SENATE COMMITTEE ON BANKING, HOUSING, & URBAN AFFAIRS SUBCOMMITTEE HEARING ON DIGITAL ASSET MARKET STRUCTURE
On June 24, the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Digital Assets held a hearing, entitled “Exploring Bipartisan Legislative Frameworks for Digital Asset Market Structure.” Witnesses in the hearing were:
- Ryan VanGrack, Vice President of Legal, Coinbase
- Greg Xethalis, General Counsel, Multicoin Capital
- Sarah Hammer, Executive Director, University of Pennsylvania Wharton School
- Rostin Behnam, Distinguished Fellow, Psaros Center for Financial Markets & Policy, Georgetown University; Former Chairman, Commodity Futures Trading Commission
Prior to the afternoon hearing, Committee Chairman Scott (R-SC), Digital Asserts Subcommittee Chair Lummis (R-WY), Senator Tillis (R-NC), and Senator Hagerty (R-TN) released a set of principles for the development of comprehensive market structure legislation for digital assets. An overview released by the Committee is available here.
Key Takeaways
- Subcommittee Chair Lummis (R-WY) highlighted the six crypto market structure principles released by the Committee before the hearing, outlined as: 1) legislation should clearly define the legal status of digital assets; 2) jurisdiction should be clearly allocated among regulators; 3) regulation should be modernized to foster innovation; 4) regulation should protect those who purchase or trade digital assets; 5) illicit finance measures should be targeted and pro-innovation; and 6) federal financial regulators should welcome responsible innovation.
- Republican Senators and witnesses cited the urgency behind delivering clarity for innovators and market participants that reflects U.S. commercial practices, legal norms, and policy priorities. Witnesses discussed how the price of failure to prudentially regulate is increased criminal and illicit activity in digital assets, with greater difficulty enforcing rules and regulations, alongside the continuation of expensive, costly, and time-consuming regulation by enforcement.
- Discussions raised how investors have lacked a full suite of protections present in traditional finance that detracted from investment in the U.S., and how innovators’ struggle to understand the rules of the road has impeded entrepreneurship in decentralized finance (DeFi) within regulated markets. Xethalis pointed to how developers are migrating from the U.S. to abroad, with capital flows shifting from the U.S. to jurisdictions with established frameworks, as he called for reducing the burden of regulatory inquiries and factoring in risk assessments on the costs associated with the lack of clear rules.
- Witnesses noted how investors and innovators are offshoring capital and infrastructure to avoid hiring lawyers to decipher what the rules might be or facing legal action. VanGrack cited spurious lawsuits and Wells notices surrounding rules and regulations that were never promulgated. Xethalis framed it as an invisible tax on U.S. developers and industry by continuing to pay the substantial legal costs of compliance due to the uncertainty. Behnam referenced how nearly fifty percent of the CFTC’s FY 2024 enforcement docket was crypto-related, deeming it an astonishing figure for a market the agency does not regulate.
- Senator Moreno R-OH) called for the U.S. to chart a bold path in market structure legislation and subsequent prudential regulatory leadership, cautioning against ceding further ground to foreign jurisdictions and continuing to lead with a fear of change to the traditional financial system. He highlighted the bipartisan agreement from witnesses on the recognized detriments of the U.S. not acting to provide necessary clarity, alongside how inaction will only result in greater risk to financial markets.
- In response to Subcommittee Chair Lummis, Behnam outlined how self-regulatory organizations (SROs), such as the Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA), have been vital to the success of both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). He cited NFA’s statutory partnership with the CFTC and FINRA’s with the SEC as he emphasized that an SRO component is critical in considerations of market structure legislation.
- VanGrack criticized how the lack of regulatory clarity and jurisdictional certainty has created a fragmented regulatory landscape. He cited negative implications on domestic investment and innovation due to the patchwork of overlapping and often conflicting assertions of state and federal authority. He called for keeping it simple to avoid complexity from future legislation hindering or undermining innovation, emphasizing that securities laws should only apply to securities.
- Hammer discussed how a principles-based approach provides a strategic blueprint for balancing responsible innovation with market integrity and financial resilience. She outlined three foundational principles for effective oversight as clear standards, rules, and enforcement mechanisms paired with robust consumer protections and U.S. leadership in global standard setting. She stated that the best approach to digital asset regulation is one that recognizes U.S. values and leadership, reiterating the importance of having a clear regulatory framework that promotes innovation and protects against malfeasance.
- Behnam raised how the CFTC’s principles-based oversight model strikes a balance between clear, outcomes-based requirements and the flexibility needed to meet those outcomes. He stated that the number one issue on customer protections should be on bankruptcy protection, citing the CFTC’s customer segregation rules. He emphasized that legislation must build on existing requirements for market participants and provide comprehensive authority for anti-money laundering (AML), know-your-customer (KYC), and customer identification programs.
SUMMARY
Opening Statements and Testimony
Subcommittee Chairman Cynthia Lummis (R-WY)
We do not want to lose momentum nor focus on the need for digital asset market structure legislation and the themes the Committee will need to consider in coming weeks. To avoid some of the bumpiness experienced in the process with stablecoins, we are going to start the market structure component of digital asset regulation with general guidelines and principles, released this morning, governing the Committee’s consideration of bipartisan market structure legislation. Legislation should clearly define the legal status of digital assets, meaning Congress should draw the line between a security and a commodity in statute. That has been a clear source of frustration for those attempting to identify their regulator. Jurisdiction should be clearly allocated among regulators. Not all digital assets and distributed ledger technologies (DLTs) should be regulated equally, as different opportunities and risks come with different assets and forms of the technology. Regulation should be modernized to foster innovation, including a new securities registration pathway for digital asset fundraising and updates to existing rules on custody and recordkeeping to account for DLTs’ efficiency and transparency. Regulation should protect consumers, which includes requiring digital asset exchanges to be subject to comparable regulation as other centralized intermediaries and ensuring that customers have priority in bankruptcy. Illicit finance measures should be targeted and pro-innovation, which includes adopting digital asset examination standards and considering the extent to which DLT can improve the work of law enforcement. Financial regulators should welcome responsible innovation and promote the use of no-action letters, sandboxes, regulatory coordination, and appropriate timelines for application decisions. Over the last four years, this industry has been embroiled in very expensive litigation that provided no clear path forward for complying with regulations while also fostering innovation. That is our goal, and we want to move market structure forward.
Ryan VanGrack, Vice President of Legal, Coinbase
There is a growing and urgent need for regulatory clarity in the digital asset industry, with global markets exceeding $3 trillion in value. Congress stands at a crossroads: it can pass comprehensive market structure legislation as soon as possible, or it can risk losing the momentum forged through months of bipartisan collaboration. By passing the GENESIS Act, the Senate has shown it is up to the task. While we applaud and strongly support the Act, stablecoins are only one puzzle piece. Congress cannot leave market structure legislation behind. We are at a generational inflection point, with the opportunity to deliver a clear, uniform, and simple legal framework for digital assets. If we get this right, we do not just regulate these markets, but also unlock their full potential to drive innovation, inclusion, and economic growth. U.S. leadership in digital assets is at stake. To position the U.S. as the epicenter of crypto innovation and capture the full promise of digital assets, we must unite and deliver durable legal certainty that only legislation can provide. Without that, regulatory gaps give bad actors room to exploit the system, putting customers at risk and eroding public trust. Meanwhile, responsible innovators are left navigating legal uncertainty, which drives talent and capital abroad and undermines U.S. leadership in financial markets. The risk of inaction dwarfs the risk of taking action. This is not just about fostering innovation; it is about protecting customers. Blockchain technology is already transforming lives by enabling faster, cheaper cross-border payments, strengthening identity verification, and driving the democratization and modernization of global finance. Yet today, Americans face a fragmented regulatory landscape, with a patchwork of overlapping and often conflicting assertions of state and federal authority. The result is that customers lack consistent, comprehensive protections. No other financial market of this scale is plagued by such uncertainty. The U.S. deserves clear, uniform, and simple federal safeguards. The good news is that Congress has the blueprint, consensus, and authority to act now. Thankfully, we are not starting from scratch. Both chambers have made critical progress on crypto legislation with strong bipartisan support, and there is growing alignment on key principles: that the CFTC should oversee spot markets; that not all transactions involving digital assets are securities; and that token issuers need clear, workable paths to compliance. Legislation is within reach. Innovation and customer protection are not mutually exclusive, far from it. Clear, comprehensive rules can both promote U.S. innovation and protect consumers while ensuring that the U.S. shapes the future of global finance. The opportunity is clear, the urgency is real, and now is the moment to deliver.
Greg Xethalis, General Counsel, Multicoin Capital
Increasingly, founders building the future of financial infrastructure and internet-native commerce are not building in the U.S. They are setting up abroad, not because they want to avoid rules, but because the rules here are often opaque, fragmented, or even contradictory. That is not a sustainable outcome and Congress has an opportunity to reverse that trend. I commend efforts for advancing bipartisan proposals that aim to bring clarity, structure, and accountability to this industry. The House’s CLARITY Act and the Senate’s prior iterations of the Responsible Financial Innovation Act are serious, thoughtful proposals, as are the market structure principles released by Committee members this morning. The House and Senate proposals are not competing, but complementary. Together, they provide a framework for regulating centralized intermediaries, as well as two essential ingredients in understanding the taxonomy of digital assets: a maturity test grounded in decentralization and functionality that helps determine when a token no longer relies on the efforts of an identifiable third party; and legal recognition that a token offered in an investment contract is not itself a security as it is the transaction and the context of that transaction that matters. The current state of affairs, with almost every digital asset transaction subject to second-guessing and nearly all innovation met with enforcement threats, has produced a chilling effect. Entrepreneurs face the risk of building into a legal gray zone, and established institutions like banks, corporations, and exchanges are sitting on the sidelines, afraid to touch new and important technologies. Industry and founders are not asking for a free-for-all. To the contrary, we are asking for regulation that is fair, functional, and intelligible. Today’s environment imposes an invisible tax on innovators through compliance costs that scale not with the complexity of a product, but with the ambiguity of the law itself. While we debate clarity here at home, other countries are moving forward. The EU passed MiCA, while the UAE, Singapore, the UK, Switzerland, and Hong Kong are all establishing bespoke licensing regimes and stablecoin oversight. According to the 2024 Electric Capital Developers Report, the U.S. share of global blockchain developers dropped from 42 percent in 2018 to just 24 percent last year, which is a striking decline in a sector where developers are the leading indicators of future company formation and capital investment. At the same time, we also need to preserve mechanisms that enable permissionless innovation. Self-custody and DeFi are not edge use cases, but how every new token and protocol begins. Centralized intermediaries only support an asset or protocol after there is proven demand measured by usage, liquidity, and community support. Without DeFi and self-custody, we lose the sandbox that allows innovation to flourish. Without preserving legal space for these tools, we push early-stage projects entirely outside the reach of U.S. regulatory oversight and commercial norms. We need a principles-based approach. Regulation should define the outcomes we want, namely transparency, disclosure, and consumer protection, but should not mandate that today’s business models are forever business models. We need legislation that can accommodate the future, not lock us into the past. Clarity is not the enemy of regulation or innovation, but the foundation. Clear rules empower responsible builders, and clear standards allow users and investors to make informed choices. Clarity enables enforcement to be more targeted, effective, and just. The U.S. has always led global financial markets not by closing doors to innovation, but by setting the rules of the road. This is a defining moment to do the same for digital assets.
Sarah Hammer, Executive Director, University of Pennsylvania Wharton School
The U.S. stands at a crossroads in shaping the next generation of financial services. I conducted a temporal analysis of proprietary, geographically tagged data on stablecoin transfers, active digital wallet addresses, and blockchain transactions. Across all categories, the data shows that while North America led the digital asset landscape in 2021 and 2022, by 2025, Europe has closed the gap and is now poised to surpass us. Notably, the 2023 passage of the EU’s Markets in Crypto-Assets regulation did not suppress activity. On the contrary, it appears to have accelerated it, reinforcing the importance of regulatory clarity as a catalyst for vibrant digital asset markets. I also conducted a global assessment of digital asset regulatory frameworks dating back to 2018. Jurisdictions including Bermuda, Singapore, Switzerland, Dubai, and the EU have established comprehensive legal regimes. Today, approximately fifty countries have either enacted or are actively developing digital asset frameworks. These jurisdictions recognize that regulatory clarity does not hinder innovation but enables it. The question now is how the U.S. will lead. In my 2022 paper, I set forth three foundational principles for effective oversight: clear standards, rules, and enforcement mechanisms; robust consumer protections; and leadership in global standard setting. This principles-based approach provides a strategic blueprint for balancing responsible innovation with market integrity and financial resilience. My assessment of foreign jurisdictions offers insights to inform development of a bold and enduring U.S. regulatory framework. A foundational pillar is a clear and coherent taxonomy, codified by statute and tailored to the complexity of this evolving market. Other essential pillars include a streamlined supervisory structure, appropriate regulation for stablecoins, market integrity measures to prevent crime, manipulation, and systemic risk, and a bankruptcy regime. Equally critical are provisions that foster innovation and global engagement, securing the U.S.’s role at the helm of financial leadership. Blockchain and digital assets are reshaping the global financial system in real time. While international models offer valuable lessons, the U.S. will chart its own course guided by principles, driven by innovation, and anchored in our leadership to marshal the future of finance.
Rostin Behnam, Distinguished Fellow, Psaros Center for Financial Markets & Policy, Georgetown University; Former Chairman, Commodity Futures Trading Commission
During my seven-year period as a Commissioner, I observed the significant growth of the digital asset market and how the digital asset market endured multiple periods of dramatic volatility. Throughout this time, I publicly stated one consistent message to Congress: under current U.S. law, there is a gap in regulation for the non-security digital asset market. That regulatory gap facilitating scandals and fraudulent activity remains today, which must be filled with targeted legislation. I do not believe public interest in digital assets will wane. Inaction will only result in greater risk to our financial markets and to the investors that participate in them, through a lack of market transparency, fraud, market manipulation, corruption, and conflicts of interest. One common refrain in past legislative debates suggests that a U.S. regulatory framework would legitimize the digital asset market, leaving opportunities for bad actors and industry players to exploit regulatory loopholes and mislead retail investors. That argument itself is the loophole, as it has left the vast majority of the digital asset market unregulated and investors vulnerable to fraud and manipulation. It is critical to anchor digital asset market structure legislation in two pillars: durable legal precedent to define tokens as securities or commodities; and the use of existing securities and commodity derivatives market structure as the model for digital asset market structure. Market structure in traditional finance has evolved over many decades. The Committee should examine how unregulated digital asset markets differ from traditional financial markets, considering where change is needed and where existing requirements should be preserved. The CFTC and SEC have a longstanding partnership that enables strong, robust regulation of securities and commodity derivatives markets. In a situation where a regulated entity handles both security and non-security tokens, separate and exclusive jurisdiction for the CFTC and the SEC is critical to a healthy, comprehensively regulated ecosystem. The CFTC’s principles-based oversight model strikes a balance between clear, outcomes-based requirements and the flexibility needed to meet those outcomes. Appropriate funding, including technology and human capital, is essential to fulfill any regulatory mandate. SROs, such as FINRA and NFA, have been vital to the success of both the CFTC and the SEC. Legislation must provide comprehensive authority for AML, KYC, and customer identification programs, building on existing requirements for market participants. Given the broad adoption of digital assets, a tailored disclosure regime and a comprehensive education and outreach program will help investors understand the risks and opportunities. Separately, the current regulatory divide between the U.S. and its international counterparts creates regulatory arbitrage opportunities for bad actors and limits the U.S. role in multilateral coordination. Any framework must ensure that state and local law enforcement remain key partners in fraud prevention. The principles and foundations that make U.S. capital and derivatives markets the deepest, most liquid, and most resilient in the world offer a strong model for digital asset market structure. We must act thoughtfully, but with urgency, to close this harmful regulatory gap and provide U.S. investors the protections they deserve.
DISCUSSION
Subcommittee Chairman Lummis (R-WY): Due to lack of clarity in our regulatory framework, are we inviting fraudulent actors to move away from jurisdictions with clearer regulations? Hammer: By not enacting a regulatory framework, the U.S. does leave the door open for fraudulent activity. A regulatory framework can enhance and enable responsible innovation. The other jurisdictions that have enacted comprehensive digital asset frameworks have emphasized fraud prevention, clarity of compliance obligations, anti-money laundering requirements, and anti-terrorist financing requirements. In doing so, they made expectations clear and enabled organizations to better comply with their regulatory frameworks, an essential component of any regulatory framework here in the U.S. The second point is engagement in the international standard-setting community, meaning U.S. leadership in the international community. Coordination and collaboration across the globe is critical to fraud prevention, anti-crime efforts, AML, and anti-terrorist financing. The U.S. can take a great step forward by enacting a framework that clarifies obligations, makes it clear to organizations what is required, and provides leadership in the international community in this space; Behnam: There are different components of fraud in a market landscape regarding AML, KYC, anti-illicit activity, and anti-terrorist activity. A lot of the entities involved are regulated at the state level, and many are regulated by Treasury through FinCEN. Bad actors gravitate toward areas that are unregulated, where they know they can get away with conduct that lacks a legal framework. Market structure is not terribly complex when considered at the principles level, like the intermediaries beginning with the customer, then the broker, exchange, clearinghouse, and custodian. It is very important to consider that existing market structure as you develop a framework for digital assets. In an arena that is essentially a regulatory vacuum, a market structure bill will go a long way toward disincentivizing bad conduct and creating a more transparent market. There will continue to be fraud, as we seen in our regulated markets, but this framework would give regulators more power and provide stronger deterrents for bad actors, resulting in more transparent markets. It will also give innovators and entrepreneurs the opportunity to grow in a jurisdiction with clear rules of the road.
Subcommittee Chair Lummis (R-WY): Which country has the best antiterrorist financing language, and are there any we should look to? Hammer: There are several countries that have anti-terrorist financing language. Each country has tailored its regulatory framework to its own principles and its own values. Ultimately the U.S. will need to do the same, and that is how we will provide leadership. There are several jurisdictions that we could look to for lessons. The Singaporean framework makes it very clear what compliance obligations are, and it does so with a stated, express purpose of anti-crime, anti-fraud, anti-money laundering, and anti-terrorist financing. While no regulatory framework is perfect, I do think there is a lesson there for the U.S. in terms of clearly setting forth what is required and strongly stating what companies must do in order to adhere to our standards and principles.
Subcommittee Chair Lummis (R-WY): What are common themes in the regulatory frameworks associated with how to determine what is a security and what is a commodity? Xethalis: We must start with the general principle that digital assets are not typically securities, but generally fungible and intangible commodities. Some can be designed as non-fungible, but in most cases, we are talking about fungible, intangible digital assets. Under those circumstances, we can look at those tokens and say they resemble a standard commodity. This is a technological innovation that can be designed in many ways, and there certainly are tokens that can be structured to carry rights associated with traditional securities. An example would be BlackRock’s BUIDL fund, which tokenizes an instrument. One can tokenize just about any type of security, but the typical digital asset referred to does not reflect a right or represent a claim against a third party. It is a technological tool that grants certain powers or access within a blockchain network or a distributed application. When evaluating the inherent securities characteristics of a token itself, we must consider whether or not the transaction involving tokens is a securities transaction. That has been the central issue industry has struggled with, particularly in the context of the now infinite Howey test.
Subcommittee Chair Lummis (R-WY): How do you view concerns from former SEC Chair Gensler about use of tokenized securities to try to get around some existing disclosure requirements for traditional securities? VanGrack: Securities laws should only apply to securities. The problem, which the SEC conceded after the courts weighed in, is that there is nothing inherent about a digital asset that makes it a security. It is only if a digital asset is part of a transaction that carries the indicia of a security, such as certain obligations and rights, that it potentially falls within the purview of securities laws. I do not mean to understate it, but it is not that complicated. The failure to define some of these rules and regulations has allowed uncertainty to become more pervasive and has allowed others, at both the federal and state level, to step in and claim jurisdiction. It is the prerogative of this Congress to establish that clear legislative framework. These issues are important but are not impossible nor intractable. The principles that you outlined are a very meaningful and important step in getting this right.
Subcommittee Chair Lummis (R-WY): How do SROs work and how do they benefit organizations? Behnam: They are partners of regulators and also of private industry, often functioning as quasi-public-private organizations. When I served as Chair of the CFTC, we had a large organization, but certainly not one with the capacity to oversee the entire commodity derivatives market. We leaned on, and continue to lean on, NFA critically to handle a lot of the work, such as boots on the ground for introducing brokers, associated persons, swap dealers, and FCMs. They are a partner by statute, and the same is true of FINRA and the SEC under the securities laws. SROs are extremely important from an enforcement, examinations, and supervision perspective, and also for understanding what is happening in the market. The broader reality is that there are limits to what a federal agency can do, and we do not want those agencies to grow too large. SROs bring acute expertise that is distinct from, but complementary to, the agencies, and they are more integrated into the day-to-day operations of the market. They are a support system, and above all else, partners. I had a fantastic experience with the NFA and a very close relationship with FINRA. I know the SEC feels similar. An SRO component and involvement will be critically important to a market structure bill.
Senator Hagerty (R-TN): What was the impact of this lack of regulatory clarity on the ability of firms to operate and innovate in the U.S.? How important is established and clear jurisdictional authority when making investments and developing products in the U.S.? VanGrack: It was devastating across the board. Regulatory clarity empowers innovators, protects customers, and allows the U.S. to lead. The U.S. essentially ceded jobs, innovation, and leadership abroad. The U.S. should be setting the standard, and instead it was following. In the absence of clarity at the federal level and the lack of a robust framework, we were left with a patchwork of states attempting to assert federal authority. That resulted in inconsistent rules, some of which directly conflict with what the federal government has said are the securities laws; Xethalis: We see the concept of an invisible tax not only on builders in this country, who must pay again and again for compliance and legal costs because we allow this industry to remain so uncertain, but also from an asset allocator perspective. We have seen the burden of regulatory inquiries and must factor into risk assessments the costs associated with the lack of clear rules of the road. We have seen not only developers migrate from the U.S. to abroad, but also capital flows shift from the U.S. to offshore jurisdictions. That is not effective and hampers growth.
Senator Hagerty (R-TN): What factors should be considered when determining jurisdiction, whether it be the SEC or CFTC? Xethalis: The first foundational principle we are dealing with is something that is a security token. If something is a security, putting it on a blockchain does not change that aspect. What we are really looking at is the context of the transaction. Tokens or digital assets that might be issued down the road as a result of investment are not necessarily securities themselves, and they are not necessarily going to trade in secondary markets as securities. We need to develop a clear line, guidelines, and a finely tuned distinction between what is a commodity and a security, assign appropriate regulatory jurisdiction. Yes, we will find some areas that approach that line. The goal should be to shrink that gray zone through engagement with regulators, lawyers, and policy experts, which will go a long way toward finding solutions. What we really should be aiming for is getting to a place where 95 percent of this market does not need to get a law firm opinion to launch a business.
Senator Moreno (R-OH): Why has this issue become so partisan? Hammer: Recognizing the potential of blockchain and digital assets to bring the attributes of decentralization, transparency, and immutability to the financial sector is not at all a partisan issue. These attributes can reduce risk, increase financial inclusion, and improve efficiency. The best approach to digital asset regulation is one that recognizes U.S. values and leadership, as well as the importance of having a clear regulatory framework that promotes innovation and protects against malfeasance. I do not see this as a bipartisan issue but as an opportunity to support U.S. entrepreneurs using digital assets for everything from managing personal energy-related data, facilitating cross-border payments, to advancing supply chain management. Entrepreneurs exploring these important use cases, and talented students who are innovating and building companies in the digital asset space are all looking for a clear regulatory framework. The U.S. is a global leader in innovation and in thinking about how DLT can be beneficial, but we are falling behind on establishing a regulatory framework at all, enshrining our values in statute, and maintaining our leadership in the digital asset space. In 2021 and 2022, the U.S. was by far the world leader by usage and transaction volume.
Senator Moreno (R-OH): How much time does the U.S. have to regain leadership, and what is the price of failure? Hammer: We need to act now. The U.S. is far behind other jurisdictions in enacting a regulatory framework. While we have had a lead in digital assets, others are rapidly catching up to us and are perfectly poised to surpass us. The price of failure is facing increased criminal and illicit activity in digital assets, more fraud, greater difficulty enforcing rules and regulations, and the continuation of expensive, costly, and time-consuming regulation by enforcement; Xethalis: I agree that the time to act is now, with two significant costs to inaction. First, other jurisdictions are already acting, and we have seen the consequences of that dynamic before, most notably with global data protection, where more onerous rules from Europe under the GDPR regime have created legal and liability challenges for internet commerce more broadly. We do not want the same thing to happen with the digital asset ecosystem. We want the rules to be created here and to reflect the DNA of U.S. commercial practice, legal norms, and policy priorities. Second, the economic cost is considerable. Ownership of transformative technology has been a defining U.S. strength but we have faltered in recent years. We fell behind in technologies like 5G and allowed semiconductor manufacturing, which began here, to migrate abroad. We cannot afford to repeat that mistake with the next generation of the internet, which has the potential to reshape not just financial transactions but consumer interactions and information flows at large; VanGrack: The time to act was yesterday. DLT was founded over sixteen years ago, and here we are nearly two decades later with the industry still asking for rules and regulations. It is unprecedented in U.S. history. Investors have lacked the full suite of protections, and innovators have struggled to understand the rules of the road. If they are not moving abroad, they are hiring armies of lawyers to decipher what the rules might be or, as in the case of Coinbase, facing spurious lawsuits to defend themselves against rules and regulations that were never promulgated in the first instance. The consequences are devastating, and I do not think we have any time to wait; Behnam: I wrote an op-ed in 2018 or 2019 calling for a statutory change, based on observations I made at the Commission at the time. As Chair in the Biden administration, I saw not only the entrepreneurial, innovative side of the market but also far too much fraud and manipulation from a regulatory enforcement standpoint. In the CFTC’s FY 2024 enforcement program, nearly fifty percent of the docket was crypto-related, which is an astonishing figure for a market the agency does not even regulate. That should give you some idea of how much fraud is potentially occurring beyond our ability to see, simply because there is no traditional regulatory authority. The time to act is now.
Senator Alsobrooks (R-MD): When considering the wide range of digital asset technologies, which do you believe provide the most tangible benefits and use cases? Hammer: Where traditional methods of tracking are inefficient and unreliable, compliance poses a challenge. Using DLT, a startup created a system to track surgical device supply chains, increasing efficiency and creating an immutable record that enables hospitals to meet compliance reporting requirements more effectively. I have seen startups using blockchain to manage energy data and increase efficiency. Others are exploring tokenization of real-world assets (RWAs) to expand access to investment opportunities for broader populations. There are so many interesting use cases, including a nonprofit organization implementing stablecoin solutions for individuals who lacked access to traditional financial services. There are many more promising use cases, including innovations we have not yet imagined. I look forward to seeing innovation fostered in the U.S. as we move toward a clear regulatory framework.
Senator Alsobrooks (R-MD): As a former regulator, what are the most essential consumer protection components that you believe must be part of digital asset regulation? Behnam: There are several but the number one issue in terms of customer protections, specifically as it relates to digital assets, has to be around bankruptcy protection as we look at traditional markets and the customer segregation rules that the CFTC has. It is extremely important, given the current market structure of some digital asset exchanges and intermediaries, that customer assets are fully segregated so if there is a situation where there is a bankruptcy, there is no question from the first minute that the bankruptcy starts that the customer assets will be returned to the customer and not a part of the larger intermediary’s assets.
Senator McCormick (R-PA): What are you seeing in the venture capital industry as it applies to digital assets? Hammer: We have been working very closely with the venture capital industry and with very insightful, successful venture investors who evaluate the startups we work with and apply a rigorous set of criteria. It has become more difficult for those investors to invest in digital asset businesses. When there is not regulatory clarity, investors cannot know if their investment will be sound over the long term. Providing regulatory clarity is absolutely essential to promoting venture investment in the U.S.
Senator McCormick (R-PA): What are legal considerations that traditional financial institutions face in exploring blockchain technology, specifically in relation to tokenization of RWAs like commodities, equities, and deposits? Behnam: There is significant operational risk that I do not think necessarily exists in traditional markets, and that would have to be thought about. They are not insurmountable, but certainly an issue of first concern and first impression for the entities. It is important to think about how tokenization of RWAs will impact existing commodity laws and securities laws. I am not suggesting that tokenization will absolutely undermine them or that there is not a sufficient way to ensure existing laws are preserved, but I do think there are potential ways, if not done correctly, that could raise issues. That is why a market structure bill is important to ensure we preserve and do not undermine existing securities or commodity laws as we see assets more frequently tokenized. It is going to provide more access for users and customers, with better ways to move assets across different portfolios, but we need to be very careful about how we approach it from both a regulatory and customer protection standpoint.
Senator McCormick (R-PA): How do we balance creating new pathways to register new firms while ensuring existing SEC and CFTC registered entities can enter the digital asset ecosystem with minimal friction? VanGrack: The industry, and Coinbase specifically, has been seeking that specific clarification because with regulatory clarity comes regulatory risk. Companies want to know how to comply with the laws, and investors want to know that those laws are being complied with. Three years ago, we begged the SEC to promulgate rules and regulations. Rather than getting rules and regulations, we got subpoenas and Wells notices. That is backwards, you have to develop the rules and regulations before enforcing them. What is important here are those pathways. Both the SEC and the CFTC, under the leadership of Chair Behnam, have in other spaces and arenas found ways to create this balance not just independently, but in areas like swaps, where we have an ecosystem in which both Commissions have a role to play. This is the exact question to ask, but it is not an intractable one to resolve through market structure legislation.
Senator McCormick (R-PA): What key principles would you suggest? VanGrack: The “KISS” method. We have to keep it simple. Complexity sucks the life out of innovation. The last four years has been a boondoggle for lawyers, harming innovators and customers.