entire bsa-cfp framework relies on centralized intermediaries.
▶ 1:05:53Mr. Massad: All transactions run through those intermediaries in some way, so we've impose obligations on those intermediaries, banks and others, to do the compliance checks that we want. Stablecoins are very different in that once they have been issued, they can be transferred, exchanged for other crypto assets, without going to a centralized intermediary.
▶ 1:06:19Mr. Massad: So we have to creatively rethink how we achieve these goals, and I think that includes extending the regulatory perimeter, if you will, but also looking at a lot of other creative measures requiring stablecoin issuers to aggressively monitor transactions, use stablecoins, looking at ways to design the smart code of a contract, so that a transaction does not go through unless someone has effectively been cleared by an
▶ 1:06:49Mr. Massad: Appropriate authority, and there are other measures as well that I talk about in testimony.
▶ 1:06:56Sen. Smith: So as a bill is written right now, a network participant comes along after, to facilitate transactions, they would not be required, as the bill is written right now, your understanding to meet the obligations of the bank secrecy act?
▶ 1:07:10Mr. Massad: Under how it is registered with treasury, it would not be.
▶ 1:07:18Sen. Smith: Ok. When bank regulators review applications for charters or for deposit insurance, they consider a bunch of factors, including the character of mismanagement. That seems reasonable to me. You want to make sure that if you are opening up a bank or safeguarding somebody's money, that management is up to the task, and that boards follow basic risk management and so forth.
▶ 1:07:41Sen. Smith: Is the stablecoin issued, perform a similar function, I would argue, consumers give their money, and in exchange, they get a stablecoin and the promise they can always come back and redeem that stablecoin for a fixed price. What the g.e.n.I.U.S. act or should the g.e.n.I.U.S. act, should our regulatory framework requires stablecoin issuers to be vetted for character and fitness as we do for other financial institutions?
▶ 1:08:05Mr. Massad: Excellent quester, senator -- question, senator. My reading of the g.e.n.I.U.S. act does not require that. I think it should require that. Part of the application review process that was contained in the mckinley waters proposal, negotiated, similar standards are in the european legislation and in other countries' legislation.
▶ 1:08:34Sen. Smith: Literally somebody like sam bankman-fried could issue a stablecoin and others would not have legal grounds to deny his application based on his history, that may be an extreme example.
▶ 1:08:45Mr. Massad: Correct.
▶ 1:08:48Sen. Smith: Let me go to one other thing in the short time I have left. There is a risk of, the need to protect from theft and fraud come if somebody falls victim to a hack or a scam, their assets could be gone for good, and there's no reversing that transaction. We see in this under digital assets. If a consumer's bank account is hacked or their debit card, for example, if stolen, people are protected, right? Their liability is limited.
▶ 1:09:13Mr. Massad: That is correct.
▶ 1:09:16Sen. Smith: What laws --
▶ 1:09:18Mr. Massad: That's the electronic funds transfer act, which does apply in those cases. Very murky with the stablecoins. It's not clear if others stablecoins would be treated as funds, whether the accounts would be funded. A proposal was put out a couple of weeks ago, but obviously that's not moving anywhere given the effective closing of the cfpb.
▶ 1:09:46Mr. Massad: Those are very challenging issues, particularly again because these are bare instruments that can travel on a decentralized blockchain. Certainly with respect to entities that are providing accounts, entities that are interacting, intermediaries who should have similar protections as we have under the efta of banks.
▶ 1:10:07Sen. Smith: It seems to me there's no specific, there's no mention anywhere of the electronic fund transfer act, the cfpb. It seems to be that would strengthen this bill. I'm just clarifying that. I thank you for your lenience, madam chair. I appreciate this hearing very much but I want to say I think establishing a robust framework for stablecoins is extremely important. And I look forward to the ongoing discussions to make sure that these consumer protections are addressed.
▶ 1:10:36Chair Lummis: Thank you very much. The chair recognizes Mr. tillis for five minutes.
▶ 1:10:42Sen. Tillis: Thank you, madam chair. Welcome, all of you. I have the belief that we do need a light regulatory regimen, it has to be goldilocks, just right, to reemerge. I think Mr.
▶ 1:11:00Sen. Tillis: Jachym, you actually said we are behind, to catch up and may be surpassed and we have to figure out the way markets and activities are properly regulated, but we also have to make sure we are not on a flight to foreign jurisdiction if we get those wrong. My one question to you, Mr.
▶ 1:11:21Sen. Tillis: Jachym, what country does that practice, if we would only implement a regulatory regimen like blank, we would be ahead of the pack? Is there an answer to that question?
▶ 1:11:33Mr. Jachym: Thank you for the question, senator. I think the U.S. can design, and we can look to other jurisdictions.
▶ 1:11:46Sen. Tillis: How do we develop a competitive advantage, jurisdictionally speaking? What drives best practices today?
▶ 1:11:56Mr. Jachym: I think if you look at the european union, for example, the united kingdom, and in other g20 markets, they have kept it simple. They have said a diverse group of asset classes, we looked at over 300, bitcoins, stablecoins, many others come and they have very diverse characteristics. If you start drawing complex lines and bifurcate markets, that becomes problematic. You can look at simplicity as an example.
▶ 1:12:26Sen. Tillis: Ms. massari?
▶ 1:12:28Ms. Massari: I think this is a great question. I think maybe I will focus a little bit on the stablecoins side. I think approvals, the eu might make some mistakes, proposals in the u.k. Might make mistakes, making requirements too restrictive. Very few are too permissive. My concern with overly restrictive is it makes it very difficult to come into the market.
▶ 1:12:58Sen. Tillis: Have you looked at any of the proposals here in congress?
▶ 1:13:02Ms. Massari: I have not. But I think if we get, to your point, the goldilocks position, just right, we can have better competitive market for stablecoin issuance. I think that is really needed. I don't think we have that today.
▶ 1:13:19Sen. Tillis: Mr. cohen, where do you think the biggest gaps are? What, if you were prioritizing tranches of regulation.
▶ 1:13:31Mr. Cohen: Thank you, senator. One point you asked about regarding other jurisdictions and the U.S. and what we can take away, it is important to bear in mind the U.S. is a bifurcated market regulatory structure, with the cftc and the ftc. Right off the back of the one of the things that needs to be done is a clear policy around how market participants can determine, and I engaged in a securities transaction or am I not?
▶ 1:14:01Mr. Cohen: That has caused immense consternation for everyone in the space, centralized exchanges, broker-dealers, issuers, and others. So as a priority matter, the lummis-gillibrand prevention act , is this by someone who is a legal issue or?
▶ 1:14:22Mr. Cohen: Where that is not the case of the transaction as assets are sold may attract security treatment, but secretary treaty between bob and alice are not security transactions. The markets can respond by creating an appropriate framework, those that appropriately required disclosures those that are more commodities like treated in a similar way as bitcoin and ether.
▶ 1:14:53Sen. Tillis: I got a classified briefing from dea looking at anybody that things organizations are carrying along suitcases of money. It is mainly on these various platforms, particularly crypto. You're right.
▶ 1:15:22Sen. Tillis: Architecturally -- is there any jurisdiction that has found the secret sauce, on the one hand make the participants responsible, on the other, identify patterns we use?
▶ 1:15:44Mr. Massad: Excellent question. I don't think any jurisdiction has found the secret sauce. Everyone is focused on this. I think it will be a combo. One is extending the current framework to intermediaries not complying. That's a problem. Second, looking at tech, thinking about ways we can reach the same goals.
▶ 1:16:13Mr. Massad: These ideas of programming smart contracts so transactions cannot go through unless someone is properly vetted, something I hear conversation about. You could put more obligations on the issuers than current proposals do. We've seen japan do that, other countries do that.
▶ 1:16:42Mr. Massad: They require more aggressive monitoring and freezing of stable coins.
▶ 1:16:46Sen. Tillis: If you happen to be a bank, it is not so easy. Look forward to continued discussion. >> senator warner? >> could you give me a minute more?
▶ 1:17:10Sen. Lummis: Mr. cohen, the sec tried to advance legal argument that digital assets underlie a contract so is this supported in case law and what would be the effect of using that argument as
▶ 1:17:41Sen. Lummis: A statutory requirement to a definition?
▶ 1:17:43Mr. Cohen: Important question. Sec has developed a nominal theory when they failed in other regards. Initially they characterized it as crypto asset securities and plainly said this in their complaints in court filings.
▶ 1:18:09Mr. Cohen: After that was rejected in court , they attempted a new theory. It may not be a physical security but it embodies a scheme. The problem is how do you know? Just because one says so? There is nothing about a digital asset that says a third party could make any determination, does it embodies something?
▶ 1:18:39Mr. Cohen: I could say this bottle embodies my plan but you cannot examine the bottle and reach that conclusion. Several courts have clearly rejected that theory. Some of this litigation has ceased and we can be thankful for that but if the legislation continued, the theory would have been rejected by federal courts.
▶ 1:19:04Sen. Lummis: Mr. gallego. Sen. cra
▶ 1:19:22Sen. Crgallego: Given that bankers -- shouldn't we apply the same standard when it comes to digital assets?
▶ 1:19:32Mr. Cohen: Yes, I would agree. Criminal/civil penalties should be in line with equal activity when done in other markets. Example, issuers convey civil and criminal penalties if they sell securities on the basis of misleading statements, if they are deliberate and intentional fraudulent activity, they can face penalties.
▶ 1:20:01Mr. Cohen: That should not be differentiated when what the securities transaction involves such digital assets but we should create new penalties.
▶ 1:20:18Mr. Massad: I would agree. We need to incorporate civil and criminal penalties and have clear enforcement mechanism. The genius act and the stable act do not have that. I think it sends a strong signal that we will not tolerate violations of the law.
▶ 1:20:46Sen. Lummis: Your recognized.
▶ 1:20:52Sen. Warner: I come to this from the intel committee. We have to make sure we get national security right.
▶ 1:21:07Sen. Warner: At the end of the day we have to maintain the resilience of the treasury market which is the backbone -- as we think about aml, I know a number of the stable coin operators, issuers are doing ky c.
▶ 1:21:40Sen. Warner: I am trying to understand, even if they do kyc, from the time as issuer to convert back to fiat currency, in that transition, there is potential challenges. I think you have addressed that. Could you all address that? Kind of enhanced monitoring up watching during that transition?
▶ 1:22:08Mr. Massad: A stable coin issuer issues stable coin, in some cases licenses a third party. It can do kyc but one stable coin has been issued, it can be transferred.
▶ 1:22:22Sen. Warner: Many times, so there is no requirement to follow that customer?
▶ 1:22:28Mr. Massad: Correct. I can transfer from a self posted wallop to another self posted wallet and that is why we have seen these things be used to evade sanctions and for money laundering by russian smugglers, hamas and others.
▶ 1:22:48Sen. Warner: I want to get to a framework that works but I have seen echoing what others have said from the classified said, my gosh, a bunch of bad stuff. I recognize some people, the anonymity block chain plays but how do we put minimum protections from issuer to conversion to fiat?
▶ 1:23:27Ms. Massari: The use of stable coins as a true means of commitment is dependent on our ability to get it right when it comes to combating finance and enforcing sanctions. Everyone must agree with that. When a stable coin issuer sells stable coins into the market, they are kycing everybody.
▶ 1:23:58Ms. Massari: You are right, when transactions happen between self custody wallet, there is kyc obligations on those but there is immutable on chain record of those transactions that can be monitored, not only by the issuer but third parties including law enforcement and that happens.
▶ 1:24:20Sen. Warner: Isn't there that process where following it through that path, you may have the block chain to follow the entity but you may not know who that entity is without kyc?
▶ 1:24:36Ms. Massari: Absolutely. People can use different tack to on purpose obvious gate there transactions. It is important. I agree we need to continue, as industry has done, to develop new tools to address these issues.
▶ 1:25:00Ms. Massari: One other piece, when kyc happens, the user transfers a stable coin to a custodial wallet, that is another point of kyc, so the gap is largest when you're talking about on hosted wallet transfers. In some instances, it is better than paper cash. Is it sufficient? Should we be satisfied?
▶ 1:25:29Sen. Warner: Senator tillis said people are not walking around with bags of cash.
▶ 1:25:36Ms. Massari: That is a difference that matters.
▶ 1:25:41Sen. Warner: The other two? >> is important to distinguish between primary issuance and transacting on secondary markets. Cracking's role in the market is essential as intermediary and we have a platform where we know who is coming in, who is coming out. Retract kyc, so we know everyone coming into our platform.
▶ 1:26:10Sen. Warner: Anything that leaves our prop form, there is enhanced monitoring tools. I think back to the role centralized intermediaries play. We believe it is essential for the U.S. to move forward with market structure legislation, create a level playing field for all intermediaries. 90% of transactions today are conducted through centralized intermediaries.
▶ 1:26:41Sen. Warner: My colleague is correct. There is ecosystem out there that is outside but surveillance, traceability available because of block chain tech is unparalleled. We have seen this. The ability to find, track, trace financial crime is unparalleled to any technology we have seen in history.
▶ 1:27:06Mr. Cohen: I agree with my colleagues here. These are difficult questions. There are trade-offs involved in any new tech. We briefly alluded to the ability, crypto assets to freeze and sees. That is different from tracking. It can mean if an issuer identifies a particular amount of stable coin is controlled by an illicit actor, they can turn that off. That is not a feature we have with paper money.
▶ 1:27:38Mr. Cohen: Illicit finance occurs through valuable movable assets. Stable coins in many ways are a step change better than a lot of other assets.
▶ 1:27:49Sen. Warner: This is better than bags of cash, I would agree. Whether this is something we ought to fully embrace, and our financial system, in trying to measure the risks, I think about the colonial pipeline act. We were able to recover a third. I get the intermediary role.
▶ 1:28:27Sen. Warner: I remember when the meta boys came up with their initial plan/ you have to help those of us who want to get there on how we cannot give rid of the innovation, bring this back to america, on sure is better than offshore, but you have to help us. I will keep listening. Thank you.
▶ 1:28:56Sen. Lummis: Before I recognize Mr. marino, we have another committee member here. Mr. marino.
▶ 1:29:05Sen. Murray: Now -- marino:. Let's start with the things we agree on. There should be certainty? Ok. Progress.
▶ 1:29:31Sen. Murray: We should make certain -- >> how are you defining certainty? >> you know what the rules of the road are. They are transparent. You don't find out through enforcement. You are driving 95. You don't know the speed limit until I cop pulls you over. There are signs telling you the speed limit. We agree it should be fair.
▶ 1:30:06Sen. Murray: This is where I think we are having problems here. I understand and don't understand it. Coming from the private sector, this is decently perplexing. Government has this total desire to control things. It feels as if something is not perfect, the government's role is to make something perfect.
▶ 1:30:35Sen. Murray: If there is ever a problem, the government will stop in. Let's go back to other tech. None of you are this old. If you were the regulator with this kind of mindset in 1900, would cars be allowed? Cars have caused millions of deaths. My god, how do we have millions of deaths? We should never have allowed the car to exist.
▶ 1:31:05Sen. Murray: Today that would seem idiotic. Ohio, probably not pennsylvania, because ohio is better, invented the airplane. Airplanes crash. Lots of people have died in airplanes. It has empowered foreign countries to fly over our airspace and caused damage. We wouldn't ban airplanes.
▶ 1:31:33Sen. Murray: Personal computers, pretty good invention. I remember sitting in my dorm in college in 1985i will confess and my roommate saying what the hell is that? It lets me send a message to anywhere on earth. He said what a dumb idea. The internet. Amazing opportunities it has unlocked but a lot of problems.
▶ 1:32:03Sen. Murray: Human trafficking, child trafficking existed for as long as civilization existed. The internet didn't create that. But we don't ban the internet. Social media is a total disaster but to a lot of people it connected people that otherwise would not be connected. Smartphones. They have caused havoc.
▶ 1:32:28Sen. Murray: The point I'm trying to make his why all of a sudden with digital currencies did we decide in washington, no, we are going to decide the pace of innovation. The way technology should work. This isn't so much of a question, I would like each of you to quickly comment. Make the case as to why we shouldn't create the lightest touch possible petri dish for innovation to grow?
▶ 1:32:59Sen. Murray: There is no way any of us know today what will rollout in the next five years. The mandate that says committee, bunch of smart people here, I know you have this impulse for control. Light touch will create innovation. Things will go wrong. Being able to know that. Am I crazy?
▶ 1:33:22Mr. Cohen: Not at all. Need to recognize what is the automobile doing? In 1900, the potted roads may have required automobiles to go 20 mph. Now that we have smooth highways, you don't have automobiles going 20 mph. It changed the rules to adapt. Digital assets do the same. We need to be thoughtful about how we apply the rules.
▶ 1:33:51Mr. Cohen: When people engage in fundraising activity with digital assets, when they entrust their capital to others, it is appropriate to think of those as investment activities. When two people exchange digital assets, I would like to use bitcoin today to send money, that is not a securities transaction. Many things are not. I wouldn't say a light or heavy touch but a right touch of litigation based on actual use cases involved.
▶ 1:34:20Mr. Jachym: It's important to understand what we know today and where innovation is developing. What we know today, we have centralized doctors/intermediaries that process most transactions in these markets. Regulators/lawmakers that know how to apply rules. Market integrity rules, operation resilience, customer protections. Let's get that done.
▶ 1:34:48Mr. Jachym: There are other areas that are diverse. When you look at decentralized protocols, you cannot take centralized rule books and apply them. Decentralization is a broad term. Other jurisdictions have grappled with this, take pause, study, evaluate and learn.
▶ 1:35:10Mr. Jachym: Let's do what we know what we can do first which is put market structure rules in place, continue to look at the decentralized ecosystem. That is not to say protections shouldn't be in place but we can apply.
▶ 1:35:26Sen. Moreno: Don't let perfect get in the way of progress.
▶ 1:35:30Ms. Massari: Dear dealing in financial services here. There are baselines we must meet. Users need to trust the products. We need to have disclosures. They need to know their regulatory frameworks for stable coins that make them good money and create competition. That's an appropriate role for regulation.
▶ 1:35:58Ms. Massari: To your point, stated nicely, we have a tendency in financial services to take a new thing and cram it into the old because we understand the old, and the risk there is we kill innovation. I could do more harm than good because it is happening anyway outside the U.S.
▶ 1:36:19Sen. Moreno: Perfect. I will venture back to you. Sorry. Ohio state, we worry about harvard guys.
▶ 1:36:33Sen. Lummis: You certainly may.
▶ 1:36:36Mr. Massad: The devil is in the details. When I think of light touch, I think that is what weak countries do that are trying to pull business away from strong countries. That is what I saw happen with swaps. We created a good framework. Smaller jurisdictions tried to undercut by having weaker rules. We had to work hard to harmonize, which we did and now the spot market works well.
▶ 1:37:07Mr. Massad: Right now europe and japan are ahead of us. They've implemented good frameworks. Most of the things I'm suggesting today are in those. There may be a few things that we don't want to emulate in what they've done but I think we can do better than the bills currently before us.
▶ 1:37:29Sen. Lummis: Thank you. Chair recognizes Mr. mccormick for five minutes.
▶ 1:37:36Sen. Mccormick: Thank you for being here. We have lived through the age of innovation in the U.S. from the internet to 5g to ai. Digital assets of the next big wave and create norms opportunity for all and particularly in pennsylvania.
▶ 1:38:02Sen. Mccormick: Our job is to create an environment where that innovation can thrive while at the same time protecting consumers. I saw this as the ceo of a software company in the late 1990's and whispered. It was gogo world, we didn't have the certainty. This critical congress must pass meaningful legislation. I want to talk about international competitiveness. In the absence of U.S.
▶ 1:38:33Sen. Mccormick: Leadership, other jurisdictions are rushing ahead. We risk having our on trimmer -- our entrepreneurs move overseas. Can you discuss how innovators in the U.S. are disadvantaged due to the development of regulatory regimes in other jurisdictions?
▶ 1:38:55Mr. Jachym: The lack of regulatory certainty in the U.S. has impeded investment in growth and that is businesses like ours, that's businesses like developers, project teams, protocols that have operated without clear guidelines as to the legal status of what they are building. You cannot run a business like that.
▶ 1:39:21Mr. Jachym: What we have seen primarily in europe, and other major g20 markets his efforts to put step one in place, basic foundations that provide regulatory clarity, and centralized markets, there is no question there are many other issues to explore and we will have to continue exploring. Let's also learn lessons from our legislative past here.
▶ 1:39:50Mr. Jachym: With swaps reforms, the toughest part about that was not domestic and limitation. It was rationalizing the cross-border market access framework. We run a global business. You want to get this right, the U.S. needs to move forward with this market structure bill and work with counterparts to develop a clear national framework.
▶ 1:40:13Sen. Mccormick: We talked about the threat of litigation and how that curtails investment. Having renovators think about that?
▶ 1:40:24Mr. Cohen: That is one of the first questions our firm gets. If we endeavor to take this innovative technology forward, what is our litigation risk? Is a constant threat and concern on the civil litigation side and from regulators, particularly those who took over aggressive stances. Fit made it difficult for entrepreneurs in the U.S.
▶ 1:40:51Mr. Cohen: To start businesses when they have the threat of overhang of litigation. You are driving on the highway and no one tells you what this speed limit isn't until they play you over. That was the feeling many clients how to run the risk of litigation. They didn't know when they were crossing a line. It's frustrating for us not to give that advice to clients.
▶ 1:41:18Sen. Mccormick: One of the benefits of stable coins is U.S. dollar dominance because they are largely denominated in the U.S. dollar can you talk about that specifically?
▶ 1:41:36Ms. Massari: Today, we see this and how issuers talk about their products, they think of stable coins as a way for those outside the U.S. don't have U.S. bank accounts to have access to the U.S. dollar anyway. That is one aspect of dollarization.
▶ 1:42:04Ms. Massari: They don't think how much demand outside the U.S. there will be for dollars but stable coins are an easy way for consumers outside the U.S. whether businesses or individuals who want to make payments to hold and use dollar value.
▶ 1:42:20Sen. Mccormick: Very good. Yield remaining time.
▶ 1:42:24Chair Lummis: Chair recognizes Mr. van hollen for five minutes.
▶ 1:42:30Sen. Van Hollen: Thank you. Good to be on the subcommittee. Sorry I am running late. A lot going on today. I am coming to this with an open mind. We have all been trying to understand for many years these currencies/stable coins in particular. I know that g.e.n.I.U.S. act has been proposed as one way forward.
▶ 1:43:02Sen. Van Hollen: Couple questions, you may have tried this territory little, if you could take a deeper dive in terms of vetting of stable coins issuers under this proposal, whether it has checks and safeguards you think necessary to protect consumers, and the other issue would be if for some reason one of these issuers were to go belly up and you had to
▶ 1:43:34Sen. Van Hollen: Resolve claims, my understanding is it is a bankruptcy type procedure as opposed to some procedures we currently have for people who need to claim lost moneys from a banking loss or something. Any other concerns you have as we approach this?
▶ 1:43:53Mr. Massad: On vetting, g.e.n.I.U.S. has some provisions you would want but it is not comprehensive enough. The fitness of management. That is not there. We need broader framework of criteria. The mckinley-waters proposal has that in terms of vetting. The other aspect is who does it?
▶ 1:44:24Mr. Massad: Federal level or state level? That is where we're trying to strike a balance. The approach in g.e.n.I.U.S. tries to do that by saying state framework has to be similar to federal meeting criterion worth and issuer cannot have market cap larger than $10 billion.
▶ 1:44:47Mr. Massad: The notion of a trigger that puts you in the federal bucket doesn't allow an issuer to go to the state is a good one but I would strengthen it. I would lower the threshold. Europe has a threshold for significant e-money tokens of 5 billion euros. I would insist on some minimal federal standards states have to follow.
▶ 1:45:15Mr. Massad: On the bankruptcy, you are right, today what would happen in the absence of special provisions is a normal corporate bankruptcy would apply. You would have the automatic stay, which would mean token holders would not get their money until the can was in of the process. G.e.n.I.U.S. at least says they have a priority claim but it does not deal with that timing issue.
▶ 1:45:45Mr. Massad: I would prefer to see some dedicated bankruptcy resolution process that is fast from the standpoint of the interest of holders but also to prevent collateral damage. If you have a situation with a large issuer and you're going through a lengthy process before the holders get their money, you could have consequential defaults.
▶ 1:46:12Mr. Massad: We saw that with the small terra algorithmic stable going. At minimum, you would want to say you have segregation of reserves. Held in trust for the benefit. Argue they should be available to be given right away. Those sorts of concepts, you could look at.
▶ 1:46:39Mr. Massad: Truthfully, dedicated process could work and should be simpler than a bank because the business model of these entities is going to be simple.
▶ 1:46:47Sen. Van Hollen: Appreciate that. Off-track a little from stable coins put to deal with digital assets -- much has been written about mean coins. You support responsible innovation of digital assets. The president issued a meme going which has gotten about $100 million worth.
▶ 1:47:18Sen. Van Hollen: Does that create conflict of interest problems? I'm interested in other people's thoughts on that.
▶ 1:47:22Mr. Massad: Absolutely. I've said this is plainly wrong. I think it is a blackeye for crypto, I think it is brazen corruption and I am disappointed more people in the industry and members of congress have not said similar things.
▶ 1:47:39Sen. Van Hollen: Appreciate that. Do you share his view?
▶ 1:47:43Ms. Massari: Taking a step back, I say this in written testimony, we've seen some of the worst scams and frauds using crypto, that is I agree -- it hurts those of us trying to build something with real value and utility.
▶ 1:48:07Ms. Massari: I think legislation that clarifies legal framework for crypto markets, stable coins will help to fight against the worst of the bad behavior because it will provide clear lines and will let law enforcement and regulators easily distinguish between good and bad.
▶ 1:48:30Sen. Van Hollen: The worst of the bad behavior.
▶ 1:48:34Mr. Jachym: With respect to the meme going market, the facts are important. We have over 300 assets listed, less than 10% are meme coins. It is not new. Those are around 10 years old. This is not new. It is trending now. Part of the reason there has been a focus on them is there has been regulatory uncertainty in the U.S.
▶ 1:49:03Mr. Jachym: To create much of anything else. Developers are looking to build protocols and technology that have many use cases. It is clear memes are not securities.
▶ 1:49:22Mr. Jachym: Our role is to ensure whatever is traded on our market, and we run these assets through vigorous due diligence tests, cybersecurity, legal tests and make sure everyone participating in our market is subject to kyc and sanctions. Putting this in perspective, it is trending now but there is a bigger ecosystem we need to focus on.
▶ 1:49:44Mr. Cohen: I would concur. This is open tech at the end of the day. People will do with it as they will. Important we focus on use cases that drive adoption around the world. I strongly support that.
▶ 1:50:04Chair Lummis: Mr. warner.
▶ 1:50:11Sen. Warner: It is unfair. I am all for innovation. Looking at that computer in the 1980's, I was already in the wireless business. I did pretty well. Started a company called nextel. I agree we need rules.
▶ 1:50:37Sen. Warner: One thing I feel is one of our best assets, one of our most essential is the stability of the dollar, financial markets. I candidly believe, while there has been innovation brought, if we do this right, every offshore will rush to america.
▶ 1:51:02Sen. Warner: What I would ask, I think back to my libertarian friends saying we don't want the government touching anything until the stuff hit the fan, and the reason we need the federal government to bail us out.
▶ 1:51:19Sen. Warner: If you're going to touch federal markets, completely divorced from the rest of the financial system, may be light touch would work but if we are ultimately going to intertwine this with the van system, we don't want to stifle innovation but nudging entities further along the line, that is the risk, balance I am trying to get to. I think there is a spot here.
▶ 1:51:52Sen. Warner: I support you and the ranking member, the chairwoman, who has worked so hard and long on this. I think reasonable people can get there in a way that maintains the integrity of our system and makes us the most attractive place for legitimate entities, finds a way to get the bad guys out as much as possible and still pursue a but that may not be light touch for the sake of light touch because I would love to get my colleagues, I wish they had been on the line
▶ 1:52:23Sen. Warner: When some of the biggest funders in this industry recalling around the sbv crisis and saying gosh, we need the fed to bail us out. I will try to share that with senator moreno later.
▶ 1:52:40Chair Lummis: I like to conclude hearings by asking our panel -- anything you wish you had been asked but were not? I would like you each to respond but briefly. [laughter] let us begin the opposite direction.
▶ 1:53:08Mr. Massad: I don't believe there is. A full hearing. I am happy to answer questions afterward. I have given you a long written testimony that addresses other issues.
▶ 1:53:21Ms. Massari: Thank you for having the hearing. Nothing in particular. It is important when we think about stable coins to focus on the competitive landscape and think about a diverse, open well-regulated but competitive ecosystem for stable coin issuance. Issuers are not as risky as deposit taking banks.
▶ 1:53:51Ms. Massari: We should treat them accordingly and let there be open competition.
▶ 1:53:53Mr. Jachym: Senator tillis asked about examples abroad. We can look in the U.S. to certain state frameworks.
▶ 1:54:07Mr. Jachym: Speaking on behalf of a special-purpose depository institution, if you look at what wyoming has done, they have taken the books and tailored them and created a bespoke product that creates and solves for unique risks in the system, with respect to custody. You cannot run a safe custody business in the crypto ecosystem the same way you can in traditional markets. States have looked to examples like that.
▶ 1:54:37Mr. Jachym: Let's look internally at what the states have done to solve for the unique risks and ecosystem.
▶ 1:54:44Mr. Cohen: Thank you for including me. To the great work you and the subcommittee will be doing. We have alluded to the importance to the financial system in the U.S. of stable coins, particularly treasury backed.
▶ 1:55:08Mr. Cohen: I saw a chart which plotted amount of treasury bonds and debt held by china over the last 10 years and it of course went down like this. The amount of that same debt that is now stable coin and similar issuers backing crypto assets. The reality is one of the things this country does well is create debt of our own government.
▶ 1:55:32Mr. Cohen: If we now have one of our major off takers of that that no longer taking up that slack, is this a way to achieve that goal? As we think about this, that is critical. That does not exist if we don't have the crypto rails to allow that activity to take place. This is interconnected. I would say quickly we didn't talk about real-world assets. It's a very important topic.
▶ 1:56:02Mr. Cohen: Real-world assets that can be run on crypto rails. There are many reasons we need to get this right. I am excited to be part of that.
▶ 1:56:10Chair Lummis: With special thanks to our panel and this committee for its first hearing, thank you all for your thoughtful consideration of today's topic. We will be consulting you again over time. We have consulted several of you prior to today. We recognize you as the expertise we wanted to hear from today. Committee adjourned with thanks.