House Agricultural Committee Hearing (7/18/18): “Cryptocurrencies: Oversight of New Assets in the Digital Age”

Below is a rough auto-transcript of a hearing held last week entitled “Cryptocurrencies: Oversight of New Assets in the Digital Age” (video available at link).

The witnesses were:

  • Mr. Joshua Fairfield, William Donald Bain Family Professor of Law, Washington and Lee University School of Law, Staunton, VA
  • Ms. Amber Baldet, Co-Founder and CEO, Clovyr, New York, NY
  • Mr. Scott Kupor, Managing Partner, Andreessen Horowitz, Menlo Park, CA
  • Mr. Daniel Gorfine, Director, LabCFTC and Chief Innovation Officer, CFTC, Washington, DC
  • The Honorable Gary Gensler, Senior Lecturer, MIT Sloan School of Management, Brooklandville, MD
  • Mr. Lowell Ness, Managing Partner, Perkins Coie LLP, Palo Alto, CA

Here are a few “pull quotes” and exchanges of interest (this is by no means exhaustive):

    • Rep. Soto (@1:42:08): “I’m more concerned though about being able to avoid money laundering for terrorism, drug trafficking, human trafficking, tax evasion — so I’d love to hear from each of you in one sentence on what we could do to stop money laundering and having Bitcoin and other cryptocurrencies be the choice of terrorists, drug traffickers, and those evading taxes.”

      Mr. Fairfield: “Trust FinCEN to do their job.”

      Ms. Baldet: “Rely on other law enforcement mechanisms that work around strong cryptography — we do not weaken roads to add potholes to them.”

      Mr. Kupor: “Bitcoin is actually the worst tool to money launderer because every transaction is registered and fully recordable so it’s actually law enforcement’s best friend”.

      Mr. Gorfine: “While the technology can be peer-to-peer, most activity takes place through a new type of intermediary where you can apply AML and KYC rules.”

      Mr. Gensler: “On top of that, rigorously require crypto exchanges to register — and you may need to pass a law to do that — but to make sure they register and that all the AML, anti-money laundering and know-your-customer is being done there.”

      Mr. Ness: “The alleged Russian hackers were caught because they used Bitcoin.”

    • Rep. Faso (@1:45:01): “I’m wondering if for the benefit of our viewers at home across the country who are watching this hearing and are trying to understand the impact of the crypto currencies and what the future holds if if perhaps miss Baldet and Mr. Kupor could tell us where you think from a five to ten year view point where this is going to be the role that these currencies are going to have in our economy and how might this affect average consumers — right now it’s the market participants are mostly very sophisticated people do you see this insinuating itself into the broader economy?”

      Mr. Kupor: “Thank you yes so we believe that this really is gonna create a whole new set of of infrastructure on which all kinds of new applications are going to be built — some which we may not even know about today. So if you think about all the benefits we’ve reaped from you know Facebook and Google and all the kind of you know internet properties have been built today.”

      Rep. Faso: “… and negatives …”

      Mr. Kupor: “… and negatives — I think what the beauty of this technology is is it gives us a new set of platforms and again very critically those platforms are not controlled or governed by centralized corporations; they’re controlled and governed by community, and so you can imagine all the utility that we have today but where the consumer actually has ownership of data the consumer has the ability to actually ensure that data is shared in a manner in which they want to be shared and the consumer also can capture the economic rents from use of that data; so we think the opportunity in that respect is endless.”

    • Rep. LaMalfa (@1:51:30): “Would you touch upon what what would look like if that token is determined to be a security?…”

      Mr. Ness: “Yeah I think the issue really comes down to friction and while we can get to a status of free trading securities by registering them, even when you do get to that status there are all sorts of ancillary friction[s] in and around the transfer of a security — you need to have broker dealers involved, and you need to have suitability requirements met and other potential disclosure issues and so forth that are ongoing; and so when we’re talking about trying to create the next generation of decentralized protocol layer kind of apps on top that are all interoperably-interacting with each other and transferring value at the speed of software to deliver a service to a consumer — it may it may be all transparent to the consumer that this is all happening under the hood –but you can’t have fundamentally the transfer of value at the speed of software if it’s a security.

      Rep. LaMalfa: “Please touch on the importance of increasing the access to the speediness of those types of trans transactions — why is that important?

      Mr. Ness: “Well I mean, to get a little philosophical I suppose I mean you know ledger technology is fundamental to Commerce, right, and double-entry accounting was an amazing innovation and ledger technology that, you know, pulled Europe out of the … Dark Ages, and the same thing can happen in in in a amazingly more robust way when we start to literally not just allow parties to trust each other through standard mechanisms of reconciliation, but when we remove the reconciliation or the need for it all together… and that is simply a philosophical point of view I suppose but it goes to this issue that we’re at early stages of this, we don’t know where it’s gonna, go but speed is probably a good thing.

      Mr. Gensler: “Could I just say I’m an optimist I agree with what mr. Ness says, but maybe it’s the MIT in me now, I think that the beneficial ownerships will be able to be tracked in a matter of milliseconds and nanoseconds — not yet, it might take five years — but we’ll get there; technology’s pretty neat how it grows and helps us.”

    • Rep. Davis (@2:01:54): “I want to ask you a quick question sir; based on the way current law is written, it’s not cut and dry whether cryptocurrency should be regulated by the SEC or the CFTC.  If Congress attempts to come up with a workable definition for cryptocurrencies that are more similar to commodities — you know call them as we’ve heard blockchain commodities — what should we be looking at to guide us?”

      Mr. Gorfine: “You know I the one thing I would say is that — and I mentioned this in my opening statement — that it’s important that we’re not hasty in terms of figuring out what the right contours are of applying… securities laws and then the the commodities framework. I do think that the SEC has in due course been providing additional clarity — there was recently Mr. Hinman over at the SEC, gave a well-received speech kind of outlining some of the SEC’s thinking as to how they would apply the securities law framework — and some of the things that I think you’ve heard are factors around decentralization, you know are their expectations of return based on meaningful work of others… Rhese are important elements that — of course are not you know I’m not saying that these are the only elements — but these are some of the things that you start to look at in terms of figuring out well when does it make sense to be applying the securities laws framework that includes things like required disclosures, it requires regulations around you know the offering of securities, and the intermediaries involved in securities, and when does that perhaps not fit the product. So I think that this discussion is ongoing, and I think that in due course, and being thoughtful you’re starting to see additional clarity and uncertainty coming out. But certainly those are some of the factors that we’ve we’ve heard talked about a fair amount.”

      Ms. Baldet: “To tag on to kind of the last question but also the the concern about regulatory framework, you know what I was mentioning is about a need for clarity more so than the, not so much the bright lines that we’re talking about with security versus commodity, as much as more interest in safe harbors for innovators; especially because we’re seeing the market adapt to this in that new disruptors are at an advantage versus incumbent institutions who are waiting for regulatory clarity to engage. And so in a way, in the absence of that, it’s not it’s not necessarily that incumbents are incapable of innovating or they don’t understand the technology, but they have to take a sidelines approach because they have traditional businesses to lose.”

      Rep. Davis: “Well thank you… We want to make sure that we devise a regulatory structure that allows this industry to continue to grow, but allows to us to address many of the law enforcement problems that have been brought up here by many of my colleagues — so I can’t wait to continue to work with you; thanks for your time.”

Again, we have not yet gone through the hearing record exhaustively. However, the transcript with links to the hearing video is reproduced here anyway, as it might be useful to some.  (Watch this space for further excerpts and comments, once we analyze the record fully).


  • The transcript was produced by a text-to-speech process performed automatically by a third party service outside of our control.
  • KrowneLaw does not vouch for its accuracy; indeed, we guarantee it is inaccurate.
  • As such, each snippet of translated text is linked directly to the point in the video at which it occurs (popup in separate window/tab).   Please use this functionality to confirm exactly what was said in each case.
  • The hearing may cover a wide variety of topics; thus, cryptocurrency/blockchain-related terms have been highlighted to assist in quick location of the relevant passages (this highlighting is by no means exhaustive, however).
  • The breaks in the text coincide roughly with changes in topic/changes in Congressperson leading the questioning.  They do not correspond to changes in speaker; thus, each block usually represents multiple speakers, including those on “opposing sides.”  You must listen to each particular segment in the video to determine who is speaking and to get the full context (and therefore, meaning).

Scroll box with full transcript follows:

[00:16:06] well good morning everyone hearing on committee of Agriculture and title crypto currencies oversight of new assets and the digital age will come to order please join me in a quick prayer never really father we ask you Lord for blessings on this meeting this morning we've got some things to understand that are new and different and we've got a great panel that's here to visit with us this morning I also want to lift lift up Collin Peterson his family during these times bittersweet and your thoughts and prayers with him as well help us to to do your will and to be the kinds of people that that will honor you we ask these things in Jesus name Amen just a quick word caller Peterson's not 8 half year old father passed this week and so our bittersweet but he was telling me a wonderful story that his dad was apparently had his faculties right up to the very end which is pretty darn good so our thoughts are with you go he's hanging in there he could remember the crop prices from 1952 you know I mean II knew everything yeah all right so well good morning we've got a terrific panel this morning I see a lot of new faces as in the audience today for the big questions up on a lot of folks Minds is what's the Agriculture Committee doing with cryptocurrency and and the distributive ledger technology but we're here to find that out this morning so for those of you that not joined us before welcome we're happy to have you as we discuss an emerging policy area that is of deep interest to our members to the emerging into crypto industry and we hope to all Americans of all stripes Digital SS like Bitcoin and ether but also hundreds of other token-based projects that are being developed represent a new way for people to interact and exchange in commerce with one another while digital assets are often thought of as payment systems or digital gold I believe the promise that token networks hold is more Universal and more exciting quite frankly than that for the first time we have a tool that enables individuals to reliably exchange value and a digital realm without an intermediary we could have assets that exists can be created exchange consumed at digital form the promise of being able to secure property rights in a digital in digital space may fundamentally change how people in people interact with one another this technology holds the potential to bring enormous benefits to each of us if we're willing to give us the space to grow provided providing a strong clear legal regulatory framework for digital the SS is essential to that end there are several questions before us about how law should govern the issuance trade and utilization of these digital assets perhaps no question is generating greater uncertainty than how to determine if a particular token is a security we generally know that it would what to do if a commonly traded asset is in fact deemed of security we simply apply the securities laws if it's not a security there's a good chance it's a commodity which will be subject to the requirements of the Commodity Exchange Act the problem seems to be in making that determination how we test which concerns the sale of orange groves and service contracts to the 1940s as offered presented as a standard test to determine if the securities laws govern a token yet they have provided they prove to be challenging in the analysis under this as an analysis under this test a related question is whether or not current laws are appropriate for these new digital assets if a token is derm is determined to be a security or a commodity or something else a regulatory regime need not be static if it's necessary Congress or regulators may want to consider developing a new framework that takes into account the diverse characteristics and unique economic relationships and Bennett in many of the types of digital assets that can be represented by tokens providing clear guidance to enable developers to determine the nature of their token and then suitable rules will enable them to develop their project is essential to both project protecting the public and promoting innovation how we regulate these products and those who develop them won't determine if they're developed or used but it will determine where they're developed in use and we want them that innovation done in our country as we consider changes to the laws or new regulations the Committee on agriculture will be part of that conversation within the house we have a vested interest in the definition of a security because it directly impacts the definition of a commodity similar to our work in agricultural commodities as well as futures and swaps markets the committee has a strong interest in promoting safe efficient transparent markets for those who use these new toá-- Marcus properly regulated Marcus promote innovation and foster economic growth and I don't believe there will be any different with respect to digital assets of course proper regulation does not mean intrusive regulation that means regulation appropriate to the nature of the activities and the participants and in some cases it might mean no regulation at all before watcher narake you remember I want to thank all of our witnesses for making time to prepare testify we have an incredibly qualified panel to present all sides of a fascinating and complex set of issues I welcome to please each one of you here today for this conversation and with that color I'll turn to you for any comments that you might want to have Thank You mr. chairman and thank all of you for joining us here today and I'm happy that we have a chance to review this new net new technology and our role is to oversee via CFTC regulation of it if that's appropriate as a CPA and someone who's found a career helping folks run numbers on their finances I still am having a hard time getting my hands around this and I have some real concerns one crate cryptocurrency that we need to pay special attention to is its volatility there are some of you that will tell us that the fluctuations in cryptocurrency are a good thing and part of its appeal but the increased speculation and the fact that regular investors stand to lose their shirts give me a great deal of concern as one study found over 80% of the initial coin offerings are scams while regular investors stand to lose a very small amount Santa Lou is a very small amount stand to gain for example 97% of Bitcoin is held by just 4% of the participants and cryptocurrency there's a lot of things here that don't make much sense to me and who knows maybe some type of this technology will come along and really make a difference after these starts and fits but as it stands right now I'm skeptical it's our jobs to be the adults in the room and to ensure that in these early days there's enough oversight of this new frontier to ensure that it can grow responsibly that I look forward to your testimony and I yield back

[00:22:32] thank you mr. Peterson so chair would request other members submit their opening statements for the record so that our witnesses may begin their testimony and to assure there's ample time for questions I'd now like to welcome our witnesses to our table first off we have Joshua Fairfield dr. mr. Joshua Fairfield the William Donald Bain family professor of law William Utley University the University School of Law in Staunton Virginia we have miss amber bald a co-founder and CEO of clover in New York New York we have Scott Cooper managing partner of andreessen horowitz midlow Park California we have mr. Daniel Gore fine director lab CFTC and chief innovation officer at the CFTC here in Washington DC we've got welcoming back for another round of conversations of the Honorable Gary Gensler who currently is a senior lecturer MIT Sloan School of Management and then we've got mr. Lowell Ness managing partner Perkins Kui Palo Alto California so we've got a terrific panel and with that we'll go to mr. Ferrell you what everybody have five minutes to pitch your wares and we've also got your opening statements for the record so with that mr. Fairfield your fair feel you're recognized talk come on Thank You mr. chairman Conway ranking member Peterson and members of the committee for the opportunity to address you today my remarks are going to try to set some context and they're organized around two questions we've heard a lot about Securities and commodities but how are people actually using cryptocurrency tokens and given that how should regulators proceed on the first question blockchain which is the technology underlying the current rash of cryptocurrency and tokens is a new decentralized database technology many communities have formed just to see what the technology can do and they're trying different experiments the potential value in these experiments is considerable collaborative communities of artists new forms of corporations fast and low-cost check settlement digitization of securities open and low-cost electronic mortgage and secured transactions filing systems secure international remittances voting systems and many more are possible applications of the technology my testimony today will focus on potential for blockchain technology to expand personal property rights online this is my primary area of research and my conclusions are and I'll continue them below that first citizens need and want an expansion of personal property rights online the cryptocurrency tokens are helping them do that by solving important problems in building markets for digital property and that we need to be cautious when regulating overlapping spaces and use cases such as systems in which most people hold a token to use it or consume it and a few hold it to speculate on the price on the second question how do we go about conducting oversight common-sense construction of how groups are using the technology a so-called duct test will help regulators begin to sort out whether and where to engage rough agency consensus can handle these conflicts and hearing such as this one are critically important for regulators to start working out the overlaps because many many more applications of this technology are coming so in the body of my remarks I'd like to discuss how this technology represents a badly needed expansion for personal property rights online we should really care about good property rules for intangible electronic digital assets good property rules preserve citizen independence property institutions build individual wealth and social welfare by reducing transaction costs and property permits us to express ourselves by changing and arranging our environment to reflect what we want here you might think of your own home or your wedding ring for example but personal property rights like this have had serious trouble coming online we just don't own that much personal property online consider that people used to have record collections now they have a subscription to Spotify people used to have bookshelves now they have Kindle accounts this is because early in the history of the internet intellectual property holders were worried about illegal copying it took several decades to develop a technology blockchain the database technology underneath cryptocurrency tokens that can be traded held bought and sold but not duplicated so far until now property institutions haven't really gotten the benefit of internet technologies because it's too costly to record all the transactions we can't have a database of ownership for every Barbie doll in the entire country right it's too costly however token systems can and will reshape all of these ways of owning if they push price points low enough the way the internet did for basic internet communication in some blockchain technology is not just used as a security it's not just used as a commodity it's used as a way to unstick personal property law for all of us online but it's only going to do it if we let it so what's the path to successful oversight responsible regulation has to rest on a frank and common-sense determination of how people are using this technology working out the jurisdictional questions is going to be time-consuming but it's not particularly harder than for network communications technology generally we've just had to hand these things out and figure it out tokens do present some challenge specifically they may be used in different ways by different members of a community they may be used at different times in different ways but most importantly the nature of the use by a community can shift a community can be trying to do something entirely legitimate and have speculators come in and begin to disrupt the purpose of the original community the current hot characterization debate is whether token sales ought to be deemed regulable unto the Howey test I believe instead the Howey test represents the outer bound of where we should look we should look inside that outer bound to figure out what the beneficial and damaging uses of the technology are if a community is using cryptocurrency tokens like securities then they should be regulated as securities but if they're not they shouldn't and that's the most important edition in conclusion blockchain technology has enabled new communities and new business forms it has also provided the technological basis for a badly needed expansion of personal property rights line and for purposes of regular regulatory jurisdiction a rough common source common sense sorting into buckets will do more good in the near term than precise definitions of what a cryptocurrency token is that is a lost cause a cryptocurrency token wears as many hats as humans give it it is an entry in a database it is a technological entry and nothing more in the current characterization debate what this means is that a token should be deemed a security when it operates like the collective security a commodity when it operates like a commodity a currency when it operates as a currency and as a simple property interest when it operates as a simple property interest thank you so much thank you for

[00:30:05] spare feel ms bell day 5 minutes chairman Conway ranking member Peterson and members of the committee thank you for the opportunity to be here this morning I'm amber Baldy co-founder and CEO of clover a company building tools that make it easier to build decentralized applications on top of both publicly accessible blockchain networks and access control distributed Ledger's previously I led the blockchain program at JPMorgan though I'd like to note that my comments today do not represent my former employer I also currently sit on the board of the Z cash Foundation a nonprofit organization seeking to advance the state of the art for privacy technology as applied to Internet infrastructure and privacy preserving cryptocurrencies these are a variety of disparate hats all of which lead me to the same message my commentary today concerns the importance of a cautious and thoughtful regulatory approach to innovative technologies even and especially those that might disrupt business as usual or add to the complexity of regulating the Internet as both critical infrastructure and a shared public good we must determine how to balance the enormous potential value of this technology with the need for consumer protections and national security and how to achieve this while respecting human and constitutionally protected rights so far money seems to be the killer app for blockchain much as the early Internet killer app email continues to be a cornerstone for how we communicate online peer-to-peer payments will likely grow into and persist as a ubiquitous part of our personal and professional daily lives in fact the ability to spend trade rent or license other sorts of unique digital bearer assets could be applicable to many things we own mortgages securities collectibles intellectual property rights personal data etc imagining this mature interconnected global ecosystem of such markets feels like standing in the 90s and imagining Netflix streaming on your phone and yet my concern is not the speed with which we reach that end state it's the choices that we make along the way which stands to be as hotly contested and impactful as net neutrality the DMCA FASTA cesta or the on-again off-again discussion of state mandate mandated week cryptography continues to be while we struggle to overlay existing regulatory frameworks onto new technology that is useful precisely for its fluidity other areas of the world are embracing that ambiguity and learning by doing in Afghanistan for example code to inspire helps train young women for technical careers and pays them in Bitcoin which they can use in local shops as well as global marketplaces in a place where women's banking and even physical agency is limited financial autonomy and Digital Inclusion is a powerful force for equality and democracy in some African countries and places with less legacy financial infrastructure companies are using crypto assets to enable farmers to properly track and register their commodities and increase their bargaining power in downstream market pricing not only can end consumers tip their farmer in support of fair and sustainable working conditions but every other factory or wholesale retailer along the way can make more informed decisions about the provenance of inputs to their products in the United States square whose business strategy is already based on disrupting traditional payments processors has added the ability to buy sell and transfer Bitcoin into its mobile app and there are many products targeting cryptocurrency investors and early adopters there's also several more experimental projects that are interesting for example using economic incentives to battle fake news cryptocurrency micropayments as an alternative business model to data hungry online advertising and fluid marketplaces for unused disk space on your home computer as a disruptive force too centralized cloud storage these projects all launched as initial coin offerings icos either on a new single purpose blockchain network or as a token on top of an existing network like aetherium are often compared to the internet startup boom of the 90s the ability to quote unquote code oneself out of business is a novel property of these decentralized blockchain applications but most experiments today invoke a variety of human controlled workflow checkpoints and escape hatches to allow intervention if necessary along with understanding who controls access to the network and who can modify the rules of the system identifying who controls these escape hatches might be helpful in sorting tokens into various asset classes once the sensible taxonomy has been established as a counterpoint blockchain is not the answer to every problem for example I recommend extreme caution with exploration of blockchain based Evo ting ensuring one-person one-vote while keeping ballot selections private is an incredibly complex computer science and human coordination problem that we are not ready to tackle yet internationally it's no surprise that some of the central bank's most aggressively investigating cryptocurrency as an alternative or enhancement to their existing currencies are in Venezuela Russia and China going forward as there is inevitably more discussion of the potential for a digital dollar I encourage strongly encrypted privacy preserving design choices coupled with opt in selective disclosure as opposed to options like mandatory cryptographic backdoors or golden keys which could make the US financial system a very attractive target for nation state sponsored cyberattacks and hackers as that conversation matures you must clarify how FinCEN oh fak and other relevant rules can be applied modified or interpreted to balance many competing interests so in conclusion and hopefully even and hopefully if this committees guidance is simply a strong commitment to non-interventionism safe harbors for innovators and work towards resolution of the patchwork fabric of state laws the time it takes to come to such a commitment have the unfortunate effect of eroding America's early mover advantage in technical innovation and entrepreneurialism thank you thank you


[00:36:06] mr. Baldev mr. Cooper Thank You chairman Conway and ranking member Peterson for the opportunity to be here today to talk about this very important new technology my name is Scott Cooper I'm the managing partner for a firm called a H capital management which manages about seven billion dollars worth of venture capital assets and very recently also for a group called cnk capital management which is a 300 million dollar registered investment advisor fund focused exclusively on investing in crypto related assets I'd like to spend my time today to focus on why we believe as investors that crypto technologies make a very compelling investment opportunity particularly for members of the venture capital community and I want to start with a definition that's different from the definition I think that we often hear about so if you focus on a lot of the public narrative today around crypto technologies there are two kind of dominating narratives one is certainly around Bitcoin and price fluctuations and volatilities which we heard certainly from the ranking member today as well as well as what are called initial coin offerings I see owes for capital fundraising as investors though we're interested in the broader ecosystem and we use the term crypto networks to describe what we think about as that ecosystem very specifically crypto networks for us means a new way to build digital services and by digital services we mean any internet application that obviously may exist today so ride-sharing applications social media applications and probably a whole host of things of course that we haven't even thought about but where those digital services are owned and operated by a community of network participants rather than by a centralized corporation now I realize at first blush that when you think about community ownership and management of an asset that may seem odd but in fact if you look at the technology industry there's actually a significant precedent for the existence and success of community based networks in the development of a significant portion of technology first is what is known as the open source software movement this started back in 1983 actually at MIT by a professor named Richard Stallman and at the time it was a very very radical notion the idea was that a community of developers would publish and then freely offer their software to others who could modify that software who can incorporate it into various other projects it was really in many respects a very liberal movement around opening up and reducing kind of copyright initiatives and software if you fast-forward to today the open source is the predominant method of software development and software utilization today in the world for any data center you go to which is obviously where major corporations run their internet applications Linux which is a major operating system is by far the dominant operating system in play and for all of you who like myself who walk around with your cell phones all day long the vast majority of components in your cell phones are what are called Android and the centrally open-source software so the history of open-source software I think is relevant for how we think about the potential for what bit coin and crypto networks can be the second important historical analogy is around what we call open protocols which really form the foundation of the modern internet that we all use today an example of this is something called SMTP which is the protocol that we all use for email transmission it's an open protocol it was governed in many cases by open communities by networks by academics and in many cases with government funding and many people built applications on top of these open networks precisely because they knew that the nature of that protocol would not change they could rely on the steadiness and the consistency of that protocol on which to build applications so if we look at technology open protocols that are well developed and well maintained can become the building blocks on which massive customer utility and economic growth can be built it's also the case however if you look at the startup world that many startup companies have failed by relying on what we called platform risk which is building on other platforms that are governed by centralized corporations and then finding that the rules of the road change over time and that really does significantly handicap their efforts as a result of this what we now see in our business is many developers are hesitant to take on this platform risk and are instead looking at things like crypto networks as a new and innovative way for developers to create new digital services without the Intendant risk that comes from depending upon centralized platforms in many ways crypto networks borrowed from the nearly 50 years of history in the technology industry which shows that communities of developers can share their work openly and properly govenor network without centralized authority but crypto networks also introduce a very powerful economic incentive that didn't exist in these prior generations the presence of what we call touken which creates a direct financial incentives for members of the communities to in fact develop and govern the networks appropriately the token really in a sense is the glue that binds the various players in the ecosystem and provides the appropriate economic incentives for all market participants understandably so this creates a whole new set of challenges for regulators consistent with recent statements that we've heard from the director of corporate finance at the SEC we believe that the regulatory nature of crypto networks varies with the stage and development of a particular project briefly when a centralized sponsor is seeking to raise capital from investors prior to the functional development of the network this is probably and what is known as an investment contract and therefore properly regulated as the security however the nature of the tokens that are delivered on that contract can ultimately be regulated as commodities once the fulfilment of that investment contract has occurred as stated by the CFTC some tokens are not securities once the network is functional and in particular in cases where the network is decentralized from an ownership perspective we believe the nature of the tokens looks more like commodities and securities and therefore probably rightly should be governed by the CFTC this is precisely because there's no centralized sponsor on which the efforts of the value of the token are largely depend instead the tokens have value based upon the utility of the service to participants this actually looks much more like the way commodities trade in conclusion the US has long enjoyed the fruits of an age innovation in the form of economic growth job growth and consumer utilities stemming from many of the great technology companies of our time and we believe that crypto networks present a new and exciting opportunity for us to continue on that trajectory doing so however will require that we develop a regulatory framework that encourages risk-taking and capital formation provides clarity and certainty to market participants and of course protects individual investors and the integrity of the markets thank you for the opportunity to be here today Thank You mr. Cooper mr. gore fine five

[00:42:10] minutes Thank You chairman Conaway ranking member Peterson and members of the committee for the opportunity to testify before you today I'm chief innovation officer and director of lab CFTC at the US Commodity Futures Trading Commission the testimony presented here reflects my own views and does not necessarily reflect the opinions or the views of the Chairman or the Commission in May of last year chairman giancarlo announced with bipartisan Commission support the launch of lab CFTC the agency's effort to help create a model for regulatory engagement and modernization in light of the ongoing digitization of our markets its mission is to facilitate market enhancing innovation inform policy and ensure that we have the technological and regulatory tools and understanding to keep pace with inevitable change the building blocks of our effort our engagement testing and experimentation and education shifting to the primary topic of today's hearing we are interested both in private or permission distributed ledger technologies that can improve market infrastructure and in public block chains that require the use of a virtual currency developments across this spectrum have society rethinking the nature of money how people transact and how we can more efficiently engage in regulatory economic and market activity with respect to public blockchains proponents note that they unlock digital scarcity enable efficient transfer of ownership and power the execution of applications and all of this can be done without the need for a trusted central intermediary that was traditionally needed to verify that each party has and does what it promises many however appropriately worry that virtual currencies and tokens may be used for illegal activities and are prone to fraud manias and bubbles driven by potential misunderstandings and myths regarding their scalability utility and intrinsic value with recent hype around this space there has also been a proliferation of icos which may be intended to raise capital for a venture and may bear the hallmarks of a securities offering our colleagues at the SEC have been thoughtfully addressing related challenges and providing additional clarity to the marketplace and from the CFTC's perspective given the potential to tokenize a broad range of economic assets it is important to remind the public that digital assets can also be commodities or derivatives depending on their terms and how they are structured given the potential and the challenges of this space chairman Giancarlo has made clear that the proper response by regulators is not to dismiss the entire movement as misguided or foolish but rather to take the time to learn facilitate the promise guard against risks and bad actors as part of this effort lab CFTC published its first FinTech primer on the topic of virtual currencies in October 2017 the primer explains that the agency determined in 2015 that certain virtual currencies such as Bitcoin are commodities and therefore implicate our jurisdiction the CFTC has regulatory oversight authority over futures and swaps markets based on commodities and that has anti fraud and manipulation enforcement authority over these and the underlying commodity markets it is important to note however that we do not have oversight authority over these underlying markets additional details regarding CFTC oversight of crypto related markets and enforcement and education efforts since the self-certification of Bitcoin futures in December 2017 can be found in my written testimony moving forward one thing is certain none of us are able to predict exactly where this innovation is heading it is accordingly incumbent upon us as a 21st century regulator to continue studying learning and keeping pace with change we look forward to ongoing close collaboration with our regulatory peers including through the eff Sauk digital asset working group we all have the shared goal to educate market participants target bad actors and ensure an efficient and effective regulatory framework we are also focused on bringing clarity and certainty to the market but need to be sure that we are thoughtful in our approach and do not steer or impede the development of this area of innovation while some may seek the immediate establishment of bright lines the reality is that hasty regulatory pronouncements are likely to miss the mark have unintended consequences or fail to capture important nuance regarding the structure of new products in the late 1990s during the early days of the internet senior government advisor policy advisor IRA Magaziner made the following observation that given quote the breakneck speed of change in technology government attempts to regulate are likely to be outmoded by the time they are finally enacted end quote given this dynamic the government largely avoided a prescriptive approach in favor of principles focused on educating and empowering law enforcement and allowed the this area of innovation time and space to develop all while maintaining the ability and careful vigilance to act to ensure market integrity this approach generally seems like the right one when dealing with new technologies which are largely agnostic as to how they are used the role of the regulators to facilitate use of new technologies that can benefit markets and the public more broadly while deterring and pursuing those who seek to use technology to do harm thank you and I'm happy to answer any questions you may have thank you where's Korra find mr.

[00:47:28] Gibbs our five minutes thank you good morning chairman Conaway ranking member Peterson my condolences on your dad's passing it's good to be with you all here today I think I've testified in front of you a dozen or two dozen times and some previous capacities but since I was last with you I took on a new role at MIT where I am engaged yes in researching teaching lecturing and advising on digital currency and blockchain technology now I say that but for those who don't know because some are new I also chaired the Commodity Futures Trading Commission for four or five years and before that long ago I was 18 years ago Minh sax so I bring from my years in finance my years in public policy and now I guess as an academic some perspective of what I've learned and with the chairs permission one thing I've learned as an academic is to ask the audience a little bit about their engagement in Bitcoin so again with the chairs permission if I could just see us how many members of this committee have invested in crypto currencies and I'm going to ask the audience to so we've got the show line in the audience Bob Cheryl the audience yeah we've got about half the audience that's an interesting split there we go I would say the other thing that splits the community in my discussions usually as if this is not a community that splits normally like right and left Republican Democrat this is a community that splits more about Bitcoin maximalist and Bitcoin pessimist or you know skeptics or one and and by the way some of those skeptics and pessimists or Republican and some are Democrats some are Nobel laureates some are in finance whether it's Jamie Dimon or Warren Buffett and then some of the max les can be a venture capitalist like an andreessen horowitz and elsewhere so it's interesting this wit in the community I'm probably a little bit center maximalist if I can say that you know I am an optimist on the underlying technology you'll also hear some people say well not that Bitcoin but the blockchain technology is good and they kind of split their their views that way so again what have I learned blockchain technology I believe has a real potential to transform the world of finance because it is about money it's about moving value on the Internet this new technology could lower costs and risk in the financial sector second to reach its potential I feel strongly that and for public confidence to reach its potential we need to bring it inside the world that we know the long-held public policy frameworks know what are those frameworks Congress has a role to play to tinker about these frameworks I've just say what are our historical frameworks about technology and finance we guard against illicit activity like tax evasion or money laundering we insure for financial stability and we protect investors and consumers those are the three big ones we protect against illicit activity we insure for financial stability and we protect investors everything else is debatable and you we need to adjust the details underneath that third the SEC and CFTC do have a role to play both of them have roles to play they've released numerous notices and enforcement actions and so forth however there's a lot of non-compliance I mean there are thousands of entrepreneurs out there they're probably right now are not complying with SEC guidance and they're fewer that are not complying with CFTC guidance but that's just because the CFTC doesn't have ever cited this thing called the initial coin offering market and and that's where there's a lot going on and this thing's going large and big it's about two hundred and fifty billion dollar market quarter of a trillion is getting some size I mean the overall capital markets in the world are about 250 trillion they're 300 trillion so it's not threatening that but thousands of eyes cos have been raised twenty billion dollars of capital formation I'm here to say nearly all of them I don't know if it's 98% or 97% but nearly all of them are probably securities under our securities laws because they're being offered in a pre functional time this IC o---- markets rife with scams and frauds forth bad actors have figured out how to use this new currency sometimes it's state actors we learned last Friday was the the alleged I should say with the alleged 12 Russians spies Venezuela tries to raise it off of their oil and outrun US sanctions policy v while federal agencies are engaged current laws apply to this activity there are gaps so if I convention a few of the gaps first I think that there's gaps around the crypto exchanges themselves either where you can buy and sell why because they're being right now regulated through state money transmission laws this approach regulating them like Western Union or money grams just not satisfactory because crypto activity is more complex and it's harder to trace and it doesn't build on top of the traditional banking system it's built on something that we can't see that's out there in other countries like in China and Russia so second the crypto exchange is lack broker to access they don't have brokers so there's no brokers by the way sending 1099 bees and my detailed testimony says you know maybe the IRS should do something about that so you can just have reporting of the gains third the issuers of securities the crypto space are only slowly coming into the SEC Rimet I think this is going to take two three four years before the SEC really cleans up this space and so there's gonna be a lot of caught can they go faster can we do it right but it's gonna take take some time forthe crypto derivatives are being handled by the CFTC I think they're doing it well but there's two things that worry me about the technology and one is that the under ret unregulated underlying crypto cash market is a mess so the corn and wheat markets that you ever see the the gold and the oil markets we have some we have a lot of history we have some confidence of that about that and then the CFTC can do their job layering over those underlying commodities the CFTC is regulating derivatives but they're referencing an underlying market where it's just at best the Wild West and at worst it's a it's it's pretty bad so about that underlying market the CFTC has general anti-fraud and any manipulation authorities with regard to it but I think the Congress will be debating it probably not in this Congress but I suspect in the next session the next Congress you all will be debating should you give the CFTC additional authority or maybe some other agency you know maybe it will be the SEC somebody else but I think the CFTC to have additional authorities about that underlying what I would call cash crypto market it's 70% of the market the SEC has securities the CFTC had derivatives I think you want to debate whether to do something about the underlying market and lastly I think you'll need to give them resources along with your friends over at the Appropriations Committee because I think these agencies will need that thank you

[00:55:03] thanks mister mr. Ness five minutes

[00:55:06] thank you all for inviting me to testify this morning I certainly agree with everybody that's gone before me that this technology does have the potential to be transformative one of the questions I get asked a lot is why don't we just call these things securities we have securities regulations we could create a scenario where these things get registered and then become quote unquote freely tradable so why not just call them securities deal with existing laws and I think the the problem with that is they exhibit some characteristics of securities during certain phases and not in others and especially when we get to full functionality when it's a truly completed product that is being sold the intention of that product is to be used in a network and that really can't happen at least not at the speed of software which is really the the fundamental principle here behind these decentralized protocols is to allow for value transfers truly at the speed of software you can't do that if everybody's got to be a broker dealer and all the intermediaries have to interact in a way that that would be appropriate for securities so we need to come up with a fairly novel and and you know pragmatic approach to dealing with the fact that there needs to be some investor protections particularly in the early stages while the thing is a PowerPoint deck and an idea in somebody's mind but find ways to create some clarity around how and when it goes from being sold as a security to being sold as a commodity and that is a very important imperative right now because we are seeing so much activity frankly and the the threat of sort of people going offshore for lack of clarity is a very real one I say in my 25 years in Silicon Valley I have not seen circumstances where you go to a meet-up in places like you know Palo Alto or even San Jose and you see regulators from zhuge Switzerland and Singapore and Hong Kong and Bermuda and and an end and so to avoid any kind of race to the bottom I do think that there's a serious imperative about getting something done before we have a situation where we're trying to entice people back into the country because then the standards would really have to be lowered to do that so I think we have an opportunity now if we get ahead of the truth light but that's an important idea around why we need some of the bright lines to that end I did in in some of my written testimony include some materials and a proposed regulatory framework that both talk about what the existing laws say and how the existing laws treat these so-called utility tokens and you know there's sort of a 50 page memo on how the existing laws work to avoid having to go through that 50 page memo type analysis with each and every one of these I think the bright lines are really what's necessary so there's a regulatory framework that we've been thinking a lot about too that would create that that set of bright lines that would enable the regulators and the regular you know the companies going out there to really know how to sort the good ones from the bad ones and and I do think that starts with kind of this test around how we and the investment contract analysis for you know regulating securities as securities in the in the primary offering in you know if they're being sold sort of pre functionality before they're before they're fully functional but coming up with ways to say that once they are fully functional how do we let them now trade as commodities effectively and the trading is important because as I said this is the movement of value to have value it needs a price and the markets really are a necessary part of this so the fact that there are secondary markets is is a key part of this they need to be able to trade in those markets to establish price they also need to be able to you to be used in their networks as non securities and so we need to come up with ways to say when they're being sold to investors as investments let's treat them like securities when they're being used in the network or they're being traded in the secondary markets let's call them commodities thank you well thank you mr. Ness the

[01:00:15] chair remind members that they'll be recognized for questioning in the order

[01:00:19] seniority for members who were here at the start of the hearing after that members will be recognized in order

[01:00:24] arrival I appreciate my colleagues understanding and I'll recognize myself for five minutes yes I agree with you that if we don't get this right and we flush the innovators offshore into other countries that getting it back is a lot more difficult so hopefully we at least this start of the the process with this hearing that we can get to an answer that doesn't do that mr. Baldev mr. Cooper you each noted that tokens and crypto networks had the potential to create next-generation open Internet protocols can you flush that out a little bit for the layman and myself that understand the words but if you could think that tell us what those actually mean it'd be a little helpful sure thank you so when we say open open means a couple things in this case we mostly mean open access when we say public blockchains which means that anyone can join the network it has to do with the degree of gatekeeping which is not necessarily an all-or-nothing kind of a decision but we can if we start thinking of public blockchains as being more like a public Commons it's a lot more like the Internet where and you have a lot of choice as how you how you access that sort of network we also usually mean open source as mr. Cooper mentioned so that we're allowing auditing of that code which increases trust of the code and most of the the core technology that powers the backbone of the internet is open source I agree with all that I would just just to give you maybe a very specific example imagine in the future you know a social network today right you have as users of social networks of course you have an intermediary in many cases a company like a Facebook who obviously is taking and utilizing the consumer data and then obviously developing relations with advertisers and others as a way to monetize that data that's their business model in the future utilizing a crypto network you can imagine a world where you as the user own your data that data is cryptographically secured and you choose which data you want to expose to various advertisers or other promoters and the flow of economic value in that case as opposed to going through an intermediary might be going directly from an advertiser or a promoter of products to you as an individual as you've kind of governed the use of that data so that would be kind of in very broad terms the way to think about kind of expansive view of what this could look like alright mr. penafiel you talked about the Howey test which seems to be the gold standard among securities lawyers who can spell that last night can you you talk about that be maybe the outer edges just where one of our questions were trying to answer is are these securities are the commodities and where does that transition occur and is it you know where could you talk to us better about this how he test and why do you think that's the outer agent and just how should it apply to to distinguishing between commodities and securities certainly there are two questions the first is lawyers are inventive they can rework the formal form of a transaction to make it into anything how he describes the outer limit of the kinds of legal forms that can be turned into investment contracts that can be turned into this sort of exchange I give you money now and I wait and I reap the benefit of your labor on the other end but the difficulty with that is that while courts must be able to look to the economic realities of the transaction look underneath the form because if we just look at the form if we just look at what it's called then anyone can just title it can title the asset whatever they want at the top of the piece of paper and escape whatever regulation they want so courts have to look past the formal titling of the asset to the economic realities of it however they also have to understand that the very flexibility of these tools both the flexibility of legal forms and the flexibility of this database technology means that it is very possible for people to be using a product for one entirely legitimate purpose and have other people begin to use it for different purposes an example of this from outside of the cryptocurrency area entirely would be the discussion we had several decades ago on VCRs right the question was some people use them to make illegal copies many people don't how far are we willing to go in rooting out bad uses that are beginning to cut away a healthy tissue and that's why I believe Howie is the outer circle it's it's it's necessary that it be there so that SEC in this particular case can reach cases in which people are labeling something one formal legal form but are actually engaging in an investment contract that's what it's there for but it doesn't really tell us anything about what the regulatory landscape should actually look like at the end of the day in fact the regulatory landscape in my estimation should and will look like something substantially different it will look like a bit of a handoff like a relay race in which for certain functions and under certain conditions one one overseer may have authority under so I lost your mic Thank You mr. Fairfield ranking member five minutes Thank You mr. chairman um I don't know where to start you know I'm somebody that believes we should still be on the gold standard and that I think we should honor the Fed because I don't really trust them you know so what worries me about this is that you know you say there's 250 billion dollars of capitalization here or whatever how much money is actually here I mean I just this is just seems like a Ponzi scheme to me it's um you know I mean I think the stock market is is a casino you know that's where I'm coming from so I mean so if I you know I'm gonna send a hundred thousand dollars to somebody through one of these deals who's gonna stand behind it you know where's the you know so I give the money I guess to one of you guys and then you turn around create these things and send it to somebody else for what in the meantime what if you went broke I mean I was involved when we found out about credit default swaps and figured out that everybody was trading these things and there was nothing there and and if we're gonna stop them the whole time what a collapse you know and I don't know if we got a similar situation going on here with this but you know I just what is behind this I mean what if there's no money at the end of the day who's gonna make up for this can anybody explain that to me good night should I take a shot I think that I'd split it into two buckets in this field where venture capitalist entrepreneurs are developing an idea and asking people for money they publish a white paper they build a following reddit post and these are different communities social network posts medium and so forth and they build a following and then they sell it and raise money and sometimes it's small just like a crowdfunding on Kickstarter but most of them aren't there's been 3,800 of them today over 50% of them fail within four months and and there's different estimates how many are scams and frauds there are good-faith actors in the middle of it too a lot of good faith actors but there's a lot of fraud and scams if if right now if they fail you've only way you could do is try under the securities laws to say they were an unregistered non compliant security and try to under the private rights of action senator securities law try to get something back nothing in the second category its digital gold the digital gold which is Bitcoin and while there's nothing behind it I would say mr. ranking member there's really nothing behind gold either you might all of us we have what's behind it is a cultural norm that for thousands of years we like gold the value of gold the worldwide value of gold is seven trillion dollars by the way just to give you a little sense but only about ten percent of the annual production of gold is used in manufacturing the rest of it is because we think it's kind of nice to have gold necklaces and jewelry or we do it as a store of value so bitcoin is a is a modern form of digital gold and it's a social construct but the money they are there just creating this money out of nowhere I mean the the in the in the first category the the the investor type that would be understated but in the second category you're right which was under this committee I mean you're you're gonna be grappling with this for a while I think I mean in the first category I mean I assume most of people are sophisticated enough to realize they're gonna get fleeced potentially you know I mean it are they or I mean I think there's people get into that area that don't realize what they're getting into they think some are no they're gonna get rich and they're gonna you know get into this deal ahead of everything else and it's going to go up and they're gonna make ten thousand percent on their money and whatever else and some guy is selling them you know on on this I mean I don't know where the protection is here there there's some are very sophisticated like andreessen horowitz and they manage seven billion dollars there there's there many like that but there are others that aren't but you're right I think this Securities and Exchange Commission has a lot of work ahead of them to sort of bring this market into the first part of the market that 70% of the market is commodities but the first part this ICO marketplace is the SCC's they're working at it but they've got a lot of work ahead if I could if I could just add mr. ranking member you know you raise this concept of kind of almost trust right which is who do I trust what's the trusted intermediary the the beauty at least certainly from the perspective of an investor and as a consumer the beauty of these crypto networks is what you're trusting is you're trusting kind of cryptography you're trusting math you're trusting software as opposed to a centralized intermediary and you have a community that's governing the interest there so in other words if the community tries to do something that is inappropriate all of this software is open-source all this software can be basically what's called forked and literally taken over and you know recreated in a new community so there is a norm of community governance that exists in these areas that really substitutes trust from a centralized intermediary to trust to a community that's responsible for government thank you but I'm still skeptical mr. Lucas 5ms Thank You mr. chairman and along with the gentleman from Georgia mr. Scott I have the privilege of setting both on this committee and financial services so I work on this discussion by the panel when it comes to the next regulatory frontier as it impacts the two committees first mr. Cooper how should regulators think about the function of the token when choosing to apply regulatory requirements should regulators look to the functioning of the token at all or only the issuing activity and for example say there's a cryptocurrency we'll call it for the sake of discussion Bitcoin 2.0 and say it functions identically to Bitcoin in every way except that a small portion of the total tokens were pre mined and distributed in token sale is it possible to issue Bitcoin 2.0 through ICO and not have it be a security or is the functioning of the token irrelevant because of the manner in which its issued so I'm asking what my folks back home would define as geek questions but this is where we are yes sir let's say you so yes a couple a couple things so the issuance of those tokens and the sale of those tokens in exchange for money before a network exists I do believe is a what's called an investment contract and should be regulated as such so if I offer if I develop a white paper and I tell you I'm gonna build this thing and you give me money for it before it exists if I fleece you absolutely the SEC has jurisdiction to you know bring me up on securities fraud charges you have private cause of action no no question about there once the network is functional and therefore the tokens are doing what they were intended to do whether that's storage or other things the value of that token now really is not a function of the efforts of the developer it's the really the question of what's the utility of that token much like any other commodity and so therefore you know certainly my view is that in that case the underlying token itself should be regulated as if it were a commodity because that's actually kind of the nature of what it's actually doing thank you mr. Ness the last prong of the Howey test identifies as an investment contract or transaction in which an individual expects profits solely from the efforts of the promoter or the third party yet for almost every token project there are multiple avenues for a holder to come into possession of token when a net works fully functional token can be purchased through promoter traded on a secondary mark exchange within a network are earned by performing work to support the network in each of these cases the efforts of the holder vary and can implicate the how detest differently how should regulators think of an asset that has multiple methods of delivery an asset that can be both purchased and earn or should the method of delivery determine the regulatory regime governing an asset fortunately I think it's a relatively simple answer which is that it really comes down to the same test which is pre functionality versus post functionality or whatever we end up deciding is the trigger point for determining the different status it seems to me that however you come by this I mean I suppose there are two two fundamentally different ways one is to get it from the issuer directly the other is to get it from some third party and if it is in pre functional the pre functional stage and you are getting it obtaining it from the issuer I would argue that is a primary offering of an investment contract even if it's essentially earned on a network because at that point there's a lot of case law out there that you know if you do work for a security you know you've paid for the security there's consideration there in the services so I wouldn't say that there's a difference between earning it versus buying it it's going to be a security depending on its characteristics as you know as we end up defining them pre functionality versus post functionality mr. gore fine in your testimony you mentioned the new working group set up by F sock and the Commission's work with the SEC and other regulators this committee cares a lot about coordination between financial regulators when it comes to these sorts of matters so can you talk more about how the regulator's including the CFTC and working together are working together I should say to understand and clarify their overlapping jurisdictions and how it affects the virtual currencies yes thank you it's a great question and we agree that that coordination in collaboration with our sister agencies is very important on this type of a topic you know one thing about this space that's common across a lot of areas of financial technology is that it inherently cuts across Geographic and jurisdictional boundaries so it's very important to make sure that we are coordinated and sharing information with each other so certainly on the topic of crypto currencies we are working closely with the SEC to make sure that we are coordinated and just to step back and explain how we view our rule set the definition of commodity under our statute is very broad so a lot of things are commodities and we're soon after the World Cup so think about soccer balls those are commodities just because something is necessarily a commodity doesn't mean that we have a direct regulatory interest it's only when we start to see the rise of futures or swaps products built on those commodities that we have kind of direct oversight but when the SEC applies the Howey test and determines whether something fits within a securities law framework that certainly matters to us because then that's something that would fall under their jurisdiction hence the need for us to be in close communication with the SEC mr. chairman if you'd indulge me for one last thought for a number of years I sat next to Ron Paul on the Financial Services Committee so when mr. Peterson brought up his observations about gold standard I can't help but think about mr. Ron mr. Paul's story noting that when the Roosevelt administration took us off the gold standard in 33 they sealed every safe deposit box in every financial institution in America and before you could open it you had to have a federal official of appropriate nature or state designee to be with you so they could make sure you didn't have any gold coins gold bars or gold certificates in those safe-deposit boxes so I think the ranking member brings up some interesting observations even gold wasn't safe in 33 you'll back mr. long reserve of government so thank you David

[01:17:45] Scott five minutes Thank You mr. chairman you know there is a good amount of very serious and legitimate concern about coins that are being offered I mean I'm not sure we realize it but there are over one thousand six hundred coins currently and growing every day and and we've got to look closely and watch how these coins are being used and if it is appropriate for them to be regulated to make sure that they're not being used improperly I'm not sure that the panelists or the audience or those who may be watching via television know but I find it very concerning that in the indictment of the twelve Russian hackers that hacked the DNC's servers did you know that they included in those charges within the indictment was the fact that the Russian hackers used principally Bitcoin when purchasing the service when registering the domains and otherwise making payments in furtherance of illegal hacking activity on the United States elections so what I'm saying is that with every new tool our technology is moving fast it's going at a rapid rate and we've got to grab hold on what we're doing to make sure that we do everything we can to ensure that these new coins are not being used illegally or for illicit activities like when the Russians attacked our election system now I also have read in some news coverage of studies studies that are out that think that not all of these icos are a positive thing there's a lot of debate on that and I think our ranking member mr. Peterson expressed it you at a customer advisory that we published through our office of customer education and outreach where we're tackling exactly this issue which is that it's a very speculative risky space for especially retail participants to be participating and we encourage them to really do their research and ask themselves important questions about the value of a lot of the different types of offerings that are out there it's an area that we think education is a key component I'll also add that from an enforcement perspective the CFTC is a well as well as a lot of other agencies are looking to target bad actors that are trying to take advantage of a lot of the enthusiasm around this space so the combination of Education enforcement and then proactive engagement as lab CFTC is doing are important regulatory tools for us to deploy yo cyber smart Austin Scott five minutes Thank You mr. chairman and well we are a long way from the peanut fields in Sycamore Georgia and I can't help but wonder if somebody who prior to getting elected to Congress actually had a series seven what would a prospectus on a coin offering look like it I don't know if it would be one page or or 10,000 pages or more but one thing that it's clear to me is that you can certainly create a coin for anything you can create a coin for any color you can create a coin for any opposite color so there's an infinite number of coins that can be that could be created I see no way to regulate every coin offering that's out there but I would also tell you that when you turn on CNBC and they show the Dow the SP and the Nasdaq on one side of the screen and on the other side of the screen is a value for Bitcoin then certainly it's reached the level where we need to have some type of regulatory certainty in this in this area most of my questions are for mr. cork or fine you run lab CFTC and you have held office hours around the country where you've met with with many people in the industry can you tell us about the interesting concerns of the developers who are working on token-based projects and how sensitive they are to the regulatory environment yeah thank you for the question and in fact I'm heading this afternoon up to New York to have another round of office hours with innovators we've had an incredible opportunity to go to various cities and and meet with folks that are heavily involved in a lot of projects across the spectrum that you've heard about today and you know it strikes me that it is a new generation that is really looking through a technology lens as to how we can transform markets make markets more efficient and effective but there are a lot of questions that they have and that's the reason we have the engagement function of lab cftc a lot of folks are trying to get a lay of the land and start to understand the alphabet soup of regulators in DC so through labs CFTC we do try to establish some guideposts and educate as to how our framework applies and in some situations will explain well this is where the CFTC fits and then there are questions that you may need to look at securities laws to understand the interplay there but in response to a lot of common questions we were getting that's why we published the FinTech primer it's our way of kind of facilitating conversation with the community to make sure we are being responsive and where possible providing as much clarity as we can other efforts of CFTC have been around things like actual delivery is a question that comes up a lot in the cryptocurrency realm so our division of markets and oversight has put out a draft interpretation that deals with actual delivery all of these are efforts to start enhancing and providing as much clarity as we can mr. Goren you suggest in your testimony that the Commission has an interest in this technology being used for capital markets infrastructure many of us on this committee include myself have introduced a piece of legislation the CFTC research Modernization Act have you had a chance to review that legislation and do you think it could help the Commission understand the emerging financial technologies and and help us better understand how we need to regulate or in some cases not regulate certain areas yeah thank you I mean one of the things that we're really focused on doing is making sure that we're engaging with technologies and fully understanding them so what you're raising is you know the ability to give the CFTC authority to research and test new technologies I'll give one example of how that may work in this space we talked a little bit about private and permission to distributed ledger technologies which could impact and improve capital markets infrastructure there's a lot of interest from market participants who are saying there may be more efficient ways for us to do for example regulatory reporting in a lower-cost way for them and in a way that for the regulator is is more consumable we can receive standardized data without kind of the traditional push process that could be very valuable what what you're pointing out congressman is that authority that that's proposed in your legislation would allow us to actually work with a consortium that type of infrastructure and that way from a CFTC perspective we could better understand how can this technology benefit our markets how would regulatory reporting be facilitated and really kind of lift the hood and really understand the technology instead of having kind of a high-level conversation so those types of authorities would be very very helpful to us thank you very much Gemma sorceress custard - thank you very

[01:28:24] much mr. chair and thank you this has been a very enlightening hearing and I appreciate all the wisdom mr. gore fine picking up on the CFTC regulations such as it is do you have sufficient resources at the CFTC or what would you recommend that you need from Congress going forward thank you well harness that the Chairman on this our Chairman's been very vocal about the need for the CFTC to have the right resources to be able to keep pace with our markets and regulate our markets most effectively I believe he's asked for 281 million dollars for our budget and a lot of those resources would be utilized not only with bringing in economists but also making sure we have the technologists in-house to be able to keep pace I'm I'm a lawyer I know multiple layers deep of the onion when you're talking about technologies but we really need to be able to get to the core of technology to make sure that we're ascertaining where new risks are arising so certainly with greater resources our agency would be able to even scale up some of those activities so I would just say for the record one obvious place to look for those resources would be to get the IRS on top of how a to tax the benefits and the gains that are being made because one of the most troubling comments today is that the IRS is not on top of how to how to capture those gains and I think that's something that we need to look at but it's also something on your side with some conversations with your counterparts at the IRS I want to quickly turn to the two professors and get a sense of a very troublesome aspect of this and if anyone else wants to comment so Credit Suisse analysts last year identified that 4% of the addresses hold 97% of the Bitcoin in the world and the philosophical goal of Bitcoin is to replace governmental backed fiat currency but if that goal is achieved you'd have an unprecedented amount of wealth and power concentrated in the hands of a very small number of people is this concerning to you and and what should lawmakers be doing with in this regard and there's a couple minutes left in some extent it's not surprising because most economic small economics ends up with some central is so an irony is that the technology is supposed to be a dis decentralized that was easier this struck me because all the commentary has been this and so it's one of the natural ironies because we all humans tend towards clusters and clumps and centralization and taking into account with the indictment that some of these addresses are in Russia with people that wanna do harm to our so more specifically to your question some of that concentration is because it's the large exchanges the crypto exchanges like coinbase has 20 million accounts they may not all be active and they hold 20 billion dollars of crypto funds and the market I should have said the market went up in the last day so it's now about 290 billion but just one exchange has a big chunk of it so I don't know if that is that then owned by multiple parties well so it's it's I'll speak a little bit like an accountant which I know the Chairman can appreciate but is that coinbase has a several accounts but they're only there coinbase and then if I wanted to trade I don't but if I wanted to trade then I have an account at coinbase these addresses would be in coin basis name not in my name so I only have a right to coinbase coin basis actually has whatever you want to call a right on this ledger in Florida my question is that not very many people end up controlling that is influencing and and if if the long-term goal is to cut out state-sponsored currency that is problematic in my view yeah I I think you're right to be concerned about the centralization of power but it when it's not necessarily so that a single address equates to a single legal entity in any way any one person can generate any number of addresses that have smaller or larger amounts and we don't really have a proper way to put it what do you think the percentage would how would you describe to the public watching today the distribution of influence there certainly are loci of power but also if you look at the movement in some of those earlier addresses or larger addresses it's commonly accepted that about 25% of something on a network like Bitcoin have not moved or have basically been lost at this point and so you'll see funds sitting in places and simply not moving and the the common consensus is that the private keys are the access to those wallets have simply are those addresses have simply been been lost what my time is up and I'll yield back

[01:33:57] but just to make a plea for democracy somewhere in this process I I appreciate the Chairman for scheduling the hearing thank you yeah Julian's back mr. Allen

[01:34:14] five minutes Thank You mr. chairman and this has been very interesting the gig economy is moving at light speed and the rest of us are just kind of dragging us along but but it is exciting you know I guess the the problem that we're having is from a regulatory standpoint is is through throughout the gig economy is obviously the reason it's doing so well is because there's lots of freedom and very little regulation but we do know that there are lots of problems people are you know I mean as far as connectivity as far as security and that sort of thing how do we reach a balance with this a in you know what we're doing is we're creating another money supply here is that as I see it in other words you disc its global I mean it's a global currency you know I just don't know how that works we you know we're like we have our basis our dollar I believe kind of sets the mark for the world right now explain how this how this is gonna work across the world yeah I mean you mentioned Afghanistan I don't what their currency base there is but I'm just gonna open it up I mean handle I don't I can't visualize how this could possibly work okay can I give it one real quick shot is government's sound governments like the US I mean if we maintain you have to maintain ur fiscal discipline and all the things we need to do if you can keep it right yeah but sound government's have certain advantages I think because of the stability and also because we allow our currency fiat currency to be used for all its legal tender for all debts public and private and you can use it to pay taxes and so there's some just natural advantages I think that how this might play out I could see a country that's in distress the Venezuela's of the world where in the future one of these currencies will be a better thing for their public than in that their individual citizens for the individuals for the mirga's they're not dealing through their government they're dealing through this global currency yeah I could see that I secondly think even in a stable economy like ours that our Federal Reserve with our respect has a little bit of competition for the payment system we Americans spend between a hundred billion and two hundred billion dollars a year for our payment system that's only a half a percent to one percent of our economy but it's still a hundred billion to two hundred billion dollars a year and so startups and entrepreneurs have a chance to chip away at that and get inside of that that's competition to the commercial banks and and the central bank when our payment system other feedback we got about two minutes yeah I just wanted to add to that around the Venezuela point that there was an some interesting usage of Z cash in Venezuela over the last year as a sort of bridge currency to the dollar so that citizens that could not have traditional access to get to the dollar we're using a crypto currency as an intermediary given the volatility of crypto currencies you wouldn't necessarily want to stay there but as a bridge and a sensor censorship resistant bridge at that it's somewhat important so all that censorship resistance can be seen as a double-edged sword we might not necessarily like the way that people are doing bad things quote-unquote with the network the ability to project into places where they also would prefer people to not be doing things should not be underestimated I can see where like a business located in a country where the government is is unstable the business community could really benefit from this what nation would I mean so then you got this competition between you know right now I guess the biggest competition is between the United States and China I mean you know there at the end seems to want to be the basis how do you I mean which nation would run this thing and ultimately be responsible for it was see that's the thing it's actually so it's it's it's decentralized so no nation does but you mentioned China I don't know there's been public reports but there's a lot of people in the community that say that though China the government has said we're clamping down the reality the reality is there's a lot of activity the Bitcoin is mined this is how its developed two of the biggest mining poles two of the three largest mining holes are in China the third ones in Russia and that combined is about 50 percent of the mining pools but beyond that the Bank of China is very actively engaged but the government is not fond of this well they're there of two mines yeah they say publicly they're not fond of it because they don't want their current their currencies not convertible so they're worried about people running around their currency that's the public face of it but underneath it they're doing a lot of work on at the Bank of China particularly is looking at it very closely because they're worried they wouldn't get their payment system right and they want to use it maybe there's also a bit of a land grab going on when it comes to enterprise distributed ledger projects where countries like China can go into emerging economies and do essentially free work for them using their technology which is impacting the adoption of specific protocols backed by various country in those regions yeah all right I'll yield back mr. buddy thank you very much

[01:40:03] god Darren five minutes Thank You mr. chairman cryptocurrency blockchain technology all have tremendous potential and I'm bullish on the prospect but we're in kind of a bizarre position here on Satoshi Nakamoto an unknown person or people who developed Bitcoin and this person or persons has nine hundred eighty thousand bitcoins and an estimated worth between nineteen point four billion to seventeen point nine billion so can any of you today and just raise your hand verify that mr. Satoshi Nakamoto is in fact a person or persons I don't believe it we've all agreed that it's a male all I asked okay Satoshi is female Satoshi's female grapes so none of you can verify who founded our own Bitcoin is my point which puts us in a strange position because normally we have industries and new currencies where we'd know who created it so that puts us in a weird position in addition you mind to develop new currency a process by which transactions are verified and you add it to the public ledger you compile recent transactions into blocks and try solving computationally difficult puzzles and you get a reward either a a guess a transaction for your newly released Bitcoin have we ever I guess gold is the only thing that we could even parallel to where we've mined in such a way have we ever had a currency online like this where you mine via transaction algorithms and solving puzzles on the Internet this that's that's the novel creation of yes somebody we don't know who she is Satoshi Nakamoto or he or collection but that that's the novel thing and when the internet was created my time is limited so we have an unknown person and a bizarre way of mining Bitcoin to get it together I'm more concerned though about being able to avoid money laundering for terrorism drug trafficking human trafficking tax evasion so I'd love to hear from each of you in one sentence on what we could do to stop money laundering and having Bitcoin and other cryptocurrencies be the choice of terrorists drug traffickers and those evading taxes we'll start from the left and going back one sentence because I've my times limited trust Vinson to do their job rely on other law enforcement mechanisms that work around strong cryptography we do not weaken two sentences bowls to them my time is limited I apologize Bitcoin is actually the worst tool to money launderer because every transaction is registered and fully recordable so it's actually law enforcement best friend okay while the technology can be peer-to-peer most activity takes place through a new type of intermediary where you can apply AML kyc rules okay on top of that rigorously require crypto exchanges to register and you may need to pass a law to do that but to make sure they register and that all the AML any money laundering know your customers being done there run-on sentence but helpful thank you the alleged Russian hackers were caught because they used Bitcoin thank you also concerned about two practices spoofing and wash Trading spoofing being flooding markets with fake orders to trick other traders into buying or selling and wash trading which is where cheaters trade with his or her self to give a false impression of market demand that lures others to dive into so can anybody give us any insight into how to stop spoofing and wash trading and we'll start from the right to the left now you know that's a tough one I don't have a good answer guess next register the exchanges and cops on the beat yeah we're a markets regulator that's something that we're able to police for within our regulated futures and swaps markets so worth a look at the underlying market to ensure that the right types of regulations are in place and are you all doing that right now the CFTC does not have direct oversight authority over underlying mark so we would have to give you jurisdiction to help with spoofing and wash trading it would be something Congress would have to look at in terms of authorities next mr. Kapoor yeah I agree either between the SEC or the CFTC you'd have to grant appropriate authority agreed broker dealers need to be treated like broker dealers I'd agree with that all right thanks and I yield back

[01:44:59] yep Jemma's Rebekah's Oh five minutes Thank You mr. chairman I'm wondering if for the benefit of our viewers at home across the country who are watching this hearing and are trying to understand the impact of the crypto currencies and what the future holds if if perhaps miss ball day and mr. Cooper could tell us where you think from a five to ten year view point where this is going to be the role that these currencies are going to have in our economy and how might this affect average consumers right now it's the market participants are mostly very sophisticated people do you see this insinuating itself into the broader economy sure thank you yes so we believe that this really is gonna create a whole new set of of infrastructure on which all kinds of new applications are built some which we may not even know about today so if you think about all the benefits we've reaped from you know Facebook and Google and all the kind of you know internet properties have been built today and negatives and negative - I think what the beauty of this technology is is it gives us a new set of platforms and again very critically those platforms are not controlled or governed by centralized corporations they're controlled and governed by community and so you can imagine all the utility that we have today but where the consumer actually has ownership of data the consumer has the ability to actually ensure that data is shared in a manner in which they want to be shared and consumer also can capture the economic rents from use of that data so we think the opportunity in that respect is endless mm-hmm sure I would say that there's two very different sides of the spectrum on the enterprise blockchain and distributed ledger side we're seeing mutualization of workflows kind of come to pass and that's a way for companies who kind of trust each other to do things in a more coordinated way that drives down operating cost on the the public side we can see to tag onto the gig economy statement earlier we can see a further kind of micro gig economy's happening wherein if people were to have more access and control over their own data this goes to for businesses as well we might be able to monetize that in new way so alternative business mechanisms to the current kind of data hungry surveillance capitalism that we see arising from centralized companies we might be able to challenge that kind of hegemony and and mr. Fairfield you referenced personal privacy issues how how do you see that coming into play here well there are a few the first would be if we were to follow through on the suggestion that KYC naml that has no your customer and anti money laundering requirements be imposed on many more actors in this space the initial reaction of many people who held cryptocurrency was that they did not particularly want those data revealed and they built products to try to keep that data from being revealed at least as far as the major exchanges and I've heard exchanges used a few different ways today but here I'm talking about the way you onboard you spend dollars you get Bitcoin for example I think that giving those exchanges the requirement under the Bank Secrecy Act to have kyc and AML requirements at the same time that they have fairly strict financial privacy requirements was a moderately decent fit for national security purposes we need to know when people can make a couple million dollars disappear in one country and reappear in another but at the same time there is some degree of constraint over what where that information can go once it's kept within financial institutions I think that's a good example of a mix that seems to work and maybe that would be a model we could spread out from and and just generally mr. Gensler or mr. gore fine as we look at the development of this it does seem that there is a issue that's going to affect government which is right now we know because we have paper trail we have electronic trails and documentation of transactions for which taxation applies for which government oversight and reporting applies how does government address this from the standpoint of its interest to try to make sure that taxation and other compliance issues are resolved that currently with our existing trim financial transactions we have mechanisms to have that reporting but I think it's it's really about knowing all the accounts this technology has what's called public keys and private keys and Z cash which miss bull debts involved in is even more secret than that but it's really knowing who owns the accounts behind that so it's know your customer beneficial ownership and then trying to do that through some of these central mechanisms like crypto exchanges it's not going to be perfect this is gonna be like a wacom all that it's going to be you know it's the IRS and the CFTC will work hard and then three years from now the technologists will have a new way to get around it mr. chairman could mr. Gore fly and respond to that as well yeah very quickly yeah if I may I mean you know one observation too is remember the most anonymous form of transaction is actual cash right people transact in cash there's very little record of that taking place most virtual currencies crypto currencies are pseudonymous so there is actually the ledger which is a fairly transparent mechanism to be able to pursue potential law enforcement as well as AML q I see so I just want to point that out but it is something that needs to be figured out by government thank you mr. Mishler boffo fabulous

[01:50:58] Thank You mr. chairman sorry I missed part of this hearing here but it might be well I'm a flip phone guy in a Bitcoin world anyhow all does you know no pretense here but mr. Ness they come from the flip phone part of North Cal as you down there in the Bay Area just a question I'll try and narrow down to it was talked about earlier in the committee about crypto networks and the internet protocols on tokens so would you touch upon what what would look like if that token is determined to be a security indium can you hit that for us yeah I think the issue really comes down to friction and while we can get to a status of free trading securities by registering them even when you do get to that status there are all sorts of ancillary friction they in and around the transfer of security you you need to have broker dealers involved and you need to have suitability requirements met and other potential disclosure issues and so forth that are ongoing and so when we're talking about trying to create the next generation of decentralized protocol layer kind of apps on top that are all interoperable interacting with each other and transferring value at the speed of software to deliver a service to a consumer it may it may be all transparent to the consumer that this is all happening under the hood but you can't have fundamentally the transfer of value at the speed of software if it's a security you're talking mean with the middleman of a typical financial institution right that's right yeah all right and again what please touch on the importance of increasing the access to the speediness of those types of trans transactions why why is that important well I mean to get a little philosophical I suppose I mean you know ledger technology is fundamental to Commerce right and double-entry accounting was an amazing innovation and ledger technology that you know pulled Europe out of the you know Dark Ages and the same thing can happen in in in a amazingly more robust way when we start to literally not just allow parties to trust each other through standard mechanisms of reconciliation but when we remove the reconciliation were the need for it all together and that is simply a philosophical point of view I suppose but it goes to this issue that we're at early stages of this we don't know where it's gonna go but speed is probably a good thing could I just say I'm an optimist I agree with what mr. Ness says but maybe it's the MIT and me now I think that the beneficial ownerships will be able to be tracked in a matter of milliseconds in nanoseconds not yet it might take five years but we'll get there technology's pretty neat how it grows and helps us well it's amazing thank you and as chairman appear at the risk of looking senatorial at a Zuckerberg Harry and I'm going to yield the rest my time Thank

[01:54:34] You mr. both of us Plaskett five minutes good good morning gentlemen and gentlewoman thank you all for being here of course this is you know something that we're all really learning about I try and say that I'm woke but you know that always doesn't work and this is one area where I think that my my 20-something year old children would find me really out of date so I'm happy mr. chair that we're having this because I think there and I think you all are correct there's a balance right we don't want to over restrict something that we don't even really understand or that's still developing but at the same time ensuring that that development while it's developing bad actors are not utilizing and gaming the system so that really terrible things can go on one of the main things that I'm concerned about people think of the Virgin Islands is really just being a beautiful paradise but we have enormous amount of drug trafficking that goes through the Virgin Islands and we also along with other Caribbean islands on other islands more so than ours have the ability to be used as a filter for hiding money and particularly ill-gotten gains and so I was wondering if anyone on the committee can really talk about how we can or law enforcement can really act as a deterrent for the use of bitcoins the marriage now between bitcoins and blockchain to be able to really accelerate the use of these types of currencies in a manner that does not you know cause individuals in other places to really take advantage of this it's ultimately a bit of an arms race because technology's new love it we're having an arms race with electronic money right we are we are it but the arms race and this is basically against societal norms and bad actors mm-hmm so technology I mean there's always gonna be crime and technology's just a new form of way to do it I think one thing that the panel's all set is Bitcoin actually is more traceable than the public thanks it's not anonymous it's what's called su nonnamous but we need ways to connect those public keys which are like 24 or 32 digits that nobody you know to real people and real companies and that's why I've recommended I think you need to have gatekeepers or gateways gateways to do that the exchanges the crypto exchanges are one set of gateways for law enforcement then detract the way that law enforcement now it uses banks the rack thing that would be one way out mhm I saw some others limiters if I could also respond the the way we catch criminals often is through traffic analysis blockchains are quite good sources for traffic analysis uh huh there are tumblr can you tell me how does the black channel facilitate that sure one thing to do would be to go online and simply google the blockchain right you'll find a website that will list each transaction as it comes across and if you spend 30 seconds sort of watching every transaction in the world that happens in blockchain and you think to yourself if I were a police officer I would find this flow of money around the world very interesting we also have computer programs though that require that don't require person set there but can comb these databases find patterns and kick bad patterns up to somebody to take a look at it there are ways of circumventing this block chains are pseudonymous I don't put too much stock in it because tumblers and dark wallets can essentially you and I might agree I'll pay your debts you pay mine that way your debts aren't traceable to you and my debts aren't traceable to me that's essentially what a tumbler does we pay each other's debts and so we hide where the money's come right but but I think that with traffic analysis standard artificial intelligence runs a combing across the database we can do a pretty good job of kicking up where bad actors are stirring the water mr. Gorn fine what do you think the role we talk about law enforcement doing this there's a all of us here concerned with what is our role what do you see CFTC in dealing with this as well yeah and I want to kind of step back and compliment the way I think you framed this this initial set of questions because I think you know it's exactly right that when I mentioned earlier my testimony about thinking about principles and making sure we're giving a you can you can regulate based on principles and then as you identify areas where there are particular harms to solve for that's where more prescriptive rules might fit in and certainly in this area of anti-money laundering you know your customer that's an area where you would want to make sure you're enforcing rules but to your more specific question you know the CFTC has now had a lot of experience dealing with some of these markets and the technologies but again we're our role is as a primary regulator of futures and swaps markets and then we do have that enforcement authority that's a look back authority to police for fraud and manipulation either in our futures and swaps markets or in the underlying market as well but because of our experience I think we have a lot to offer at this stage in terms of informing the discussion around this space given our enforcement experience the the role of our division of market and oversight in regulating the the actual exchanges monitoring some of the clearing and risk issues associated with crypto currencies customer education and then lab CFTC outreach so I think we're playing a very important role and then hopefully can help inform these efforts thank you and I yield back

[02:00:31] I just want to make sure that the regulations that we're doing while we give time for these this is to grow we also make sure we don't end up like Facebook where it has outpaced us in terms of being able to do damage in in the general good jump jalisa expired mr. Davison Thank You mr. chairman mr. Griffin I'm gonna go right back to you obviously we've talked a lot about jurisdictional issues and how to set up the proper regulatory structure that many in the industry are asking us to do you know there's obviously with many of the commodities and different products we have a SEC portion that is regulated in many cases and then we have the CFTC which falls under our jurisdiction and you get to to see some of the humorous anecdotes from members of Congress here who I'm sure had many maybe have had similar things to say when that new thing the internet was taking place and how are you ever gonna buy things off of the internet well Jeff Bezos has told us how I showed us a very well that anyone can do that now and as crypto currencies continue to grow in usage they're going to become less and less in intriguing and more and more used I am going to get into the demographics of many of the crypto users but I want to ask you a quick question sir based on the way current law is written not cut and dry whether cryptocurrency should be regulated by the SEC or the CFTC if Congress attempts to come up with a workable definition for crypto currencies that are more similar to commodities you know call them as we've heard blockchain commodities what should we be looking to guide us yeah thank you for the question you know I the one thing I would say is that and I said that mentioned this in my opening statement that it's important that we're not hasty in terms of figuring out what the right contours are of applying you know securities laws and then the the commodities framework I do think that the SEC has in due course been providing additional clarity there was recently mr. Hinman over at the SEC gave a well-received speech kind of outlining some of the SE c--'s thinking as to how they would apply the securities law framework and some of the things that I think you've heard are factors around decentralization you know are their expectations of return based on meaningful work of others I mean that these are important elements that of course are not you know I'm not saying that these are the only elements but these are some of the things that you start to look at in terms of figuring out well when does it make sense to be applying the securities laws framework that includes things like required disclosures it requires regulations around you know the offering of securities and the intermediaries involved in securities and when does that perhaps not fit the product so I think that this discussion is ongoing and I think that in due course and being thoughtful you're starting to see additional clarity and uncertainty coming out but certainly those are some of the factors that we've we've heard talked about a fair amount Thank You mr. Baldi and mr. Cooper and I'm sorry I wasn't here at the beginning of the hearings if I mispronounced a name forgive me I always try to mispronounce my colleague Ted's on purpose but not yours now Ms baoddai this is an industry that you are getting into in the infancy and you've actually done something that we don't see a lot around here you've come to us to actually ask for a stricter regulatory environment to stop some of the fraud and abuse that that was mentioned by some of my other colleagues today I want to ask for those of you who are in this business what demographic usually utilizes Bitcoin here in the United States what age it's Souda nonnamous so based on based on Twitter it's probably few people in there you know 20s to 40s Millennials its Millennials sure but you know institutionally there's a very different skew towards the size of transactions and the types of people that are playing and the larger dollar values so and there's also as you know there's a developing institutional market in this as well right so yes I think it started certainly there but if you look at some of the major financial institutions there there are institutional markets and you know large private equity groups there that are heavily transacting this as well yeah and to tag on to kind of the last question but also the the concern about regulatory framework you know what I was mentioning is about a need for clarity more so than the not so much that the bright lines that we're talking about security versus commodity as much as more interest in safe harbors for innovators especially because we're seeing the market adapt to this in that new disruptors arm are at an advantage versus incumbent institutions who are waiting for regulatory clarity to engage and so in a way in absence of that it's not it's not necessarily that incumbents are incapable of innovating or they don't understand the technology but they have to take a sidelines approach because they have traditional businesses to lose well thank you and mr. chairman my time is about ready to expire but we want to make sure that we devise a regulatory structure that allows this industry to continue to grow but allows to us to address many of the law enforcement problems that have been brought up here by many of my colleagues so can't wait to continue to work with you thanks for your time thank you of a

[02:06:10] show for five minutes Thank You mr. chairman I appreciate you all having the patience be here this is something that's really confusing to me my wife and I we watched a documentary on bitcoins and when we got done we were more confused and I have not invested in any as you asked with that said mr. Gensler in your testimony you mentioned the recent SEC staff determination that ether is not a security although it might have been at its issuance if the SEC had determined ether it was a security in 2015 what regulatory requirements would either be subject to today and I've got two follow-ups and anybody else that wants to weigh in on if they had determine that way back in 2015 at the time they would have had to give some full and fair disclosure I think the SEC at that time would have probably said well it's probably not three years of financials and things like that because it was a new startup and this is something the SEC is grappling with even now for current initial point offerings what is full and fair disclosure I think director Hinman at the SEC said it right it's about information asymmetry give an investor enough information so they can take the risk the government shouldn't it's not a nanny government we're not you know but the investors can take their risk as long as they get enough information okay and how might security I might such a regulatory regime affect the functionality of the ether 'im Network I think that and mr. Ness raised this question earlier there's friction right now because we don't have the beneficial ownership securities laws say we have to have full and fair disclosure and we have to keep track of anybody who owns the security it's that second one that's the friction mr. Ness mentioned I'm an optimist I think technology can solve for this it's not going to be in 2018 so it would slow down some of these token economies but I believe that it's important to track beneficial ownership for all the reasons about illicit activity and taxing and I agree with that anybody else at the risk of confusing you more about aetherium oh well I was going to say that named aetherium is apropos because it's just out there yeah it looks like where is it yeah so whereas some systems like Bitcoin were initially meant for peer-to-peer value transfer transfer the etherium Network does what's called well it's kind of more like a distributed world computer in a way don't think about it too much but what you can do is you can use the native token of the system this ether which may or may not have been a security issue and says you mentioned to pay for what's called gas in that network and that gas is used to by computational cycles on a shared computer so if something like gas ends up looking a lot like a security it that's generating PNL just as you're running a general computer it would be incredibly cumbersome if not impossible for normal humans to figure out what their their balance sheet should look like so we need to be be careful and not just applying a you know one-size-fits-all solution on them well I think the important thing is you know we don't want to stifle the imagination the entrepreneurialship the development of this but yet we want to have the safeguards in place whether it's a CFTC or the SEC we just want to make sure that when people get involved in it that their monies or their investment are protected you were gonna add something I was going to make a rough analogy because these are databases it's like the database in your computer and applying securities regulation to these databases would have the same impact as having the SEC regulate your computer at the internal level which is it's just simply going to gum up the works right yeah we don't want that I mean but we want the safeguards there my other question is I sit on foreign affairs and we deal a lot with North Korea and the sanctions and all that and we see countries changing companies funneling money breaking sanctions or skirting sanctions and a lot of it we see is being done over electronic currency like this what are the safeguards that you guys can help us with on that so that we can follow it you know when that's cash transfers it's easier to track that we can block and sanction those banks or those entities but when they're transferring things like this or any other nefarious activity drug deals and things like that what are the safeguards that you guys can put in place that we know we can follow that stuff yeah we we talked a little bit about this earlier but the the idea behind these networks is all the transactions are in fact traceable in beautiful and so in fact in most cases that you've seen for example in the recent Russian you know hacking investigation they really create a trail at a presence that actually really is a date of mind for many respects law enforcement so I think there's I think there's actually quite I think if you fast forward a few years I think this will look at many respects like GPS and cell phones have to come for law enforcement as well which is it really creates an immutable record that I agree benefit I appreciate your time I'm out of my time and thank you mr. chairman well thank the panel mr. gore filed I think you may have to slip out gets a play but I'd like to give each of you probably no more than a minute kind of closing comments think you wish you have said there you're opening there there a question that didn't get answered you thought about it be helpful for the for the record to have it so we'll start mr. Fairfield any any closing comment quickly only that I think it's a wonderful idea to begin with these kinds of conversations because it is here that we're able to look at the different communities that are using the technology in different ways and perhaps craft legislation or other rules that will permit us to not only capture the bad guys not only get them cleaned out of the system but to leave intact what is good behind sure thank you for for having me I would say that it's certainly important that we're having these conversations and moving towards some right size frameworks at the same time I think and possibly this is just our general American sensibility we're focusing on the private sector kind of business how does this look like a business how does this look like a financial system angle whereas there's a whole other conversation to be had about how what does this look like if it becomes systemic infrastructure similar to the internet and what does that mean globally so at the same time it's it should not be an either/or conversation we need to be thinking about how rather than just defensively we regulate how we can proactively make sure that we are frontline innovators in the way that we were for the Internet as well globally yeah I just want to echo a little bit mr. Yoho what you said which is to be very clear I speak myself none of us is suggesting here that there shouldn't be appropriate regulation in this market I think the there is actually a very good framework between definitions of security laws that apply to the SEC and then things that actually you know rightly so look more like commodities there's also FinCEN as we've talked about right in terms of KYC @ml so there is a there is quite a patchwork out there and I think you know for certainly in our business where we sit a lot of what we're seeking is quite frankly just regulatory clarity so that we ensure that companies who are good actors actually understand what the rules the road are and we fully support obviously the activities the SEC and CFTC and others are doing to make sure that the bad actors are routed out of the system yeah thank you I just want to thank the committee for taking an interest in this area and allowing us and as CFTC to help inform and support the effort to strike the right balance it's a it's a promising and very new area of innovation that you know as I said earlier we don't know where a lot of these different threads will lead but it's important for us to be vigilant and make sure that we're targeting kind of bad actors and making sure there are appropriate guardrails in place and that we have an efficient effective regulatory framework in place and look forward to helping support that effort first it's just so good to be with your chair and this committee again after five years - I think promoting innovation and promoting competition means also bringing this inside the public policy sphere I don't think they compete I think it's together I think that if you recall as this committee that there's the issuer based crypto which is kind of the SEC in these I cos there's derivative crypto which the CFTC has but it's going to have some challenges and then there's the whole cash commodity crypto which is 70% of this world that's where I think Congress has a role a real role and and to think about is there more authorities I say incumbents versus startups startups feel that they can beg for forgiveness after they sort of mess up with the law enforcement incumbents feel they've got to ask for permission and so right now there's an imbalance right now where incumbents aren't in this space and startups or and you might want to address that MIT and I are available any time if you need any help with any of this thank you I guess I'll echo that you know I think probably Eber taught us all that for better for worse if you build something that is incredibly popular the laws will change to conform to to that new technology technology is moving at a very very fast pace we've heard today about some of the pitfalls of these new technologies that get out ahead of the legislators and so I want to compliment you guys for for being on top of this and I think the SEC as well has been you know incredibly you know on top of it and and working closely with us and open to dialog and that and that's what I think is really needed is a kind of free flow of information and communication between those of us who are sort of on the front lines dealing with the day to day fact patterns and and you guys who need to think about the actual policy-making aspects well thank you it's been a terrific couple hours well spent for us I hope you consider it the same clearly elucidated some issues not all just with regulation of these issues but also the tangential impact of taxable transactions being captured in a way that that folks can comply with our tax code and and the revenues there the law enforcement piece is ball day I think you may be involved with a group that's trying to find a way to create a currency that is not synonymous but would be anonymous that's perfectly within that's what these market is that's what innovators do is they see something that that needs to get changed and they'll do that and so that just speaks to how dynamic the process as so long as the stupid criminals keep using Bitcoin will be great but then the support was no pivot to to something that allows them to hide better behind this so it's been a terrific i opening session and will not be the last because our folks at the CFTC who are our part and no bacon has happened and their partners at the SEC really want to do the same thing and that is regulate where it needs to and you have a certainty so that the incumbents don't have to worry about you know asking for permission while the innovators are asking for forgiveness that's an unlevel playing field and we also want this action going on it within the United States so thank you all very much under the rules of the committee that's at the record of today's hearing will remain open for 10 calendar days to receive additional material and supplementary written responses from the witnesses or any question posed by a member this hearing of the communitive agriculture is adjourned thank you [Music]