reporters after the hearing. this is about two hours and 15 minutes.

>> without objection the chair is authorized to declare a recess of the committee at any time. examining cryptocurrencies and ico markets. i recognize myself for four minutes to give an opening statement. the cryptocurrencies and coin markets have grown recently in the years -- more specifically, the last couple of months. for thirst businesses and products. to that end, people often equate them with a new kind of ipo. however, an ico is not an ipo. icos, whether they represent offings of security or not offer

potential for entrepreneurs to raise more effective, transformative and efficient funding for innovative projects as opposed to a traditional ipo. although an ico has the came characteristics of raising capital it does not involve an investment in some amount of equity in a company, which is afforded under an ipo, nor does it offer the same amount of investor protections. the size has grown exponentiallily in the last year. the token report estimates approximately $6.6 billion was raised in coin offerings. in 2018 alone, just in the first few months, 480 icos are estimated to have raised $1.66 billion. cryptocurrencies and icos provide an innovative vehicle for start-ups to potentially access capital and grow their businesses. early investors in some cryptocurrencies have experienced massive gains in an ever increasing number of icos has created opportunities for investors to diversify their portfolios in cryptocurrencies.

since this surge in popularity or cryptocraze, there has been considerable attraction by investors and start-up interprizes in search of additional access to capital and growing their businesses. this is also rightly garnered the attention of the regulators. additional scrutiny has surrounded the cryptocurrency and ipo markets due to the number of fraudulent ipos that have raised money with no intention of providing a product or a return to the ico purchasers. a soon to be published mit study estimates that 270 million to $317 million of the money raised by coin offings as likely gone to fraud or quotes, end quote. according to one m.i.t. professor. the s.e.c. has authority to bring enforcement against them for violation of any of the federal securities laws. the s.e.c. recently announced

actions against two virtual currency organizations for engaging in unregistered securities offering. additionally, the s.e.c. suspended trading in three issuers claiming involvement in cryptocurrency and block chain technology. "the wall street journal" also recently reported that the s.e.c. has issued, quote, dozens of subpoenas and information requests to technology companies and advisers involved in icos, closed quote, including, quote, demands for information about the structure for sales and presales of the icos, closed quote. further, on march 7 of this year, the s.e.c. broadened its series of notice statements to exchange-type activity, warning that online trading platforms may also be violating the federal securities laws. according to the statement, if a platform is providing a mechanism for trading assets that are classified as securities under the federal securities laws then the platform is operating as an exchange. and must register with the s.e.c. as a national securitys

exchange. today's hearing will examine the economic efficiencies and potential capital formation opportunities that cryptocurrencies and icos potentially offer to businesses and investors and review the adherens to applicable laws so -- additionally the hearing will consider the current regulatory approach that regulators such as the s.e.c. are using to monitor and oversee cryptocurrencies and icos and how to achieve further regulatory clarity in these markets. as further action on how to regulate cryptocurrency and ico markets is considered, it's important that innovation in the area of digital currencies and capital formation are not stifled while ensuring that consumers are protected, fraud and prevented and securities laws are followed. the chair now recognizes the gentleman from minnesota, mr. ellison, for 2 1/2 minutes for an opening statement. >> mr. chairman, thank you for calling this important hearing today. as important as it is, there are some other things happening that

i want to address. the senate is voting today to roll back some of the rules for the biggest banks in the country. think about that for a minute. just ten years after big banks crashed the economy, senate republicans and some dems want to roll back the rules that put in place -- that we put in place to prevent the next crash. some of my colleagues may have forgotten about how bad the crash was but i haven't. millions of people lost their jobs. one in 54 homes was in foreclosure. $2.6 trillion vanished from americans' retirement accounts. so why on earth are we going back there? supporters of the bill say this is just about helping out the small community banks. no, no, not buying it. community banks are doing pretty well. we're not saying they don't need some attention, but this is not about them. the fdic says that 96% of them are profitable and these profits are higher than ever. again, i want to be attentive

and responsive to community banks but this is not about the small banks. the banks that are going to benefit here, these are banks that got close to $50 billion in bailout money during the crisis and banks that can put their name on a football stadium. some of the provisions in this rule roll back the rules for the very largest banks like citigroup and j.p. morgan chase. this bill increases the chance of another crash and the nonpartisan congressional budget office says the bill will increase the likelihood of another bailout. i'm disappointed the senate is likely to pass this bill today and i can promise this committee that i'll do everything in my power to stop it when it comes over to the house. and i yield back. >> thank you. the gentleman yields back. the gentleman from illinois, the vice chairman of the committee is recognized for one minute. >> thank you, chairman. thank you all for being here. according to coinmarketcap.com, there are over 1,500 cryptocurrencies with the total

market capitalization estimated to exceed $350 billion. it's a staggering amount of money. as the market develops, congress has a responsibility to ensure investors are protected without unduly limiting opportunities for growth. some of our most respected technology companies have expressed at least some uncertainty regarding cryptocurrencies. this is a complicated topic. for example, google just announced the its banning ads promoting cryptocurrencies, wallets, initial coin offings and firms providing advice. congress needs a strong understanding of the technology and its application before we can understand how to fits into our existing regulations and how the laws we have on the books may encourage or inhibit an efficient market. for example, do we need clarification of what a cryptocurrency exchange is and if this word implies any investor protections? the s.e.c. staff made this point when noting, quote, many online trading platforms appear to investors as s.e.c. registered and regulated marketplaces when they are not, end quote. similarly, chairman clayton has

expressed skepticism about no initial coin offerings being registered. my time is expired and i yield back. >> the gentleman's time has expired. the chair now recognizes the gentleman from california, mr. sherman, for 2 1/2 minutes. >> our colleague was unable to be here this evening. cryptocurrencies are a crock. what social benefit do they provide? well, they allow a few dozen men in my district to sit in their pajamas on the couch all day and tell their wives they're going to be millionaires. they help terrorists and criminals move money around the world. they help tax evaders. they help start-up companies commit fraud, take the money and 1% of the time they actually create a useful business, but then again, i dare say that some

tiny percent of all larceny and crime helps finance something that turns out to be useful. it hurts the u.s. government in two ways. our ability to have the dollar be the chief means of international finance is what has underpinned our ability to impose sanctions and stop tax cheating. and furthermore, when we -- when people take risk, we don't encourage gambling, we encourage investment in the real economy, but when you buy bitcoin, are you financing a new factory? no, you're gambling on its value for no social benefit. now, i know that the -- these cryptocurrencies are popular. they're popular with guy who's want to sit in their pajamas and tell their wives they're going to be millionaires and popular with those who have read "atlas

shrug" and if the fountain head" and believe these are the newly divine documents of our age. they're harmful in one way, that is -- it is the benefit that the u.s. government gets by issuing currency. it is the float, it is the fact that we do not pay interest on newly created dollars. we lose that as well. and the fed is able to return well over $50 billion to our treasury in many of the recent years, we undercut that. and then finally we've got these initial coin offerings deliberately naming themselves to lie to the public and convey the image it's like an initial public offering. they stole the intellectual property and trademark of legitimate investing and applied it to a fixed fraudulent gambling scheme of no social

benefit. aside from that, i think it's a good idea. i yield back. >> the gentleman yields back. and gentlemen on our panel, you're in for a lively conversation. no, this is not a senate hearing about dodd/frank reform. you are in the right place. we are here to talk about cryptocurrencies and block chain technologies, but we are here today to welcome a great panel. the chief legal and risk officer for coin base. dr. chris brumer, a professor of law from georgetown university law center. mr. robert rosenbloom, partner at a law firm and peter, director of research for coin center -- each of you will be recognized for five minutes to guy an oral presentation of your testimony. having read the testimony, there is far more than five minutes of information in each one of yours, so good luck as you consolidate that down. but we will then have a question period and we will, without objection, put your written testimony into the permanent

record and part of the record as well. so with that. you are recognized for five minutes. >> thank you. good morning, chairman. ranking member maloney and members of the subcommittee. thank you for the opportunity to address this important topic at a significant time. my name is mike lempres and i'm the chief legal officer at coin base. i commend you for holing this hearing on a technology that could transform capital formation, innovation and our economy. it has tremendous potential. to fulfill that potential, we believe that responsibly regulation is required. but the technologies' incredibility benefits could be stifled by regulatory or legal mis-steps. i'm pleased to testify this morning on behalf of coin base. we view ourselves as a leader in the legitimatization of and, maturation of the crypto economy. we provide an onramp for acquiring, trading and holding

digital currencies. through our strategy using the most easy digital exchange and wallet, we've grown dramatically. very strong cyber security protections and compliance practices to ensure that we remain the most truchted company in this space. our cyber security program is state of the art and remains the critical core of our business. similarly, our compliance program is designed to build upon the highest levels of compliance in our industry. in addition to our formal regulatory role, coinbase continuously shares its expertise to make sure that our ecosystem is clean and compliant. we train more law enforcement agencies globally than anyone. i plant to discuss through items today. the model of the coinbase exchange, our view on icos and the broader regulatory environment. coinbase exchange operates a spot exchange that offers the ability to buy and sell four digital currencies. we do not offer margin or

derivatives training. there are more than 1,400 tokens and currencies available and we limit our trading to four that have regulatory ability. part of the reason we trade only those four assets is that each has been determined by regulators to be a virtual currency and therefore we believe not a security. one of today's questions is how to approach icos. coinbase currently does not trade icos or any other security tokens. despite that, we believe that icos are inevitable and full of tremendous potential. we believe they can unlock the ability of entrepreneurs anywhere in the united states to raise money on a level playing field. plurs won't need to know funders in silicon valley or new york to access vibrant sources of capital. at the same time, there is a need for responsible regulation to ensure investor protection. we welcome that regulation. in order to fully enable icos, investors must have confidence

in the integrity of the market. for this reason, we support enforcement actions where they are necessary to weed out bad actors and to protect investors. at the same time, we need to be sure we're not chilling good innovation brought about by new technology and good actors. we believe there is no need for congress to create a new regulator or a new regulatory scheme because federal regulators already have sufficient authority to oversee this space effectively. there are at least four regulatory agencies that can effectively protect investors and the markets, the s.e.c., cftc, fin sen and the federal trade commission. with respect to the u.s. regulatory environment, it is important to stress that not all tokens are alike and regulators need to be able to distinguish between various tokens to enable regulation. this requires regulators to provide clear guidance to market

participants. for example, some tokens may be a commodity and others a security. the s.e.c. and cftc should be able to draw a line to determine whether a token should be treated as a commodity or a security for compliance purposes. the agencies have done this before when new asset classes emerge. for example, in addressing stock intercies and swaps. we believe that trust is enhanced through partnership with regulators. at coinbase, we are committed to working with you, the s.e.c., the cftc and other regulators to help shape a responsibly regulated market. we believe the decisions you are making now will help determine the future of innovation and capital formation. that future is not 20 years away. it's almost here today. thank you for this opportunity to discuss these issues and i look forward to answering your

questions. >> thank you. with that we go to dr. brummer who is recognized for five minutes. >> members of the subcommittee -- >> if you can push the button in front of you. there we go. thanks. and pull that mike down in front of you. there we go. >> thank you so much for inviting me here to testify at this hearing. my name is chris brummer and i'm here today solely in my capacity as an academic and i'm not testifying on behalf of any entity. we are blessed in the united states to have one of the safest, deepest and most liquid capital markets in the world. one of the reasons for this success is our system of information-sharing and dissemination to investors. the disclosure system embodied in the securities act of 1933 is one were proerts share among

other things material information about their company, management and the securities being offered as well as the intended use of the proceeds. this information is then filed with the securities and exchange commission where it is vetted, scrubbed and analyzed. most ico disclosures, by contrast, are facilitated by unregulated white papers, focussing largely on the existing technology or technology under development to be financed via an offering. there is, as a result, a large large gap between the disclosures and many of the register registered filings such as an s-1. and this raises a number of red flags to say the least. for our purposes today, i would like to highlight briefly some of the key disclosures one would expect and likely need in order for buyers of ico tokens, whether they are investors seeking to profit or technology users seeking to support and participate in innovative product in order to make a

purchase in an informed manner. these disclosures are relevant, especially relevant i believe as icos transition from technical expert ecosystems to the distribution of instruments that are ever more likely to attract everyday investors and the retail public. disclosure number one, promoters location. at least one study has noted in raffl 32% of icos, it is not possible to identify the issuing entities or promoters' organize. this creates serious information asymmetries on the part of the investor. without knowing the issuing entities it becomes impossible to know or identify what rules and legal protections might be afforded to investors. further, investors have few means by which to contact relevant public authorities in the case of fraud, theft or loss. ico white papers should therefore set out a detailed statement beyond a simple p.o. box of what the issuer as well as where the issuer -- as well as its key management are

located. disclosure number two. problem in proposed technology solution. for most of the history of u.s. securities law, no information was more important for investors than an issuers' financial statements, but icos tend to serve a different purpose from ipos of the 1930s. instead of funding industrial companies transitioning to a more mature cycle of development, they involve products by start-ups identifying technology-based problems and prosing the sale or financing of technology-based solutions. in return for financing, promoters offer coins with various financial and security features. instead, it is the venture's technology prop sis. consequently ensuring that investors including retail buyers understand the basic

contours is paramount as icos become a more popular form of fund-raising. to that end, you can implement a number of reforms. a disclosure would require a plain english description of the technology problem and solution. further more, for larger fund-raisers, more technical parts of the white paper would ideally be subject to a system of third-party validation, what could be termed a technology audit. meanwhile, all code, regardless of the size of the fund-raise would be -- so potential buyers can either -- other or proxies for the strength of the code. promoters should avoid hyperbole, an endemic problem in many white papers and required to identify an objective basis for all forward-looking statements. along these lines, disclosures should be made whether post-icos -- promoters should be able to disclose whether or not

and how the ipo ownership of the company's protocol as well as to detail with specificity what legal rights holders of the tokens will enjoy, as well as how the tokens will be traded and on what system. they should also be required to provide disclosures for block chain governance and the basic risk factors impacted not only the token itself but the industry at large. thank you. >> thank you. mr. rosen bloom, you're recognized for five minutes. >> thank you, mr. chairman. honorable members. first of all, let me thank all of you for holding this hearing. i think it is timely. i think it is very, very important. and i think many people in the industry, those who want to get things right will church welcome your participation and your interest in the topic, so, again, thank you for holding the hearing. >> do you mind pulling your mike a little closer. >> normally people don't have a trouble hearing me so this is a

lovely change. i am a partner at a law firm, a palo alto law firm that is generally recognized as being a leading adviser to technology firms to life scientist firms and the like. i am the head of the firm's block chain and cryptocurrency practice. i do need to say i'm appearing here on my own behalf, not on behalf of my law firm, not on behalf of any clients. however, thank you for having me anyway. in our capacity as being among, if not the leading tech firm, we obviously handle a great number of initial coin offering and similar transactions we represent a large number of ico issuers. we represent a large number of entities often very sophisticated entities that are investing in initial coin offerings. i will give you a quick

observation about nine months or so ago the ico market really started to become significant in the united states, i was concerned, as some of the comments we've already heard, whether there was really a there there. as i'll talk about in a couple of moments, i think there really are important things happening in this market and, again, i think that's why it's so important for this subcommittee to be focussing on these issues. i actually have two basic proposals or two basic suggestions for this subcommittee. first, i think in the near-term congress could greatly help the markets, the ico markets, to facilitate good icos and to help guard against fraud by authorizing the s.e.c., by both authorizing and encouraging the s.e.c. and other appropriate federal regulators to both modify and amend their rules to more -- to more closely assist, to better assist ico issuers in

meeting the requirements of the federal security laws. there are already a number of disclosure issues, there are already a number of registration requirements to securities issuers. they don't work well. they're not geared towards icos and to tokens. so the s.e.c. can be doing a lot more. although they're trying very hard. they can do a lot more to amend their rules and modify their rules and i think this committee can help. i think in the longer term, this committee can lead the way towards having a more unified disclosure approach, registration approach, overall legislative approach to how we handle icos and token use in the united states. truthfully, i think it's too early to know exactly what the contours of that legislation is going to look like at this point. we're only nine months into icos, the industry is so dynamic and changing so quickly that i

think it would be premature at this point to try to actually craft that legislation, but i do think that there are basic principles that can help us inform what that legislation will look like at the -- when you're able to get to it. i think there are three things, though, that in all of your legislative activities that we should be keeping in mind. one is there is tremendous innovation in the block chain and cryptocurrency community. by the way, cryptocurrency is a bit of a misnomer. there are some tokens, bitcoin, ether, for example, that really are cryptocurrencies. there are a number of other tokens and most of those that we'll be talking about today that have very specific purposes on very specific platforms designed to do very special things. second, there are tremendous capital raising techniques and i hope we have the chance to

discuss why they're so significant and potentially so valuable to the u.s. economy. third, there is no getting around the fact that there is significant fraud, significant opportunities for market manipulation, significant opportunities for loss of privacy and data breaches. and those need to be part of and considered in any regulatory and legislative response. with that, let me end my remarks and thank you so much. >> thank you. you are recognized for five minutes. >> thank you, chairman and members of the committee. i'm the director of the research at coin center, an end nonprofit that's focused on the cryptocurrency public policy space. today i'll start by describing the fundamental innovation of bitcoin then discuss the differences between cryptocurrencies and icos and finally describe the regulatory landscape for these technologies. the fundamental innovation of bitcoin is digital scarcity. so in the physical world, you

know a thing like gold is scarce because you can hold it in your hand. you can ask a lab to tell you that it's real and when you hand it to somebody else, they have it and you don't. but in the digital world, how can we know that a bitcoin is scarce? we know there are only 16.9 million bitcoins in the world right now because their distribution and movements are described with perfect accuracy on a public ledger called the bitcoin block chain. anyone can immediately read and mathematically authenticate the data in the block chain, just like anyone can independently verify the scarcity of gold. now, that digital scarcity can then be employed by innovative people for a variety of innovative purposes. a token that is scarce can be used as money just like any other portable and transferrable good throughout history from gold to sea shells. that in a nutshell is bitcoin,

but a scarce token can be automatically redeemable for a digital good or computing service provided by the same network of participants who verify the block chain. these are projects like ethereum, file coin and block stack and beginning to compete with incumbent service providers like amazon, facebook and google. a scarce token can also represent a legal agreement or a financial asset. so a public company or investment fund could issue and track its shares as tokens on a block chain. now, these block chains are just records. whether they're about money, assets or computation, but rather than relying on a handful of corporations running vulnerable data centers to keep the record, a block chain version of the record relies on an open network of thousands, potentially millions of participants who have skin in the game and independently verify and secure that data. those records will always be available until every last participant goes offline. in other words, they'll likely

always be available. and those records will be accurate unless every participant has their individual computer hacked. in other words, they'll likely always be accurate. it's this revolutionary decentralized architecture that makes these systems effectively unhackable, at least using traditional methods of attack. especially pertinent to today's hearing, these technologies are also employed for capital formation. scarce tokens like bitcoin and ether already exist and are already in use. recently various developers have raised money to fund the development of new block chain software projects by selling a promise of future tokens to willing investor in so-called initial coin offerings or icos. from a regulatory standpoint, there is a fundamental distinction that must be made

between on the one hand scarce tokens that exist on a block chain and are used for payment or to obtain computing services and on the other hand promises of future tokens, representing the hopefully profitable efforts of a developer. bitcoin and ethereum are digital commodities. scares items that may have value on open marketes as money, investments or inputs for industrial processes. they're commodities, just digital. the latter promises future tokens are securities. promises from issuers to investors that efforts will be put forward to create profits. now both have investor protection risks but they are distinct risks best addressed in different ways. a commodity-like token has no issuers upon whom investors rely, but the token does trade on speculative commodity markets. policing these markets for fraud and manipulation is critical for

investor protection. a promise of future tokens is a security with an issuer upon whom investors rely. mandating accurate disclosure from these issuers is, as we've said, critical for investor protection. so the sensible and emerging investor protection regime is nothing new, even though the underlying assets seem like science fiction. the cstc should use its existing authority and the s.e.c. should manage and mandate disclosure from issuers making securities offerings. but if policymakers again the line wrong or if it isn't made clear by regulators, it will destroy the viability of these innovations and cede leadership in this technology to the rest of the world. thank you and i look forward to your questions. >> thank you. and i appreciate all of your input. we're going to start with five-minute question period for myself. i recognize myself here. i want to try to cover a couple of quick things, investor protections first and foremost,

the s.e.c. versus the cftc and then sort of use of block chain technologies. so on that investor protections part, maybe dr. brummer, you could illuminate us a little bit on what current protections you see or lack of current protections that are in place to really protect mr. and mrs. 401(k). you know, we've got institutional investors, sophisticated investors and then we've got more retail investors. if you could address that quickly. with your mike on and down towards your mouth, please. >> like mr. rosenblum, it's very rare i'm asked to speak louder. at this point in time, the s.e.c. is working on really operational easing some of its own powers and authority under the 33 act, the 34 act and the 40 act for the mom and pops, for the investors who are increasingly having exposure to

cryptocurrency markets for the better in some instances and for the ill in others. there is a regulatory vacuum currently. that regulatory vacuum extends to some extent to the spot market in cryptocurrencies. i think that where there is are are financial products that under traditional analysis would be tend to identified as commodities, there are questions about disclosure that are required to be asked. i think that even in the securities law space the infrastructure on which many of these tokens are currently being traded are not entirely subject to the s.e.c.'s oversight. so there are rules that are in place but it's a mismatch. >> i'm going to get to mr.

rosenblum. here's how i encapsulated it here. the s.e.c. is trying to do its job to protect investors and they need to modify their rules to facilitate icos yet it's premature to draft legislation. both chairmans clayton and gian-carlo have said on parts of others that they may come to congress here in the coming months and we know that this has moved very quickly in the last nine, ten months, we've seen this explosion of it. this panel, this congress is not going to sit by idly with by lack of protection for investors. you've heard some of my colleagues express some, shall we say, skepticism of the legitimacy of cryptocurrencies and certainly icos, so i want to look at what -- very quickly what the role for congress may be to play in this and what chilling effect it may have from your opinion quickly. >> yes, thank you, sir.

first, i think there are two parts of the legislation, right? there is an immediate set of legislation that needs to happen to authorize the s.e.c. and other regulators to amend modify rules consistent with investor protection but also to facilitate capital development or capital investment. that's not to say that there won't also be additional grants of power or additional protections that congress adds, but what my broader -- my other point is these -- this industry is moving so very rapidly. it is very difficult to know -- here as one example, the -- if you take block chain, which has a tremendous capacity to store, record and obtain information and you mix that with artificial intelligence, which is certainly something people are trying to do today, right? the capacity of artificial intelligence combined with the block chain to potentially lead to tremendous new marketing, tremendous new business

opportunities, tremendous scientific, sociological advances is tremendous. however, the opportunity to advance and to also use that same technology for manipulative conduct, for data breach and for all sorts of other what i'll refer to as nefarious conduct is really hard to proteedict right now. so what i don't want to do is lock us into a system too early. i'll give you one more -- >> i don't disagree. unfortunately i'm running out of time. we'll be able to hopefully explore this with other chemicals. mr. lempres, i'd like to get to you very quickly. do you believe there are any instances where initial coin offerings should not be regulated as an offering of securities? >> thank you for the question. it's difficult to answer because it's hard to imagine all the circumstances under which icos might be offered.

i think that, again, speaking on behalf of coinbase, we clearly don't -- we do not support any initial coin offerings at the current time because we're not sure what the regulatory structure and treatment is. >> in your written testimony, you talked about the cftc quite a bit, the s.e.c. not so much. they believe the cftc has been more flexible and open and receptive to icos and block chain. i don't know if that's been your experience as you viewed it. >> yeah, i have got to say, our experiences, we are waiting for the dust to settle between the cftc and the s.e.c. before we'll actively engage in supporting icos. >> okay. >> once the rules are clear, we'll move in. we think tremendous potential. we want to be there to support it. i will say there is an important distinction between what is a security and what is a commodity. they perform different functions and they do deserve to be

treated differently. >> yep. my -- i'm well over my time. there is no doubt, though, a token is not gold and a commodity as such. so i think that's some of the struggle that we have. so with that the chair recognizes the gentleman from georgia, mr. scott, for five minutes. >> thank you, mr. chairman. and, chairman, you have opened up a line of discussion here that i'd like to follow up on. mr. lemers, in your testimony you said you believe there is no need for congress to create a new regulatory regime. you said you felt that the federal authorities already had that authority and that it was basically just a lack of coordination. but both the s.e.c.'s chairman clayton and the cftc chairman

gian-carlo have told me that neither one of them nor the s.e.c. or the cftc have any regulatory authority. and as a matter of fact, they say what regulation there is is that this state -- at the state level. and on top of that, at the state level they are regulating these entities. that's what they refer to as money transmitters. so it just seems like to me that there is some type of regulatory shortfall here, and if you ask me it's a little bit of that and not just a lack of coordination. so you see my point there? >> yes, congressman. thank you, i do. and what i would say is that there are sufficient authorities in place today.

i'll point out that there is a long -- >> so you're saying that the chairman of the s.e.c. and the chairman of the cftc are wrong? >> of course not. >> they say that's not so. >> no, what i'm saying, though, is i think in context what's happening is when you talk about money transmission licenses, that covers a portion of our activity as a business. where in many ways an integrated business, a portion of which is licensed by the states for money transmission purposes. >> but it's done at the state level. there is none at the federal level. >> well, respectfully, congressman, the -- i also would point out that with, again, staying at the state level, we have a bit license with new york state which is, indeed, a comprehensive consumer protection license that covers crypto activity within the state of new york. on the federal level, i would respectfully say there is regulation of commodity markets

just the way there is regulation of commodity markets everywhere else and that this new asset, which is not a physical thing that you hold in your hand, still has many of the characteristics of a commodity. >> well, let me -- let me -- my time is getting short. i want to -- there is so much here. this is an exciting new area and we've got to -- we're discovering a lot here, but let me -- let me switch to the ico issue. now, mr. rosenblum, in your testimony you said you believe it is to early for congress and the federal regulators to enact a comprehensive legislative or regulatory scheme governing cryptocurrency. now, i can assure you i'm the co-chairman of the defend tech caucus and i can assure you none of us on that caucus or on this committee want to be killing good innovation, especially one that is raising as this is

billions of dollars of capital. because it's very important for everyone to know and c-span is broadcasting this, but it's important to know that as of february 28th, 2018, individuals and businesses raised $1.66 billion. through initial coin offerings or icos. so i agree with you, mr. rosenblum. however, going back to the s.e.c. and the cftc, they have not proposed rules regarding the regulations of cryptocurrency and other digital assets, and instead have relied on informal rule-making or enforcement actions. so i want to ask you,

particularly mr. rosenblum and others on the panel, what in your minds could the federal regulators be doing better? and do you believe that enforcement actions and other formal guidance are sufficient to regulating and -- this emerging and exciting digital assets? >> congressman scott, thank you for the question, and i agree with -- i agree with, i think, the point that you're moving towards or that you're suggesting here, which regulation by enforcement in an area that is as complicated, as dynamic as this is not the appropriate way to regulate. enforcement is necessary, of course, however, i do agree with you entirely that we need clearer guidelines, clearer understanding of how the s.e.c.'s registration rules, its market trading rules, its exchange rules, its investment, company investment adviser rules should apply and do apply, and

that is not something that you can do by regulation through enforcement. and that is, again, one of the reasons i think this subcommittee and this hearing is so this subcommittee and this hearing is so important to this process. because we do need more guidance on precisely those areas. >> thank you, mr. rose den blum. which that, the vice-chairman of the committee. >> thank you all for being here. appreciate your work. this is something we're all interested in learning as much as we can. i want to address my first question to mr. lempres, if we could. your testimony mentions that you store more than $20 billion worth of digital currency and have traded over $150 billion in assets. in light of the january 2018 hack of the coin check cryptocurrency exchange, wherein $534 million was stolen, i've got a few questions for you related to that cybersecurity side of this. i wonder what cybersecurity standards does coinbase adhere

to? >> so thank you for the question. we -- and the reason i'm hesitating is this is not my area of expertise, and i apologize when i get into this stuff. cybersecurity protocols i believe are state-of-the-art. we have an entire team obviously that does nothing but work with cybersecurity. approximately 99% of the assets that we hold are held offline in what is known as cold storage, which makes them virtually immune to hack. we do have a hot wallet process for in effect, if you think about it, the cold storage is akin to a vault. the hot wall is akin to a teller window at a bank. the hot wallet is online, obviously, and we have that amount fully ensured to protect consumers and investors as to that. >> are there any -- if you know about it, and we can follow up in writing too, are you going to

let us know who the person is you recommend with coinbase that we talk to. but is coinbase legally required to follow any federal cybersecurity laws or regulations? for example, financial institutions and some service providers are subject to gramm-leach-bliley. security exchange and others are subject to sci. are there any other federal cybersecurity laws or regulations that already apply to coinbase and others like you? >> first off, i'm more than happy to get you the name. >> that would be great, which the head of our security. and second off, the cybersecurity thing, standard that we are most adhered to is new york state's standard through their bit license, which is a -- take quite a lot of work. we are also working with a number -- a few of the big four accounting firms to develop appropriate standards to make sure everything is stuck to and other standards.

>> i think you answered this. but maybe clarification. in the event of a hack of your platform that results in the loss of assets, is there a guarantee provided to the purchasers of the assets through your platform? do you have any legal responsibility for safe keeping of clients' assets? and what other protections are afforded for your customers in the event that the hot wallet is attacked? you kind of mentioned that but if you can go into a little more detail. >> sure. we do hold a little bit of fiat currencies, usd and the united states dollars. those are held in banks which do have fdic insurance as to those dollars. as to our cryptocurrencys, there is no federal insurance program to which we belong. we've attempted to create a degree of comfort amongst our customers by ensuring the hot wallet amount. i will note that to date we have not been hacked. we've never had to make a payment out under those.

>> good. i hope it continues that way. your testimony also mentions that the exchange only supports four assets because each has been determined by regulators to be a virtual currency and therefore not a security. however, you go into -- on to note that regulators are not providing enough clarity for other crypto currencies. how did you establish the regulatory and legal certainty for those four currency sthas you currently support or have? and did the s.e.c. or cftc individually provide guidance for the four currencies, or did coinbase make a determination about those four currencies based on the s.e.c., ftc guidance? >> for example, in fact published a primer that listed on three of those assets as crypto currencies. the fourth a bitcoin cash is a hard fork which is in effect a derivative of bitcoin and it would be covered by the same running. >> okay. >> there are some court cases that refer to them as

cryptocurrencys, and the sec itself has distinguished between crypto currencies and securities and specifically in the dow report, they referred to ether as a cryptocurrency in the concept of discussing currencies. >> okay. you also mentioned in your statement -- i'm out of time. if that's okay if i can follow up. and i've got questions for others. sorry. five minutes goes way too fast. but thank you all for being here. well want to understand this as much as we can. but grateful for your testimony and we'll follow up with other questions if that's all right. with that, i yield back. >> the gentleman yields back. and it may be behoove the chair at this time to note that we will be having an opportunity to forward questions through the chair to the panel. and depending on your time as well and participation, we may be able the get to a second round of questioning. so with your indulgence. we'll continue to move along. and with that, mr. ellison from

minnesota is recognized for five minutes. >> thank you. and now let's talk about cryptocurrencys a little bit. so, you know, in my meetings with constituents over the last several months, i've had many of them say hey, what's going on with this cryptocurrency? i hear that it started really low valuation, now it's high and it's up and down. should i get into it? well, look, i'm no investor. i can't tell you what you should do. but it did occur to me that i should ask you experts if somebody who is not sophisticated in this area wants to invest, what should they -- what should they know in advance? do you all talk about what the hazards might be for an unsophisticated investor in this area? >> that's a great question. it's an important question. and i would certainly say that given the complexity of many of

these instruments, it's very dangerous. one of the disclosures that i had suggested would be really critical, particularly as retail investors become more interested in this space is to understand what the risks are when it comes to investing. it's not only that they can lose a lot of their money, but they can lose all of it. and that it's not just the specific venture itself that creates risks. it's not even the cyberrisks or the potential for hacking. but it is a very dynamic ecosystem there are certain kinds of changes in the nature of the technology where say internet-based principles become embedded in the block chain and lead some of the block chain technologies that we're depending on now rather obsolete where the tokens tied to them then become ultimately worthless. these are the kinds of risks that retail investors themselves may not necessarily understand, even where they may have some basic, if not only hazy understanding of the technology itself.

and as a result, because just like you all sometimes go to the gym and people will ask me, so tell me about bitcoin. i think that that is always the sign of trouble, of sometimes either a potential for investors to not be properly informed about where they're putting their hard earned savings. and as a result, there is a need for much more fulsome communications with those who are seeking or who may be interested in participating in those markets. >> so over the course of 2017, we saw, you know, some precipitous increases in value. we saw some drop, changed a lot. what do you think is driving some of those swings? is it regulation or the threat or the possibility of it? >> i think it's a product of speculation. i think it's a product of -- >> bubble? >> a bubble, certainly. it's a product of investors who

are money chasing investments instead of investors chasing money. it's a product of inadequate disclosure. and as a result, i think just to echo some of the comments here on the panel, that regulation can be very healthy for those markets. it can help to address some of the spikes and volatility and the patterns of fear, the bubbles. but that kind of action is needed now. >> so -- yes, sir? >> i would only add that we've had a long history of technology bubbles. i think a lot of what's happening in block chain technology looks rather like the .com bubble of the late '90s, early 2000s. i think that's important for main street investors to understand and educational programs like lab cftc and educational advisories are critical. because in the late '90s, it would have been extremely correct to say that pets.com is

overvalued, extraordinarily overvalued and they're going to blow all their money on a super bowl ad. and there are some projects in our space that look like that. but it would also be incorrect to say that amazon.com was overvalued. and i think that's why we see the froth in these markets. because a lot of these projects, say filecoin or etheirium, and if any of these succeed they'll be in the future as valuable as those corporations created. but that's a highly speculative bet. >> i only have time for one last question from one last person. so we're talking about regulation here in the united states. the discussion is on. what about other countries? and how does that impact this conversation? anybody? >> so we've been looking particularly at georgetown, my colleagues and other people certainly on the panel at how interoperab interoperable. the cftc has been very

interested in terms of information transfers, information exchanges between regulators. i think that one important component to these projects, certainly an important and healthy program. but to think through also how do we include more than just a market access component to those agreements. and to push our regulators to also incorporate in the space questions of coordinated regulatory design, information sharing and enforcement. and i think that would help to ensure we can export some of our best practices and approaches abroad and to take best lessons learned overseas and to incorporate them here. >> gentleman's time has expired. with that, the chair recognizes the gentleman from ohio, mr. survivors of the for five minutes. >> thank you, mr. chairman. i really appreciate you holding this very important hearing on a topic that has a lot of people's

attention. the first question i have, and i'm going to try to ask three questions and we'll see how it goes, is to dr. brummer. can you talk a little bit about the promise of block chain technology? let's take a couple steps backward to talk about chain block technology to make our system transparent and efficient -- well, not transparent. efficient. and what block chain technology can mean both for financial transactions and other things in our economy. >> so i think the value in block chain technology, and it's very useful for us to remember that block chain technology has its applications not only in the financial space, but in other ecosystems. everything from pharmaceuticals and health and real estate and property. but it provides a platform whereby in a very decentralized format, you can create a system, a ledger, a methodology and mechanism for tracking things and transactions in a way that

is extraordinarily difficult to tamper with. and it allows for the intermediation of certain kinds of folks in the middle that allow for a cheaper transaction experience. i think that precisely to the cause it is embedded in online technologies, the ability to fully lever -- right now i'm going to talk about the upside for a moment. because i've certainly been emphasizing there are. >> and i'm like you to wrap this up in about 15 seconds. keep going. >> but the difficulty is that to the extent which you are operating online, there is more that the regulators can do, the federal regulators can do in terms of investor protection, but it also raises questions. someone mentioned money transmitter laws as to how do you coordinate. >> that's my third question. we'll get to that in a second. think michigan second question

is for mr. van vulg kenburg. can you help us understand the promise of tokens that becomes a security? and if you can do it in about two minutes, that would be great, because we have five. >> it's a great challenge. and happy to try and answer. thank you for having me. so we have a flexible test in the u.s. for what is a security. it is derived from a case called the howie case. and that test can be applied for promises of future tokens. what you're really looking for are two things. an expectation of profits -- i'm simple fight. reliance on efforts or an issuer or third party promoter. that's why the promise of future tokens is critical to thinking why an ico is a security. we have a definable or discernible issuer who is promising to build something of profound economic value. but we're relying on them to

actually keep that promise. that's why it fits the test for an investment contractor security. now a digital commodity might be a digital commodity for a number of reasons. well use commodities for money. we use commodities as investments. well use commodities as inputs for commercial industrial processes. and the same thing is true of digital commodities like bitcoin or ethirium or filecoin, once filecoin is built. it's important to know that filecoin is raising money to build itself. once it's built, i think it will be a commodity. now i'll just quickly go through those three because they're kpraet great examples. bitcoin is nothing but is something that is scarce and transferrable person to person. that's why i make the metaphor to gold. it's of course very different than gold. but like gold, i could hand it to another person. if that's valuable in markets, that may be valuable and used as a medium of exchange or a store of value. >> and i want to do one more question. we've got 58 seconds. >> yep, yep. >> the other two quickly. >> ethiirium is a computing

system on the internet. in order to get access you use ether as a fuel to power that engine on the internet. it's a commodity like oil. and the final coin, the last one is rather like digital real estate. so you use filecoin to get storage on the internet. so it's a commodity like real estate if you want to think of real estate as a commodity measured in gigabytes instead of square feet. >> great. thank you. one last question for the whole panel. and i know this is slightly off topic. but because it's come up, if folks could comment on whether they feel like fin-syn's 2013 guidance on the appropriate level of anti-money launders and know your customer safeguards are appropriate or do you think that they are being abused out in the system? do you think there is nor information needed on those issues? we just go down the panel. anybody that is interested in answering that one. >> i think it's a very sensible piece of guidance.

it was written early on in the space and it created a lot of clarity, especially for exchanges. and that's why all u.s. exchanges that i'm aware of are collecting information on their customers and filing suspicious activity reports and keeping the financial system transparent, even if it's cryptocurrency. >> thank you. i yield back, mr. chairman. >> with that, the chair recognizes the ranking member of the committee, ms. maloney for five minutes. >> thank you. my apologies. i had to chair for the democrats another meeting. but this is an incredibly important issue. thank you, mr. chairman, for calling it. mr. lempres, as you know, my good friend and colleague mr. cleaver sent letters last month to the bitcoin foundation and the digital chamber of commerce asking what they are doing to prevent extremist groups like those involved in the white nationalist movement from using encrypted currencies to fund their campaigns of hate. and i've also seen evidence that

cryptocurrencys are used heavily by sex traffickers to sell women. so this is a big problem, and one that anne wagner and have i been working on. as coinbase is one of the largest cryptocurrency exchanges in the world, what are you doing to prevent these extremists from using your exchange to fund their activities? do you have a set of standards? thank you. >> thank you for question. first off, i say that we take that very seriously. specifically with regard to hate groups, for example, we have a specific section of our terms of use that we rely on and we kick people off the platform any time we see anything that constitutes either encouraging or facilitating hate on that. >> thank you. >> through our network. speaking more broadly on sort of bad actors and the things we do to track them down, it is one of the nice things about this technology, it actually gives

you insights that you can't get in any other financial instrument currently because of the nature of the block chain, which is an immutable, permanent record that is publicly available. we use both internally developed and commercially available block chain analytic tools, which actually give us quite a bit of insight into connections between individuals. if, for example, we were to identify some sort of bad note or bad activity, we can track to see whose touched that and what relationship they would have with anybody who else who might have touched that. i should mention that we are members of the bank secrecy advisory group. well work very closely with fin-syn. we file an awful lot of sars. to show how important we view this space we have nearly 20% of our total employees are dedicated towards compliance. >> thank you. thank you. and as i've said before, i'm extremely concerned about virtual currencies because a lot of average people are using it

and believing that it's an investment tool. they're pouring their life savings into virtual currencies, and they stand to lose their -- a lot of money when this bubble eventually bursts. some people are treating these things as investments. not as currencies. and that's a huge problem because there is no investor protections like we have for stocks and bonds. so i'm working on a bill that would regulate virtual currencies, but not the technology, that have the characteristics of an investment like we've always regulated investments with robust investor protections, including disclosures that will be regulated by the fcc. mr. brummer, let me start by asking you a question. do you believe that the definition of a security in current law encompasses all virtual currencies? >> no, i don't believe so. the howie test, which is long the standard for evaluating

nontraditional financial products in determining whether or not they fall within the s sec's regulatory perimeter establishes several key characteristics and benchmarks that have to be satisfied. i think that when you apply them to some of these virtual currencies like bitcoin, you get less than fulsome results, according to those bench marks. >> so if we wanted to regulate virtual currencies that are being treated as investments and to require adequate disclosures to investors, would congress need to expand the sec's authority, in your opinion? >> they would need to expand the sec's authority, yes. >> and i liked the part of your testimony where you describe what kinds of disclosures should be made to people who invest in initial coin offerings. and i glie the sec can tailor for virtual currencies which are

different from traditional securities. do you think requiring these kinds of basic disclosures would stifle innovation in this space or harm the development of the block chain technology? >> i really don't think so. the kinds of things i've outlined, adding mailing addresses -- >> and have i 15 seconds left. professor brummer -- >> i'm being generous. >> i know my colleagues need time too. what do you think of the idea of subjecting virtual currency exchanges to minimum cybersecurity standards? do you think is necessary in light of the huge cybersecurity risks that virtual currency exchanges face? >> i think that would be extremely helpful. cybersecurity is perhaps the number one challenge facing our financial markets' provider. . and to the extent you want to provide those services you should be subject to certain high expectations about the

cybersecurity of your operations. >> my time has more than expired. thank you so very much. thank you, all of you. >> with that the chair recognizes the gentleman from minnesota, mr. emmer for five minutes. >> thank you, mr. chair. appreciate it. appreciate all you have being here. this is a huge topic that cannot possibly be even scratched in my mind in five minutes with each of the people that's up here. i have a whole litany of questions which i know my office will follow up through the chair with each of you. i think where i want to go this morning after listening to you, because i find myself maybe not with my colleagues on some of this. i just -- i have a problem with government is here to help us, and we need more government. we're going have to go into this new frontier, and we've got to have more regulation. i mean, i heard at the beginning we have a regulatory vacuum. that scares me to death. i tend to trust people before i distrust them. i tend to believe that people

are in these things for good, that they're trying to improve their own lives and hopefully the lives of people around them. that old adage of a rising tide lifts all boats. and yet i hear elected officials who don't have any concept of what we're dealing with here and how exciting it is oh, my gosh, we have to run in, we have to regulate we have to create more government infrastructure. and by the way, i respectfully disagree with the idea that that won't act as a wet blanket on this amazing new technology. what we're talking about here is block chain. block chain technology applies all over the place. i mean, it can solve some of our cybersecurity issues. these are open transactions where milton freedman, of all people predicted this back in 1999 when he said there will be come a day in the financial services space where you will be able to do this over the internet, where a will have a transaction with b, and it will be entirely open for people to see, but a won't know b, and b won't know a. you can know that, and you can see things i think mr. lempres

was talking about how you can see things through the block chain that are going on. i love the fact that mr. rosenblum talked about examples of block chain technology outside of this space. and i will tell you, in minnesota we have a company called bank u that is using block chain to provide digital identities to unbanked and underbanked individuals in order to build a credit history and access capital. i mean, that's something that democrats and republicans should be celebrating here in congress, not going oh, my gosh, this is terrible. we don't understand it. we need a new policeman or we've got to take the policemen we already have and give them even more powers to start to invade this space and perhaps frustrate the development. i have concerns -- i realize there has to be some regulation. but it's the balance. and i've heard from the panel that we have regulation already in place. we just need clarity. mr. lempres, why don't i start

with you. you talked about we have to be able to say what is a security in this space stwh? what is a commodity? i would add what is currency? because these are all important definitions to whether or not certain agencies are within their jurisdiction. and to have you say two things really scared me. one, that you haven't made any offerings because you don't have the certainty you need to know whether or not you can start to work in this space. and second, to say that 20% of your workforce is working on compliance, that's nothing to be celebrating from this side of the table in my mind. so i just ask you what, about clarity in this issue, in this area? and what about the balance that i'm concerned with? >> thank you for raising it. it's obviously a very, very important issue. we -- going to certainty, i can tell you that from our standpoint, what we really need more than any particular approach, to know what that approach is going to be from the

government so we can plan and we can move. this system innovates very quickly. and just knowing where the lanes are is extremely helpful for us. >> if i can interrupt real quick, i'm sorry, because i'm thinking at a conference that i was at last week, one of our very important and respected secretaries made a statement about everybody needs to register. well, there is no clarity around the law. so all of the sudden people who are looking at being in this space or getting into the space, i heard from more people there after that comment that we can't start our business in the united states. we're going to have to go somewhere else to start it. i mean, does that concern you? >> it does, although i will say the entire world is struggling with these same issues. and with regard to the percentage of our team that is focused on compliance, the biggest piece of that is focused on bank secrecy act. know your customer obligations. people are concerned about moneylaundering, counterterrorism, things like that. and that's an important element, no matter which country we're operating in.

certainly any developed country will have those expectation. >> and we should work with all of you to understand better those things that would work. i would just leave you with this. right now, this system gives advantage to the individual, and not to the government. and i'm worried about giving advantage to the government and taking away liberty from the individual. so hopefully we'll be able to meet that balance as we go forward. thank you, mr. chair. >> the gentleman's time has expired. with that, the chair recognizes the gentleman from illinois, mr. foster for five minutes. >> thank you. before i begin my testimony, i would like to ask unanimous consent to enter the record a letter on behalf of congresswoman cinema from an arizona-based block chain company and support of this company's investigation into this area. >> without objection. >> thank you. >> distributive ledger technology has tremendous value. the value of a nonfalse final ledger will have liability. it could reduce transaction costs, increase transparency and provide for instant and final

settlement in areas ranging from cash transactions to real property records to securities. it also provides a platform for more speculative transactions, such as bitcoin, that are backed by nothing more than perhaps their scarcity and the belief that there will at some point be a greater fool to take them off their hands at some unknown price in the future. but nonetheless, much of our daily lives will soon involve something like block chain. so i think it's past time that governments around the world have a look at these digital tokens and figure out where and how they should be used. and it strikes me -- there are three fundamental questions that i would like your reaction to. will there be a mechanism to bus trades or not? in the case of the flash crash, for example, we had the tfc had very clear rules about trades being broken. there is no such mechanism, for example, in bitcoin where if

someone steals your bitcoin codes that. >> visit and you cannot get it back. similar questions arise about a hacker abscond was the contents of your vault. is there a higher authority that you can go to break that trade? so that's the fundamental design question that i think you face and that we face as regulators. secondly, is there a need for something equivalent to a consolidated audit trail? in the securities space we have learned by bitter experience of the need, if we're going to detect and prevent market manipulation, we need to have an electronic record of the timing and the beneficial owner behind every transaction. you know, that could be designed into, into digital entities like this. or it could not be. and thirdly, is the aught indication of participants. will there be a mechanism if necessary with a court order or with an order of the regulator to unveil the identity of

counterparties andish wears? that's something that could be present or could not be in any of these. and so i was wondering if you have reaction to how we should address those three issues, busting trade, authenticated. i'm happy to go down the line here. >> sure. busting, there is technological challenges to that. these trades once they occur, the transaction once it occurs, has occurred, there is no opportunity to -- for to settlement it 24 hours later where you can look at it and pull it back. so that is a challenge. >> but there are technological means of doing that where every transaction would be conditional on the fact that some trusted set of entities haven't publicized a code that invalidates the trade. there are technological ways of doing that. but everyone has to understand that it's not like cash, you

know. if you steal cash, it's yours. all right. sand with the exception of serial numbers and so on, you pretty much own that cash. but kit be designed differently. all right. >> it absolutely could be. it absolutely could. >> the consolidated audit trail. >> the last two items i put together, the aught indication and the consolidated audit trail. certainly if you're trading on our platform we have information on you. we have your bank account typically. we have a lot of know your customer information. we know the individuals. we know where they are. we verify their identity. we know the source of funds. we know quite a lot about them. and there is an immutable record that once it's created, so in many ways, while it's not consolidated audit trail exactly the terms you're looking at, we have much of that information gathered in our platform in a form that we are able to reconstitute if it becomes necessary. >> okay. all right.

dr. brummer, do you want to take a swing at those? >> your microphone please. >> i'd have to defer to mr. lempres as to how the internal operations. >> mr. rosenblum? >> sir, i think to -- to take all of your questions, we have to step back and look at a couple of things. there are a number of different currencies and there are a number of different items being traded here, and there are a number of different places in which they get traded. so if you're talking about bitcoin or other things we'll view as pure currencies, right, which is probably where this question starts from, i think there are one set of answers to the questions. i promise to get to those. the second thing, though, is when we're talking about new tokens and things that are being developed for particular platforms, those are very different, right? and there is at least two places that those can be traded. one is on the platform itself.

the second is on exchanges, most likely exchanges registered with the sec. when we talk about exchanges registered with the sec, i think your notion of having all theory of those things exist will absolutely happen. i think the question of if we -- and i think with well regulated, well thought out platforms, right, that type of at least to a large extent, all three things that you're talking about identifying customers, having a consolidated audit trail or some kind of trail and being able to bust trades can happen on those platforms. i think when we move to something like bitcoin, there i think you have a much more difficult problem with this, because that genie is already way out of the bottle, right? and the ability to trade bitcoin throughout the world is very difficult to put in at least a know your customer rule or an identification rule. for example you have a wonderful consolidated audit trail. you can follow bitcoin throughout the trail, right. you just don't know 1-800-was who held it.

so that one i think is the one that is going to be much more challenging for this subcommittee. >> gentleman's time has expired. with that, the gentleman from ohio, mr. davidson is recognized for five minutes. >> thank you, chairman. and i think you all for your expertise on the topic. in the rapid expiration of five minutes has been duly noted. so i'll try to crank through this. i really appreciate the dialogue that has been had about the differentiation between commodities and securities. and i -- mr. valkenburgh -- sorry about that, valkenburgh, my apologies. i wanted to spend a little bit of energy on that. these securities are offered in a way -- i think you did a good job of highlighting what might look like a commodity with a test. but a lot of times when people go to market, these aren't like shares in a company. they're -- if you think of them

as a sort of inequity, they're nonvoting shares. and some of them aren't even committed to a dividend. those that are committed to have some sort of return in their structure, how it is that i make money for it, in some ways it looks almost like a bond. so could you say, look, if we were filing for securities which people haven't done yet, part a plus, part d, part s, what does that look like, to treat it as a security in common frame of reference for folks. >> thank you, congressman. i'd first start out by saying there are several developers who have sold their tokens through reg-d filings. and they're not selling the tokens in that case. they're selling a promise, an investment contract in the true meaning and spirit of the howie test wherein they're going to make efforts, people will rely on those efforts, and the outcome will be something

profitable. but the outcome in many of these cases is brand-new decentralized computing system that has baked into it tokens which can achieve some sort of functionality. once that is built and the investors bought a regular d offering and are given the tokens, those tokens to me, assuming the network's functioning that people are relying on the block chain instead of issuer, they're relying on a block chain the issuer created for a proof of ownership, for the functionality that that block chain creates. at that point it looks more like a commodity. at that point maybe you can do something wit. use it in an engine for computation or hold it as a valuable and scarce commodity like gold or salt or things like that. >> well thank you. in that sense, shares have many of the same features and of course they're treated as securities. mr. rosenblum, i want to spend a little bit of time talking about a lot of the companies that

raise this capital are early stage companies. and historically, one of the past capital for early stage companies venture. venture is often considered smart money. you get the benefit of lots of experience helping small early stage companies navigate to scale up. icos don't always have those features. last year it's estimated that startups raised about $4 billion in icos. can you talk a little bit about the concerns with respect to venture versus icos? >> thank you, congressman. actually, let me say one quick thing. i'm the only one on the panel who has not been asked about security versus commodity. so if somebody hat some point wants to ask me, you're going get a very different answer from me on that question than the other panelists. to answer your question, sir, one of the things we have seen in the ico market to date has been a large number of people, a large number of companies

raising money in ways that any securities lawyer would have told you and truthfully did tell you that you shouldn't do. so for example, dr. brummer's suggestions about how to improve a white paper to me make -- i understand the notion, but no rational securities lawyer will ever sell or advice their client to sell off a white paper. we always sell off of a private placement memo and document. we always have risk factors. we always take all the steps you need for an ico in exact the same way we do in a private placement for any other security. right? and so one of the things we've seen, and i know time is short, sir. but one of the things we've seen are market practices that have been detrimental i think to the long-term development of the ico market. >> yeah, thank you for that. and i think a very good distinction, and i like that you hooked back in this notion of a white paper and how soft that is versus a private placement memorandum.

i guess to your point, if i could hear your perspective on commodities versus securities, i would appreciate that as we close. >> thank you so much for the invitation. so i think that the notion of trying to decide what is a security and isn't a security is something that would lead the market to distraction. to take the notion that once something becomes functional, once a platform becomes functional, you no longer have a security has got to be wrong. you can still be relying very extensively on the efforts of the promoters. trying to draw a line on when it is that you're no longer significantly relying on the efforts of promoters is so very difficult and so convoluted and so open to secondguessing. my suggestion is don't even bother. come up with a simple, easy system to use eventually that's going to apply to all of these things, regardless of whether they're a security. >> thank you. and thank you, chairman, for the additional minute, seconds. i yield.

>> the gentleman's time is expired. with that, the gentle lady from missouri is recognized, ms. wagner for five minutes. >> i thank the chairman very much. mr. lempres, in your testimony, you stated, and i quote, we need to be sure that we are not killing good innovation brought about by new technology and good actors. for example, the state of new york requires a bit license, which has been unpopular, causing companies to end their business relationships in the state. mr. lempres, let me start off by asking you two questions. since coinbase is one of four companies who have received a bit license, do you believe new york's model was appropriate for all industry participants? and secondly, what lessons can we learn from new york's attempt to regulate the virtual currency market? >> thank you for asking. and we are one of four companies that received it.

i think -- an obvious lesson is new york made a -- it was a very ambitious effort by the state to regulate in this space. the fact that they've only issued four licenses i think answers the question to a certain extent. there have not been -- they have chilled activity in the state of new york. having said, that when you you're at the scale that we're at now and the number of individuals and institutions that we're dealing with now, we do benefit from the comprehensive regulatory scheme the state of new york has put in that people do trust more that we're doing the kinds of things they want to see when we have people who are used to dealing with financial institutions and the state of new york is in effect treating through its bit license us and other companies the way they treat financial institutions, i think that sends a message to the market. so for a company of our size, and again, there are four that have this license, we have found benefits in dealing with the state of new york on this.

i would note that there are hundreds or thousands of companies in our space. and obvious i will only four of them are operating in new york under that authority. >> what are other state laws that regulate cryptocurrencys? >> so we have 40 licenses in 38 states. they're primarily money transmission licenses. >> okay. that. >> we deal with. they lead to full examines. we've i believe had 28 exams to current various states coming into our offices. >> okay. switching topic somewhat, i wanted to talk about compliance a little bit. as a registered msb, coinbase is required to submit suspicious activity reports or sars to fin-syn. mr. lempres, i understand that coinbase includes block chain analytics when filing their sars. can you explain to the committee how including this information allows fin-syn to get a more complete picture of what is

going on? >> yes. yes. and thank you. you're correct in all of your parts there, that yes, we do file sars with fin-syn, and that we do include block chain analytic information where it's helpful in that search and rescue -- sar. and the reason we do that is to do everything we can to put in context the information. we have access to information that many federal agencies don't see on a day-to-day basis. we see it all the time. we try to tie it together to present as accurate and complete a picture we can. so that if further investigation is warranted, they at least have the broader context. >> as a follow-up, can you talk about how coinbase coordinates with law enforcement and how your know your customer program was developed? >> sure. so we're quite proud of our involvement with law enforcement. we have a group, our global intelligence unit that focuses exclusively on law enforcement coordination and education. we train i believe more law

enforcement agencies globally than anyone. we've trained hundreds of state and local agencies. and when i talk about training, it's essentially how the block chain works. how cryptocurrencys work. what information is there and how to put a case together if they need to put a case together. >> mr. van valkenburgh, in your testimony you mentioned there is friction and mismatch between new technology and old regulatory structures when it comes to state-by-state money transmission regulation. you explain, sir, how the current state regulatory approach poses issues with regard to cryptocurrency exchanges? >> yes, thank you. the first thing i'd say is these are naturally global technologies. they work on the internet. so when people use them, they necessarily cross borders. and a company like, say, coinbase will have customers not only in every state, but probably across the world. and that means that compliance when it's done at a more local level is very burdensome and

often redundant. the 40th background check that your company gets will probably not make you less likely to or more likely to be secure, to have, you know, a good reputation. it's just -- it's extra. now the other friction or mismatch between state money licensing and these technologies, especially at the exchange level is that money transmission licensing relatively exclusively focuses on this idea of transmission, a to b. not on the idea of custody, as clearly defined, but on the idea of transmission. there are also people in the world who are developing these technologies who facilitate transmission because they write highly innovative software that help power these new block chain technologies. they're critical to this innovation. and they don't take custody of consumer funds. so they don't actually put customers in risk, but depending on how a various state money

licensing statute is drafted, you could interpret it to say that that software writing activity is included as money transmission. and the penalties for being an unlicensed money transmitter are very grave. so if we can clean up that statutory language state by state to make it clear, folks that hold people's bitcoin, like my colleague's company coinbase are licensed. but people who don't actually hold it are not suggest to a licensing requirement, that would be a very positive signal from the authenticity we're willing to protect innovation where it doesn't endanger consumers. >> i thank you all for your testimony. my time is way expired. thank you for your indulgence. >> we've been somewhat generous today on that, knowing how this is -- how do you unravel this in five minutes is very difficult. and still, while we're in this first round, welcome back, mr. sherman, who is recognized for five minutes. >> thank you. currency is both a store of value, one you hope appreciates and a medium of exchange. so let's focus on the medium of

exchange. is there any reason why i would need a cryptocurrency to pay pour my groceries or anything else? why would i -- that wouldn't be adequately served by using dollars? yes? mr. van -- yes. >> no, not yourself, i believe, sir. because you and i are -- >> you're assuming i'm not a terrorist or a criminal and i thank you for that. >> no, i'm aim aye assuming you're an american citizen which i think is a pretty safe assumption. >> that one is safe. the other two are questionable. go ahead. >> you and have i the benefit of a well functioning and extremely important financial infrastructure that surrounds us every day of credit cards, of bank accounts. and most americans do find it not too difficult to become banked. we have an unbanked problem in this country, but it's not nearly as profound as other

parts of the world. >> is there any part of the world where the unbanked couldn't just as easily have access to transactions in real currencies rather than cryptocurrencys? >> so there are parts of the world where real currencies in those countries are being basically debased by their governments or hyper inflate order they just don't have actual purchasing power because people don't trust them. >> you can use dollars, euros, swiss francs, why are those not adequate substitutes? >> if you can find cash u.s. dollars, that might be a good exchange, but those will trade at extreme premiums. my only point is cryptocurrencys are acceptable. they're acceptable financial tools only on the basic precondition that someone has a smartphone and an internet connection. and i think there are regions of the world where people will sooner have smart phones and internet connections than they'll have access to a valuable and secure financial services from companies. >> i wonder if someone else can comment on that. i don't think in the tallest

mountain of tibet, there is somebody with the a $100 that they're holding on to. and every cell phone there is a way to use dollars or euros. does someone else have a comment? >> mr. sherman, thank you for the questions. i wanted to divide your question into two different parts. one is part one remrelates to t like bitcoin and other currencies. the second part is going to relate to tokens and similar types of instruments that have specific purposes on specific platforms that people can earn and generate in ways that you could not do with cash. >> just -- i have limited time. focus on what can't you do with cash? >> well, in a platform, for example, where we are -- where we have a buyer of property, sellers, and then we have third parties who are performing important services to the platform to help the platform run, to help validate services,

to help do other functions that are -- >> and why can't these platforms use dollars? >> because there is nobody who is going to pay them. what happens on these platforms is that the platform itself -- >> wait a minute. i have a bank. away them one way or another. >> no, no. you have to find a source. you have to find somebody who would have -- who would be in the business of paying them. and that cost money. so what you see in these platforms, what you see -- >> sir, i've live mid whole life. i'm as old as almost anybody in room. >> very kind you have to say. >> and various intermediaries have handled my financial transactions my entire life. and none of them have gone hungry. >> we're talking about a very different business model. that's one of the things that's so important about this. >> we know that this is a good method for terrorists, criminals, and tax evaders. so the question is, is there some great social purpose that cannot be met in any other way?

and i want to hear from a different witness. and i don't see one volunteering. >> honestly, i think it's an important question because you're getting ultimately to this question as to whether or not many of these crypto currencies, and i think the vast majority of the crypto currencies tied to icos are really just means by which you're raising capital as opposed to currency. >> well, raising capital, but unregulated. >> oh, absolutely. >> and doing an ipo but calling it an ico. >> one of the key responses i was trying to make for mr. rosenblum when discussing the adequate disclosures or the kinds of disclosures one would like to see in a white paper is precisely an order to beef up the white papers so they become more compliant with the expectations of our securities law, which i think is an expectation that all sculptures lawyers would enjoy. but i am very sympathetic to that. >> but if i go by an ico and the

company sells great pizza and eventually makes billions, i don't get any of, that right? i'm not a stockholder. >> but, sir, the important thing on the tokens is the company that creates the platform may not have any financial success on the platform. and the fact that the platform becomes very successful may not redound to the benefit of the entity that created the platform. >> okay. well, perhaps we'll have another hearing after some major terrorist event financed by cryptocurrencys, and i yield back. >> the gentleman yields back. with that, the gentleman from connecticut, mr. himes is recognized for five minutes. currently pass. we are -- we have some people potentially in transit, but if it is okay with my clear, we'd like to go on to a second round, which basically means i get to ask another question, finally. after having a number of them. and mr. rosenblum, you asked for

it. so the differences between commodity and a security. >> so in this case, as i said before, it's very difficult to know where one begins and one ends. the notion of saying, well, something has usage. if we go back to the citrus groves that were at issue in the howie test, is there no doubt that the citrus groves had usage. they really produced some kind of citrus fruit that people really sold. it doesn't mean that the participation interest in those were anything other than securities. the problem that we face is that we -- i can draw a line for you that says when the promoters' efforts on the platform become less important than the commercial usage of the platform in driving the token value, probably it's no longer security under howie. what i cannot tell you is a good test or a good set of factors to look at that tell you with any great certainty when you get to that point. so the thing that i keep suggesting to people on this i

think that in the long run, we shouldn't worry about that issue. we shouldn't worry about the distinction between this is a commodity, this is a security, and how they travel back and forth between each other, but instead have a simple system. move to an environment where we have a simple system that works for both, and we don't have to have lawyers like me argue with other lawyers and argue with courts and argue with the sec over which side of the line it is. >> so can i just jump in for one quick observation? and it responds to something that you said which i think is really quite useful. when you think about the citrus groves, right, and the howie case, this famous howie case, you had oranges. the oranges themselves were commodities. it was the combination of the oranges of a service contract, right, with an -- basically with an opportunity to invest in them. it's the combination of it all where the whole is greater than the sum of its parts and you end up in the world of a security. however, i would say that there

is a difference in terms of how commodities are regulated under the cea, and how securities are regulated. and securities regulators, for example, tend to put a little bit more of an emphasis on disclosure, the relationship that the sec has with infrastructure providers and other market participants, there is a difference level of reliance in the commodities world versus the securities world. and these are things that i think that you as a committee really ought to take into consideration when you're drafting any potential legislative response. and i'd like to also when we think about a commodity, one of the commonalities between commodities world and securities world is an awareness that digital things tend to be more abstract, and therefore they tend to be a little bit harder to understand. and as a result, there is a bit more of a tension that focused and placed on those products. gold is the quintessential

commodity because it's finite. people tend to like shiny objects, and it is universally identified as something that has value. here we're debating a lot to of that, and a result of regulatory authorities. >> based on those regulatory authorities, and we saw my colleague mr. emmer talk a little bit about this. and i see the natural tension. you've got people saying there is no way i want any governmental regulation on this. in fact, we came up with it. get out of it. this is a free fire zone, and we like it that way. government bureaucracies and agencies tend not to view the world through those lenses. and i think there is a certain governmental responsibility to protect those investors versus a known investor or a unique investor that is sophisticated in that. and i've got a minute left here, and i'm going to be tight on this five minutes here.

but i am curious and anybody can answer this, will a governmental central bank in any system recognize and utilize a cryptocurrency? because i think until that point, this is going to be a bit of an outlier, and whether it would be some small country or some others. it seems to me the only way there is going to be an ultimate legitization of a cryptocurrency is whether a central bank somehow recognizes it. anybody? >> mr. chairman, i think several countries in europe, for example, and in latin america have already thought about it and already are considering digitizing their currency. so i think that is something that may very well happen. i wonder, though, whether to at least -- >> but that's a little different. that's a governmental created currency versus a nongovernmental currency at this point, right? >> well, that's right. but i wonder what the difference. right? once we've moved away from the treaty, and once we have currencies floating freely

around with each other, i think in one sense what we're worried about is bitcoin isn't backed by a state actor, and that's about it. >> okay. >> with that, the gentleman from georgia is recognized for five minutes. >> thank you very much, mr. chairman. you know, again, i'm so excited about this new cutting edge, what i call the new frontier of our financial service industry. and it's an exciting time for us. but here, let me give you all this scenario. we got millions of new investors who are literally pouring their savings into virtual currencies here. and it is a wonderful thing, as i said before. it's burgeoning up. it's billions of dollars in

capital being raised. but then these facilities in this virtual currency are facilities and this virtual currency have facilities that store and transfer these digital assets for investors which are known as digital wallets. but here's the problem. these digital wallets have become targets for hackers. and hackers are using social media, phone calls and ads on search engines to fool investors into providing them with sensitive personal information that they can use to gain access to accounts at digital wallet providers and steal literally thousands of dollars worth of virtual currencies. hackers have also targeted the

digital wireless themselves, finding the vulnerabilities in our security systems. he pointed out the digital wallet storing or transacting digital assets that are securities can trigger other registration requirements under the federal security laws including broker a deal, transfer agents or clearing agency registration. so panel, what i want to and you is what are the benefits to investors of digital wallets registering with the fcc? would that help to defer? these are the kind of technical and complex questions that present us as members of congress because it all falls on our shoulders.

and most certainly we want to be responsive. and as i've said before as cochairman of the caucus, i am very proud of this industry. but i also know for example they're deferred in one position or another doing a special order charter for fentex, and then you have all these regulators boxing around how to identify them. and all this comes to our lab. and if they are registered with the fcc, should these digital wallets be enhanced for cyber security protocols? such as chairman clayton said as fcc's regulatory system compliance and integrity of regs

fci. i mean we're dealing with an opportunity to get it right before we get it wrong. so tell me. >> thank you, congressman. i think the testimony of both chairman clayton and jim carlo before the senate banking committee is important to look at. chairman clayton as you rightly said talked about tokens that are securities. either because the token does represent a legal agreement. it's because the company saying these are shares of our stock, or companies are saying these are perspectives of future efforts. he talked about pure cryptocurrencies and the chairman suggested those are outside of fcc jurisdiction, and if you look at one of his responses to the questions, he said do not misconstrew.

i think we want to look to the institutional competencies of these two different agencies to protect investors. and they'll continue to use their existing authority to spot fraud and manipulation and the fcc will make sure only securities are traded only on atfs or national security requirements. the spot market for cryptocurrencies are policed by the cftc expost. instead they're supervised by

the states in a patchwork approach. it might be time to rationalize and federalize that supervision of cryptocurrency markets. >> if you saw those two -- >> time has expired. >> thank you, mr. chairman, and again thank tuesday each of you all for being here today. peter, i want to thank you for the private briefing you gave several weeks back and just to encourage any other members, staff on either side of the aisle just to reach out. you guys have been very helpful in bringing us to speed on this. so thank you again. so i want to make a statement and then and a few questions. one, regulation in this space is something that the u.s., we have to get right. because poor or rushed policy with respect to cryptocurrency and tokens, in my opinion, it

really threatens america's leadership in finance and in technology. you have to be careful to avoid missteps because this technology has the potential to become something great. so i just think we should move with caution here. and on that note, i'm curious about an idea i've heard and being floated around as a potential regulation scheme for cryptocurrencies. with this idea would divide cryptocurrencies into securities and nonsecurities. with security coins being regulated as nonsecurities and nonsecurity coins being regulated as commodities. the security coins would offer dividends or equity, anything that would not be on the dividend side would be on the commodity side. if you have any thoughts if you could answer that as well. >> thank you, congressman. the first thing i'd point out is this is a global technology as you rightly said. and if u.s. laws are not a good

fit for both the innovators and the investors as far as protecting them but also enabling markets, these technologies will move to other jurisdictions. congressman is i think correct that a sensible way of dividing these markets is between things that are more commodity like or more security like. and it in the u.s. the flexible test for security, the howie tool, is the tool for doing that. but it is not the tool globally. in europe, for example, there's more of a black letter approach. certain things have been identified in european jurisdictions as securities. and there are more things that suggest things that clearly offer a dividend or some capital return on investment. finding a bright line test may be useful, although, the fcc's test can be helpful in going after schemes that pretend to be securities by not offering those

formal things. so finding a way forward is not easy but probably worth according. because at the moment you see many more of these i think truly innovative capital formation opportunities moving over to europe. you see a lot in switzerland. you see a lot in germany. and these are not countries with lax securities regulations. these are just countries with a certain legal test. so i think guidance to the fcc how they'll interpret the howie test with respect to token sales, they've already had a lot of deliber exactly how you draw the line.at it might look more like what europe is doing these days. my first response b is the approach on this. it's very much with the other p european regulations. they are grappling with the same issues just as we are

today.nd an enormous amount of uncertainty of how it will play out. it is extremely important when who should be regulating different financial products. i think what kind of exposures should be there. that may legally under current law resemble kemal -- the commodity as opposed to a security because the disclosure process is buyer

beware approach. but even under existing rules. there will be some kind of subsequent rulemaking required there's work that well had to be done. in order to get it right.ha thank you mister chairman.

we thought that they have an obligation as well as to the safety of the american people. all of this technology that we had been applied very sensitive areas with that machine that was created to serve us. it's the right kind of regulation that really helps solve the problem. we have hackers out there in damaging great careers you

brought up how the the cftc and the sec would work together in working with us. which presents another problem that we have and let me ask you situation the great need because that's a problem we have. when we have these regulators involved. we've several regulatory agenciesve and puts your industry in an awkward position trying to figure out and trying to make sure that they're both coming out at the same way. that congress put in whatever

we do a rule for harmonization. when he talks about policing authority over these spot markets for commodities. emphasizes that they don't have any authority that can supervise beforehand. as i was briefly same earlier is largely the state it's in arctic between various estates in regulators. state-by-state is both the biggest impediment to the technology because of the profound and non- productive costs.

in the sun an adequate way to protect consumers in investors. it would also include sensible investor protections for those who become licensed by federal authority. the testimony before the ag committee what that will look like will be data reporting. measures to prevent fraud and manipulation. that is a sensible package to require from intermediaries and are corrupted currency space. the chairman yields back the time. i would like to think our witnesses for today. i thought it was ruminating in so many very areas was very

helpful and thank you. it's probably hello and not goodbye. and without objection. to the chairec which i will forward on to you all. ask our witnesses to please respond as promptly as possible. i can think you very much for your time and your attention to this. this hearing is adjourned.

[inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations]

[inaudible conversations] this was our first sort of formal conversation that we are having is a committee. and certainly there will be whether there is committee form or not as you saw brad sherman saying to tom emmer's saying i'm not sure the government should have a touch on this at all because it sort

of outside of the proper lanes of government. i don't know that they don't have a role. i think treasuries can have some of that. it was also part of some opening statements. we alluded to treasury being engaged and involved in this. certainly between treasury they also had regulators fully engaged. what i haven't seen as a whole lot of court nation on that. and some of the is frankly our job also.d the job of oversight that congress hasha into all of these

things. with some jurisdictional issues and cftc and us dealing with the securities exchange commission. a significant amount of time was spent on that. and therefore how it is defined as very important as to how it is dealt with. those are some of the things where we have a hearing the hearing today. to explore some of those things and in my final farewell i think this is hello not goodbye. i think this is hello not goodbye. i think by its nature no. we know there has been problems.

it was not invented as a ponzi scheme. the currency and have there been problems. in the tool has the potential of being used in an illicit fashion. >> it's moving to real need elaborate.

that technology again. they touched on that. about a do we really need this.y clearly mister rosenblum was arguing yes.

i think one of the questions that still wasn't resolved in my mind was some aspiration and consultation. how is it different than apple pay a recognized and utilized currency. creating a crypto currency or any kind of fiat currency like that. that was what i was sort of getting at. ultimately is as can be fully integrated unless there is some sort of central bank systemte could it be a smaller non- player now.

whether it's something in the middle east or asia. trying to assert themselves in a way that they haven't traditionally. >> do you have any other insights.lv they have the necessity to get information. try to figure out whether there is fire where the smoke is. should you as think about regulatory opportunities. what rule are you all playing. the question is should we. figuring out where those boundaries are in technology.

i think this is part of what we wanted to get. i did not hear consensus as to whether the current structure is adequate to address that. so far the regulatory agencies believe that it is. they are trying to do their job why do you have anybody from the cft at the hearing. we wanted to get the panel out here first. we will be having sec folks. we are working through all of the department heads to have them in.

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