Highlights from the US Congressional Hearing on Cryptocurrencies and ICO's



the hearing is entitled examining crypto currencies and ICL markets I now recognize myself for four minutes but we are here to welcome today a great panel mr. Michel Empress who is the chief legal and Risk Officer for coinbase dr. Chris Bremer who is a professor of law from Georgetown University Law Center mr. Raza Robert rosenbloom partner at Wilson Sonsini Goodrich and Rosati and Peter Van Valkenburg a director of research for coin Center according to coin Marquette Capcom there are over 1500 different cryptocurrencies with the total market capitalization estimated to exceed three hundred and fifty billion dollars it's a staggering amount of money as this market develops Congress has a responsibility to ensure that investors are protected without unduly limiting opportunities for growth 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 until their wives are 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 that 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 US 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 we encourage investment in the real economy but when you buy a Bitcoin are you financing a new factory no your Tate you're gambling on its value for no social benefit now I know that this bit you the that these crypto currencies are popular they're popular with guys who want to sit in their pajamas until their wives are gonna be millionaires they're harmful I'm gonna mispronounce the word does sinner edge is the benefit that the US government gets by issuing currency it is the float it is the fact that we do not pay interest on newly created dollars so each of you will be recognized for five minutes who give a oral presentation of your testimony I commend you for holding 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 responsible regulation is required but the technologies and credible benefits could also be stifled by regulatory or legal missteps we are blessed in the United States Apple in the safest deepest and most liquid capital markets in the world one of the reasons for this success is our system of infirm a sharing and dissemination to investors most ICO disclosures by contrast are facilitated by unregulated white papers there is as a result a large gap between the disclosures and many of the registered filings such as an s-1 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 to make a purchase in an informed manner these disclosures are relevant especially relevant I believe as ICS transition from technical expert ecosystems to the distribution of instruments that are ever more likely to attract everyday investors and retail public I think many people in the industry those who want to get things right feel very much welcome your participation and your interest in the topic so again thank you for holding the hearing about nine months ago or so the ICO market really started to become significant in the United States I was concerned as some of the comments we've already heard as to whether there was really a there there I think there really are some very important things happening in this market and again I think that's why it's so important for this subcommittee to be focusing on these issues I think in the near term Congress could greatly help SEO markets to facilitate good icos and to help guard against fraud by both authorizing and encouraging the SEC and other appropriate federal regulators to both modifying and amend their rules ro to better assist ICO issuers in meeting the requirements of the federal securities laws they don't work well they're not geared towards icos into tokens and so the SEC can be doing a lot more i although they're trying very hard they can do a lot more attempt to amend their rules and modify their rules and I think this committee can help one is there is tremendous innovation in the blockchain and cryptocurrency community and by the way cryptocurrency is a bit of a misnomer there are some tokens Bitcoin ether for example that really are crypto currencies there are a number of other two tokens and those are most of those that we'll probably 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 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 by any regulatory and legislative response with that let me end my remarks and thank you so much Thank You mr. Van Valkenburg you are recognized 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 sixteen point nine million bitcoins in the world right now because their distribution and movements are described with perfect accuracy on a public ledger called the Bitcoin blockchain anyone can independently read and mathematically authenticate the data in the blockchain 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 and transferable from person to person can be used as money just like any other portable and transferable good throughout history from gold to seashells that in a nutshell is Bitcoin but a scarce token can also be automatically redeemable for a digital good or computing service provided by the same network of participants who verify the blockchain 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 may seem like science fiction the CFTC should use its existing authority to police commodities spot markets for fraud and manipulation and the SEC should manage and mandate disclosure from issuers making securities offerings but if policymakers get the line between commodity tokens and securities offerings 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 [Applause] Thank You mr. chairman I really appreciate you holding this very important hearing on a topic that has a lot of people's attention dr. Bremer can you talk a little bit about the promise of blockchain technology let's take a couple steps backward what blockchain technology can mean both for financial transactions and other things in our economy I think that the value in blockchain technology and it's very useful for us all to remember that blockchain 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 disintermediation of certain kinds of folks in the middle that allow for a cheaper transaction experience mr. and valkenburg can you help us understand the difference between a token that is used as a commodity and the promise of tokens that becomes a security we have a flexible test in the u.s. for what is a security it is derived from a case called the Howey 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 simplifying reliant on the efforts of an issue or a third party promoter so that's why this promise of future tokens is critical to thinking about why and ico is a security even though other things might not be as we have a definable or discernible issuer who's promising to build something of profound economic value but we're relying on them to actually keep that promise and that's why it fits the test for an investment contract or security now a digital commodity might be a digital commodity for a number of reasons we use commodities for money we use commodities as investments we use commodities as inputs for commercial industrial processes and the same thing is true of digital commodities like Bitcoin or aetherium or file coin once file coins built it coin is nothing but something that's scarce and transferable person-to-person and that's why I make the metaphor to goals it's of course very different than gold but like gold I could hand it to another person and if that's valuable on markets that may be valuable and used as a medium of exchange or a store value theorem is a computing system on the internet and in order to get access to that computing system to get useful results you use ether as a fuel to power that engine on the internet it's a commodity like oil and the last point the last one is rather like digital real-estate so you use file coin to get storage on the internet so it's a commodity like real estate if we want to think of real estate as a commodity measured in gigabytes instead of square feet great thank you and 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 thin since 2013 guidance on the appropriate level of anti money laundering and know your customer safeguards are appropriate or do you think that they are being abused out in the system do you think there's more information needed on those issues 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 US 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 some people are treating these things as investments not as currencies and that's a huge problem because there's 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 wrecked regulated investments with robust investor protections including disclosures which will be regulated by the SEC so professor bro Martin do you believe that the definition of a security and current law encompasses all virtual currencies no I I don't believe so the Howey test which is long the standard for evaluating non-traditional financial products and determining whether or not they fall within the SE C's regulatory perimeter establishes several key characteristics and benchmarks that have to be satisfied and I think that when you apply them to some of these virtual currencies like Bitcoin you get less and fulsome results according to those benchmarks so if we wanted to regulate virtual currencies that are being treated as as investments and to require adequate disclosures to investors would Congress need to expand the SE C's Authority in your opinion they would need to expand the SE C's authority yes and and I liked the part of your testimony where you described what kinds of disclosures should be made to people who invest in what what do you think of the idea of subjecting virtual currency exchanges to minimum cybersecurity standards do you think this is necessary in light of the huge cyber security risks that virtual currency exchanges face I think that would be extremely helpful cybersecurity is perhaps the number one challenge facing our financial markets infrastructure providers and to the extent to which you want to provide those financial services you should be subject to certain kinds of high expectations about the cyber security of your operations my time is more than expired thank you so very much thank you all of you thank you with that the chair recognizes the gentleman from Minnesota mr. Emmer for five minutes Thank You mr. chair appreciate it appreciate all of you being here this is a huge topic that cannot possibly be even scratched in my mind in five minutes with each of the people it'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 I 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 to have to go into this new frontier and we've got to have more regular I mean I heard at the beginning we have a regulatory vacuum that scares me to death III tend to trust people before I distrust them I tend to believe that people are in these things for good but 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 talking about oh my gosh we got a run in we got to regulate we got 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 blockchain blockchain technology applies all over the place I mean it can solve some of our cybersecurity issues these are open transactions we're a Milton Friedman of all people predicted this back in 1999 when he said there will 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'll be entirely open for people to see but a won't know B & B won't know aid so that I think that the internet is going to be one of the major forces for reducing the role of government the one thing that's missing but that will soon be developed is a reliable ecash the method we're buying on the Internet you can transfer funds from A to B without a knowing B or B knowing a the way in which I can take a $20 bill and hand it over to you then there's no record of where it came from and you you may get that without knowing who I am and that kind of thing will develop on the Internet and that will make it even easier for people to use the Internet of course it has its negative side it means that the gangsters the people who are engaged in that illegal transactions will also have a easier way to carry on their business I love the fact that mr. Rosen blimp blum talked about examples of blockchain technology outside of this space I and I will tell you in Minnesota we have a company called Bank you that's using blockchain to provide digital identities two 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 got to take the policeman we already have and give them even more powers to start to invade this space and perhaps frustrate the 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. Lemp hrus why don't I start with you I you talked about we have to be able to say what is a security in this space 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 percent of your workforce is working on compliance that's nothing to be celebrating from this side of the 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 yeah thank you for raising it's obviously a very very important issue going to certainty I can tell you that from our standpoint what we what we really need more than any particular approach is to know what that approach is gonna 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 it's there's no clarity around the law so all of a sudden people who are looking at being in this space or getting into this space I heard from more people there after that comment that we can't start our business in the United States we're gonna have to go somewhere else to start it 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 mr. lovers 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. LAN first 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's received it I think 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 killed activity in the state of New York I'm having having said that when you reached when you're at the scale 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 that the state of New York has put in in that people do trust more do you know we're doing the kinds of things they want to see when we we have people are used to dealing with financial institutions and the state of New York is in effect treating through its fifth licensed US and other companies the way they treat financial institutions I think that sends a message to the market so it for our 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 so we have 40 licenses in 38 states there are primarily money transmission licenses that we deal with they lead to full exams we've I believe had 28 exams to current various states coming into our office I thank you all for your testimony my time is way expired thank you for indulgence we've been somewhat generous today on that and knowing how this is the how do you unravel this in five minutes is very difficult and still while we are in this first round welcome back to mr. Sherman who is recognized for five minutes the 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 for my groceries or anything else that wouldn't be adequately served by using dollars yes mr. van yes Thank You congressman I know not not yourself I believe sir because you and I are you you're assuming I'm not a terrorist or criminal and I thank you for though I'm assuming you're an American citizen which i think is a pretty safe save assumption that that one's safe the other two are question yeah go ahead we you and I have the benefit of a well-functioning and extremely important financial infrastructure that surround us every day of credit cards of bank accounts and 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 in other words there any part of the world where the unbanked could just as easily have access to transactions in real currencies rather than crypto currencies so there are parts of the world where real currencies in those countries are being basically debased by their governments are hyper-inflated or there just don't have actual purchasing power because right so you can't use dollars euros Swiss francs why are those not the adequate substitute if you can find access to cash in your region of the world US dollars that might be a very good means of exchange but those will trade at extreme premiums my only point is that crypto currencies are accessible they're accessible 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 smartphones and Internet connections then they'll have access to a valuable and secure financial service from companies I wonder if someone else can comment on that I don't think in the tallest mountain of Tibet there's somebody with $100 bill that they're holding on to and if and every cellphone there's a way to use dollars or Euros does someone else have a comment Sherman thank you for the questions I wanted to divide your question into two different parts one is part one part relates to things like Bitcoin and other currencies which is really what you're discussing second part is gonna relate to tokens and similar types of things that have the instruments that have specific purposes on specific platforms that people can earn and generate in ways that you could not do with cash what just foci of limited time focus on what what can't you do with cash well in a platform for example where we have 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 under what why couldn't these platforms use dollars because there's no place nobody who's going to pay them what happens on these platforms is that the platform itself in about I have a bank I pay them one way or another no no you you you have to find a source you have to find somebody who would have who would have who would be in the business of paying them and that costs money so what you see in these platforms what we've seen is sir I've lived my whole life as old as almost anybody in the room I saw it kind of you to say but and and various intermediaries it handled my financial transactions my entire life and none of them have gone hungry we're talking about a very different business model right then that that's what that's one of the things that's so important about this and 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 the this question as to whether or not many of these cryptocurrencies and I think the vast majority of the cryptocurrency is tied to AI cos are really just means by which you're you're raising capital as opposed to currency I will say well raising capital but unregulated doing an IPO but calling it an IC o—- well what are the one of the one of the key responses I was trying to make for mister rosenbloom when discussing the adequate disclosures or the kinds of disclosures that one would like to see in a white paper is precisely in order to beef up those white papers so that they become more compliant with the expectations of our securities law which i think is an expectation that all securities lawyers would enjoy but I am I am I am very sympathetic to that but if I go buy an IC o—- and the company sells great pizza and eventually makes billions I don't get any of that right I'm not a stockholder but neither but sir the important thing on those 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 point of the entity that created the platform well perhaps we'll have another hearing after some major terrorist event financed by cryptocurrencies and I yield back gentleman yields back with that gentleman from Connecticut mr. Himes is recognized for five minutes in currently pass okay we are where we have some people potentially in transit but if it is okay with my colleagues we'd like to go on to a second round Mr Valkenburg did you you hit it on the head as to what I think we have an obligation both to this burgeoning industry here as well as to the safety of the American people we got to get this right in terms of what I think is a delicate balance of the right kind of regulation that really helps to solve the problem we got hackers out there that are at work and damaging great careers and jobs and just the lives of the American people and they looked at us here in Congress to try to solve that and so when I brought that issue you brought up how the CFTC and the SEC would work together in working with this because that's a problem we have when we have these regulators involved and you have several regulatory agencies it puts your industry in a somewhat an awkward position trying to figure out and try to make sure that they're both coming at it the same way so would you recommend that whatever we do knowing these different agencies that Congress put in whatever we do a rule for harmonization yes I do think harmonization is critical Chairman giancarlo when he talks about policing authority over these spot markets for commodities emphasizes that they don't have any ex-ante authority they don't have the ability to supervise beforehand they're not the regulator on point and as I was briefly saying earlier the regulator on point is largely the States whether it's through the bit license or through money transmission licensing and so it's not just anarchic as between federal agencies potentially it's anarchic as between federal agencies and various state regulators I think state-by-state money transmission licensing is both the biggest impediment to the technology because of the profound and redundant and non-productive costs that it imposes on the industry and on the ecosystem and and it also is not an adequate way to protect consumers or investors thank you very much sir chairman so I would like to thank our witnesses for today I thought this was nominated in so many various areas and completely the fuddling and others which which welcome to Congress I guess the so but it was very helpful and thank you for this I believe that this is a probably hollow not goodbye we are going to be continuing to have this conversation again thank you very much for your time your attention to this and your insight and this and sorry this hearing is adjourned

2 thoughts on “Highlights from the US Congressional Hearing on Cryptocurrencies and ICO's”

  1. Mr Emmer is for the people. We need to send him a Thank You email to let him know we support him. Just takes a second.

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