SENATE COMMITTEE ON BANKING, HOUSING, & URBAN AFFAIRS
HEARING ON DIGITAL ASSETS
For questions on the note below, please contact the Delta Strategy Group team.
On July 9, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “From Wall Street to Web3: Building Tomorrow’s Digital Asset Markets.” Witnesses in the hearing were:
- Summer Mersinger, CEO, Blockchain Association
- Jonathan Levin, CEO, Chainalysis
- Dan Robinson, General Partner, Paradigm
- Brad Garlinghouse, CEO, Ripple
- Timothy Massad, Research Fellow and Director of Digital Assets Policy Project of the Mossavar-Rahmani Center for Business and Government, Kennedy School of Government at Harvard University, former CFTC Chairman
- Richard Painter, S. Walter Richey Professor of Corporate Law, University of Minnesota Law School, former Associate Counsel to the President and chief White House ethics lawyer
Below is a summary of the hearing prepared by Delta Strategy Group, which includes several high-level takeaways, followed by summaries of opening statements and discussion.
Key Takeaways
- Chairman Scott (R-SC) called for market-driven innovation under clear but light-touch federal guardrails, highlighting the need for jurisdictional clarity between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) as he criticized the Biden administration’s approach of regulation by enforcement.
- Witnesses warned that traditional financial rules often do not fit the unique characteristics of decentralized systems, with comments urging Congress to adopt principles-based legislation that protects users without stifling emerging technologies or offshoring innovation.
- Several witnesses stressed the need for clear jurisdictional boundaries between the SEC and CFTC, highlighting the regulatory gap in the crypto spot market for non-security digital assets as they urged Congress to mandate coordinated rulemaking without duplicative or contradictory oversight.
- Senator Hagerty (R-TN) emphasized the need to shield developers from liability for publishing code, warning that applying financial regulations to open-source DeFi protocols risks criminalizing software development and further offshoring innovation. Robinson cited the Blockchain Regulatory Certainty Act as a model for protecting engineers from enforcement actions based solely on how others use their code.
- Democrats, led by Ranking Member Warren (D-MA) and echoed by Painter, raised concerns about conflicts of interest as they warned against government officials, specifically President Trump and members of Congress, establishing a regulatory framework for crypto while having a financial stake in the industry.
SUMMARY
Opening Statements and Testimony
Chairman Tim Scott (R-SC)
The question is whether the U.S. will lead in shaping the future of digital finance or whether we will let other countries like Singapore and the UAE set the standards while U.S. jobs and innovation are offshored. The Biden administration failed to meet the moment, with an enforcement-first approach that punished innovation and created a legal minefield for entrepreneurs. The Trump administration understands the importance of innovation, opportunity, and keeping U.S. talent onshore. Our job is to set clear, light-touch guardrails to protect investors, stop fraud, and allow responsible innovation to flourish. We have seen agencies like the SEC and the CFTC contradict each other while the Americans are left to guess or left behind. Committee Republicans put forward clear principles for market structure legislation that recognize the need for clarity. That means legislation that: 1) clearly defines which tokens are securities; 2) supports modern trading infrastructure; 3) ensures appropriate illicit finance protections are in place; and 4) protects investors while fostering innovation.
Ranking Member Warren (D-MA)
Republicans are aiming for another industry handout that gives the crypto lobby its wish list, which is the government’s approval combined with crypto rules that are weaker than the rules that every other financial actor must follow. If we are going to provide rules of the road for crypto, we need to shut down the superhighway for presidential corruption. New crypto rules should not open a back door to destroy the securities laws that have served as the bedrock of our capital markets for nearly 100 years. Recent proposals, including the CLARITY Act that the House is voting on next week, have language that would allow non-crypto companies to tokenize their assets in order to evade SEC regulations. There is no reason that the rules prohibiting stock exchanges from simultaneously serving as brokers and giving preferential treatment to their own trades over their customers should not also apply to the crypto market. We should counter the threat of illicit finance with common-sense rules to fight crime and protect national security. Crypto service providers acting as financial institutions must be required to implement AML programs. Republicans refused to strengthen AML rules and close sanctions loopholes in the GENIUS Act, with the claim they would in market structure.
Summer Mersinger, CEO, Blockchain Association
Regulating the industry with existing laws has created ambiguity, stifling U.S. innovation and driving entrepreneurs to jurisdictions with clear legal frameworks. While jurisdictions like the EU, UK, Japan, and Singapore are implementing bespoke digital asset frameworks, we is falling behind. It is not a matter of whether to regulate, it is how. We need bipartisan legislation that provides clarity, encourages responsible innovation, and reinforces the U.S.’s role as a global leader in financial innovation. We put forward twelve principles that should form the foundation of any durable market structure legislation, many of which align with the Senate Banking Committee Crypto Market Structure Principles. This space includes not just traditional financial intermediaries, but also software developers, validators, and other participants who do not fit neatly into 20th-century regulatory categories. We must recognize that digital assets are not inherently securities. There must be a clear, workable path for platforms to register and operate. Our industry fully supports strong consumer safeguards such as secure custody of customer funds, detailed disclosures, bans on market manipulation, and robust oversight. These are not regulatory burdens but are the foundation of trust and resilience. The country that leads will set global norms as it unlocks enormous economic and strategic benefits.
Jonathan Levin, CEO, Chainalysis
The power of blockchain technology, combined with the authorities of law enforcement and industry partnerships, has proven to be a more effective disruptor of illicit activity than anything seen before in traditional finance. The U.S. can be the major beneficiary if the policy framework is done right, and allows regulators to adapt and change with the pace of the technology. Blockchain introduces a fundamentally new model for financial oversight. We often hear the phrase in these rooms, “same activity, same risk, same regulatory outcome,” but the unprecedented visibility offered by the public blockchain must be factored into the assessment of both activity and risk. With the right tools, the public ledger becomes a powerful resource for market participants, regulators, and law enforcement to protect financial integrity. The consideration of different types of activity and risks should begin with all available information about how these mechanisms work and the relative transparency and residual risk they present. In contrast to traditional financial systems, the ongoing monitoring, oversight, and supervision of the system must begin with publicly available information. We need to equip agencies to fully leverage this new parameter. Getting the right regulations in place will require building the capacity of different agencies and industry bodies to tackle various risks, particularly those related to illicit finance and payments. It requires the government to understand the operational risks involved in deploying smart contracts and decentralized infrastructure, and the accompanying mitigations. It also requires leveraging transparency and available real-time information for effective supervision. Compliance regimes must be designed so that all institutions can engage with decentralized technologies. Government agencies with the right mandates and a focus on public-private partnerships will lead to the type of market infrastructure that all market participants are searching for. Blockchain enhances our ability to act quickly against illicit actors, as following the money on the blockchain is easier than in traditional finance. Issuers of tokenized assets can take actions to freeze and seize assets. The traceability and programmability of these assets are key benefits in addressing illicit activity.
Dan Robinson, General Partner, Paradigm
DeFi’s promise can be strengthened by well-designed market structure, and one that does not account for this could be harmful to innovation. DeFi can reduce costs and improve accessibility by removing unnecessary frictions in the back-end infrastructure of Wall Street. For many crypto natives, the natural place to trade is on a decentralized platform rather than centralized exchanges. These decentralized exchanges are open, verifiable, and interoperable; a far cry from the opaque and fragmented back-end systems of Wall Street. With crypto, and especially with DeFi, we can radically upscale our markets to make them more efficient, liquid, and integrated across our economy. Tokenized stocks could lower barriers to entry for investing in U.S. companies, and prediction markets can be more broadly brought to bear across the economy, improving our ability to foresee unexpected outcomes and hedge risks accordingly. Markets do need rules, with crypto regulations that are clear, fair, and equitable. It has been an unforced error for the U.S. to be one of the last major developed countries to enact legislation on crypto market structure. In the hopes of providing some hard-won wisdom, we released seventeen principles for market structure legislation. Crypto assets should be commodities, designed to be used to interact with smart contracts and, in some cases, to pay for on-chain operations, not merely for investment. A token classification rubric based on the Lummis-Gillibrand ancillary assets approach would be the best way to reflect this principle. Any decentralized crypto asset exchange should not be required to register with the CFTC, SEC, or any other regulator, with a true DeFi protocol as software. Just as we do not ask Microsoft to register Excel with the SEC just because companies use it to track their IPOs, we should not demand the engineers of DeFi protocols register their software just because others use it to trade. DeFi should be protected and supported, with no government allowed to impose global restrictions on the trading of crypto assets through DeFi. There is a tremendous potential opportunity in market structure legislation. There is tremendous potential for market structure legislation to support economic growth in free markets, from prediction markets in DeFi, to tokenized stocks, and even bitcoin mining to support the electric power grid.
Brad Garlinghouse, CEO, Ripple
Ripple made the deliberate choice to work with policymakers and regulators, not around them, with a compliance-first approach. Smart legislation should be based on several core principles: consumers need protection from fraud and scams; markets need proper oversight; bad actors need to be kept in check; and innovation must thrive. A constructive and workable framework that achieves these goals will expand access to financial markets, create jobs, strengthen the economy, and put the U.S. on the path to being a global blockchain and crypto leader. The legal and regulatory uncertainty has prohibited meaningful progress in the U.S. We saw firsthand how the lack of clear rules of the road can be weaponized to target good actors. In turn, the technology, jobs, and tax dollars that go with it are pushed offshore, reducing regulatory oversight and putting consumers at higher risk. Ripple was the tip of the spear for this regulation-by-enforcement campaign and was subject to enforcement action in 2020. We were the first leading U.S. company to be sued by the SEC, with a loss as a death knell for the industry. We prevailed and the court ruled in our favor on everything that mattered, including finding that the token XRP is not a security, which cleared the path for other market participants to fight back. Congress should focus on passing principled and smart legislation with critical goals to: 1) set clear jurisdictional boundaries for main financial regulators; 2) establish pathways for companies to build in the U.S. without sacrificing investor or consumer protections; and 3) ensure that the U.S. can be a global leader in crypto by taking full advantage of the benefits and efficiencies brought by digital assets and blockchain technologies. There is no reason the U.S. should not be the undisputed leader in digital assets and blockchain. A smart regulatory framework for crypto market structure is essential to realize that future is overdue. Congress must prioritize the passage of market structure legislation for digital assets to provide the rules and regulations needed to ensure that the U.S. becomes the crypto capital of the world. Market structure legislation for digital assets will catalyze a new era of U.S. competitiveness and unlock efficiencies in financial transactions.
Timothy Massad, Research Fellow and Director of Digital Assets Policy Project
We are in a time loop when it comes to achieving clarity in the regulation of digital assets. There have been repeated congressional hearings calling for clarity and a series of legislative proposals, each claiming to provide it, with no consensus but similar flaws. They rewrite securities laws to create a new category of digital assets that their proponents claim will forever solve the problem, but none will achieve clarity or sensible regulation, and each would undermine existing regulation. This technology will be used in many ways, including in tokenizing securities. Whether something in digital form is a security, a commodity, or neither cannot be easily defined by a paragraph in a statute. We should not lock in definitions that will prove obsolete soon. A principal reason for the lack of clarity is our fragmented regulatory system, with two market regulators, neither of whom with full jurisdiction over the spot market for digital assets that are not securities. Industry has taken advantage of this gap by arguing that most use cases are not securities and can therefore be issued and traded without regulation, which has led to a lack of investor protection. The primary regulatory response to date, court cases that seek to interpret the Howey test, has not been sufficient. It was a whack-a-mole strategy, even when the particulars of a case made sense. The solution is not for Congress to become the regulator, but instead a process for the SEC and CFTC to work together to provide clarity and necessary regulation, and legislation should provide them with the proper authority, principles, and flexibility to do so. Legislation that writes detailed rules and creates a binary classification scheme is bound to fail. Former SEC Chair Jay Clayton and I proposed this approach two years ago. We said Congress should mandate that the SEC and CFTC work together, through a self-regulatory organization or otherwise, to develop joint rules that would apply to every intermediary that trades or handles bitcoin or ETH. That was the jurisdictional hook. It establishes jurisdiction over the market without debating classification of each token or Congress pursuing tortured rewriting of existing definitions of securities and commodities. We also said that rewriting existing law might fail to bring clarity and could inadvertently undermine decades of regulation and jurisprudence as they apply to traditional securities and commodities markets. A key principle for market structure legislation must be do no harm to those frameworks. The latest market structure proposal, like its predecessors, instead revises the securities laws in various ways that will create more confusion than clarity. It creates a broad exemption for activities described as decentralized finance, which will lead to migration of regulated activity into an unregulated space. Decentralized activities may warrant different regulations to achieve regulatory goals, but not a free pass. It provides an exemption from securities laws for raising funds to build a mature blockchain system, but you do not actually need to build it; only have an intent to do so. The exemption is not needed, and it will be misused. It will not even regulate all the crypto activity taking place on centralized platforms today. It will provide many opportunities for lawyers to engage in regulatory arbitrage.
Richard Painter, Professor of Corporate Law; former Associate Counsel to the President and chief White House ethics lawyer
Congress must carefully look at this bill and consider whether it will soundly regulate these markets. We cannot repeat the mistakes of the past to regulate the banking industry. Consider carefully whether we should be drafting and passing through Congress a very detailed bill that locks a lot of definitions in stone, or rather, take up Massad’s recommendation that the SEC and the CFTC work together to respond to evolving market conditions. Consider whether it makes sense to define a stock as a security, but not the tokenization of that stock. It is important that the conflicts of interest of members of Congress and the President do not influence the regulation of cryptocurrency or any other industry. Under 18 U.S. Code § 208, it is a criminal offense for a government official to participate in a government matter that affects their own financial interest. A Treasury Secretary regulating cryptocurrency while issuing memecoins and investing in a crypto business would be committing a felony. But Congress has exempted itself, as well as the President, from that statute. Those in charge of passing, enforcing, and implementing legislation cannot have conflicts of interest with their official responsibilities. One should be divesting from crypto if they are going to be regulating crypto, and so should the President. The integrity of our financial system depends on this. Congress has passed laws to regulate the financial sector, and it ended in disaster because it was not truly regulated.
DISCUSSION
Chairman Scott (R-SC): What are the risks if we fail to provide certainty and clarity for innovators and markets? Mersinger: Traditional bank regulations are not fit-for-purpose for digital assets and blockchain technology. They are meant for centralized intermediaries, and that is not what we are dealing with. We need a regulatory structure that is fit-for-purpose. This patchwork of regulations and state laws, and industry trying to piece together their regulatory framework, does not work. It is going to continue to offshore innovators. The most important thing is to create a framework that gives clarity. The status quo does not work. We need responsible innovation in the U.S, and a framework that provides customer protections. The framework put in place must ensure that U.S. values are what this technology is based on.
Chairman Scott (R-SC): What are common misconceptions regarding digital assets and illicit finance? What rules do digital asset market participants already comply with, and how does industry work with law enforcement? Levin: The majority of activity inside cryptocurrencies and on blockchains is legitimate activity, with trillions of dollars of payments made using stablecoins every year, and the vast majority of that is not illicit activity. Our illicit activity estimates are less than one percent of the overall activity that occurs on blockchains, which is equivalent to what we see in traditional markets and, in fact, oftentimes less than. Criminals understand that it is not possible to launder vast sums of money in these networks. When it comes to threats, from pig butchering to terrorist financing, industry comes together with law enforcement to collaborate on solving these cases. Chainalysis has powered thousands of investigations to capture criminal proceeds. The centralized services helpful with this are subject to AML and BSA obligations and have been since FinCEN guidance in 2013. It is through public-private collaboration that we can solve the problems of illicit finance.
Senator Cortez Masto (D-NV): What legislative goals should we be looking at more? Massad: It needs to set up a process and some principles for achieving clarity and addressing this regulatory gap of no regulator of the spot market for anything not a security. We need to fill that and bring some clarity to the question of when the use of digital technology turns something into a security or a commodity. But that is much more complicated than simply writing in a single definition. That is why Clayton and I advocated more of a process of bringing the SEC and the CFTC together. You do not necessarily have to merge them, but they must work together; Mersinger: I agree. We need a framework that is going to work for the industry, and need clear lines of jurisdiction. I totally agree with the SEC and the CFTC working together. They are doing that now, working together to provide what clarity they can. But we still need legislation to oversee the spot market.
Senator Cortez Masto (D-NV): What is the importance of preserving state’s powers in legislation? Massad: State securities authorities have always played a critical role. This is a technology, and most activity is through centralized intermediaries. We still need the resources of the states, as well as the enforcement resources of the SEC and the CFTC, to bring to bear.
Senator Cortez Masto (D-NV): What are the biggest obstacles to identifying and recovering ransom payments or stolen funds? Do state and local law enforcement and regulators have the tools they need, and what aspects of market structure regulation can ensure they do? Levin: The biggest barrier is that money can move to foreign jurisdictions where there can be non–compliant centralized entities that hold cryptocurrency on behalf of illicit flows. The U.S. must be able to work across geographies to prevent laundering in foreign jurisdictions. We are still in infancy of state and local agencies having the capabilities. There are instances in certain jurisdictions where the state and local enforcement agencies have the capabilities at their disposal, but there is a technological barrier to entry. We have been pioneering new technology powered by AI to help state and local agencies gain easier insights into these types of crimes so they can go after this activity. It starts with regulators having the tools in place to monitor publicly available information and proactively go after types of threats we need to address, rather than overly relying on a reporting structure as we do in traditional markets.
Senator Kennedy (R-LA): Why is industry so scared of being regulated by the SEC? How should we approach classifying digital assets? Massad: They do not want everything treated as a security because they do not want that entire framework to apply. That is also because the SEC failed to try to customize and adapt its rules for this technology, and it should do that. Congress needs to fill the gap which is, if it is not a security, who is going to create a regulatory framework for it. Questions about exactly when it is a security, when it is not, how do we customize the rules, and what should we do about DeFi should really be left to the agencies. You could establish some principles, but I would not write detailed rules.
Senator Kennedy (R-LA): What do you think about the CLARITY Act? Massad: It has a lot of problems, with 236 pages of regulatory arbitrage opportunities for creative lawyers.
Senator Smith (D-MN): Would the CLARITY Act prevent any digital asset from being regulated if it is represented as a collectible or something with inherent value, utility, or significance beyond just existing as a digital asset? Massad: Yes, it would.
Senator Smith (D-MN): Would crypto stock tokens issued by automakers have inherent value? Massad: It certainly would and would also be exempted and still regulated as a security. This is the problem as it is unclear exactly what would be categorized as digital commodities under this definition. Many say it would be these native tokens, like bitcoin. Most trading occurs through centralized intermediaries listing several hundred tokens, not decentralized exchanges. The question is how many of those tokens would be regulated, and I think it would only be a handful. That is a real problem and a loophole.
Senator Smith (D-MN): Under the CLARITY Act, would a crypto company be allowed to raise up to $300 million from retail investors exempt from SEC registration and disclosure rules? Massad: There is a new exemption for capital raising to build a mature blockchain system. It does require some disclosure, but it is otherwise an exemption from SEC registration. A regular company would have to disclose to the SEC. The exemption’s problem is that one does not have to build the mature blockchain system, just have the intent to. The Act is undermining the existing regime. We need to customize some rules, but this is not a good way.
Senator Moreno (R-OH): Would you describe bitcoin and ether as native tokens? Massad: A native token is when you have a blockchain and you have the token that allows you to use that blockchain. Bitcoin is a commodity.
Senator Moreno (R-OH): Were you prohibited by law to cooperate with the SEC? Massad: No, I cooperated. Congress should not try to be regulators, but also not abdicate responsibility.
Senator Moreno (R-OH): What is the technical difference between a baseball card and memecoin? Massad: A baseball card is not a security and you could classify them both as collectibles. People should be able to invest in whatever they want to, but there should be a regulatory framework for certain financial instruments. The SEC has said they will not regulate memecoins, and that is fine with me. The difference is that this a technology of tokenization.
Senator Warnock (D-GA): What effect will the SEC’s staff memo have on memecoin investors? Will the SEC bring civil actions or enforcement against scammers involved? Massad: The SEC has said these are not securities, and I would agree. The issue then becomes, if they are being listed on centralized exchanges where people are trading bitcoin, what should we do about that? People say we want to regulate platforms insofar as they trade bitcoin. We should either say they cannot trade other things that are not regulated, or whatever they trade has to be subject to the same regulations. I do not expect the SEC or anybody else to take action unless it was really a serious case of fraud, which would be up to the Justice Department.
Senator Warnock (D-GA): What do we need to see in a Senate bill to protect consumers from memecoin scams without sacrificing market innovation? Massad: Consistency between what we allow centralized exchanges trading bitcoin to trade and what is subject to the bill. If we are going to regulate those centralized exchanges, they should not be allowed to list things that are not subject to the same regulations. The bill is very inconsistent in that respect because it excludes those memecoins from digital commodities, but it does not prohibit the listing of those memecoins on these very same exchanges.
Senator Hagerty (R-TN): What is our role in establishing market structure regulation that effectively limits developer liability for third-party actions? Robinson: A lot of industry engineers have been very concerned about the potential for regulatory actions going after software developers just for publishing code. It is very important that the Senate includes a protection shielding developers from liability. The Blockchain Regulatory Certainty Act, adopted in the House as part of the CLARITY Act, does address exactly that. I would encourage the Senate to include similar language.
Senator Hagerty (R-TN): Why is it important to ensure jurisdictional harmony between the CFTC and SEC as we delineate and establish the appropriate regulatory authorities between them? Mersinger: When the only regulatory actions occurring are lawsuits and legal settlements, there is no clarity, and you have a situation where those who want to follow the law and do the right thing are worried about innovating in the U.S., but they also are not sure where to go to follow the rules. We have to have clarity around what is the right regulator and who is overseeing these markets. The CFTC has broad anti-manipulation and anti-fraud enforcement authority over commodity spot markets, but they do not have regulatory jurisdiction over those same markets so they can only come in after fraud or manipulation has occurred. There is no regulatory oversight. Providing that regulatory framework to have a regulator overseeing these activities will prevent regulation through enforcement, with examiners and regulators ensuring that businesses are following the laws and the regulations, rather than having to come in after something bad has happened and bring enforcement cases.
Senator Hagerty (R-TN): What factors should we emphasize to ensure the framework is appropriate and does not stifle innovation by forcing markets into outdated regulations? Garlinghouse: There are unique aspects that need to be thoughtfully and potentially uniquely applied to any legislation. Depending upon the SEC and CFTC to work together assumes good faith from appointed officials to make those decisions. Under Chair Gensler, the SEC sowed confusion in the marketplace and took contradictory positions in different court cases, which created more confusion. Federal judges said the SEC was arbitrary and capricious in their application of the law, and not following a “faithful allegiance to the law.” With the most recent SEC was a war against the industry at large without a consistent application of that law.
Ranking Member Warren (D-MA): Could market structure legislation make it possible to structure a non-crypto product to dodge security laws? Massad: Yes, it certainly could and could substantially undermine the SEC’s authority. If you provide an exemption for activity on decentralized trading protocols, and that is a very broad exemption, then you could tokenize a stock and have it traded on that protocol and then be exempt from Securities Exchange Act trading requirements.
Senator Britt (R-AL): How do we create a framework with the proper guardrails and the clarity needed without locking in rules that quickly become outdated? Mersinger: This is a reason why there is so much interest in having the CFTC as a regulator over the digital spot market because they have a principles-based regulatory regime, which provides that flexibility. As technology changes, companies can still operate and fulfill their regulatory duties but not be subject to a prescriptive regulatory framework that locks into place the technology, systems, or processes they are using when it is put in place. The most important thing you can do is have a principles-based regulatory regime and prevent prescriptive regulations.
Senator Britt (R-AL): Are there permanent and durable mechanisms, such as regulatory sandboxes, that effectively encourage innovation? Mersinger: Absolutely. There has been talk about sandboxes being a helpful tool. The SEC and the CFTC have exemptive authority that they can use like staff no-action letters and relief, with tools in place to oversee and regulate the space but not stifle the innovation that is occurring and developing.
Senator Britt (R-AL): Can you address the narrative of digital assets as untraceable and explain what tools are available to identify and combat bad actors? Levin: There are forensic tools being used in investigations looking at very specific transactions of interest that have been flagged either through regulatory reporting or investigations. Blockchain actually allows for a much more macro view of trends and threats that are persisting against society. One could investigate ransomware as a whole threat to the U.S., look at the entire supply chain that causes ransomware to have an impact on our communities, and find where there is an opportunity for actual disruption of that supply chain for the threat.
Senator Van Hollen (D-MD): What are the challenges in the effective enforcement necessary to oversee crypto on parity with existing laws? Massad: We should think about what activity takes place on-chain and what takes place off-chain. We need better monitoring by issuers of digital assets, such as stablecoin issuers. Issuers need to be monitoring the chain, applying risk analysis techniques, and so forth. With respect to off-chain activity, that is where a lot of illicit activity takes place through centralized intermediaries and is why we need an entire regulatory framework around these entities. We need to prevent wash trading, and to ensure a good job on beneficial ownership. We need to give Treasury more tools to enforce sanctions on money laundering. There were a number of proposals made two years ago to enhance its authority. Because digital assets are bearer instruments and transferable on blockchains, Treasury needs greater authority to impose sanctions and other measures on offshore entities harboring it.
Senator Blunt Rochester (D-DE): What are the risks in moving too quickly without broad input and clear understanding of market consequences? How do we ensure this process produces a bipartisan framework that can stand the test of time? Painter: We risk repeating the experience of regulating the banks in the 1920s and the depression that followed, or repeat what happened in 2008 when campaign contributions poured into Congress from the securities-based swap industry. We do not want another economic collapse caused by deregulation.
Senator Blunt Rochester (D-DE): How should we design a system that applies rules fairly and earns trust, given that some proposals would let crypto companies decide which rules apply and which regulator they answer to? Massad: Congress should think in terms of principles, not trying to write detailed rules, because those can quickly become obsolete. Congress needs to fill the gap in regulation on the use of this technology for things that are not securities. The problem with many proposals is that they attempt to write detailed rules that will not provide true clarity and will instead create opportunities for evasion.
Senator Blunt Rochester (D-DE): How should Congress decide when a decentralized protocol acts more like a centralized financial intermediary and be regulated as such? Massad: Just because it is decentralized does not mean it is free of regulation, but that regulation may be different. If we had a decentralized protocol that became the primary market for trading Treasury securities, we would not say, “because it is a decentralized protocol, do not worry about regulation.” We may need different rules, but we still need rules.
Senator Kim (D-NJ): What role do mixers, smart contracts, and other anonymization tools play in facilitating illicit finance and illicit trading? Levin: Mixers are used by illicit actors to cover their tracks in terms of laundering proceeds of crime, but it is possible to continue to trace through certain types of mixers in certain instances. We have seen law enforcement be successful in those regards. It is important to look at what the residual risks are there.