HOUSE FINANCIAL SERVICES COMMITTEE HEARING
Overview
For questions on the note below, please contact Scott Parsons, Edmund Perry, or Ruth Lunsford.
On December 4, the House Financial Services Committee held a hearing entitled “Innovation Revolution: How Technology is Shaping the Future of Finance.” Witnesses in the hearing were:
- Denelle Dixon, CEO & Executive Director, Stellar Development Foundation
- Avlok Kohli, CEO, AngelList
- Nathan McCauley, CEO & Co-founder, Anchorage Digital
- Henry Ward, CEO & Co-founder, Carta
- Alan Butler, Executive Director, EPIC
Legislation noticed for the hearing:
- H.Res. 1600, Expressing the sense of the House of Representatives with respect to the use of artificial intelligence in the financial services and housing industries
- H.R. 10262, The AI Act of 2024 – The bill is a comprehensive study bill that directs the federal financial regulators to examine and report on current uses of AI technology in their respective markets, the benefits and risks of those uses, and internal use by agencies.
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Yesterday’s hearing focused primarily on the various opportunities and risks associated with digital assets and various ways to create an appropriate regulatory framework for the industry.
- Committee Chairman Patrick McHenry (R-NC) and Subcommittee Chairman French Hill (R-AR) highlighted concerns that America is falling behind other jurisdictions in financial technology and concerns that digital asset companies are being unjustly “debanked” without sufficient explanation.
- Several witnesses highlighted difficulties accessing banking services for crypto companies due to regulatory uncertainty while emphasizing the potential for blockchain and stablecoins to reduce costs and increase access to financial services. Alan Butler, Executive Director of EPIC, acknowledged that while cryptocurrencies have transformed finance, they have also introduced new risks requiring proactive consumer protections
- Representative Bill Foster (D-IL) emphasized the need for digital identity verification to protect data privacy and market participants, particularly in Know Your Customer (KYC) processes.
Opening Statements and Testimony
Chairman Patrick McHenry (R-NC)
America is falling behind Europe in technological innovation and adoption. Digital assets and blockchain technology hold the potential to revolutionize the financial system by reducing costs and increasing access. However, unclear regulations have pushed the digital asset industry overseas. In response, we passed Financial Innovation and Technology for the 21st Century Act (FIT 21) in the House, providing a clear regulatory framework and consumer protections to help the industry thrive in the U.S. We are working to ensure that regulations foster innovation rather than hinder it, including clarifying policies for bank-fintech partnerships and advancing regulatory sandboxes, which have been successful in my home state of North Carolina.
Ranking Member Maxine Waters (D-CA)
Today, we will discuss a vision for the future of finance, focusing on how technology is shaping the industry and driving innovation. My goal is to ensure that our witnesses feel comfortable sharing everything we need to move forward on this exciting new journey.
Denelle Dixon, CEO & Executive Director, Stellar Development Foundation
By working in a bipartisan way to understand the benefits of blockchain technologies, this Committee has positioned the U.S. to not only capitalize on these innovations but to lead globally. Blockchain innovation is not about replacing the financial system, it is about enhancing it. This technology is already making a difference, from streamlining humanitarian aid and enabling secure payments to reducing barriers to financial products for Americans.
U.S. dollar-backed stablecoins have become an invaluable tool for global payments, with high demand worldwide. The stablecoin market is now valued at over $190 billion, with almost 99 percent of it in U.S. dollar-denominated stablecoins. This global demand for stablecoins makes it essential for the U.S. to take the lead in the stablecoin debate by establishing clear, supportive legislation for crypto and blockchain without stifling innovation.
Avlok Kohli, CEO, AngelList
Innovation drives markets and society forward. Startups are key to breakthroughs in technology, medicine, and science, and they are vital for economic growth and job creation. The bipartisan JOBS Act of 2012, a landmark achievement in which Chairman McHenry played an integral role, reshaped the startup ecosystem. Increasing the number of allowable investors in small venture funds also empowered emerging fund managers, who now play a critical role in sourcing and supporting early-stage startups.
To further unleash innovation in financial services, we must focus on three key areas. First, harnessing the power of AI, which is transforming industries by improving decision-making, risk management, and cost efficiency in financial services while ensuring sensible regulations that foster innovation. Second, modernizing infrastructure by providing clear regulatory frameworks for blockchain technologies to streamline operations and reduce costs. Third, enhancing liquidity in private markets, which are currently hindered by illiquidity, by supporting emerging financial technologies that unlock new pathways to liquidity and lower transaction costs.
Nathan McCauley, CEO & Co-founder, Anchorage Digital
We must strike a balance between protecting the public and fostering innovation. The U.S. has ceded leadership in crypto to other countries offering the regulatory clarity needed for growth, risking the loss of talent and capital. Real progress is on the horizon, but the U.S. must act now. The broader crypto industry still lacks this regulatory clarity, which stifles innovation and is unfair to businesses and consumers. Since the mid-2010s, when crypto first gained traction, my co-founder and I recognized that institutions needed secure, regulated crypto solutions. Blockchain is revolutionizing financial transactions, making them faster, cheaper, and more transparent. Smart contracts and tokenized assets will unlock new opportunities, benefiting artists, gig workers, and investors.
The U.S. capital markets have set the global standard with clear regulatory frameworks that inspire confidence among businesses and investors and support emerging technologies. As we look to the future of finance, it is imperative that America extends this tradition to the crypto markets and sets the standard for the world.
Henry Ward, CEO & Co-founder, Carta
While private capital, like angel investors, venture capital firms, and private equity, may not seem connected to the broader economy, it plays a vital role in American entrepreneurship. If we solve the problem of private market ownership, we can broaden economic opportunity and ownership for more Americans. To broaden the impact of private capital, we should focus on three key areas: expanding investor access, broadening the startup economy, and modernizing the regulatory framework. First, policy should create more on-ramps for accredited investors and allow retail investors to access diversified private funds. Second, we need to empower fund managers to invest early, locally, and diversely by supporting emerging managers with larger fund sizes, higher investor limits, and expanded qualifying investments. Lastly, the regulatory framework should evolve to support the industry’s need for data-driven information, lowering barriers, reducing costs, and improving capital allocation.
Alan Butler, Executive Director, EPIC
Innovation must not be used to obscure exploitative practices. Technology can improve financial security, create entrepreneurial opportunities, and build trust in digital platforms, but it needs proper oversight. While cryptocurrencies, digital payments, and crowdfunding have transformed finance, they have also introduced new risks that require proactive consumer protections. Currently, consumers lack control over their personal data, which is often commodified and sold without consent, eroding trust. Security remains a priority, with financial services being one of the most breached sectors. While progress in authentication and risk management is promising, digital defenses must continue to evolve to meet emerging threats. Financial services should be built on privacy models that empower consumers.
Over the last decade, data collection has expanded, and privacy protections have not kept pace. Financial privacy regulations should align with consumer interests by allowing data collection only when necessary for services and prohibiting secondary uses that do not serve consumers. Reducing unnecessary data collection also strengthens security, as data that is not collected cannot be breached. We must remain vigilant against unfair practices that exploit information imbalances in the financial system. Just as Congress responded to past changes in the financial sector with consumer protection laws, today’s evolving landscape requires an updated regulatory framework.
Discussion
Digital Assets
McHenry (R-NC): What are the benefits of blockchain technology, not just your network, but the underlying technology? What is the public benefit of having a federal regulatory regime? Dixon: Parts of the global majority lack access to traditional banking, and blockchain offers a solution, especially for those who want to leverage the U.S. dollar. Blockchain enables efficient, secure, and low-cost transactions, which is vital for people receiving funds from diasporas; McCauley: The main benefits of a regulatory structure for digital assets are trust and transparency. This provides safety not just for the investors but for all downstream investors, such as those in large ETFs, benefiting everyone in the ecosystem.
Hill (R-AR): I am concerned with debanking in the digital asset space, especially when banks do so without a paper trail. Legal businesses should have the freedom to bank and access financial services, and this committee is committed to addressing these concerns. Have companies in your space been debanked because of regulatory guidance? Dixon: We have had to go to ten different banks to open accounts after being debanked without explanation; McCauley: We were also debanked in June 2023, following the January guidance from the Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC), which warned banks from interacting with crypto.
Velázquez (D-NY): How can blockchain technology provide access to capital for underserved businesses or those in rural areas? Dixon: We have tokenized assets in money market funds, allowing people to invest with minimal capital. Simple smart contracts can also provide global access to capital, helping those who cannot access traditional funding. Blockchain infrastructure can also lower fees and barriers, connecting underserved businesses to traditional financial markets.
Velázquez (D-NY): Is it important to maintain a separation between financial and commercial activity when it comes to the issuance of stablecoins? Dixon: This Committee’s stablecoin legislation would keep commercial activity and stablecoin payments distinct, and stablecoin issuers, which are not banks, are required to hold one-to-one capital reserves. This protects traditional banking infrastructure and consumers and ensures that stablecoins are not fractionalized.
Meeks (D-NY): How could stablecoins benefit everyday Americans, especially those excluded from the current financial system? Dixon: Many people in the U.S. are excluded from financial infrastructure. Stablecoins can help these individuals send and receive money more affordably, particularly for cross-border payments. Traditional remittance fees can be as high as fifteen percent, but stablecoins can reduce this to around two percent. Services like Venmo require bank accounts, but stablecoins do not, which can be a game-changer for the unbanked.
Meeks (D-NY): The New York Department of Financial Services (NYDFS) has created a leading regulatory framework for crypto. What is the importance of maintaining a state pathway in future stablecoin legislation, while ensuring a federal floor to avoid a race to the bottom? McCauley: One of the great traditions of U.S. financial regulation is the shared responsibility between federal and state levels. We fully support preserving both state and federal roles in regulating stablecoins and digital assets. The NYDFS has been a leader in this space and has helped the industry grow.
Lucas (R-OK): What is the importance of the U.S. leading in financial innovation? Dixon: The U.S. has historically been a leader in financial innovation, particularly in areas like stablecoin legislation and market structure. Other countries are now moving ahead of us, and that is a concern because we set global standards. If we do not maintain our leadership in financial innovation, we risk losing economic advantages and the strength of the U.S. dollar; McCauley: This Committee’s work, especially on stablecoin legislation, has the potential to ensure that the U.S. remains a leader in financial innovation for the next century, ensuring the continued dominance of the U.S. dollar; Ward: The U.S. has been a leader in exporting democracy and values, and it should also be an exporter of technology. When the world adopts U.S.-made technology, it is better for everyone, including the U.S.; Butler: It is critical to direct innovation in ways that empower consumers. While some innovations create risks, oversight bodies like this Committee are essential to ensuring that when people use new digital services, they can trust that their money is safe and that they will not fall victim to fraud.
Davidson (R-NC): What is the biggest opportunity and risk for the next Congress? Dixon: The biggest opportunity is to allow technology to flourish by improving the regulatory environment, particularly for digital assets and stablecoins. With the right market structure, we can unlock significant innovation in both financial infrastructure and beyond; McCauley: The biggest risk is the same as the opportunity: the U.S. needs to establish itself as the global leader in digital assets. Just as we have led in capital markets and technology, we must ensure America remains at the forefront of the digital asset ecosystem.
Timmons (R-SC): How can we foster innovation in the next Congress, given current regulatory challenges? Dixon: The key opportunity is advancing stablecoin legislation and establishing a clear market structure for digital assets, which will unlock significant innovation; Kohli: I support stablecoin legislation as an essential step to provide clarity and foster growth in the digital asset space; McCauley: We need to restore thoughtful rulemaking which helps create a clear framework for banks’ involvement with digital assets. This approach should be extended across other agencies; Butler: Promoting fair competition in the market is essential. The open banking rule is an example of how we can protect consumer privacy while fostering competition and innovation.
Nickel (D-NC): Does debanking hinder innovation, particularly for digital asset companies? McCauley: Yes, we experienced debanking firsthand, attempting to open accounts at thirty banks and being denied by all but one. This creates concentration risks and pushes innovation overseas, as many in the digital asset industry lose trust in the U.S. financial system and regulatory reliability.
Kim (D-CA): How is tokenization transforming the way Americans interact with financial products and services, and can you describe specific use cases? McCauley: One major example is tokenization of money market funds. This moves a traditional money market fund onto a blockchain, enabling 24/7 instant settlement, significantly reducing counterparty risk. The ability to settle transactions instantly will create a safer, more efficient financial system in the long run.
Steil (R-WI): What safeguards should Congress consider to protect against the use of digital assets for illicit finance? Dixon: Digital asset transactions offer more transparency than traditional financial transactions. Blockchain allows us to track assets throughout the value chain, something we cannot do with physical cash. Digital assets are inherently more traceable, so we should capitalize on that before rushing to introduce new regulations.
Flood (R-NE): How can Congress help ensure regulators are equipped to properly regulate digital assets? McCauley: Ethics rules prevent regulators from engaging with cryptocurrencies like bitcoin or ether, which slows down their understanding of the technology. Allowing regulators to engage with these assets would help them learn and better regulate the space. Additionally, agencies like the OCC have set good examples of building specialized teams to focus on digital assets, and that approach should be expanded.
Foster (D-IL): Digital identity is essential for cost reduction in financial services and KYC. What is your perspective on digital identity’s role in lowering costs? Butler: Digital identity is critical for reducing costs in financial transactions, especially in KYC processes. I agree that decentralized systems are key. Right now, identities are often controlled by governmental or quasi-governmental entities, creating security risks. A decentralized approach, where individuals control how much of their identity they reveal, would better align with democratic values and improve privacy and security. We need to shift away from reliance on Social Security numbers and empower individuals to manage their own digital identities.
Williams (R-TX): How has AI benefited the financial services industry, and what specific examples can you provide? Dixon: AI has impacted DeFi through risk assessment, helping to alleviate concerns about the anonymity of participants. It is also used in smart contracts to automate compliance and prevent fraud by validating transactions. AI-driven blockchain-based identity verification addresses KYC concerns by ensuring that individuals are properly authenticated. Additionally, AI optimizes blockchain trading and asset management, providing substantial benefits to fintech and the financial industry.
Flood (R-NE): What impact would passing stablecoin legislation have on the future of stablecoins, and what opportunities would it unlock for consumers and small businesses? Dixon: Stablecoin legislation is critical. It is a piece of low-hanging fruit that could help the U.S. establish a leadership position in the digital asset space. With 99 percent of stablecoins being U.S.-dollar-backed, clear legislation would strengthen the U.S.’s role globally and provide a framework for innovation in the financial system. It would also unlock new opportunities for consumers and small businesses, offering them more efficient and secure ways to transact, especially in cross-border payments and remittances.
Nunn (R-IA): How do foreign jurisdictions compare to your experience with the OCC’s approval in the U.S.? McCauley: The approval process in Singapore was long and comprehensive, but the clarity they provide is very helpful. In Singapore, the regulatory environment is clear about the definition of different types of tokens, as well as what activities institutions are allowed or restricted from doing with those tokens. In comparison, the U.S. regulatory environment has been less clear, and that uncertainty can be a challenge.
AI
Waters (D-CA): What principles are most important for data privacy, and how would they benefit consumers? With generative AI evolving, what disclosures would protect consumers from systemic risks? Butler: The key is giving people meaningful control over their data with enforceable rights. Limiting data collection to what is necessary should be a core principle. This would enable consumers to make informed choices and protect them from exploitative practices. On AI training data, transparency is critical. Public information about data sources allows for better evaluation of fairness and risks, such as misinformation or discrimination. Without transparency, it is hard to assess the quality and impact of AI outputs.
Green (D-TX): What will the impact of generative AI be on job security, and how will it affect people? Ward: When AI is introduced, jobs will not disappear, they will evolve. AI will change jobs, but it will also create new opportunities. History shows that technology creates more jobs than it eliminates, and I believe this will be true for AI as well; Butler: I think the concerns about automation’s impact on the workforce are real and significant. As we track AI adoption, we need to consider its effects on existing jobs. There are already some policy interventions in place to assess these impacts before fully rolling out these tools, and it is important to evaluate these systems carefully.
Pressley (D-MA): Given public concerns about data privacy, can you elaborate on how personal data is used by AI systems, especially without explicit consent? Butler: Unfortunately, many companies deploy AI tools that automatically collect users’ data for training purposes, often requiring users to manually opt out of these practices. This approach is not user-centric, and it highlights the need for better regulations.
Green (D-TX): How do we deal with the possibility of generative AI introducing bias in its outputs? Dixon: Addressing bias in AI is crucial. We need to focus on the desired outcomes: unbiased systems, with diverse data sets and large language models (LLMs) that consider a broad range of data, not just a narrow subset. Policy can help by setting standards to ensure that we do not end up with AI systems that perpetuate bias in their outputs.
Cleaver (D-MO): Do companies developing generative AI need updated guidelines for the risks it presents? How far behind is Congress in addressing this? Butler: There is still much work to be done at the federal level. California’s new regulations on automated decision-making systems are a step in the right direction, focusing on risk, efficacy, and bias. However, without transparency, we cannot effectively evaluate risks or govern AI systems.
Garcia (D-TX): With the rapid growth of generative AI, especially in financial services, how is personal data being used by AI systems? Butler: The rapid expansion of AI technology has outpaced the rules governing data collection and use. We lack transparency on many data sources used by AI systems, and there is no guarantee that personal data, especially in sensitive sectors like finance, is secure or will not be misused. There are concerns about second- and third-party data brokers, over which consumers have little control. We need to give consumers more control over their data and clamp down on data brokers to ensure that data collection is linked directly to the services individuals are receiving.
Barr (R-KY): What challenges are companies facing in adopting emerging technologies like AI? Kohli: The main challenge is not the adoption of AI itself, but the risk of overregulation, especially regarding open-source AI. Many startups rely on open-source software, and excessive regulation could restrict access to these resources, potentially stifling innovation.
Pettersen (D-CO): What should we focus on regarding AI regulation in the coming years? Ward: A balanced, progressive approach to AI regulation is necessary, like how we have handled past technological innovations like the internet. We need to allow AI to develop, but with thoughtful regulation that does not stifle its potential.