▶ 0:17:50Talk about digital commodities and what the committee needs to do with respect to legislation. The current market cap for the digital asset market exceeds 3.5 trillion dollars. Approximately 70% of digital assets are digital commodities and roughly 55 million americans own or use crypto. The U.S.
▶ 0:18:10Currently lacks comprehensive regulation of digital commodity markets meaning a significant percentage of americans trade with crypto with limited federal customer and market risk protections. It has been referred to as the digital commodity regulatory gap.
▶ 0:18:30While the regulatory gap has not stifled consumer interest in crypto we know from past experiences what can happen when crypto intermediaries operate outside a regulated framework without care or3 comprehensive digital commodity market regulation. Americans economic interests are at risk. The lack of comprehensive federal regulation on -- in the U.S.
▶ 0:18:56Has created significant regulatory uncertainty among innovators, developers, and market participants. Not knowing the rules of the road, U.S. businesses have moved overseas, leaving U.S. consumers vulnerable. It's why we must act on digital assets legislation. To protect customers and insure innovation and growth remain in the U.S.. I have said it before and I will say it again.
▶ 0:19:24The cftc, and only the cftc should regulate the spot trading of jitter -- digital commodities. The cftc currently has enforcement authority over these markets and we should build upon that authority, not distribute it among different regulators. Let me be clear.
▶ 0:19:44Entities that list or facilitate the trading of digital commodities should not be exempted from cftc regulation simply because they are registered with another federal agency. The U.S. financial capital market standing as the deepest and most liquid in the world is largely a byproduct of the federal government bifurcated approach to regulating those markets.
▶ 0:20:10With the sec regulating the securities market and the cftc regulating the commodity derivatives market. This long-standing american approach to financial market regulation was at the core of the dodd frank act regulation of the swaps and security-based swap's market and should be the foundation upon which we build a comprehensive regulatory framework for digital assets
▶ 0:20:41Markets. It's not too picked regulators against one another. It's the opposite. We draw inspiration from the agency's past regulation of the swaps market and entrust the cftc and sec with the authority to collaboratively regulate digital asset markets.
▶ 0:21:04We must ask -- act expeditiously to develop a framework for the trading of digital commodities and ensure we get this right. We must support our calling senate banking committee as they work on a regulatory framework for the trading of digital assets and securities transactions.
▶ 0:21:25As with the cftc and sec, while there are cute -- clear lines of jurisdictions between the committees we are committed to working collaboratively on a comprehensive bill for the digital asset market place. I alongside ranking member klobuchar and all members of the committee will work in a transparent and bipartisan matter to develop the framework.
▶ 0:21:48The task requires hearing from everyone and for all committee members to work together to create a framework that allows for liquid and resilient spot digital commodity markets, strong retail protections, and rules that give american businesses confidence to continue to innovate and grow in the united states.
▶ 0:22:11Today we will hear from the former cftc chairman the head of the derivatives self regulated of association and the head of an association representing a diverse group of qom -- crypto stakeholders. Now I turn to our ranking member senator klobuchar for opening statements.
▶ 0:22:32Sen. Klobuchar: Thank you, chairman and thank you to all our witnesses for being here today. Over the past decade and a half, as the chairman noted, we have seen the increasing use of an investment in digital commodities like bitcoin.
▶ 0:22:52Sen. Klobuchar: What was once a niche market for early adopters and cryptography into is a swiftly growing market increasingly connected with traditional financial markets and institutions. Last year I noted that the market capitalization of digital assets was over $2 trillion. Now it is more than $3 trillion. The price of bitcoin then was $73,000 and now it is more than $100,000.
▶ 0:23:23Sen. Klobuchar: Yet, oversight and regulation of the market hasn't evolved to keep up with growth. The commodity futures trading commission has long played a vital role in ensuring the integrity of our financial and agriculture derivative markets including protecting market participants from fraud and manipulation, maintaining orderly markets and enabling farmers, ranchers, manufacturers, and small businesses to hedge against risk.
▶ 0:23:51Sen. Klobuchar: We are honored to have two former chairs with us today. Asdetermined digital assets cane commodities and found that bitcoin, the largest such asset, was a commodity. Derivatives on bitcoin and other digital commodities have been listed on cftc regulated exchanges and the cftc has full regulatory authority over the products.
▶ 0:24:18Sen. Klobuchar: It is only anti-fraud and anti-manipulation authority over the underlying spot markets, a regulatory gap that has resulted in untold losses to customers and the increasing risk of contagion to traditional financial markets as digital commodity markets grow in size and are integrated into the existing financial system.
▶ 0:24:42Sen. Klobuchar: If congress gives the cftc the authority and resources to step in and oversee these spot markets, it would be well-positioned to do so given its existing role. That role is overseeing the digital commodity derivative markets and the enforcement authority it has exercised over the underlying spot markets. Providing regulatory certainty and oversight to these markets can encourage responsible innovation and the adoption of new technologies.
▶ 0:25:12Sen. Klobuchar: At the same time, we have to ensure a level regulatory playing field, so crypto market participants are subject to standards as rigorous as those applied to traditional financial institutions. If congress is to do this, it must do so without compromising on crucial customer protections, with safeguards to prevent illicit finance and with provisions to address market integrity concerns.
▶ 0:25:41Sen. Klobuchar: It means putting in place guardrails to address conflicts of interest in the digital asset sector, preventing exchanges and issuers from using their position to favor affiliated actors or exploit customers. If congress is going to establish a new financial regulatory framework, it must to strengthen our system, not weaken it by putting safeguards in place to prevent corruption or self-dealing by a federal officials, including those in positions of power that might
▶ 0:26:14Sen. Klobuchar: Sponsor, issue, or profit from digital tokens. I look forward to hearing from witnesses on how they believe regulation of digital commodities can responsibly encourage innovation while ensuring our financial markets continue to be the safest in the world for market participants. It's a big job, but I look forward to hearing your testimony and working with you. Thank you.
▶ 0:26:43Chair Boozman: Now we will into to it -- introduce our panel of witnesses, Mr. ji kim president and chief executive officer of the crypto council for innovation. Mr. kim has served with over 15 years of experience in the digital asset sector and before being named ceo served as chief legal and policy officer for cci. Thank you, very much, for being here today. I think senator klobuchar will introduce the rest.
▶ 0:27:18Sen. Klobuchar: Thank. We are pleased to welcome back rostin benham, who many of you know from his years of service on the committee staff, most recently as commissioner and chairman of the cftc. Mr. benham is a distinguished fellow at the psaros center for markets and financial policies at that georgetown university mcdonough school of business. From 2021-2025 he served as chairman of the cftc.
▶ 0:27:48Sen. Klobuchar: Before joining the commission, he was a senior counsel on the committee, to then chairwoman debbie stabenow. During his tenure at the cftc Mr. benham oversaw the significant expansion of digital commodity derivatives markets and led the agency's enforcement activity in spot markets for digital assets. Welcome back to the committee.
▶ 0:28:15Sen. Klobuchar: And we are pleased to welcome back timothy massad, a research fellow at the mossavar-rahmani center for business and government at the harvard kennedy school of government where he directs the centers digital asset policy project. From 2014-2017, he served as chairman of the cftc.
▶ 0:28:38Sen. Klobuchar: During his tenure, he oversaw the implementation of dodd frank reform in the over-the-counter swaps market, worked to harmonize cross-border regulation, and it led to the cftc in becoming the first U.S. regulator to take action on cryptocurrencies. Previously he served as the assistant secretary for financial stability at the U.S. treasury department 2010-2014 bread welcome back to the committee. I am sure -- 2014. Welcome back to the committee.
▶ 0:29:08Sen. Klobuchar: I'm sure you remember many happy moments before the committee. Thank you for your testimony.
▶ 0:29:14Chair Boozman: Mr. tom's accident is the president and chief executive officer of the national futures association, a self-regulatory organization for the U.S. derivatives market. Mr. sexton joined in 1991 and was on their communities -- commodities and futures trading global markets advisory committee. Thank you very much for being here.
▶ 0:29:42Chair Boozman: I want to introduce the honorable michael colucci -- the honorable walt lukken. 2002-2010. He is the current president and chief executive officer of the futures industry association, a position he has held since 2012. Prior to his time at the cftc, he served as counsel to the committee under chairman lugar.
▶ 0:30:12Chair Boozman: Welcome back and thank you for being here. >> we appreciate you being here. It is a who's who of the industry and we are anxious to hear from you. We will start out with you, Mr. kim.
▶ 0:30:28Mr. Kim: Thank you for the opportunity to testify today on how best to strengthen U.S. leadership in digital asset innovation. I believe it can best be accomplished through crimes or best -- through comprehensive oversight of digital commodities grid I represent industry leaders across the digital asset space.
▶ 0:30:52Mr. Kim: It is critical for congress, following this committee's leadership to urgently pass legislation providing the cftc with oversight over the trading of digital commodities to provide necessary regulatory clarity and certainty for tech consumers and venture continued U.S. leadership over digital assets. For years, the digital asset industry requested peer rules of the road and a framework to operate in the U.S..
▶ 0:31:18Mr. Kim: Such a framework is in the natural -- national interests and will benefit you to send consumers, foster industry growth and strengthen U.S. markets by preventing fragmentation and regulatory ambiguity. Now is the time for congress to act to secure this future. Today, roughly 28 percent of american adults, 65 million americans, owner digital assets. The reasons and benefits are many.
▶ 0:31:42Mr. Kim: Individuals and businesses use them to make transactions more efficient and humanitarian groups use them to deliver aid to high-risk regions citing their speed, transparency, and reliability and centralized finance is expanding access to economic services. Beyond payment, the tokenization of real-world assets, securities, and agricultural commodities has a potential to make markets more liquid, accessible, and inclusive.
▶ 0:32:06Mr. Kim: Given the many benefits of expanding real-world applications of digital assets we commend the committee for pursuing a legislative framework to guide further development. From a consumer protections standpoint, clearer federal supervision of market activity is essential. The industry is committed to building necessary guardrails so consumers can participate in marketplaces which are fair and secure.
▶ 0:32:30Mr. Kim: With that backdrop, a significant portion of the digital asset ecosystem including widely used assets like bitcoin and ether function like commodities instead of traditional securities. The assets aren't issued by centralized entities to capital and lack profit sharing rights. Courts and regulators including the cftc have affirmed such assets fall under the commodity exchange act depending on their structure and use.
▶ 0:32:54Mr. Kim: Most digital asset trading volume occurs in secondary markets where participants trade assets as a store of value, not equity stakes. Recognizing the commodity-like nature of these assets is essential to crafting a regulatory framework. A comprehensive framework can provide essential consumer protections including business conduct standards, disclosures, customer funds, minimal capital requirements, trade surveillance, and more. Digital assets in the U.S.
▶ 0:33:20Mr. Kim: Are already suspect are subject to compliance and suspicious activity reporting and requirements should be confirmed and codified at any a conference framework. In addition to the oversight of the digital asset derivatives market the cftc has enforcement authority over spot commodity markets. It must be matched by a broader federal framework that addresses how americans use digital assets today.
▶ 0:33:47Mr. Kim: The cftc will play a central role in overseeing the spot digital -- digital asset commodity markets. It is a regulator with a mandate to deter price manipulation, ensure financial integrity, protect market participants, and promote innovation for the agency has experience supervising large, complex markets and maintains robust enforcement capability. The U.S. is in a global race for leadership in digital asset innovation, a true race to the top.
▶ 0:34:17Mr. Kim: We have seen other jurisdictions including the eu, the u.k., japan, and singapore, recognize the importance of the technology by actively engaging with the industry to implement tailored regulatory regimes. While many of the best minds in technology and resources still exist under the U.S. we can further establish U.S. leadership with conference of legislative framework. Legislation is the most effective way to ensure long-term stability and guard against future policy volatility that might otherwise repeatedly shift the goalposts.
▶ 0:34:50Mr. Kim: This important work, squarely within the domain of this institution, congress, and this committee will unleash powerful potential, enhanced clarity, ensure consistency, and best protect consumers. Thank you again. I look forward to answering your questions. >> thank you for the opportunity to testify before you today on this important topic.
▶ 0:35:17Mr. Kim: Between 2017-2025 I first as a n chairman. During that period I served the significant growth of the digital asset market. At the cftc, the digital asset market endured multiple periods of dramatic volatility. Throughout this time I've probably stated one consistent message to congress. Under U.S. current law, there is a gap in regulation in the digital commodity asset market.
▶ 0:35:45Mr. Kim: The regulatory gap remains today and must be filled with targeted legislation. It has facilitated countless scandals and fraudulent activity, some very small, others massive in profile. First and foremost, filling the regulatory gap will provide the needed customer protections american investors have become accustomed to in traditional financial markets regulated by the cftc and sec.
▶ 0:36:12Mr. Kim: Further, I don't believe public interest for digital assets will wane. Inaction will only result in greater risk to our financial markets and investor through lack of market transparency, fraud, market manipulation, corruption, and conflicts of interest. One common refrain in connection with past legislative efforts to fill the digital commodity gap suggests a U.S. regulatory framework would legitimize the digital asset market, creating regulatory loopholes.
▶ 0:36:42Mr. Kim: I believe this argument is the loophole. It has only left, for far too long, the vast majority of the digital asset market unregulated and american investors vulnerable. I believe the cftc is the appropriate regulator to oversee the digital commodity asset market because of its expertise regulating commodity markets including digital asset derivatives, since 2017. And it's enforcement experience in the underlying digital commodity market.
▶ 0:37:11Mr. Kim: Unique characteristics of digital asset trading including decentralized finance, custody, and market structure demand specific focus to ensure a broader policy outcomes. All investors deserve access to material information about a financial asset to ensure an informed decision. Market structure and traditional finance has evolved over many decades.
▶ 0:37:33Mr. Kim: I urge the committee to examine how current unregulated digital asset markets structure differs from traditional market structure and consider where there might be opportunities for change and where existing market structure requirements should be preserved. The cftc has a long-standing productive partnership with the sec. In a situation where regulated digital asset market participants handle both security and nonsecurity tokens in the underlying market, separate and exclusive jurisdiction for each agency is critical.
▶ 0:38:04Mr. Kim: Any regulatory system that includes deference or exempted authority will be incomplete. Further, any framework where each agency does not retain its exhaustive -- exclusive licensing authority pretends a future of bird of jurisdiction across digital assets and possibly physical commodities.
▶ 0:38:24Mr. Kim: The cftc's principle based oversight model has served regulatory markets while striking an appropriate balance between clear outcome requirements and measured flexibility to meet the outcomes. Market regulators could tailor rules to meet the risk, leaving flexibility to adapt with the changing market landscape as the digital market itself evolves.
▶ 0:38:54Mr. Kim: Second, regulations are only as strong as the agency and personnel that enforce them. Appropriate funding is necessary to meet the mandate of any regulatory program. Third, a reliable self-regulatory organization has been critical to the success of the cftc. The national futures association served as an effective partner for the cftc for more than five decades. Effective legislative effort must include a role for the nsa.
▶ 0:39:20Mr. Kim: It is essential legislation provide comprehensive authority for anti-money laundering. Know your customer, and customer identification programs. Finally, given the broad adoption of digital assets by the american population, comprehensive education and outreach is critical as well. Domestically, federal law enforcement relies heavily on state and local partners to identify and combat criminal and civil misconduct that often targets society's vulnerable.
▶ 0:39:48Mr. Kim: I encourage the committee to ensure that state and local law enforcement remain a key partner. The principles and regulatory foundations that make U.S. capital markets and derivative markets the deepest, most liquid, and most resilient in the world provide an effective model for digital asset market structure. We need to act thoughtfully, but with urgency, to fill this gap. I support recent steps from that U.S. house committee on agriculture and financial services in a bipartisan manner to fill the gap.
▶ 0:40:20Mr. Kim: There's more work to be done to ensure congressional market structure legislation is comprehensive and addresses the unique characteristics of the ecosystem. Today's hearing is a critical step to achieve that goal. Thank chairman and members of the committee for your focus in this area. I look forward to your questions.
▶ 0:40:41Chair Boozman: Thank you. Mr. massad .
▶ 0:40:50Mr. Massad: Thank you for inviting me to testify. The views are my own and they don't represent the views of the kennedy school of government. I hope the hearing gives us an opportunity to rethink how we should regulate digital assets for the clarity act, like many earlier proposals, has the right goals. Address the regulatory gap, provide clarity. But the wrong approach. We need to keep in mind a few basic facts. First, this is a technology, not an asset class. It will be used in many ways.
▶ 0:41:22Mr. Massad: The most valuable use cases might betoken icing securities. Second, we cannot define it whether it in digital form is a security, a commodity, or neither with a few paragraphs in a statute. Appropriate regulation depends on what the token represents, whether there is an issue, whether capital is being raised, and other factors. And, technology is evolving rapidly.
▶ 0:41:49Mr. Massad: Therefore, we should not lock in definitions that should failed to bring clarity, nor should we try regulators hands. Third, a principal reason for the lack of clarity is our fragmented regulatory system. We have two market regulators, neither of whom has jurisdiction to regulate the spot market for digital assets that are not securities. I believe that the solution should bring the agencies closer together. Finally, we are in a different place than the last few years.
▶ 0:42:18Mr. Massad: The primary regulatory response to date, court cases that sought to incorporate the howey test was not sufficient. By the sec has already abandoned regulation by enforcement. It's actively working to provide necessary guidance. Congress shouldn't fight the last war. All these factors argue a different approach. One that establishes regulation over the spot market without rewriting securities laws.
▶ 0:42:47Mr. Massad: And one that mandates the sec and cftc work together, not just on a few rules, but overall. Because, both agencies have significant stakes and expertise in these matters. Regulation of the spot market needs to draw on the expertise of both agencies. Classification issues can best be addressed by agencies working together to implement general principles, not prescriptive rules provided by congress.
▶ 0:43:17Mr. Massad: And cubs -- and, customization of rules to make sure they work for digital technology in record-keeping, custody, parents and a settlement or otherwise must be as consistent as possible between the agencies. Former sec chair jake clayton, appointed by president trump indictment, proposed essentially this proposed -- approach two years ago.
▶ 0:43:41Mr. Massad: We said congress should mandate the sec and cftc work together to make joint rules that would apply to every intermediary that trades or handles bitcoin or ether. That approach establishes jurisdiction over the market without, as we said, "debating the classification of each token or congress pursuing tortured rewriting of existing definitions of securities and commodities.
▶ 0:44:06Mr. Massad: We added that rewriting existing law might fail to bring clarity and inadvertently undermine decades of regulation and jurisprudence as they apply to traditional markets. Unfortunately, the clarity act does the things we warned against. It won't provide clarity. It will undermine regulation. Let me briefly note a few of its weaknesses. It addresses classification with a tortured definition that rewrites existing law.
▶ 0:44:34Mr. Massad: It provides exemptions from securities laws like raising funds if one has the intent to build a metro block train system that are unnecessary and will be misused. It creates a broad exemption for decentralized finance activities that will lead to the migration of regulated activity into an unregulated sphere.
▶ 0:44:56Mr. Massad: Indeed a large intermediary like robin hood or goldman sachs could operate a software protocol for the trading of tokenized securities that would then be exempt from the securities exchange. It would not require crypto trading platforms to own the digital assets of customers purchase. It will commit them to engage in their own proprietary trading and have other conflicts of interest.
▶ 0:45:20Mr. Massad: Finally it will provide opportunities for smart lawyers to manipulate its provisions to achieve lesser compliance burdens for clients. I was a corporate lawyer for 25 years with one of the best firms in the world and I know how it works. Finally, I wish to agree with and underscore the ranking member's comments about the importance of addressing the activities of government officials in this sector. Thank you, again, for inviting me.
▶ 0:45:50Mr. Massad: I look forward to your questions.
▶ 0:45:54Chair Boozman: Mr. sexton. Good afternoon. Thank you for the opportunity to testify. Over 50 years ago congress enabled the creation of a registered futures association or rsa to support the cftc oversight of the commodity futures markets.
▶ 0:46:22Chair Boozman: It is an industry wide self-regulatory organization for the derivatives industry and is an rfa. It is solely a regulatory body. We do not operate a market and we aren't an industry trade association.
▶ 0:46:39Chair Boozman: Over 40 years of public-private partnership overseeing the derivatives industry has been a tremendous success and we recognize the cftc's commitment and significant efforts promoting the integrity, resilience, and vibrancy of the derivatives markets. Today I want to address the three main points that might be helpful as the committee continues to work on market structure legislation for the federal oversight of digital commodities.
▶ 0:47:02Chair Boozman: The first point is to introduce nfa and its critical role protecting customers and ensuring the integrity of the derivatives markets. Nsa has a clearly defined mission. To safeguard the integrity of the derivatives markets, protect investors, and ensure nfa members meet regulatory responsibilities.
▶ 0:47:23Chair Boozman: We optimize the self in self-regulation paired our borders primarily composed of representatives from nfa member firms and weight leverage industry expertise in every aspect of our work. Our activities are closely overseen by the cftc, who provides frontline regulatory oversight of exchanges, clearinghouses, and a swap execution facilities.
▶ 0:47:44Chair Boozman: Nfa provides frontline over ship -- oversight of global membership of cftc market participants. Nfa's primary responsibility includes registering all firms and professionals on behalf of the cftc, developing rules for fair dealing with customers and counterparts, monitoring member compliance with the rules and taking enforcement actions when members violate the rules, offering arbitration for
▶ 0:48:16Chair Boozman: Customer disputes and providing investor protection and education resources. The second point is to discuss key principles for the effective oversight of digital commodities. Nfa firmly believes that cftc is well equipped to take on the oversight of digital commodities given its core principles and regulatory approach.
▶ 0:48:33Chair Boozman: The experience over the years integrating new asset classes into its oversight framework and current experience gained from anti-fraud or jurisdiction, over a spot digital commodities and supervisory oversight of related derivatives products including bitcoin and ether futures.
▶ 0:48:51Chair Boozman: In establishing an oversight framework we recommend the committee focus on the following, number one, terror lines of jurisdiction but we recommend congress provide the cftc with exclusive authority over digital commodities and the sec with authority over digital securities. We should avoid a framework in which jurisdictional lines are blurred and we have two market regulators writing rules for the same activity. This would be confusing for market participants, create blind spots in the market, and lead to regulatory arbitrage.
▶ 0:49:23Chair Boozman: Number two, strong customer protections. We advise congress to look at time-tested and robust customer protections that have served the derivatives industry extremely well including customer fund safeguards, customer disclosures, business safeguards, and anti-money laundering protections. Number three is flexibility to keep pace with innovation bid we encourage congress to rely on the cftc's significant experience with innovative products and retain its core principle approach.
▶ 0:49:51Chair Boozman: The third and last point is to underscore self-regulation provides many benefits to customers and the industry. As derivatives markets have evolved over the years, congress and the cftc have entrusted nfa with additional responsibilities. Our coordination with the cftc resulted in a strong track record of protecting retail customers and prosecuting retail trading abuse and fraud.
▶ 0:50:15Chair Boozman: Today customer complaints and single event customer arbitration at the nfa and cftc reparation cases remain at all-time lows. Importantly nfa is adaptive and proactive. We have numerous member firms engaged in spot digital commodity activities. To enhance oversight of the firms, we adopted a rule in early 2023 with supervision requirements on them.
▶ 0:50:40Chair Boozman: 50 years ago, congress had the wisdom to establish a public-private oversight framework with -- which the cftc and sec have effectuated to form a strong oversight partnership. We recommend congress in any market structure or legislation retain a significant role for an rfa to partner with the cftc. Thank you again britt I'm happy to take any questions. -- thank you again. I'm happy to take any questions.
▶ 0:51:07Mr. Lukken: I am president and ceo of the futures industry association that represents the futures, options, entity or derivative markets globally. As was mentioned, I had the honor of working for that committee during the passage of the commodity futures modernization act of 2000 and was able to serve as commissioner and acting chair of the agency for seven years, leading the agency during the financial crisis of 2008.
▶ 0:51:34Mr. Lukken: The digital asset industry and, importantly, its customers, deserve a proper regulatory framework that will keep market safe, innovating, and growing. The U.S. has two strong market regulators. In the cftc and the sec. Collectively, they can bring digital commodities and digital securities into a proper regulatory framework.
▶ 0:51:59Mr. Lukken: Given my background I want to share my views on the commodity exchange act and why the agency is well-suited for the oversight of digital commodities. The cftc framework has five strengths. First is the agency's principles-based regulation which insurance the cftc can keep pace with technological changes and adaptions in market dynamics.
▶ 0:52:24Mr. Lukken: That is key for the evolving digital commodity market for the second strength is the agency's supportive innovation. The cea requires the cftc to promote responsible innovation in fulfilling its duties. The agency has done this for 50 years. Allowing innovative new asset classes to be listed including futures on cryptocurrencies eight years ago.
▶ 0:52:51Mr. Lukken: Today, more than 60 cryptocurrency futures and options trade on seven cftc registered exchanges. The third strength is the agency's customer protections that have safeguarded investors for years. They require futures, commissioned merge, ftm two separate and confirm customer balances each day. Fcm, intermediaries who serve as agents for customers, also provide a guarantee against customer shortfalls.
▶ 0:53:20Mr. Lukken: Fcms contribute to a break the glass default fund at every clearinghouse. Should a single clearing member not be able to cover the losses. This model of protections has provided critical resilience and risk management over the years. A fourth strength is enforcement. Strong enforcement, in combination with robust customer productions, has shown to be a powerful 1-2 punch for the agency.
▶ 0:53:47Mr. Lukken: The cftc aggressively used this enforcement authority to bring actions against those that seek to swindle investors or manipulate prices. The last item I will mention is the cftc approach to cross-border trading. Given the global nature of traditional commodities as well as digital assets.
▶ 0:54:09Mr. Lukken: The cftc's cross-border recognition framework, which it pioneered in the 1990's, strikes the right balance of protecting U.S. participants while providing access to markets globally. These five strengths will enable the cftc to take on increased responsibilities in digital commodities and provide these innovative markets with a sound regulatory framework. I want to highlight a couple of other key stakeholder recommendations for your consideration.
▶ 0:54:40Mr. Lukken: The first involves recognizing the risk reducing positions of customers for margin and capital. Farmers and other end users utilize our markets to hedge the price risk of assets, whether it is corn, oil, or financial products. When the offsetting products are regulated by different agencies, customers may be forced to pay double margins because of a lack of recognition of the offsetting trades.
▶ 0:55:09Mr. Lukken: We support a language that instructs the sec and cftc to allow cross margin in between offsetting positions in these respective markets. And, legislative language that instructs regulators to recognize offsetting risk but sessions through cross product and netting. The two actions will free capacity for the growing markets and incentivize a strong risk management.
▶ 0:55:34Mr. Lukken: The last item I will mention relates to the need for clear rules around managing conflicts of interest. We support legislative language that requires the cftc to conduct rulemaking on managing conflicts of interest when entities combined exchanges, clearinghouses, fcms, and trading arms within the same legal structure.
▶ 0:55:56Mr. Lukken: We believe the development of consistent rules around conflicts will enter cust -- ensure customers can use innovative new structures without. Thank you for the opportunity to testify. I look forward to your questions.
▶ 0:56:14Chair Boozman: Thank you. Let's start with questions. Mr. benham, Mr. lukken as former cftc chairman can you describe why you believe the cftc and only the cftc is the right regulator for spot digital commodity trading? Can you also speak to concerns over allowing entities to list or facilitate trading in digital commodities without having to fully register with the cftc?
▶ 0:56:51Mr. Benham: The number one thing, and there are a few reasons I have stated this in the past. We will start first with the experience, going back to chairman massey's time in the 2010s when we had at the determination of bitcoin a commodity and you started to see enforcement actions out of the cftc around it digital assets. That was a long time ago. Over the 10 year period the cftc has been at the forefront of enforcement, both on the fraud and manipulation side of crypto.
▶ 0:57:19Mr. Benham: Enforcement does not just mean enforcement action. There are staff within the agency conducting research. They are doing surveillance of both the derivatives markets and the underlying physical market itself. The agency has developed, over this course of time, a very distinct and unique expertise in the digital asset market. The second thing I will say is the expertise in the commodity market. The cftc is over 100 years old.
▶ 0:57:47Mr. Benham: The cftc has independent -- as an independent agency is 50 years old and it understands commodities markets. It is different from securities markets. Lastly, I will say it is extremely important that the cftc become the primary regulator of any commodities asset. As you noted to market regulators, it is important we have two market regulators because independently they are very large, unique markets that demand different sets of regulation.
▶ 0:58:14Mr. Benham: I believe that if there is any agency that starts to regulate commodity tokens, it potentially creates a blurred outline of what is jurisdiction between the cftc, commodity markets, potentially, physical commodities themselves, and other regulators.
▶ 0:58:31Chair Boozman: Mr. lukken.
▶ 0:58:35Mr. Lukken: I echo my colleague. At three strengths that give the cftc the unique ability to oversee the digital commodities markets, our expertise. The agency, for 50 years, has been developing an ability to look at secondary markets for commodities.
▶ 0:58:55Mr. Lukken: That expertise, whether it is surveillance, manipulation of the markets, how best to ensure those markets are not taken advantage of by those trying to manipulate prices. Regarding cryptocurrencies, as was mentioned, the cftc has already experience in this. We are regulating 60 products currently.
▶ 0:59:17Mr. Lukken: Futures on those derivatives all goes with it from all the core principles that go with that regulatory expertise. They already have experience in the digital commodities space. The second is their mission. In section three of the commodity exchange act it is unique because it says we should be promoting responsible innovation as an agency. This is something congress had the wisdom to put in in 1974.
▶ 0:59:48Mr. Lukken: It allows the products, as they get listed, for them to be thinking about ways we can promote new, innovative technologies coming in. That is an important top-down mission of agencies that will help these products evolve and develop. Lastly it's flexibility. The agency has principal based regulation and other parts of the act allow it to carve out certain things that might not be in their jurisdiction, exemptive authority.
▶ 1:00:20Mr. Lukken: I think the cftc has the tools to exclusively oversee these markets, and also, with some flexibility that will allow the markets to evolve.
▶ 1:00:30Chair Boozman: Mr. kim, can you talk about the importance of avoiding applying decentralized media area regulatory requirements to decentralized software and technology?
▶ 1:00:44Mr. Kim: Important question. Decentralized finance in its purest form allows individuals to transact with each other peer to peer without the use of software and code. Notably, the software and code does not take custody of the funds. Of course, we regulate exchanges , not the matching engine. We regulate brokers, not the trade in between and we regulate intermediaries that take control of -- and custody of the funds, Mr. chairman.
▶ 1:01:16Mr. Kim: It is important to keep that in mind as we establish a comprehensive framework for the U.S. to keep innovation here in the U.S.. As congress contemplates a broader and more mature framework of the focus has been on centralized intermediaries that take control or custody of funds. There is a regulatory gap. There is no federal framework for the supervision of digital commodities. There are no business conduct standards, no conflict of interest provisions, no consumer education.
▶ 1:01:46Mr. Kim: It is important, for us to cement U.S. leadership at best protect consumers, that we address this gap.
▶ 1:01:54Chair Boozman: Sen. klobuchar:.
▶ 1:01:56Sen. Klobuchar: Mr. massad, you talked about the cftc having a role, a clear one, regulating digital assets. And you talked about how you and former trumpcare have suggested doing something where the sec does some of it and the cftc does some of it. Mr. sexton raised this issue. He's concerned.
▶ 1:02:25Sen. Klobuchar: That there would be vagary, these two institutions regulating the same thing. Can you talk about how this would work in today's environment, making those kind of suggestions or including that legislation? I found that interesting.
▶ 1:02:45Mr. Massad: Mr. clayton and I were suggesting that if we were trying to establish jurisdiction over the spot market, without rewriting securities laws, without rewriting the definition of security, that is why we argue for joint rules. Secondly, this is a different market. We have to recognize that. It is much more retail than what the cftc has regulated in the past.
▶ 1:03:13Mr. Massad: I would have great respect for the agency's abilities and expertise. We need to keep that in mind. We need to keep in mind this will be an exception. This cftc does not regulate other spot markets and we don't want the exception to grow. I wouldn't want to see other constituencies say why what the cftc regulate the spot market? Finally, it's an unusual technology. You will have things that start a securities and then become commodities.
▶ 1:03:44Mr. Massad: That is the reason they have to work together. How would that work? It would involve joint rulemaking. It would involve one of the agencies taking a lead. I think in terms of implementing rules, enforcing rules, that could certainly be the cftc with respect to this digital commodities spot market. I think it should also involve an sro, a self-regulatory organization. I think that could be jointly supervised.
▶ 1:04:14Mr. Massad: As the loomis and gillibrand proposal advocated. It would be a combination of joint rulemaking, perhaps, a joint sro. You could even have common commissioners. I realize that that would be a big step. I have not advocated merger. I'm not advocating merger. But this is an unusual situation we are in.
▶ 1:04:36Mr. Massad: This is a technology that will have multiple uses and it is necessary we approach it in a way that we have consistency across the board. >> thank you, Mr. benham. Mr. massad just talked about the concerns for retail and how uniquely retail this is in terms of other people who have purchased this as part of their savings.
▶ 1:05:06Mr. Massad: What approaches would you recommend to ensure innovation and -- in crypto does not come at the expense of basic safeguards or customer protection for the public. Specific marketing disclosure rules? What do you see?
▶ 1:05:25Mr. Benham: I agree a lot of the market is retail oriented unlike the typical cftc market that is institutionally oriented. But we really have to look at the asset itself as opposed to the constituency investing. Commodities versus securities are regulated in different ways. A securities are regulated to bridge information gaps between the issuer of the security and the investor. You have centralized individuals and financial statements that need to be disclosed to investors. That's not the case with commodities.
▶ 1:05:56Mr. Benham: I don't think you need to build it -- and frankly, I don't think you can build a as an investor disclosure regime at the cftc like you have at the sec. You cannot simply disclose something about bitcoin like you can the share of a stock. Second, I have advocated this and said it in my testimony. The cftc will absolutely need to increase its ability to get information out about the risk of loss associated with investing in digital assets.
▶ 1:06:26Mr. Benham: The cftc has a well-thought-out customer education program but I believe the committee should think about investing in that further.
▶ 1:06:34Sen. Klobuchar: Thank you for your ideas. One last question, Mr. massad, considering any legislation to regulate these digital markets, we cannot ignore the numerous ways president trump has sought to profit from digital assets and influence. His trump meme coin offers a nontransparent backdoor for those seeking presidential favors or attention entered in the recent crypto dinner he sponsored that put money directly in his pocket.
▶ 1:07:03Sen. Klobuchar: His world of liberty financial issued stable coin, ust one, only recently entered the market. But it has already skyrocketed to be one of the top five stable coins. What effect do these activities have on the crypto industry and efforts to regulate it? You and I seemed to agree, in the opening comments, that this has to be part of any regulation.
▶ 1:07:31Mr. Massad: I think it is a black eye for the industry and I know people in the industry who have expressed that but are afraid to speak out. It gives the wrong impression of what this sector is about and that is why it is so important to address it through rules on conflicts and divestment and so forth. And I hope I can come back on the disclosure point later.
▶ 1:07:54Sen. Klobuchar: I am sure we will have a second-round or one of my colleagues will ask you.
▶ 1:08:01Chair Boozman: Senator marshall.
▶ 1:08:02Sen. Marshall: Good to see everybody. Mr. benham, welcome back. You look great. Seems like life has treated you well. I will give my first question. The crypto industry seems to use a lot of synonyms. Since the first time we met, I have been concerned about anti-money laundering. And you're rules that the crypto industry be held to the same standard as banks. How can we stop black markets from happening and using this type of activity?
▶ 1:08:31Sen. Marshall: How should we handle potential deficiencies moving forward to address these issues?
▶ 1:08:39Mr. Benham: I think that whatever efforts the committee makes around anti-money laundering and know your customer should be grounded in the existing law around both of those things that the treasury, mostly, implements. But the agencies will also need to have increased authority around anti-money laundering and know your customer. Most of the industry is about anonymity. I think we are here today to bring the anonymity to light, to bring transparency around it.
▶ 1:09:12Mr. Benham: Regulation serves that purpose. Comprehensive regulation around entities, intermediaries, will provide the tools congress needs and law enforcement eight and season need to prevent anti-money laundering and know your customer issues that support illicit activity, potentially terrorist activity, terrorist financing, that is a big issue we have addressed and something that has to be addressed very specifically.
▶ 1:09:40Sen. Marshall: Is this a little or big concern?
▶ 1:09:44Mr. Massad: -- Mr. benham: it's a concern that needs to be top of mind for all of you as legiss .
▶ 1:09:57Sen. Marshall: What specific --
▶ 1:10:00Sen. Marshall: What strategies d strategies e implemented?
▶ 1:10:09Mr. Kim: Countering illicit finance is important for the industry. No amount of illicit finance is acceptable for any industry including digital assets. Since 2013, it digital asset exchanges to have reporting, amo compliance, sanctions and screening.
▶ 1:10:31Mr. Kim: I believe providing the cftc with oversight over a spot traded commodities and allowing the cftc to come up with addition there -- additional rules and guidelines to protect the industry will benefit consumers and the industry and allow innovation to grow in the U.S.. The only way to keep the industry growing is to protect consumers.
▶ 1:10:52Chair Boozman: Senator smith.
▶ 1:10:53Sen. Smith: Thank you, Mr. chair and ranking member. Welcome to the committee, everyone. I come at this from the basic perspective that people should be able to invest their money in any way they choose and they ought also to be able to count on free markets, markets that work well. There is a regulatory structure in place that protects them from unfair and rigged environments. I will start with you, Mr.
▶ 1:11:20Sen. Smith: Massad, because I could tell you wanted to follow-up on this issue of cftc versus stc. I think there is an important role for both agencies. Our job here should be figuring out how to fill the gaps that exist when it comes to regulation regarding crypto assets. Would you follow up on the issue of disclosure that was raised?
▶ 1:11:49Mr. Massad: Thank you, senator. I will agree with Mr. benham that generally on commodities we don't worry about a disclosure framework. We just worry whether the contract is susceptible to manipulation. But this is different. It will be different. When you look at the clarity act, loomis gillibrand, any of the proposals, they provide for disclosure regarding so-called digital commodities.
▶ 1:12:14Mr. Massad: So we will have to build out some kind of disclosure framework and again, I am fine with the cftc being the lead authority on overseeing these markets. Ideally, through the work of an sro. But I think the development of the rules will require cooperation. >> I appreciate that. That's helpful. We don't have legislation here in the senate, as you know. We have the clarity act, that the house will be taking up as soon as this week. I want to dive into some of the issues on the clarity act.
▶ 1:12:46Mr. Massad: We spoke about this last week in the banking committee as well. Securities brokers are required to get their customers the best possible trade, right? They have to look across multiple exchanges. But this isn't happening for crypto trading right now. At best, the law is unclear, as I am understanding it. Do you agree? With the clarity act to do anything to address the issue?
▶ 1:13:12Mr. Massad: I agree with your point, and no, it would not. I think americans think our financial markets are well regulated, because they are with respect to securities and commodities, but this is different for there is no best execution obligation or prevention of conflicts of interest on behalf of brokers or crypto exchange's.
▶ 1:13:32Sen. Smith: Is there any reason a crypto broker could not or would not be required to execute trades in the best interest of their customers? Anything intrinsic in the technology?
▶ 1:13:44Mr. Massad: Not to my knowledge, senator.
▶ 1:13:46Sen. Smith: Customers deserve to know when they are buying or selling an asset that their broker is trying to get the best execution on the trade and not somehow profiting without them knowing about it. This is a place, colleagues, where we can look at how to improve the clarity act as we go forward. I want to ask about tokenized stocks, and challenging issue.
▶ 1:14:08Sen. Smith: The trading platform robin hood announced it would start offering tokenized stocks to european investors. They aren't actual shares in a company. But they are digital assets that at least in theory derive value from the real thing, the real stock. They don't provide ownership stake in the company or any rights that would come with being a shareholder, for example. Mr.
▶ 1:14:33Sen. Smith: Massad, proponents of the tokens claimed they would expand investment opportunities for folks. I don't know if that tells the full story. Would you address the risks the tokenized stocks would pose investors on the broader market.
▶ 1:14:56Mr. Massad: It is a situation where there could be confusion and failure to protect investors. It won't be clear exactly what this is. Does it pass through the rights or just represent trading on the price? There could be fragmented disclosure. There could be less transparent trading. There is a big exemption with things like the credit act.
▶ 1:15:22Sen. Smith: You could own a tokenized stock -- >> it would depend again on what it meant. That's why we need some joint rulemaking and coordination between the agencies. It could represent something where it is passed through, but it might not.
▶ 1:15:44Sen. Smith: In the sec. I have left, how could the clarity act provide -- I'm concerned there will be an incentive to move to an regulatory structure versus another which will be best for the company and not for the investor. Could we address that from a policy perspective if we chose to? >> absolutely we could. We would not have exemptions that encourage that kind of activity. That is what we see right now in the clarity act and some of these other proposals.
▶ 1:16:22Sen. Smith: >> Mr. kaine, you touched on this briefly in your opening statement. What risk are we at in the united states? I recently talked to some of the exchanges, and they are freaking out about how we have to do something. What are your thoughts? >> thank you very much for your question, senator.
▶ 1:16:53Sen. Smith: It is a global race to the top, so other jurisdictions have not been waiting for the U.S. to lead. The eu, singapore, u.k., looking to attract technologies. I see blockchain digital assets as the plumbing for the second half of the 21st century. We need the U.S. to lead. That said, despite the progress in other jurisdictions, everyone is watching the U.S. the u.k.
▶ 1:17:18Sen. Smith: Is a good example where I have been taking a modular approach, but recently they announced and all at once approach where I believe there is an opportunity for the U.S. to submit its leadership, and that starts with a comprehensive framework, as I discussed. >> do you have anything on that, about us dragging our feet?
▶ 1:17:48Sen. Smith: >> senator, I encourage this committee and the house to continue to work on legislation in this area. I think it is very important. I can tell you that from our perspective, we have, as I indicated, member firms already engaged in this activity, and to the extent that the cftc would be provided with not only antifraud but also regulatory oversight over digital commodities, I think it would be very helpful as far as our own regulatory structure here.
▶ 1:18:23Sen. Smith: >> thank you. We touched on this briefly, the problem with having two regulators only works if they have clear jurisdiction. Can you talk about the need to clear up this regulatory definition? >> thanks for the question.
▶ 1:18:46Sen. Smith: From that point, the agencies will really be able to start to develop rules either distinctly and uniquely or in a joint fashion, but this is certainly a new asset that has a lot of characteristics that are similar to other assets but also a lot of characteristics that are novel and new and will require a different way of thinking about. I do think it is critically important.
▶ 1:19:10Sen. Smith: I also think it is important the agencies get a bit of a steer from this committee because there are lines I think this committee and congress can draw to help the agency start to really define the landscape of what tokens are securities and what tokens are commodities. >> thank you. You back.
▶ 1:19:31Sen. Lujan: Thank you, Mr. chairman for holding his hearing and an opportunity to have this discussion about digital asset market structure. One of the concerns I think has been brought up today that many have throughout the years is what happened with ftx and a few others like tara luna when there was a lot of devastation. What I appreciated recently was everyone's willingness to come and have more conversations and say no, there needs to be rules.
▶ 1:20:01Sen. Lujan: I appreciate the bipartisan nature of how this has been taking place as well, so thank you so much for this particular conversation. Mr. massad, it is widely understood bitcoin is a commodity, not a security. If I want to buy or trade a bitcoin, a mean coin or other commodity, I could log onto an exchange to do that.
▶ 1:20:24Sen. Lujan: However, I could also buy and exchange tokens that look more like securities on the same platform right next to each other. What are some of the differences and protections for consumers between commodity like a mean coin versus a security like a stock?
▶ 1:20:38Hon. Mr. Massad: Today, they are huge because we don't have any regulation of the spot market for so-called digital commodities. That's what we need to put into place. Your question also really goes to the fact that when we think about how to make that regime work, we will need things that are unusual for commodity markets.
▶ 1:21:01Hon. Mr. Massad: We will need disclosure rules as well as trading rules as well as conflict rules and so forth, and that is why, again, I think we will have to have some coordination between the agencies.
▶ 1:21:11Sen. Lujan: With that said, is it reasonable for customers to be confused about regulations and protections when they are listed next to one another?
▶ 1:21:25Hon. Mr. Massad: Absolutely. Under the clarity act, it's not even clear that mean coins would be regulated. I think they recently put out a regulation that maybe they would be, but we should have a framework where anything that is traded on these platforms is subject to the regulatory framework. They cannot just list something else that is not and then those rules have to be clear so that customers are not confused, and we should not have securities trading on the same platform.
▶ 1:21:53Sen. Lujan: What are your thoughts, your expertise for what congress needs to do to protect consumers from fraudulent schemes while still allowing americans to access and benefit from cryptocurrencies? >> again, we need to put in a good, comprehensive framework. The measures that have been proposed so far have some of those elements but not sufficient ones. I think they are too lax, and a lot of the requirements. I think they do not address conflicts of interest sufficiently.
▶ 1:22:23Sen. Lujan: I think they undermine securities laws by creating some exemptions from those laws. It requires a comprehensive framework that will create investor protection standards that are comparable to what we have in the securities markets today.
▶ 1:22:37Sen. Lujan: Appreciate that. One issue is the cftc does not have authority over spot crypto markets.
▶ 1:22:49Sen. Lujan: As past chair, how would you protect consumers from rogue polls and pump and jumps -- rogue -- rug pulls and pump and dumps?
▶ 1:23:08Hon. Mr. Massad: If we can get minds drawn around definitions, the whole premise and thesis is that there may be an issue or at some point in the evolution of a token, but when it is trading on an exchange, it is decentralized enough or at some point where it is sufficiently decentralized where there is no central institution where an individual is controlling or impacting the price of the asset, so if it is
▶ 1:23:39Hon. Mr. Massad: Sufficiently decentralized, which works often with a lot of legal precedent, you really would not have the issue where you have individuals pulling off manipulative trading activities that hurt investors.
▶ 1:23:54Sen. Lujan: Is it fair to say the deposition section of this legislation matters -- the definition section of this legislation matters?
▶ 1:24:04Hon. Mr. Massad: The definition section is arguably the most important part.
▶ 1:24:10Sen. Lujan: I appreciate that. That's one of the issues I and my staff raised during the markups with g.e.n.I.U.S. act as well. I certainly hope we can pay particular attention to the expertise of the staff we have around us and others coming in when we are looking at that definition. Thank you for the time.
▶ 1:24:34Sen. Justice: Thank you, Mr. chairman. Thank you for being here. From my side, I speak really plain, ok? I would say just this -- for god sakes a living, do we not have enough smarts in this room to figure this out? When it really boils down to it, do we not have the smarts in the room to figure it out?
▶ 1:25:04Sen. Justice: I really believe that we do. I believe hands down, too, that the potential -- the upside potential is off the chart, and almost every country on the entire globe is scrambling like crazy to get a piece of the puzzle. That is all there is to it. Why in the world are we so afraid of the dark?
▶ 1:25:33Sen. Justice: Why in the world are we so afraid of something that has the potential beyond belief, and do we not just figure it out? Now, let me tell you justice this, just two or three things. Today, bitcoin is trading in its own little hemisphere, and it is trading at 117 $1000. 45 days ago at the summit in las vegas, it was trading at $110,000.
▶ 1:26:03Sen. Justice: For all practical purposes to make it real easy, 7% in 45 days. Lots and lots and lots of folks, if we want them to or we don't want them to, lots of folks are saying, I want in. With all that being said, what we need to do is we need to have a framework that allows innovation, period, do we not?
▶ 1:26:31Sen. Justice: But -- great big b-u-t -- we've got to have an enforcement arm that protects the consumer. Without any question, we've got to protect toby and edith.
▶ 1:26:54Sen. Justice: I always call toby and edith the voters, but they don't have -- I always call toby and edith the voters. They want in, but they don't have any idea how to understand this. They don't ask us to do this, and I say it -- I have said this a bunch of times, but in my world, I can remember my dad saying just count the egg- sucking cows.
▶ 1:27:26Sen. Justice: You don't have to count their legs and divide by four. Come on, we are really smart. We are a country that ought to be leading the way in every way. What are we doing? Why are we so scared of the dark ? Why are we so committed to counting the legs and divided by -- dividing by four? Listen, we passed genius.
▶ 1:27:59Sen. Justice: That's good. Now we have to in some way acknowledge legitimacy and market structure. We have to have regulated clarity. We have to have clarity. We have got to protect toby and edith all the time, 100%. We've got to have real, live enforcement that absolutely eliminates your bad actors. You are really smart people. Super smart people.
▶ 1:28:27Sen. Justice: You've got some really smart people on this committee -- maybe not me, but you've got some really smart people. I am here to tell you, we need to move and move now. We are going to sit around and twiddle our thumbs, and a lot of people are going to have a leg up on us like we can't imagine. That's not doing toby and edith right. Toby and edith want to play the game. They want to be involved.
▶ 1:28:57Sen. Justice: They want to be the next innovation. They ask us one simple thing -- protect them. I'm almost out of time. You've got to go real fast. 10 seconds apiece. Tell me, how can we pull it off? How can we pull the innovation off? How can we protect them? Real simple. >> I believe that when the U.S. puts its mind or something that we can accomplish great things.
▶ 1:29:23Sen. Justice: I think, like you said, senator, we do need a framework to allow for responsible information, a principles-based approach while rejecting consumers and I think now is the time to do so.
▶ 1:29:35Hon. Mr. Massad: I think great capital markets, derivatives markets start with that as a foundation.
▶ 1:29:43I Would Say --Hon. Mr. Lukken: I would say keep a couple principles in mind. Do no harm to the markets, rely on the expertise of regulators. They do have expertise and we should draw on it and not fight the last war when they were not doing enough perhaps to customize rules. >> use the time-tested structure that has already been in place and has been for years. The cftc regulates commodities.
▶ 1:30:14I Would Say --Hon. Mr. Lukken: The sec regulates securities. Use that structure. Congress gives some definitional support to what is security, what is a commodity, and go from there. It has worked in the past. It is simple. It will work again. There are sro's underneath that that support the sec and cftc in their work.
▶ 1:30:39I Would Say --Hon. Mr. Lukken: >> your description of the volatility of bitcoin reminded me of other commodities like oil, gold, production crops that farmers that talk to you all the time are dealing with. The cftc is a natural home for these types of commodities that are dealing with volatility. My advice to this committee is to get exclusive jurisdiction over digital commodities to this agency and to give digital securities to the sec and give clear lines of jurisdiction to both agencies.
▶ 1:31:10Sen. Justice: Thank you all. Thank you, Mr. chairman, because you lead the charge and everything.
▶ 1:31:23Sen. Durbin: Thank you, Mr. chairman. The clarity act which will receive a vote in the house this week, they create a loophole for crypto tokens known as collectibles. That means those crypto tokens will not have to register with financial regulators and will benefit from a lighter touch regime. In fact, collectibles are not even considered digital commodities.
▶ 1:31:50Sen. Durbin: They are basically exempt from most requirements. On one of the largest crypto exchange is went to court with the sec, callingspace I believe is a member of your -- coinbase, I believe is a member of your organization. His lawyer argued in court these tokens were like beanie babies, meaning just trading collectibles, but these collectibles can involve multi of dollars.
▶ 1:32:19Sen. Durbin: Just ask president trump, who listed his own meme coin on exchanges like coin base and cracking -- and kraken. It has no real use and trades its values based on popularity and height, just like a beanie baby, but that did not stop him from auctioning off his meme coin and giving top investors -- get this -- access to a face dinner with the president of the
▶ 1:32:51Sen. Durbin: United states. Not only did president trump make $315 million in fees by selling his meme coin -- get this now, 2 -- 764,000 unique wallets lost money to the president's scheme. Talk about toby and edith. All the while, crypto exchange's claim they have a robust listing process and continue to perform due diligence, on and on. Mr.
▶ 1:33:21Sen. Durbin: Massad, let's start with you. What concerns do you have about listing crypto as collectibles? Number two, you talk about a black eye to the industry with this transaction involving the president. I think it is more than a black eye. I think it is evidence of corruption. The question and bottom line as far as I'm concerned is -- what does the industry do if they are afraid of the president when it comes to regulation?
▶ 1:33:50Hon. Mr. Massad: Thank you for the question. First on the collectibles, I agree with you. The clarity act does exclude those as commodities and I think the rule should be digital commodity exchanges cannot trade anything unless they are covered by these rules. What I would suggest to you, senator, is why don't you write all the big platforms -- coin base, kraken, gemini.
▶ 1:34:16Hon. Mr. Massad: If the act is so clear, ask them to tell you which ones are digital commodities and see what answers you get.
▶ 1:34:35Mr. Sexton: With regard to those types of tokens, coins, I can tell you that we approach it from a slightly different angle, and that is we regulate the conflicts that may be embedded within our members, and --
▶ 1:35:01Sen. Durbin: I will have to ask you to make a brief conclusion to your answer so I can ask another question.
▶ 1:35:08Mr. Sexton: Go ahead.
▶ 1:35:11Sen. Durbin: Americans lost a 33% increase to crypto schemes in 2024 from the previous year. The type of scheme I'm worried about involves a machine called a crypto atm. We have 1600. What happens with a crypto atm?
▶ 1:35:44Sen. Durbin: Basically, the way they victimize senior citizens and people in minority communities. Once a victim places their hard-earned cash, it disappears into a criminal's wallet and is almost impossible to get back. Scammers call on a suspected victim and tell them they owe taxes to the irs for failure to appear for jury duty. Not to worry, they can pay it off at a crypto atm.
▶ 1:36:14Sen. Durbin: These people put their life savings in some instances into the criminals'digital wallet. This industry ought to wake up to this reality. There is a misuse of one of their operative machines to scam people over and over again with huge sums of money. Want to be known as a reputable industry?
▶ 1:36:42Sen. Durbin: Do something reputable like protecting consumers. About 15 states have done it. All of them should. When the g.e.n.I.U.S. act came before congress, I want to offer this amendment -- no amendments. Take it or leave it on the genius bill. If we have a second chance with clarity or genius returning, let's at least think about the consumers.
▶ 1:37:08Sen. Booker: I'm grateful that we are hearing about this bill structure that provides appropriate market appropriation. Mr. massad, you said something that to me maybe was an understatement.
▶ 1:37:26Sen. Booker: I never imagined in my life I would see the president of the united states create a digital asset that is open to being purchased, a meme coin that could be purchased by anybody anywhere, from our adversaries, our rivals, from people trying to curry favor with the united states, people looking for military deals, and to literally sell seats to a dinner at the white house, one of the more sacred civic spaces.
▶ 1:37:55Sen. Booker: To me, this amounts to a level of calling corruption never, ever before imagined that could happen in our country, and we are normalizing it. It is corrupt. It is dangerous. It is an attack on our democracy. It is a violation of the emoluments clause, and it is undermining this industry as a whole. Would you agree with me?
▶ 1:38:26Hon. Mr. Massad: I would totally agree with you, and I have said similar things. Memecoins are a perfect bribery tool because they are out there. Someone can buy them and therefore provide essentially money to the president and still claim, I'm just speculating on a memecoin.
▶ 1:38:50Sen. Booker: The way our constitution is designed, the legislative branch is supposed to provide checks and balances and oversight, and the fact that the united states senate has not had one oversight hearing of this corruption is a surrendering of our obligations and duties under the constitution.
▶ 1:39:12Hon. Mr. Massad: It is shocking to me. Even the meme coins have been called by the creator of inferior him -- ethereum a bribery tool.
▶ 1:39:29Sen. Booker: I think it is extraordinarily dangerous, and I am beyond frustrated that we are normalizing this level of corruption in america and have the most corrupt president imaginable who is making hundreds and hundreds of millions if not billions of dollars profiting off of the presidency and a very national security risk that it proposes to our country -- that it poses to our country.
▶ 1:40:00Sen. Booker: As many of these countries are trying to curry favor and have deals. That does not even begin to mention the trump hotels and all the other things that he is doing that truly undermine any idea of what it means to operate the presidency with integrity. I'm very deeply engaged and involved in trying to make sure that we land something that can deal with a lot of the challenges.
▶ 1:40:28Sen. Booker: One thing that has not been discussed is when I talked about this ad nauseam, is the cftc's capacity to regulate this area. Right now, we have seen budget requests for a 2.9% decrease in funds from a 2024 request and a 5.1% decrease in personnel, which is, on top of cuts made earlier this year by doge, that threatens the cftc's ability to
▶ 1:40:58Sen. Booker: Oversee the debt markets it is already responsible for, without even adding the growing crypto market into the equation, as is envisioned. The house's clarity act would expand jurisdiction without a single additional dollar. It would create chaos for retail consumers in our markets, I believe crypto and in traditional finance.
▶ 1:41:23Sen. Booker: Am I right to be outraged that this is how we are starting without understanding the resources that would be necessary to do what a lot of us are envisioning?
▶ 1:41:31Hon. Mr. Behnam: Short answer is yes. Number one priority, if we are going to authorize a new priority for the agency, the issue is funding and resources so we can execute those responsibilities.
▶ 1:41:46Sen. Booker: I want to tell you this now, I want to lean in in a bipartisan way and craft market regulation, but right now I see senators and congresspeople trading stocks and bonds, people who are involved in the crypto world.
▶ 1:42:05Sen. Booker: Again, I have legislation with a number of senators that say clearly we should be doing everything we can as a matter of integrity to stop corruption, that we should reduce and past the end crypto corruption act, which would make sure the president and vice president, senior executive branch members of congress and immediate families that stops them from benefiting from issuing, endorsing, or sponsoring crypto assets, so we have this air of
▶ 1:42:36Sen. Booker: Corruption that undermines the integrity of congress and the presidency, at a level of corruption we have never seen before, and be very regulatory bodies that should be overseen -- overseeing these massive markets is being starved of resources to even do the jobs they are doing right now.
▶ 1:42:52Sen. Booker: Any serious effort to engage in the kind of market structure bill we are having without putting the resources that we have discussed in the past -- the bill we had in the last congress, a bipartisan bill, we had a way of addressing this, so there are a lot of structural problems I have right now, and the level and possibility of corruption, of scams, of people that could get hurt if we don't do this right is stunning to me, not to mention the very foundations of our democratic
▶ 1:43:26Sen. Booker: Systems so we do not become some corrupt banana republic where people can corrupt the rules for their own benefit. We have to do something different. >> thank you for holding this hearing. Thank you to the witnesses for being here. Mr. massad, president trump earned about $57 million from his stake last year.
▶ 1:43:58Sen. Booker: World liberty financial launched a stable coin, which was used by an abu dhabi-back investment company for a $2 billion investment in finance. Just before the inauguration, president trump issued a meme coin, which surged in price.
▶ 1:44:17Sen. Booker: President trump hosted a dinner, as has been said, for the 220 biggest holders of his trunk coin, further reducing the value of the coin. I don't think we should have to wonder if the president of the united states is favoring the interests of a foreign nation or private crypto exchange like finance because he stands to personally profit, and that is why last month I took over the senate floor to directly add an amendment to a piece of crypto
▶ 1:44:50Sen. Booker: Legislation that we were considering, the so-called genius, which was on the floor of the senate. My amendment, the only democratic amendment that was pending, would have prevented the president and vice president from issuing stable coins.
▶ 1:45:04Sen. Booker: I would be surprised to know that there are a smaller percentage than 95% of the american people who would not have agreed with my amendment, and yet it was thrown out of the bill, and democrats and republicans voted for that bill without demanding that the president and vice president and members of congress not issue these currencies.
▶ 1:45:29Sen. Booker: Today's conversation does not only address stable coins but the entire ecosystem of digital assets, and it is really important for us to get it right. I believe really strongly -- and I believe again, 95% of the american people if not 98% would agree that the president, the vice president, members of congress, high-ranking officials of our government, should not be in the business of issuing any cryptocurrency. Mr. masson -- Mr.
▶ 1:45:57Sen. Booker: Madd Mr. masson -- Mr. madssad, as a former federal regulator, should federal officials are prohibited from issuing or endorsing commodities while in office?
▶ 1:46:15Hon. Mr. Massad: Absolutely, sir.
▶ 1:46:18Sen. Bennet: We have had conversations about why these are different than commodities like wheat.
▶ 1:46:24Hon. Mr. Massad: Memecoins are a classic example. They have been called a classic pump and dump scheme. He is investing in not just a stable coin. They are now doing things with bitcoin mining and other business ventures, so I agree with you totally. He should be limited, prohibited from doing the things I'm required to divest.
▶ 1:46:54Sen. Bennet: Can you imagine any benefit to the american people of allowing a president or vice president to speculate in this currency?
▶ 1:47:05Hon. Mr. Massad: None whatsoever, senator.
▶ 1:47:10Sen. Bennet: And yet, the U.S. senate has passed a bill allowing him to do that and I had an amendment pending that said they should not do that. I would be shocked if I live long enough to have an amendment pending that would be more popular with the american people and yet, the senate threw it out before they blithely passed the legislation.
▶ 1:47:32Hon. Mr. Massad: We never imagined that a president would do these kinds of things and therefore we do not have the rules in place to prevent it, but we need them now.
▶ 1:47:40Sen. Bennet: I would think the industry would want these rules in place.
▶ 1:47:45Hon. Mr. Massad: I think they do but are afraid to say it because they were afraid it might hurt their business interests. I have had so many people in the crypto industry tell me that.
▶ 1:47:57Sen. Bennet: We have to figure out as the elected leadership of this nation to do better.
▶ 1:48:01Hon. Mr. Massad: I agree, senator. If you don't do it, who will?
▶ 1:48:06Sen. Bennet: Exactly. Mr. chairman, I will submit the rest of my questions. Thank you. >> I think it is important we have good, strong, sound regulation of this whole industry to protect consumers, to make sure that there are clear and understandable rules of the road, that there is some certainty for investors, for consumers, that their
▶ 1:48:37Sen. Bennet: Protections in case of bankruptcy as fraud -- that there are protections in case of bankruptcy or fraud. I'm also concerned about the prospect of high administration officials manipulating digital currencies or their ability to influence enforcement actions, and I would be interested in your thoughts about how to address these conflicts, potential and real conflicts of interest when you have people who are in positions of dominant influence like the president or others issuing, endorsing,
▶ 1:49:09Sen. Bennet: Sponsoring their own digital currencies, how we can ensure that we either prohibit such actions completely or that we make sure that people who are engaged in them are subject to laws against market manipulation and self-dealing. We start, if I can, Mr. behnam -- good to see you again. He was spoken about the need to maintain public confidence in these markets.
▶ 1:49:39Sen. Bennet: Do you think public officials that have any kind of supervisory or influential role should be permitted to issue their own currencies or endorse their own currencies, or would it be the most basic and fundamental provision that that should simply be banned?
▶ 1:49:57Hon. Mr. Behnam: Thank you for the question. Short answer is they should be banned. As a former regulator, five or six months removed, for seven years at the commission, I took that obligation very seriously, ensuring there was no conflict of interest or ensuring there was no exposure that me or my family had to the markets are regulated.
▶ 1:50:23Hon. Mr. Behnam: >> does anyone testifying here today think it is ok, good practice, nothing to see here for high administration officials who have influence over these markets to be able to issue or promote their own personal stable coins, digital currencies of any kind?
▶ 1:50:42Hon. Mr. Massad: Just to be clear, I agree it should be prohibited. >> I would go further, I would say ban all those actions from members of the house or senate. Anyone disagree with that proposition? >> I know this has been a discussion among policymakers. For myself, this is immediately outside my area of expertise and I think it is a decision for congress. I just wanted to say that respectfully, senator.
▶ 1:51:12Hon. Mr. Massad: >> I appreciate that, and I hope we will make that very decision because I think it is important we regulate this area. I think the current unregulated or regulation by litigation posture we are in is undesirable for everyone. It does not protect consumers. It does not help legitimate actors in the industry. It does not provide any certainty or ability to plan or predict or invest.
▶ 1:51:39Hon. Mr. Massad: At the same time, the most basic protections we might put in place to protect consumers will be undermined if those that can influence the whole market are in business themselves and able to enrich themselves. Let me move on from the problems that have been documented by the first family's involvement in this business.
▶ 1:52:04Hon. Mr. Massad: In what other respects -- I open us up to any of our participants -- can we help ensure that consumers are protected? Obviously, there have been some catastrophic failures of company in this space engaged in fraud. What is the best way to protect consumers so that in the event of a catastrophic failure they are protected?
▶ 1:52:32Hon. Mr. Massad: >> maybe I will start off, but the first is acting. I think congress needs to fill that regulatory gap. This congress is starting the process of doing that, and we have to, as mentioned, make sure we have strong, clear lines on how you think the jurisdiction should go, but importantly, each agency brings unique customer protections and important market integrity issues that will help fix the problems that you are identifying. I think you are preaching to the choir here.
▶ 1:53:02Hon. Mr. Massad: Everybody on this panel wants to fill this gap, and it is up to congress to act quickly. >> I will add in december of 2022, I testified shortly after ftx failed, and it had one entity registered with the cftc and a number of global entities, over 125.
▶ 1:53:23Hon. Mr. Massad: I said to this committee, of the 125-plus entities, two I think in asia and one here in the U.S., let your ex, which was registered and regulated by the cftc -- ledger x had value after that bankruptcy.
▶ 1:53:44Hon. Mr. Massad: This entity that had regulation, that had supervision, that had oversight had a future because of regulation, and that is the point that I think is most important for this committee to take away. As much as there are issues for the committee to discuss and regulate, regulation works and ultimately will protect customers. >> I agree and I think the other entity was one in japan that was also subject to regulation.
▶ 1:54:12Hon. Mr. Massad: >> if I may very briefly, I agree with the need to address the regulatory gap. Taking us on a slightly different angle, a lot of what we do is consumer education. We would love to be a resource to you and your office. We have different workshops making sure that there are scam awareness campaigns.
▶ 1:54:34Hon. Mr. Massad: Even though we are here to talk about market structure, there is a need to educate a lot of consumers about fraud and scams out there ncci is committed to coming up with infrastructure for that. >> I agree with all my fellow panelists, but this is not difficult. There are long-standing safeguards in place to protect retail customers. The cftc and nfa have adopted them over the years with regard to derivatives.
▶ 1:55:03Hon. Mr. Massad: Those should be applied also to the digital commodity markets to protect retail customers. Safeguarding customer funds, market practice rules, business conduct rules, disclosures, there's a whole litany of them, and I think it is extremely important that this committee look to those time-tested requirements and safeguards, and they go and mom way to accomplishing what we are trying to do, and that is protect retail customers with regard to
▶ 1:55:34Hon. Mr. Massad: Digital commodities.
▶ 1:55:37Sen. Klobuchar: Thank you, Mr. chairman. I just have a few questions, as promised, at the end, and I hope the world watching heresies that we are not going to be rolled here on this bill, on the clarity act, and that you have a lot of members who want to see a piece of legislation that truly protects consumers, people who have worked with the industry in the past on our side that are
▶ 1:56:08Sen. Klobuchar: Interested in working on this but really want to see some serious changes and are concerned both about the conflicts issue, are concerned about the funding issue of how the cftc should do this, and are certainly concerned about consumer welfare and what safeguards should be in place and there's not loopholes that could drive a truck through here. That is kind of where it is not consensus.
▶ 1:56:36Sen. Klobuchar: We have members with different views on this, but I do think people should take home from this that we will want to see some major changes. You previously called for additional funding and staff for the cftc to write rules for and oversee these markets. How important is it that congress provide for durable, sufficient funding when it comes to these brand-new markets?
▶ 1:57:04Sen. Klobuchar: Just to combine my questions, one of the concerns is we have derivative markets, we have an economy that is on a roller coaster right now because of tariffs and other things. We do not want to disadvantage existing markets and market participants in how we do this, so it is a little bit the same question.
▶ 1:57:25Hon. Mr. Behnam: Short answer -- it is an absolute priority. If you authorize the regulatory program but do not have the funding, there is no teeth. I did a number of estimates of about 130 million dollars to staff up on the tech side.
▶ 1:57:46Hon. Mr. Behnam: With everyone on the panel and the committee, I cannot tell you how much personnel time was taken in the last few years of my chairmanship on crypto-related matters. I don't mean that in a negative way, but it is zero-sum. When you have this people working on crypto matters which are novel and legally without precedent, it leads them away from traditional areas.
▶ 1:58:22Sen. Klobuchar: The issue is pretty much funding because what will happen if resources are pulled too thin because of this major challenge coming in in a good and bad way, but something that was going to have to be accomplished, and then you have these other things going on that you have always done in the cftc.
▶ 1:58:42Hon. Mr. Lukken: I think the agency certainly deserves full funding, especially if they are taking on the issue of new commodities. They will need funding to ensure they can administer the act. That is something that has traditionally been through the appropriations process. I think the clarity act gives the ability, a transitional fee that happens for four years. That, to me, makes sense.
▶ 1:59:08Hon. Mr. Lukken: If you start to put in a permanent tax on the industry, the concern is that you may start to impact hedgers, people who are trying to utilize the markets and taxing them instead of appropriating that through the appropriations process.
▶ 1:59:31Sen. Klobuchar: Mr. kim, I'm not going to get into what this means for many of us in that process. Senator marshall was talking about the need to make sure we protect against terrorists' use of these commodities. I thought that was a good line of questioning, and I just had one thing to add.
▶ 2:00:05Sen. Klobuchar: Are these technologically capable of complying with the laws? Should congress tailor the laws to account for the unique features of these technologies?
▶ 2:00:15Mr. Kim: I think the U.S. already has a robust structure, but that said, it is appropriate for the cftc to be the regulator for digital commodities.
▶ 2:00:28Mr. Kim: I think there could be additional protections as need be, but what has been missing is that regulatory gap right now where the cftc does not have the authority to look at centralizing intermediaries in my testimony has been about the need to address that cap -- that gap.
▶ 2:00:49Sen. Klobuchar: Eventually revealed how customer assets can evaporate when we do not have adequate safeguards. In both cases, there were cascading barriers that shook public confidence.
▶ 2:01:10Sen. Klobuchar: What mechanism can best guarantee that these assets are safe, even if prices have -- prices of collateralized digital assets collapse? How should congress address this?
▶ 2:01:30Hon. Mr. Behnam: It goes to the core principles and rules that cftc provides. Segregation rules, I think everyone would agree on this panel, are sacrosanct to the cftc, making sure money is prioritized, and if you regulate what rules are used for
▶ 2:02:02Hon. Mr. Behnam: Nontraditional markets and individual markets, we will be able to protect consumers.
▶ 2:02:12Sen. Klobuchar: We know that decentralized finance raises novel regulatory challenges, so how should congress approach decentralized finance platforms and the regularized -- and decentralized platforms?
▶ 2:02:32Hon. Mr. Behnam: I do think there should be and needs to be a unique look at how these platforms function relative decentralized platforms, but I am a firm believer that there needs to be some regulation and oversight. There has to be some intersection with the regulator and a decentralized platform. Otherwise, there will be a race to the bottom.
▶ 2:03:04Sen. Klobuchar: Does the exception in their concern you at all? Is it too broad?
▶ 2:03:12Mr. Sexton: I know there are concerns about the deify -- the de-fi exception. I believe congress should give some instruction as to how to deal with these platforms going forward in legislation, and also, I think that the cftc and ftc should carefully examine together de-fi protocols and
▶ 2:03:44Mr. Sexton: Together determine how best to look at these protocols in the future and possibly come up with some type of regulatory oversight over them.
▶ 2:03:56Sen. Klobuchar: Do you want to add anything?
▶ 2:04:02Hon. Mr. Massad: I think the exemption in the clarity act is one of its first -- one of its worst features. We have to define what we mean. The term is not just an autonomous protocol. They are typically talking about situations where you have a business that is the front end of that or managing that, so there's lots of touch points for regulation.
▶ 2:04:28Hon. Mr. Massad: De-fi should not get a regulatory pass, and we may need different rules, but we need to achieve the same regulatory objectives. One simple way to think about this is if we had a protocol that was for the treasury market and that suddenly became the main way treasuries were traded, we would not say we do not need to regulate it. We do not need to worry about it.
▶ 2:04:52Hon. Mr. Massad: The key things are define what we mean, look at the touch points for regulation because there are typically centralized actors acting in that space and there are different ways we need them but achieve the same regulatory objectives.
▶ 2:05:12Sen. Klobuchar: They collapsed in offshore exchanges underscored how quickly the gaps in regulatory frameworks can put U.S. customers at risk. The challenge in addition to the others we laid out, deals with funds in this truly international market. How can the U.S. ensure that funds are protected?
▶ 2:05:49Hon. Mr. Behnam: We have been a bit behind regulatory's across the globe and I think that has created arbitrage opportunities. Also, these platforms who do not feel like they have a path to legislation are essentially creating virtual private networks to get access to the U.S.
▶ 2:06:11Hon. Mr. Behnam: As congress moves forward, if drafted correctly and comprehensively, this will bring the market in the regulatory fold, and that will provide the customers that you are talking about the protections that they deserve and that we need to have on an outcomes basis. Regulation as we take steps will hopefully resolve with other regulators.
▶ 2:06:37Sen. Klobuchar: I want to thank you, Mr. chairman, for having this bipartisan hearing so everyone could listen to the witnesses' ideas, and we look forward to working with you and with the rest of the committee going forward, so thank you very much. Consider my last comments my closing.
▶ 2:07:00Sen. Warnock: Thank, chair. Last congress when we were considering legislation that would provide the cftc with the authority to regulate the spot market for digital commodities, you testified before this committee, that the cftc would be 100 -- we need $120 million to regulate an entire industry. Do you still agree with your previous testimony? >> yes.
▶ 2:07:40Sen. Warnock: To your knowledge, has the trump administration requested additional funding for additional staffing and our financial regulators to support additional regulatory responsibilities? >> no, it has not.
▶ 2:07:55Sen. Warnock: We have seen hiring freezes and staffing reductions all while refusing to nominate democratic commissioners for bipartisan boards like the cftc.
▶ 2:08:14Sen. Warnock: We were consistent that new funding would be needed for new staff, staff training and technological upgrades, so let's say a new crypto market structure builder gives the cftc new regulatory responsibilities is signed into law. What are the risks associated the congress failing to provide the cftc with sufficient resources to properly supervise the digital asset industry?
▶ 2:08:39Hon. Mr. Behnam: In short, the answer is without the tools behind the authorization for the program, the program becomes essentially useless. There's obviously a lot of talented staff at the cftc and I know they will work hard to implement the program, but we need resources to properly implement the program.
▶ 2:09:02Sen. Warnock: Absolutely, I agree with that. Clearly investors of all sizes if we are going to create a situation where capital markets will thrive, we need to have confidence that regulators are upholding the law, protecting consumers that they have the capacity to do so, so I look forward to working with my republican colleagues to ensure that the cftc is properly resourced.
▶ 2:09:29Sen. Warnock: Regulatory certainty for the digital asset industry limits unnecessary risk and can help prevent the collapse of another cryptocurrency exchange firm. One thinks of ftx a few years ago, but I'm concerned that today, a handful of centralized firms have come to control multiple stages of the trading process, and all that concentrates the risk, creates conflicts of interest in my
▶ 2:10:02Sen. Warnock: Mind. Mr. massad, good to see you again. It is routine for exchanges to also serve as the custodian of customer funds and be responsible for listing, trading, clearing, and settling trades is typically what we see?
▶ 2:10:26Hon. Mr. Massad: Yes, it is, and most trading is through those intermediaries.
▶ 2:10:33Sen. Warnock: What sort of risks or inefficiencies are conflicts of interest may exist when exchanges are vertically integrated like that?
▶ 2:10:40Hon. Mr. Massad: There's also the conflicts that can arise. For example, today, these trading platforms can do their own proprietary trading so they confront run customer orders or misuse customer information. They can have other business ventures, and with respect to custody, they can be charging separate fees and may not adhere to good custody rules, and even the clarity act does not require these platforms to hold the
▶ 2:11:14Hon. Mr. Massad: Bitcoin that they say their customers own. It does not require that.
▶ 2:11:18Sen. Warnock: This vertical integration creating unnecessary risk for customers, we saw this with ftx, with customers being unable to access their money months after the collapse of ftx.
▶ 2:11:36Sen. Warnock: I'm especially concerned customers may not be getting the best prices on trades, that they may be paying higher fees and more consolidation will lead to less competition in the market and create more systemic risk like we saw in the case of ftx. What provisions do you see in a senate bill to limit the risk that large centralized firms may have on the digital asset market?
▶ 2:12:03Hon. Mr. Massad: We need a comprehensive regulatory framework that prohibits these kinds of conflicts of interest, so no proprietary trading, no interest in the tokens they list, no business ventures that can pose conflicts. We need to impose best execution requirements on brokers.
▶ 2:12:20Hon. Mr. Massad: We need to impose strict custody rules and either consider separate custodians or at least have rules that ensure that they really are holding the bitcoin or other assets they claim their customers own and segregating it properly and not charging fees for that.
▶ 2:12:42Sen. Warnock: Thank you for your testimony. I look forward to working with my republican colleagues to create a senate bill that contains strong, comprehensive language so we can safeguard the financial system and protect consumers. Thank you so much, Mr. chairman.
▶ 2:13:02Sen. Boozman: Thank you. Thank you to our witnesses for their participation in today's important hearing. The record will remain open for five business days. Today's hearing is now adjourned.