September 19, 2022

Icymi: A Leader In Digital Asset Regulation Efforts, Senator Kirsten Gillibrand Questions Experts During Hearing On Digital Commodities

In case you missed it, U.S. Senator Kirsten Gillibrand questioned leading experts during last week’s Senate Agriculture Committee hearing on digital commodities and protection for consumers in the ongoing evolution of the digital assets market. Senator Gillibrand is leading the effort to regulate digital assets in Congress and authored the bipartisan Responsible Financial Innovation Act with Senator Lummis (R-WY). This landmark bill would create a complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law. To date, the Lummis-Gillibrand bill is the most substantial and comprehensive bipartisan effort to provide certainty and clarity to the growing digital asset and blockchain industries. 

For the full clip and transcript of Senator Gillibrand’s questioning, please click here and read below:

 

U.S. Senator Kirsten Gillibrand’s Q&A with CFTC Chairman Rostin Behnam:

 

U.S. Senator Kirsten Gillibrand: Chairman Behnam, thank you so much for your leadership on this issue. Thank you for being willing to work with this committee, for you being willing to work with me on my legislation as well. 

This bill that we are looking at, I think, can be transformational. I think it is timely, I think it is urgent, I think it is necessary to create stability in a market that is growing. And I talk to a lot of colleagues about cryptocurrency, blockchain, Web3 and they say, "Well, is this going to go away?" It's here for good, it's part of the world economic community. And the question that we have as a committee right now is, are we going to be a part of the solution or are we not? 

And what is needed so much right now are rules of the road. We just need rules of the road, so market participants, so innovators, so businesses can have basic clarity on how to create their businesses, what level of oversight and accountability will be effective, how to create basic safety and soundness, how to create consumer protection. And you being a part of this process has been absolutely essential to getting this bill written and to getting it where it is today for the committee. So I'm very very optimistic. 

I would like you to continue along with the line that Senator Ernst started, about why is this relevant now? This bill takes jurisdiction over the commodities part of cryptocurrencies. Some cryptocurrencies are securities. Digital assets can take many forms. SEC has a regulatory responsibility, CFTC will have regulatory responsibility, IRS will have regulatory responsibility and so will thoughts and ideas on cybersecurity, which I’ll address after this question. 

But what I would like you to talk about is how does this bill fit into the broader framework? Why is getting this bill done now so essential? And, why and how does getting this bill done now allow us to build on it to do the rest of the regulatory frameworks? To then go and look at the Banking Committee and try to do stablecoins, go and look at the Banking Committee to try to get SEC regulation for those digital assets that are securities? Talk about why this piece matters now.

CFTC Chairman Rostin Behnam: Senator, thanks for the question. You rightfully point that this is one piece of the puzzle. We all have a role to play, we all have our pieces to contribute to the larger puzzle. I’ve been lucky to participate in the principles working group, the Financial Stability Oversight Council, other international fora, and this is a big issue. 

You mentioned stablecoins, this is a predominantly prudentially banking regulated issue. The security tokens, there are thousands of security tokens that innovators are creating and that we need to address. There are issues around payments, custody, settlements, so many different elements of this larger, digital asset ecosystem that in many respects is interconnected. As much as they’re their own little silos, they are all interconnected. 

I think this is an important bill because, you expressly outline bitcoin and ether and commodity tokens. That will be a significant majority of the digital asset marketplace, and I think it will push the conversation forward so that we can continue to have policy around the different areas of the digital asset space, clarified and complete. Because as much as this will bring clarity, transparency, and most importantly, as you point out, customer protections to this particular market, which is significant, the other elements need to be completed too. We need to complete the larger puzzle, because if we are going to see advances in the technology and innovation, coupled with the customer protections, the market resilience, and ultimately financial stability depending on the size of the market, we need to have this patchwork all plugged together so that we have the full lens into that space, from a regulatory perspective and from a prudentials perspective.

Senator Gillibrand: Thank you, Mr. Chairman.

Along the lines that I mentioned on cyber, when I first became involved in this issue, it was through my role on the Intelligence Committee. And so, obviously, addressing things like cyber-threats, fraud, theft, privacy breaches, and other technology-based crimes facilitated through Web3 applications by foreign adversaries is top of mind for me. Can you talk a little bit about the work that you and your agency are undertaking to be ready to address these types of threats, and what needs to be done in the future to ensure security of the commodities market?

Chairman Behnam: Thanks, Senator.

Cybersecurity is top of mind at the agency right now. We are a financial market regulator that has systemically important registrants. As I mention in my earlier responses and in my statement, we have core principles which drive our rules and regulation. The core principle around system safeguards directly relates to cybersecurity. We have to build operation resilience within the institutions, the regulated institutions. Thankfully the DCCPA addresses this specifically, prescriptively mentions cybersecurity. So, we are leveraging the tools, the expertise that we have. We understand that we are going to have to up our game, because, from a markets perspective, the cyber resilience and cyber issues are largely the same. But this technology, specifically the custody element, the how do we hold these tokens and the unique nature of the technology, is going to require some deep thinking. It’s going to require new hires and new expertise in the space.

So those are the areas that I’m concentrated on. Using the resources that the bill provides will be critical to ensure that we can recruit, retain, and build out that infrastructure so that we have a cyber-resilient system. As we have seen in the past with Colonial Pipeline or others, digital assets will be a vulnerable point, will be a touch point for bad actors to try to attack the US through different systemically important infrastructure.

Senator Gillibrand: Thank you Mr. Chairman, thank you Madam Chairwoman.

 

Senator Gillibrand on decentralized finance:

Senator Gillibrand: So, I wanted to, Ms. Warren, I want to talk a little bit about DeFi because this is an area where I think we could improve this bill. Right now, for those who are focused on this issue, decentralized finance has enormous opportunity to improve innovation toward, collectively towards creating more financial inclusivity, as many of you have testified about, fewer intermediaries, more opportunities for people of all income levels to engage in the financial system. 

And while this bill does include decentralized finance in its regulatory framework, I don't know that it is being treated in the way it would need to be treated to actually continue to participate. So I want to talk a little bit more specifically for the benefit of the staff who are working on the next iteration of this bill, what you would suggest laying out in terms of protocols that would apply and map for decentralized finance better than the definitions right now that seem to be overly broad and encompassing too many things that don't really apply.

CEO of the Crypto Council for Innovation Sheila Warren: Thank you, Senator. I agree. I think that the definition proposed as now is frankly a bit unworkable in terms of how DeFi actually operates, and I think it's important to note that crypto is not a monolith, and so DeFi – I've been in this space full-time now for almost six years, and DeFi didn't exist when I entered this space as a concept. It was brand, brand new. So we are really at a point where the cutting edge of innovation is reflected in what we're seeing in this space. And the market hasn't even had time to decide which models make sense, let alone settle into parameters and models that are consistent across different types of offerings and services here. 

I echo your sentiment that this is a critically important edge for financial inclusion in our system. It is going to provide, I believe, over time increasing advantages to those who simply cannot access other forms of financial services because they have been, again, historically underserved, as the report that is named in the DCCPA so aptly, it’s so aptly named. I think what's also really important is to ensure that DeFi remains in the United States as a locus of innovation. And the concern that I have, which I've shared with you previously, is that we are going to see offshoring of this innovation space in a way that, as our colleagues on the panel have noted, is going to not embed the principles-based frameworks that are so critical to ensure that Americans receive the adequate protections that they need and deserve, let alone the global citizenry that's going to benefit from this innovation. 

So as a general matter, you know, we do recommend that this is a space that requires a lot of study, requires a lot of focus on what is happening, what is coming, the trajectory here, but also a bit more time for the space to settle a bit before we try to box it into something that may wind up cutting off avenues that could benefit tremendous groups of people. 

Senator Gillibrand: And can you just explain it a little more in detail? Because a lot of people don't understand the difference. So if you have a DeFi protocol that never takes custody of assets, does it need to make sure they're not co-mingled? Like a bank or something, more institutional finance bases. Can you explain the difference and why these definitions unfortunately may include, and therefore exclude, DeFi entirely? Just explain the difference for the committee, particularly for Chairman Boozman and the staff, so they understand why it needs a separate study for this part and to make sure it's not being excluded.

Warren: Swept up, really, in these workflow definitions. So the way that DeFi works is it is basically an immediate pass through. It enables a precise peer-to-peer connection between two parties that are engaging in a transaction, without a centralized intermediary that's in the middle of that. 

Senator Gillibrand: And that it's software and it's not an entity. It's not like a group of people managing an organization. It's a software program. 

Warren: That's exactly right. It is code, it is code that is actually governing this exchange. And that leads to a lot of exciting innovation, but it's also challenging to figure out, how do you create a framework around that? Because everything that's come before – we've talked a lot about 1922. This is about as opposite from that kind of model as you could get because there isn't an entity in the middle of this that is directing the flow of funds and pointing you know, things to where they ought to go. It is code. It is essentially conducting that same service and providing that same opportunity. So we do, it does behoove us, I think, to think very carefully about the precedent that's being set when we think about a code base that is perhaps serving a primary financial service function. How ought we to think about regulation there in a way that protects consumers but again, retains that innovation edge, and most importantly, ensures that a principles-based framework that is grounded in historical, the US historical approach to financial services is underlying all of that.

Senator Gillibrand: Thank you, Ms. Warren. Mr. Phillips, I want to thank you as well for your leadership and the work you've done with this committee and with my staff on writing portions of this legislation in terms of ideas and thoughtfulness. I want to talk a little bit about the issue that people have concerns about, about energy use, and the way this bill will create a study and a protocol to create better disclosure, perhaps, or other recommendations so that the participants can make informed choices. Can you talk a little bit about how you do that? Which other regulatory agencies, such as FERC, we may ask for information from, and explain how we're doing that and how you think ultimately will help long term? 

Director of Financial Regulation and Corporate Governance at the Center for American Progress Todd Phillips: Absolutely, Senator, thank you. So this bill would require the CFTC to conduct a study, along with other regulators, examining the energy impacts of a variety of digital asset commodities. In addition to studying and creating recommendations for Congress and the agency on how to reduce those energy impacts, it would also require the CFTC to list the energy impacts of a variety of different digital asset commodities, so that investors can see those disclosures and make investing decisions based on what they see. If there is a token that has an extremely high energy impact compared to something else that is a similar type of token, it's reasonable to believe that investors would move to the lower energy intensive asset, incentivizing the higher energy ones to reduce their energy impacts by moving to a different blockchain or doing something else, reducing the overall impact of energy usage in the crypto market overall. 

As for other regulators that the CFTC should speak with in doing this, definitely FERC, which does have oversight of the nation's energy markets, the Securities and Exchange Commission, which I expect would also – I would want them to examine the energy impacts of those digital asset securities. And in addition, potentially, the bank regulators and FSOC, who oversee other parts of the digital asset markets.

Senator Gillibrand: Thank you. Thank you, Mr. Chairman. I have more questions if you want me to filibuster, but if you have questions it’s your turn.

Senator John Boozman: If you want to ask another question.

Senator Gillibrand: I have one more.

Senator Boozman: As long as they don't get mad at you over on the floor.

Senator Gillibrand: Oh, well they might. One more, Ms. Warren, I have one more. I want to talk a little bit about what happened after the days of Russia's invasion of Ukraine. People were concerned that cryptocurrency would be used by Russian oligarchs to evade sanctions. But that actually wasn't the story that we heard. It winded up being a very important example of how this industry and blockchain technology can be a solution for families, countries, unstable governments that need resources to get them quickly. I thought Ms. Dixon made some excellent points about remittances and how important that is for a world financial market. I care very deeply about access to capital for communities that are disadvantaged and are unbanked or underbanked. And then the banking community doesn't serve it.

So I'd like you to augment Ms. Dixon’s testimony and talk about some of the really positive stories about how this industry and this technology can transform who has access to capital at urgent times of need. And I think you can use the Ukraine example as one but whatever ones you want to add to the record.

Warren: Well, I think that is the most acute. Because I think there is really no question, and I don't mean to sound dramatic about this, there's really no question we'd be in a very different situation in that conflict if the crypto community had not mobilized in response to a specific request from the Ukrainian government, all the way up to the president's office, asking for crypto donations to bridge and serve as a catalyst while the international community could provide the badly needed aid, the billion dollars of aid that actually has resulted in where we are and the ability of the Ukrainian people to stand up to this brutal invasion.

There's no question crypto was a bridge, it was a catalyst. It was essential and critical in order to give the international community time to use traditional financial means to provide this kind of capital. And we know because we can see on what's called a block explorer where that money went, who it was given to and also what it was used for. So we know based on all the accounts that come from the Ukrainian government, this was medical supplies. It was in some cases arms, it was just things that were critically vitally important at that crucial time.

In addition, we've seen crypto be a critical tool for activists, those who are working in some cases with the US government against rogue states to actually provide money, whether it's money to get them securely out of a country in times when their lives are in political crisis because of political happenings around them. We've seen this all over the place. We've also seen women in times of trouble, and Afghanistan is probably a really great example of this – maybe the best – where in a patriarchal society, where when the Taliban came in, they were looking to basically seize and appropriate funds. And the community was using crypto, particularly women were using crypto in a way to shield assets from that seizure, which is critical and again provided the ability for people in that country to resist the authoritarian regime that was being pushed upon them.

So these are examples that I think are located in other countries, but they are so critical. And they underlie, in my opinion, the nature of crypto and why it is so important to your particular point in times of crisis. And the reality is that here in the United States, we certainly have communities in crisis as well. And so these may not be the examples that are as popular as noted, because they are quieter examples and maybe aren't as dramatic in terms of the opposition that's being faced. Nevertheless, there are communities here that also have been unable to get access to basic financial services that are turning to crypto. And the numbers speak for themselves and we quoted them already.

So whether or not you're in an acute situation or a crisis, I do find that preserving the opportunities that this particular innovation represents is of critical importance. And again, grounding that in the principles-based frameworks that underlie the American financial system are also of critical importance.

Senator Gillibrand: I just want to thank the entire panel. I appreciate your testimony and the information you're giving to this panel about the urgency and the importance and the benefits of really creating these regulatory frameworks now. Thank you so much.