US Congress – Krowne Law

July 23, 2018

House Financial Services – Monetary Policy and Trade Subcommittee Hearing (7/18/18): “The Future of Money: Digital Currency”

Below is a rough auto-transcript of a hearing held last week entitled “The Future of Money: Digital Currency” (video available at previous link).

The witnesses were:

Dr. Rodney J. Garratt, Maxwell C. and Mary Pellish Chair, Professor of Economics, University of California Santa Barbara
Dr. Norbert J. Michel, Director, Center for Data Analysis, The Heritage Foundation
Dr. Eswar S. Prasad, Nandlal P. Tolani Senior Professor of Trade Policy, Cornell University
Mr. Alex J. Pollock, Distinguished Senior Fellow, R Street Institute

We have not yet gone through the hearing record exhaustively and produced a selection of “pull quotes” of interest. 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).

TRANSCRIPT GUIDE AND ADVISORY:

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 transcript follows:

July 23, 2018July 23, 2018

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).

TRANSCRIPT GUIDE AND ADVISORY:

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:

May 20, 2018May 20, 2018

Congress Members Push Back Against SEC; Promise To Introduce Utility Token/SAFT-friendly U.S. Legislation

A routine House Financial Services Committee hearing held on May 16th, 2018, turned eventful when a number of U.S. Congressional representatives sprung “initial coin offering” (ICO-related) questions on SEC officials — most of them from a more positive and supportive perspective than the SEC’s Chairman Jay Clayton has evinced in his comments directed at the ICO sector for most of the past year.

At the hearing, Ms. Avakian and Mr. Peikin, co-directors of the SEC’s Division of Enforcement, testified for the SEC.

Notable statements and exchanges included (emphasis added):

Rep. Sherman (28:21): “I hope you shut it all down” (in reference specifically to ICOs; Sherman goes on to contrast the supposedly-lax SEC treatment of ICOs with a perceived harshness faced by conventional filers merely “misstating a footnote”.)
Rep. Maloney (42:30): ” … there [has] been a strong debate about whether a token that is offered as an ICO can be a security when it is first issued to investors and then later evolved into something that is not a security; some people think that once it’s a security it’s always a security and the others think that the token status as a security can change over time. As far as I know this is not a decision that’s been decided by the SEC or the court, so I’d like to ask both of you do you believe it’s possible for a token to start as a security but then evolve to something that is not a security?”
Ms. Avakian: “I think it’s always going to be a facts and circumstances test as to whether something meets the definition of a security, and if the substance of something changes over time that analysis is going to have to continue to happen — but we really do look at the substance of the transaction, not the name of it, not what it’s called, and look at, you know, does it fit the test for a security…”
Rep. Maloney: “… have you seen any situations where [a coin going from a security to ‘utility’ status] has actually happened?”
Mr. Peikin: “I mean we have dozens of investigations that are ongoing and one of the subjects of many of these investigations is evaluating whether or not a particular instrument is or isn’t a security. I don’t think I can speak to… the outcome of those because some of that work is ongoing. A lot of what we’ve seen though in these ICOs obviously looks and… meets the definition of securities.”
Rep. Maloney (44:14): “… chairman [Clayton] has stated, and I quote, ‘I believe every ICO I’ve seen is a security’ — do you agree with that statement?”
Mr. Peikin: “I can’t speak to whether he’s seen the broad… gamut of instruments that our division is is investigating, so I certainly don’t dispute that what he’s seen he he believes is a security; the question… is whether some of the things that we’re looking at now, do they actually meet that definition, and I think… some more needs to be written on that.”
Rep. Emmer (01:10:10): “… as I’ve listened today, clearly I must have a different point of view when it comes to some of my colleagues on cryptocurrencies, and I will say that you just testified that these initial coin offerings present real risks to investors — but let’s not forget they also present real opportunities and we’re talking about a technology blockchain technology that has an amazing potential … “
Rep. Emmer (01:10:51): “… secretary Clayton has said ‘every initial coin offering is a security’ — that’s not what I heard you say; you’re reviewing these and you’re developing what your view is of the different types of cryptocurrency… problem is, a lot of people up here with white hair without hair or people that have been around for a while don’t even understand what they’re talking about and we worry that too much government could actually kill this thing before it can grow into something that’s very good for our economy…”
Rep. Emmer (01:12:46): ” … how does the SEC distinguish between an ICO and the sale of a token for use on a blockchain platform?”
Ms. Avakian: “That’s always going to be a real facts and circumstances question, and again, we’re gonna take a step back and look at exactly what the substance of that particular transaction or token is not the name of it…”
Rep. Emmer: “Is that [determination] evolving , because it could be a security, it could be a commodity, it could be a currency — there have to be some delineated lines so that people understand where they’re at and… who has jurisdiction over them, because we want to make sure that they’re continuing to explore the opportunity, and not just going out of business.”
Ms. Avakian: “Yeah, I think that’s right — and we’ve spoken a lot publicly about it, certainly the Chairman’s spoken a lot publicly about it, you know to the extent something is a pure currency, pure medium of exchange, that’s not a security. I think we’re relying on the experts in the marketplace — the gatekeepers, the lawyers, others like that — to really take a step back and take a true look at what is the underlying substance of a transaction, and that’s really going to be I think what guides someone. But we are… open in terms of having folks come to us and help work through that analysis.”
Rep. Davidson (01:19:00): “What do you make of these folks that are clearly cryptocurrency today, yet if they had raised capital, might be seen as security at the time — how do you resolve that?”
Mr. Peikin: “… we’re obviously… encountering [a] kind of new area with new products and changing technology, and some of these issues are being worked out in in the courts… as we speak… We’ve been focused on the tokens and crypto assets that fit the definition of a security, and the CFTC has been focused… on currencies and mediums of exchange, but you know I’m not sure I’m an expert to say… where that exact line is drawn, and I think some of this is going to be worked out… over time.”

And, the coup de grâce:

Rep. Davidson (01:20:02): “… Our office is working on an initial coin offering bill that would provide certainty about how a security is… fundamentally, is the Howey test still relevant, what’s the role of SAFTs, is a white paper paper gonna cut it, or do you to use SEC forms that already exist — how do you advise proceeding forward with your office? …”

There is more discussion on ICOs, throughout — check out the full hearing record to get a complete picture.

We will not attempt to handicap the likelihood of this legislation coming to pass, but the comments do speak revealing to the presence of genuine advocates of ICOs and the new blockchain token asset economy in Congress. As such, we find the exchange that transpired distinctly encouraging.

(No official transcript of the hearing has been released; however, video of the full session can be accessed here, and KrowneLaw has provided an approximate, marked-up automatic transcript of the entire hearing, below.)

TRANSCRIPT GUIDE AND ADVISORY:

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 covers a wide variety of topics; thus, ICO-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 transcript follows: