[Senate Hearing 119-367]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 119-367

                    EXPLORING BIPARTISAN LEGISLATIVE 
                     FRAMEWORKS FOR DIGITAL ASSETS

=======================================================================



                                HEARING

                               before the

                            SUBCOMMITTEE ON
                             DIGITAL ASSETS

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED NINETEENTH CONGRESS

                             FIRST SESSION

                                   ON

              EXAMINING THE FRAMEWORKS FOR DIGITAL ASSETS

                               __________
                               
                           FEBRUARY 26, 2025
                               __________



Printed for the use of the Committee on Banking, Housing, and Urban Affairs



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                Available at: https: //www.govinfo.gov /
                

                               ______
                                 
                 U.S. GOVERNMENT PUBLISHING OFFICE

63-448 PDF                WASHINGTON : 2026








            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM SCOTT, South Carolina, Chairman
            ELIZABETH WARREN, Massachusetts, Ranking Member

MIKE CRAPO, Idaho                    JACK REED, Rhode Island
MIKE ROUNDS, South Dakota            MARK R. WARNER, Virginia
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
BILL HAGERTY, Tennessee              TINA SMITH, Minnesota
CYNTHIA M. LUMMIS, Wyoming           RAPHAEL G. WARNOCK, Georgia
KATIE BOYD BRITT, Alabama            ANDY KIM, New Jersey
PETE RICKETTS, Nebraska              RUBEN GALLEGO, Arizona
JIM BANKS, Indiana                   LISA BLUNT ROCHESTER, Delaware
KEVIN CRAMER, North Dakota           ANGELA D. ALSOBROOKS, Maryland
BERNIE MORENO, Ohio
DAVID MCCORMICK, Pennsylvania

                    Catherine Fuchs, Staff Director
                 Jon Donenberg, Minority Staff Director

                      Cameron Ricker, Chief Clerk
                      Shelvin Simmons, IT Director
                       Pat Lally, Assistant Clerk

                    Sheryl L. Arrington, GPO Detail
                      Jason T. Parker, GPO Detail
                                 ______

                     Subcommittee on Digital Assets

                  CYNTHIA M. LUMMIS, Wyoming, Chairman
                 RUBEN GALLEGO, Arizona, Ranking Member

THOM TILLIS, North Carolina          MARK R. WARNER, Virginia
BILL HAGERTY, Tennessee              CHRIS VAN HOLLEN, Maryland
BERNIE MORENO, Ohio                  TINA SMITH, Minnesota
DAVID MCCORMICK, Pennsylvania

                Chris Land, Subcommittee Staff Director
         Jonathan Tsentas, Minority Subcommittee Staff Director









                                  (ii)








                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, FEBRUARY 26, 2025

                                                                   Page
Opening statement of Chairman Lummis.............................     1

Opening statements, comments, or prepared statements of:
    Ranking Member Gallego.......................................     2

                               WITNESSES

Lewis Cohen, Partner, Cahill Gordon & Reindel LLP................     4
    Prepared statement...........................................    32
Jonathan Jachym, Deputy General Counsel and Global Head of Policy 
  and Government Relations, Kraken Digital Asset Exchange........     6
    Prepared statement...........................................    45
Jai Massari, Chief Legal Officer, Lightspark.....................     7
    Prepared statement...........................................    50
Timothy Massad, Research Fellow and Director of Digital Assets 
  Policy Project, Kennedy School of Government, Harvard 
  University.....................................................     9
    Prepared statement...........................................    57

              Additional Material Submitted for the Record

Letters and statements submitted to the Committee................    81











                                 (iii)








 
                    EXPLORING BIPARTISAN LEGISLATIVE 
                     FRAMEWORKS FOR DIGITAL ASSETS

                              ----------                              


                      WEDNESDAY, FEBRUARY 26, 2025

                               U.S. Senate,
  Committee on Banking, Housing, and Urban Affairs,
                            Subcommittee on Digital Assets,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., via 
Webex and in room 538, Dirksen Senate Office Building, Hon. 
Cynthia M. Lummis, Chairman of the Subcommittee, presiding.

    Present: Senators Lummis, Tillis, Hagerty, Moreno, 
McCormick, Gallego, Warner, Van Hollen, and Smith.

        OPENING STATEMENT OF CHAIRMAN CYNTHIA M. LUMMIS

    Chairman Lummis. I would like to call this first meeting of 
the Digital Assets Subcommittee to order.
    And Mr. Gallego, welcome as the Ranking Member. I'm looking 
forward to working with you and the other Members of the 
Subcommittee. This has been a long time coming. So I'm 
delighted to get started. I'll make an opening statement and 
then the floor will be yours to make an opening statement. And 
then we'll introduce our witnesses.
    So the hearing now being in order, thank you, everyone, for 
being here at the inaugural Subcommittee on Digital Assets 
hearing. I'm really grateful to Senator Scott for creating this 
Subcommittee. And as I said, Senator Gallego, looking forward 
to working with you to pass bipartisan legislation on Bitcoin, 
on stablecoin, and digital assets.
    We want to promote responsible innovation and protect 
consumers. We sure have come a long way since I first arrived 
in the Senate. Many Members of the Senate, we're still trying 
to wrap their heads around what is a bitcoin, what is a digital 
asset, what is a stablecoin, what is a Howey test.
    And so now we've arrived at the point where we can move 
forward. We're on the precipice of finally creating a 
bipartisan legislative framework for both stablecoin's market 
structure. I hope we can get both pieces of legislation to 
President Trump for his signature this year, including the 
Lummis-Gillibrand Responsible Financial Innovation Act which is 
the more market structure-oriented bill that would sort of 
dovetail with what the House passed last year which was FIT21.
    But we're going to start with stablecoin and on stablecoin. 
So I'm optimistic the Senate Banking Committee will soon markup 
Senator Hagerty's legislation. It is called the GENIUS Act. 
Chairman Scott and Senators Gillibrand and I are all 
cosponsors.
    The act makes the U.S. dollar fit for the digital age, 
creates additional demand for U.S. debt, and makes payments 
both faster and cheaper. I'm also pleased that the legislation 
fully protects the dual banking system and creates parity 
between both States and Federal stablecoin charters.
    Turning to market structure, I'm excited to work with 
Chairman Scott, our Subcommittee Members, Chairman Boozman, 
Chairman French Hill over in the House, and Chairman G.T. 
Thompson who are respectively chairs of Financial Services and 
Agriculture to clearly draw the line between a security and a 
noninvestment contract commodity and to create a path for 
digital asset exchanges to register with the Commodity Futures 
Trading Commission. This industry needs clear rules of the road 
that it can follow while simultaneously promoting both 
responsible innovation and protecting consumers.
    So each of our witnesses today are committed to these 
goals. And I'm really grateful to all four of you to be here 
and share your expertise on these topics.
    First, we have Lewis Cohen, partner at Cahill Gordon & 
Reindel. Did I get that right? Thank you. Mr. Cohen is a 
learned lawyer and an expert with respect to differentiating 
between a security and a commodity. Can't wait to hear from you 
about that. We have been wrestling with that for months.
    Second is Jonathan Jachym, Global Head of Policy at Kraken. 
I am proud that Kraken calls Wyoming home today. And Jonathan, 
thank you for being here and sharing your expertise.
    Third, Jai Massari, Chief Legal Officer at Lightspark. Ms. 
Massari is one of the original thought leaders on stablecoin 
policy and understands how stablecoins operate. And then 
finally, we are honored to have Tim Massad as a witness. He was 
Chair of the Commodity Futures Trading Commission from 2014 to 
'17 and is a research fellow at the Harvard Kennedy School of 
Government.
    I'm personally thankful to each of you for working with me 
and my staff over the years and providing great feedback on 
legislation and providing it over and over as we've tried to 
move the subject forward. We're thrilled to have you here today 
and look forward to having an in-depth policy conversation 
about the intricacies of stablecoin and market structure 
policy.
    Ranking Member Gallego, you are recognized for an opening 
statement.

              OPENING STATEMENT OF RANKING MEMBER
                         RUBEN GALLEGO

    Senator Gallego. Gracias, Chair Lummis, for hosting this 
hearing and for starting off our work on this Committee with a 
bipartisan focus. I look forward to our continued work together 
on these issues.
    Thank you also to our witnesses for joining us today to 
discuss an issue of growing importance, how Congress can 
deliver bipartisan legislative solutions for digital assets 
that promote innovation and U.S. competitiveness while 
protecting consumers and ensuring the integrity of our 
financial system.
    The rapid development of digital assets, blockchain 
technology, and the broader crypto economy presents both 
extraordinary opportunities and, of course, significant 
challenges. These innovations have the potential to enhance 
financial inclusion, streamline transactions, and spur economic 
growth. At the same time, they raise concerns and questions 
about consumer protection, financial stability, and the proper 
role of Government in overseeing these emerging technologies.
    We, in Congress, have the responsibility to strike the 
right balance which we sometimes do, fostering safe and 
responsible innovation and establishing clear guardrails to 
prevent abuse, fraud, and systematic risk. So this is not about 
us picking winners and losers among technologies or industries. 
It's about creating a stable and predictable regulatory 
environment that allows legitimate enterprises to thrive and 
grow while protecting the interest of the American people and 
consumer.
    First, let's talk about safe and responsible innovation. 
Digital assets are a fast, evolving sector and the United 
States must lead in this space. Innovation should be encouraged 
and it must be safe, transparent, and accountable.
    Without robust oversight, bad actors can exploit loopholes, 
undermining trust in the system and causing harm to consumers 
and investors. We must ensure that digital assets are not used 
to circumvent existing laws on money laundering, tax evasion, 
or illicit financing.
    At the same time, we must ensure that we are encouraging 
innovation as productive and useful to everyday Americans. The 
growth of things like memecoins on everything from Trump to 
Doge to Peanut the squirrel about flashy headlines and trending 
on social media. And they are not about helping traditionally 
un- and underbanked communities, gaining access to the 
financial system. I hope to hear from our witnesses on how we 
can incentivize good behavior and mitigate risk while still 
allowing digital assets and the economy to develop.
    Second, we need to have clear rules of the road. Today's 
regulatory framework for digital assets is insufficient in my 
opinion. Bipartisan legislation should provide clarity and 
consistency well into the future enabling innovators to operate 
with confidence and ensuring regulators have the tools they 
need to address risks effectively.
    Third, we must ensure that the rise of digital assets does 
not come at the expense of safety and the soundness of our 
traditional banking system. Stablecoins and other digital 
assets with links to the broader financial sector could pose 
risk if not properly managed. We must ensure that the use of 
digital assets does not lead to risk to depositors or the 
Government backstops for the banking system.
    Finally, consumer protection must remain at the heart of 
our efforts. I became interested in crypto because I heard from 
many of my constituents, especially young Black and Latino men, 
that are excited about what this new technology can offer to 
them in terms of access and investment opportunities that 
largely they have been shut out of. What they don't want, 
though, is to be the victims of fraud or dangerous financial 
loss.
    Consumers need transparency, safeguards, and recourse if 
things go wrong. Digital assets can and should be a place for 
bipartisan collaboration. Both parties share an interest in 
fostering innovation, protecting consumers, and maintain the 
strength of our financial system.
    By working together, we can craft legislation that meets 
these goals and cement America's leadership in the new digital 
economy. Thank you and thank you, Chair. I look forward to 
working together and look forward to hearing from our 
witnesses.
    Chairman Lummis. Thank you, Mr. Gallego.
    We will hear now from our witnesses starting with Lewis 
Cohen. We're looking forward to hearing what you have to say 
and sharing your expertise in why there are gaps in existing 
securities laws with respect to digital assets, love to hear 
your views on the Howey test, and how Congress should 
appropriately draw the line between securities, commodities, 
and anything else you care to share with us, Mr. Cohen.
    The floor is yours.

  OPENING STATEMENT OF LEWIS COHEN, PARTNER, CAHILL GORDON & 
                          REINDEL LLP

    Mr. Cohen. Thank you, Chair Lummis, Ranking Member Gallego, 
and distinguished Members of the Subcommittee. My name is Lewis 
Cohen, and I'm a partner at the Wall Street law firm of Cahill 
Gordon & Reindel and the cohead of the firm's CahillNXT 
emerging technologies practice. As a practitioner, I have over 
20 years of experience working in both traditional finance and 
the blockchain sector. This experience has allowed me to 
witness firsthand both the tremendous promise as well as the 
regulatory challenges of this technology.
    Today, I offer testimony in support of a legislative 
framework for activity involving the use of digital assets. 
Over the past several years, innovation in the digital asset 
sector has raced ahead of the legal and policy frameworks 
designed decades ago for traditional finance, resulting in 
divergent regulatory approaches, inconsistent agency 
pronouncements, and a fragmented legal landscape, throttling 
American competitiveness.
    Perhaps most critically, this uncertain regulatory 
environment has left consumers and users of digital assets at 
risk. A clear, practical, and flexible Federal statutory regime 
is urgently needed to address activity involving digital assets 
in both the primary and the secondary markets. The U.S. 
securities laws formed in the wake of the Great Depression rely 
on the bedrock concept that every security has an identifiable 
issuer such as a corporation that can be held accountable for 
ongoing disclosures to investors.
    And for virtually all of the digital assets that are widely 
traded in the U.S. today, almost none create a legal 
relationship with an identifiable business entity that may be 
considered the asset's issuer. Unlike securities which cease to 
exist if the securities issuer has been dissolved, digital 
assets, once created, continue to exist and circulate in 
perpetuity on global decentralized networks.
    However, without an issuer that can be required to register 
and disclose information, current law struggles to address 
secondary trading of these assets. This creates unnecessary 
confusion as to the lines between securities transactions which 
are the appropriate subject of SEC oversight and more 
conventional commodity-like activity.
    Nevertheless, our securities laws were thoughtfully 
designed to address what the Supreme Court has referred to as 
novel, uncommon, or irregular devices. And the Howey test you 
mentioned, Chair, recognized that fundraising schemes in which 
a person invests money to purchase an item, expecting profits 
from the efforts of the promotor, are securities transactions, 
even where the item sold is not itself a security.
    Over the years, these investment contract transactions have 
involved all sorts of items purchased not for use but rather 
for the resale and a hope for gain. These ancillary assets have 
included beavers, chinchillas, earthworms, and even postage 
equipment. I discuss these cases in my 19--excuse me, in 2022 
paper entitled the Ineluctable Modality of Securities Law.
    Many digital assets have similarly been sold as ancillary 
assets to raise capital to develop a blockchain-based project. 
With an understanding of the distinction between fundraising 
activity that results in a securities transaction and a 
nonsecurity ancillary asset sold in that transaction, the basis 
of a sensible regulatory framework is inherent. Where the Howey 
test applies, fundraising transactions involving digital assets 
would continue to need to be registered with the SEC or exempt 
from registration, for example, as a private placement.
    However, a change in law is needed to require sellers of 
ancillary assets, that is the issuers of these securities 
transactions to provide ongoing disclosures. These disclosures 
would be subject to SEC oversight and securities law antifraud 
rules once the related ancillary assets initially sold or come 
widely traded. These required disclosures would cease when the 
entrepreneurial efforts of the fundraising team are no longer 
essential to maintaining the value of the digital asset.
    This framework set out in the Lummis-Gillibrand Responsible 
Financial Innovation Act would recognize the critical role that 
the SEC plays in capital formation and fundraising. It would 
also provide for a new ongoing securities law-based disclosures 
from fundraising parties that would eliminate the potential for 
asymmetries while implementing a clear dividing line to end the 
is it or isn't it debate about when securities themselves--
excuse me, when digital assets themselves are securities.
    Thank you again for the opportunity to share these 
perspectives, and I look forward to your questions.
    Chairman Lummis. Thank you, Mr. Cohen.
    Next, Jonathan Jachym who is Deputy General Counsel and 
Global Head of Policy for Kraken Digital Asset Exchange. We 
look forward to hearing from you on how the lack of legal 
clarity is impacting businesses, digital asset trading 
practices, and how digital asset exchanges should be regulated.
    Mr. Jachym, the floor is yours.

 OPENING STATEMENT OF JONATHAN JACHYM, DEPUTY GENERAL COUNSEL 
  AND GLOBAL HEAD OF POLICY AND GOVERNMENT RELATIONS, KRAKEN 
                     DIGITAL ASSET EXCHANGE

    Mr. Jachym. Chairwoman Lummis, Ranking Member Gallego, and 
distinguished Members of the Subcommittee, thank you for the 
opportunity to testify today.
    My name is Jonathan Jachym, and I serve as Global Head of 
Policy and Government Relations at Kraken. Part of my past 3 
years in this role, I spent over a decade in traditional 
markets based in the U.S. and Europe.
    Kraken was founded in San Francisco over 13 years ago and 
has grown into the world's largest--one of the world's largest 
and most trusted digital asset exchanges. Today, we serve over 
15 million customers around the globe. We custody over 40 
billion in assets on our platform. We executed over 600 billion 
in transactions last year, and we have a team of over 2,000 
professionals across 60 countries.
    Kraken plays a diverse role across three main areas of the 
markets. First, we operate as a centralized exchange for spot 
crypto markets along with other intermediary services.
    Second, we support traditional market investment into 
digital assets. This includes the world's leading benchmark 
provider, CF Benchmarks, and our novel State-chartered bank, 
Kraken Financial, which offers institutional custody under an 
innovative and robust Wyoming legal framework.
    Third, our on-chain business includes our wallet and our 
Layer 2 blockchain, called Ink, which serves as our platform 
for decentralized innovators.
    I would like to commend and thank Senate Banking Chairman 
Scott for establishing this important Subcommittee and 
Subcommittee Chairwoman Lummis for her many years of leadership 
in advancing bipartisan legislation and discussion on digital 
asset policy. The first drafts of comprehensive market 
structure legislation were introduced in the Senate over 3 
years ago. A lot has happened since then. We've seen fraud, 
poor risk management, and business failures.
    We've experienced misguided attempts to regulate our 
markets through enforcement actions rather than sound policy 
development. This has pushed innovation, investment, and market 
activity offshore.
    But through these challenges, we also saw bipartisan work 
in Congress continue. Last June, the House passed the market 
structure bill with strong bipartisan support. Ranking Member 
Gallego, we thank you and your former colleagues from the 118th 
House for advancing that historic effort.
    This collaboration across parties and across chambers has 
built a strong foundation to finalize and deliver market 
structure legislation to the President's desk for signature 
this year. Bipartisan support for good crypto policy is no 
longer a distant goal on the horizon. Congress should act 
decisively this year to establish the essential foundation for 
market regulation.
    Today, nearly 90 percent of activity in the digital assets 
market is executed via centralized intermediaries like Kraken. 
Market structure legislation is the critical foundation to set 
a level playing field in areas of consumer protection, 
security, and market integrity. Many other markets have already 
taken this important first step.
    Innovation in our industry evolves rapidly. Emerging areas 
in our markets will require further study, inputs, deliberation 
before arriving at policy conclusions. But solving every single 
policy issue should not delay building a basic regulatory 
foundation for centralized markets here in the United States.
    This critical first step must happen here in Congress. 
Effective market regulation should include spot market 
authority for the CFTC to register and oversee centralized 
intermediaries and secondary market transactions, effective 
disclosure rules, and clear jurisdictional cooperation between 
the CFTC and the FCC. Jurisdictional lines in statute should 
not be overly complex. They should be clear, effective, and 
durable.
    We commend this Administration for embracing innovation and 
establishing the President's Working Group on Digital Assets. 
And we also commend the new leadership at the SEC and CFTC for 
quickly moving forward to engage in real policymaking. We look 
forward to supporting this important work on our new journey 
ahead.
    The crypto industry is diverse and includes developers, 
decentralized protocols, centralized intermediaries, 
institutional and retail customers, and many others, each 
playing a very important role in expanding this new area of 
innovation. Our industry will continue to work hard to forge 
consensus and support bipartisan passage of a market structure 
bill this year.
    Thank you again for the opportunity to testify. I look 
forward to your questions and our discussion.
    Chairman Lummis. Thank you, Mr. Jachym.
    And now, Jai Massari, Chief Legal Officer of Lightspark, is 
going to share her thoughts with us. I'm so delighted you're 
here. Your knowledgeable about both stablecoins and market 
structure which we're starting with in this Committee.
    And all of us get questions about the use case for these 
assets, people who don't work with them on a regular basis. And 
I know you have expertise in what makes stablecoins valuable to 
the economy, the manner in which stablecoins operate, and all 
of the legislative approaches to stablecoin legislation and 
regulation. So we're very much looking forward to your 
testimony.
    And thank you very much for being here. The floor is yours.

    OPENING STATEMENT OF JAI MASSARI, CHIEF LEGAL OFFICER, 
                           LIGHTSPARK

    Ms. Massari. Thank you, Chair Lummis, for that very kind 
introduction. Thank you, Ranking Member Gallego and Members of 
the Subcommittee. I'm really happy to be here speaking on this 
topic today.
    I'm cofounder and Chief Legal Officer of Lightspark, a 
company that is building modern payments on the Bitcoin 
Lightning Network. Before Lightspark, I was a partner in the 
Financial Institutions Group of Davis Polk where I advised a 
wide range of banks, stablecoin issuers, and crypto firms on 
regulatory matters.
    There should be strong bipartisan support for new laws to 
regulate stablecoins in crypto markets. They will provide 
clarity, protect American consumers in markets, and help bring 
the United States back to the cutting edge of innovation in 
financial services. These new laws must be based on strong 
fundamentals that reflect our best views about the benefits and 
risks of stablecoins in crypto markets as they should exist, 
not only based on the industry as it exists today.
    Today, we can email, text, or call each other instantly and 
for low cost, no matter what brand of phone or computer we're 
using. Payments can and should work the same way. Stablecoins 
can help make this a reality. Among other uses, they enable the 
24/7 transfer of dollar value to anyone online. They are 
uniquely suited for online commerce when they are properly 
regulated.
    My comments today will focus on three fundamental aspects 
of stablecoins with recommendations for legislation. Some of 
these points are already well addressed in bills being 
considered by the Subcommittee and should be kept at the 
forefront as these bills move through Congress.
    The first fundamental is that the true innovation of 
stablecoins is in their potential to be digital cash, always on 
noncredit money. Unlike bank deposits, the money value of a 
stablecoin is supported by full reserves, not FDIC insurance or 
the creditworthiness of the issuer. This means that someone 
using a stablecoin to pay or accepting a stablecoin for payment 
should not care which stablecoins are being used. This is not 
true today, with users in markets correctly distinguishing 
between USDC, USDP, USDT, and so on.
    Stablecoins as digital cash can be achieved through the 
following mechanisms. Stablecoins must be backed one-to-one 
with reserves of high-quality liquid assets, with carefully 
calibrated capital buffers and liquidity requirements. Issuers 
must be available to redeem the stablecoin at face value, for 
example, a dollar.
    And in resolution or bankruptcy of the issuer, reserve 
assets should be segregated and beneficially owned by 
stablecoin holders. These assets should be quickly liquidated 
and paid out to these holders in an orderly manner.
    The second fundamental is that stablecoin issuers should 
compete based on innovative payment use cases, not on reserve 
design. Of course, this requires getting reserve design right. 
Reserve requirements that are too permissible, reduce 
incentives for stablecoin issuers to innovate or compete based 
on the usefulness of their stablecoin.
    At the same time, overly conservative reserve requirements 
make stablecoin issuance attractive only to the largest market 
participants or for those that can subsidize stablecoin 
issuance with other business. In addition to striking the right 
balance on reserves, stablecoin legislation should promote a 
diverse and competitive stablecoin issue or landscape.
    It should allow for issuers of different types, banks, bank 
affiliates, as well as nonbanks with different kinds of 
business models to establish minimum operational and compliance 
requirements for all issuer types. It should address potential 
conflicts of interest or other concerns about affiliates 
through limits on affiliate transactions and should impose 
common enhanced standards for all issuers for access to Federal 
reserve payment systems and master accounts. This approach will 
create a more competitive multi-issuer world and incentivize 
issuers to compete on payment solutions and utility rather than 
on reserve size and returns.
    Third, we should use stablecoin legislation as a way to 
level up our approach to financial compliance and privacy. The 
industry has built new compliance tools, including chain 
analytics and technology to freeze or block stablecoin 
transactions to meet BSA requirements that have long applied to 
stablecoin issuers and those providing money transmission 
services using stablecoins.
    Similarly, the industry is developing new tools to address 
privacy considerations raised by on-chain transactions which 
can reveal sensitive information about consumer and business 
payments and can put user privacy at risk. These tools are a 
critical way to advance new and better technologies for better, 
more efficient, more informative, and less costly financial 
crimes and privacy compliance. While these technologies are 
designed to benefit stablecoin use, they can also be leveraged 
more broadly in crypto and even in traditional financial 
services.
    Stablecoin legislation should set strong and clear 
standards for illicit finance and sanctions requirements. It 
should also provide for time, flexibility, and incentives to 
develop new and better ways to address these requirements.
    Thank you again to the Subcommittee, Chair Lummis, Ranking 
Member Gallego, and the hardworking staff who are dedicated to 
getting stablecoin and crypto markets regulation right. I'll be 
happy to answer questions.
    Chairman Lummis. Thank you, Ms. Massari.
    And our last witness is Tim Massad, a research fellow at 
Harvard Kennedy School, and very helpfully to this discussion, 
a former Chair of the Commodity Futures Trading Commission 
under President Obama. We're very much looking forward to your 
view on potential approaches to stablecoin and market structure 
legislation and your emphasis on consumer protection. And we'd 
love to hear your thoughts about the GENIUS Act, Lummis-
Gillibrand, and FIT21.
    Mr. Massad, the floor is yours.

   OPENING STATEMENT OF TIMOTHY MASSAD, RESEARCH FELLOW AND 
 DIRECTOR OF DIGITAL ASSETS POLICY PROJECT, KENNEDY SCHOOL OF 
                 GOVERNMENT, HARVARD UNIVERSITY

    Mr. Massad. Thank you very much. Subcommittee Chairman 
Lummis, Subcommittee Ranking Member Gallego, Members of the 
Subcommittee and staff, I'm honored to be here today. The views 
I express are my own and do not represent the views of Harvard 
Kennedy School.
    It was in 2014 that the CFTC under my leadership declared 
bitcoin a commodity. And ever since then for over 10 years now, 
I've been writing about the need to strengthen regulation in 
this area and bring clarity. Everyone wants clarity. We can all 
agree on that.
    But you can have clarity with bad rules. We need to create 
a regulatory framework that encourages responsible development 
of this technology as the Ranking Member said and not one that 
just leads to more of the speculative activity and abuses that 
we've seen far too much of today.
    I'm happy to focus on stablecoins, the most useful 
application of the technology to date. And I applaud the 
Subcommittee for prioritizing this.
    The GENIUS Act has many features I support such as full 
reserves for tokens, conservatively invested, and limitations 
on the activities of an issuer. But there are many areas where 
it is deficient. It is substantially weaker in many respects 
than the McHenry-Waters proposal that was negotiated between 
House Republican and Democratic members last fall, and it's 
substantially weaker than what Europe and other jurisdictions 
have put into place.
    First, the basic prudential requirements need to be 
strengthened. This includes how the reserves are held and 
invested and whether regulators have sufficient authority to 
establish rules regarding reserves, capital, liquidity, and 
other risk management standards.
    In addition, the proposal limits State's authority for 
licensing and supervision to situations where there is a 
substantially similar State framework and an issuer below 10 
billion in market cap. That's a good concept. But I would lower 
the threshold and explicitly require States to still follow 
some minimal Federal standards.
    Second, the legislation does not address the bankruptcy of 
a stablecoin issuer. This means that the standard corporate 
bankruptcy process would likely apply which would likely take a 
long time. The fact that the proposal gives holder a priority 
claim is good, but it does not assure them a full recovery, 
even at the end of that process. Ideally, the legislation 
should create a dedicated resolution process that returns money 
to holders quickly and minimizes collateral damage.
    Third, the GENIUS Act does not do enough to address the 
risks of financial crime and evasion of sanctions. It's good 
that it says stablecoin issuers are subject to the Bank Secrecy 
Act or BSA. But the BSA focuses on obligations on centralized 
intermediaries.
    Stablecoins can be transferred and traded without going 
through a centralized intermediary, whether that's on a self-
hosted wallet or on an automated decentralized platform. And 
they can be transferred through centralized platforms in 
jurisdictions that don't comply with BSA type rules. We need to 
extend the regulatory perimeter and be more creative in 
tackling the AML and CFT challenges as I discuss in my 
testimony.
    Fourth, the GENIUS Act does not have strong enough 
enforcement provisions. Three of the five largest dollar 
denominated stablecoin issuers are offshore, including Tether. 
The legislation should have a clear enforcement mechanism, 
strong criminal and civil penalties, and an explicit 
extraterritoriality provision.
    Fifth, the proposal does not address questions of 
competition and concentration of power, including limits on 
affiliate relationships and transactions and how to ensure a 
level playing field among competing platforms, including 
potentially by giving them access to essential bank payment 
infrastructure.
    Finally, I urge the Subcommittee and the Congress to get 
stablecoin legislation in place first and defer for now 
consideration of market structure legislation for several 
years. For 4 years, the crypto industry has called on the SEC 
and CFTC to develop rules and guidance and to stop regulating 
by enforcement. That is now happening.
    The SEC has dropped enforcement cases and launched a crypto 
task force to tackle these issues. We should let these 
regulatory initiatives make progress before rushing to rewrite 
the securities laws. Many of the market structure proposals 
made to date in my mind would create more confusion than 
clarity regarding when a digital asset is a security, a 
commodity, or neither. And they have the potential to undermine 
our securities laws.
    That is particularly true of proposals that focus on 
decentralization. That term and DeFi are used to describe a lot 
of things that aren't decentralized. There are almost always 
some vectors of control. And even if a process is decentralized 
or automated, that does not mean it should be exempt from 
regulation. As I discuss in my testimony, I think there are 
other ways for Congress to advance the goals of clarity and 
market structure without substantially rewriting our securities 
laws at this time.
    Finally, with all due respect to the Subcommittee Chair, I 
join the many voices from across the ideological spectrum 
expressing opposition to a bitcoin strategic reserve for 
reasons that I've discussed in my written testimony.
    Thank you, and I'm happy to take your questions.
    Chairman Lummis. Thank you to our panel. And we'll begin 
with questions. The Chair recognizes herself for 5 minutes.
    Mr. Cohen, I'm going to begin with you. From a legal 
perspective, why are most digital assets not properly 
classified as securities today?
    Mr. Cohen. Thank you, Chair. This is a really important 
question, and it's flummoxed many in the space, lawyers, 
judges, and regulators alike. What characterizes as a security 
is a legal relationship between an issuer and the investor.
    So when you think about, for example, a share of stock, 
there's a legal relationship, not necessarily a contractual 
relationship but a legal relationship that identifies who the 
issuer is. A security is not the piece of paper it's printed on 
the digital asset or any other representation. It is a 
relationship that the law recognizes, whether that is debt or 
equity.
    The vast majority of digital assets that are traded right 
now simply do not evince that relationship with any other 
person. The reason this becomes so important, Chair, from a 
securities law perspective is that there is no one that 
actually can take permanent responsibility for that asset. This 
is why this has been so challenging, whether we think of, for 
example, the Ether token, there is an Ether foundation. But if 
that foundation wound itself up, the token would continue to 
exist. This is unlike any security that's out there.
    Chairman Lummis. So to constitute a security, has the Howey 
test historically required some kind of written or verbal legal 
relationship after the sale of an asset?
    Mr. Cohen. Senator, the Howey test has focused historically 
prior to the advent of digital assets on transactions that 
purported to be commercial in nature. I'm selling you 
something, chinchilla, what have you. And it turns out that the 
actual activity going on, the courts have recognized, is really 
more of an investment.
    I didn't want those chinchillas. What I really wanted was 
to make a return based on your managerial or entrepreneurial 
efforts. Many digital assets are sold in the same way.
    However, in none of those cases, zero exactly, has any 
court stated that that kind of relationship makes some asset 
that is not itself a security. It's sort of an embodiment of a 
securities transaction. So the law has not recognized or placed 
on nonsecurity assets some characteristic of being a security 
simply because they were sold in digital assets.
    And in the paper I mentioned, the Ineluctable Modality of 
Securities Law, we reviewed each and every appellate case on 
Howey from the Howey case onward. And you can see our 
appendices analysis that reaches that conclusion.
    Chairman Lummis. Thank you. Mr. Jachym, where in the United 
States is a relationship to other countries in setting up a 
framework for digital asset exchanges to register? How do we 
stand?
    Mr. Jachym. Thank you for the question, Chairwoman. Behind 
but in a strong position to catch up quickly. We've seen 
progress. Kraken is a global company. We've seen other 
jurisdictions, major jurisdictions, G10 markets move forward 
with legislation, move through the regulatory phase to finalize 
rules. And we've worked with policymakers in those 
jurisdictions to put those in place which is why it is so 
critical after many, many years of hard work in Congress that 
we move forward with this foundational step to pass a market 
structure bill.
    Chairman Lummis. Thank you. And Ms. Massari, why do 
stablecoins make payments faster and cheaper? Here again, the 
use case issue.
    Ms. Massari. Such a good question. It's always the first 
and most important question when talking about crypto. The way 
I think about stablecoins is they are a new fast money, right?
    So they are inherently on-chain. They can be transacted 
online, on-chain transactions 24/7 with anyone that can access 
a crypto wallet. They also can be transacted only on-chain.
    No complicated clearing mechanism needs to happen to make 
sure that transactions are settled behind the scenes as is the 
case for bank deposits and other forms of electronic money that 
we have today. So this is really a new form factor for money 
that can work as digital case. And it can be transacted 
instantly, 24/7, around the world. That's something that 
doesn't exist today.
    Chairman Lummis. And how does the GENIUS Act put in place 
commonsense prudential standards for stablecoins?
    Ms. Massari. I think the GENIUS Act goes a long way to 
providing the kind of foundational elements that will make 
stablecoins good money. So prudential standards for reserves 
are probably the most important point. Another is requirements 
for redemption of stablecoins by the issuers.
    That's what makes stablecoins good money, capital liquidity 
requirements against reserve assets or a third aspect that are 
really important. And then I think the GENIUS Act goes a long 
way in trying to define different types of stablecoin issuers, 
how they must be regulated, how they must be chartered, and how 
they must be registered. And I think those are really 
fundamental aspects of the bill.
    Chairman Lummis. Thank you, Panel. I recognize Mr. Gallego 
for 5 minutes.
    Senator Gallego. Thank you, Madam Chair. One of the main 
reasons I think Congress needs to act on digital asset 
legislation is to ensure the U.S. remains competitive in this 
given space, especially the rapid pace of digital asset 
regulation internationally. Particularly, we avoid regulatory 
arbitrage.
    So Mr. Jachym, and sorry if I said that incorrectly, Kraken 
operates globally in jurisdictions with established digital 
asset regulations. What elements from these international 
frameworks should Congress consider incorporating into 
legislation to ensure U.S. competitiveness and innovation?
    Mr. Jachym. Thank you for the question, Ranking Member. I 
think there's two fundamental components here. One is 
regulation of centralized intermediaries, including exchanges.
    This is the most fundamental basic step. I've been involved 
in market regulation most of my career. There are very common 
components to how you regulate centralized markets.
    There are unique risks and opportunities that digital asset 
markets prevent. But when you talk about registration, 
disclosures, rules around market integrity, rules around 
operational resilience, those are all fundamental components of 
market regulation. We've seen these jurisdictions put that 
basic first step in place.
    The other component has been simplicity. So rather than 
attempt to bluntly apply traditional rulebooks to the digital 
asset markets, jurisdictions have simply called this market and 
this new asset class crypto asset in many markets. And I think 
that's fundamental to this discussion today when we talk about 
the path forward here in the United States. The jurisdictional 
lines, the tests, the oversight needs to be simple in order to 
be durable and to be on par with what the rest of the world has 
moved forward with.
    Senator Gallego. Ms. Massari and Mr. Massad, what other 
lessons can we learn from other countries to shape our approach 
to digital asset legislation?
    Ms. Massari. Thank you for the question. I think it's 
really informative to look at jurisdictions that have gone 
before us. As I mention in my comments, we need to think about 
what the industry should look like, not only what it looks like 
today.
    And I think perhaps some other jurisdictions who have gone 
very, very quickly with digital asset legislation, whether it's 
unstable coins in markets, may have moved too soon and have 
been slightly backward looking in how they regulate. And I 
think as we think about--particularly as I focused on 
stablecoins, we should think about the real opportunities that 
present and what makes them different and unique and important 
for better modern payments and aim legislation in that way to 
be forward looking. And I'm not sure that's happened in other 
jurisdictions.
    Senator Gallego. Mr. Massad.
    Mr. Massad. Thank you. I think there's also a lot we can 
learn, starting with stablecoins. I think some of the 
jurisdictions that have gone ahead of us have put in some very 
good measures.
    Europe, I think, has overall a much stronger prudential and 
customer protection framework than is in the GENIUS Act or the 
STABLE Act. The authorities have greater discretion to specify 
necessary rules on a variety of requirements. There's stress 
testing, diversification requirements. And Europe has said 
stablecoins don't pay interest--can't pay interest which is 
also something we should be thinking about.
    Senator Gallego. Can't or can? I'm sorry.
    Mr. Massad. Cannot.
    Senator Gallego. Cannot? OK.
    Mr. Massad. Cannot, because that turns them into more of an 
investment vehicle. And that raises a lot of issues. So you 
don't want to allow the payment of interest and at the same 
time exempt them from being securities.
    And the market structure area, one thing I would point out 
that's often not noted is under the MiCA framework, yes, they 
created this framework for crypto assets. But they made it very 
clear that crypto asset does not include a financial 
instrument. And their financial instrument definition is very 
similar to our securities definition.
    So they're facing these difficult jurisdictional questions 
as we are too. They're just inherently hard. So I think maybe 
we can learn from where they are on that.
    Senator Gallego. Some bills have also proposed using a 
bankruptcy process to resolve user claims if a stablecoin 
issuer fails. But bankruptcy can take years. And Ms. Massari, 
you actually talked a little bit about this in your opening 
statements.
    What other mechanisms should we consider so that if a 
stablecoin issuer fails users can still get their money back 
quickly while other creditors go through the bankruptcy 
process? So essentially, for that person that is holding a lot 
of this, they don't have the bandwidth nor the reserves to 
basically wait until the bankruptcy process finishes.
    Ms. Massari. This is a really, really important question. 
Thank you for asking it. And I think Mr. Massad also touched on 
it in his remarks.
    This point is not only important out of a matter of 
fairness for stablecoin holders when or if something goes wrong 
with their stablecoin issuer. But instead, it's fundamental 
sort of ex ante to make the money good money because----
    Senator Gallego. And could build confidence.
    Ms. Massari. Exactly, build confidence that if something 
bad happens, they will be able to get their money out just like 
we do for bank resolutions by the FDIC. The priority, right, is 
to make sure the depositors can have access to their deposits 
as quickly as possible. The concept is the same and really 
important.
    I think priority over reserve assets for stablecoin issuers 
is part of it, and it's an important part of it. But exactly as 
you've said, the result of that could still be an extended 
process in bankruptcy. I think a stablecoin bill should provide 
for clear rules under which stablecoin holders own assets from 
the reserve at the time of a bankruptcy or resolution of the 
issuer so that it's not part of the bankruptcy estate and then 
can be paid out very quickly. I think a mechanism like that 
will serve better, both from a confidence in the value of the 
money up front as well as be fair to issuers on the way out.
    Senator Gallego. Thank you. I'm out of time. Thank you, 
Madam Chair.
    Chairman Lummis. Thank you. The Chair recognizes Mr. 
Hagerty for 5 minutes.
    Senator Hagerty. Thank you, Senator Lummis. I appreciate 
your leadership on this Subcommittee and for holding this 
hearing today. And welcome to all of our witnesses here.
    I'm just going to provide a broad set of statements here. 
So everybody can relax for a moment. Let me touch on my view in 
terms of the need for providing a legislative framework for 
digital assets.
    To me, it's overwhelming clear. The lack of clear rules is 
stifled innovation and set businesses offshore to date. It's 
also weakened consumer protections by forcing activities into 
foreign jurisdictions that don't have the kind of standards 
that Americans would expect.
    Solution, and this is sure to be a bipartisan solution, is 
to provide what innovators, consumer production advocates, and 
our financial markets crave and that's legislative clarity. My 
colleagues and I have already taken concrete steps toward 
developing constructive policies that advance this mission. I'm 
proud to sponsor the GENIUS Act alongside Senator Lummis, 
Chairman Scott, Senator Gillibrand, and Senator Alsobrooks, all 
of this to establish a commonsense framework for stablecoin 
issuance in the United States.
    The United States can and should be a leader in payment 
stablecoins. They improve transaction efficiency, expand 
financial inclusion, and strengthen the dollar status as a 
world reserve currency, all while driving demand for U.S. 
treasuries. I'm optimistic that we'll advance this legislation 
and demonstrate that a commonsense framework for digital assets 
is a bipartisan priority.
    This progress will build momentum in other crucial areas 
such as market structure for digital assets. The status quo of 
having no regulation does nothing to stymie bad actors and is 
pushing innovation beyond our shores. We need regulatory 
clarity for digital assets to both protect consumers and to be 
a leader in the industry.
    Thank you, Madam Chair.
    Chairman Lummis. The Chair recognizes Ms. Smith.
    Senator Smith. Well, thank you, Madam Chair and Ranking 
Member Gallego. And thanks to all our panelists for being here 
today. I appreciate this very much and having an opportunity to 
learn about--hear your thoughts about what we need to do to 
provide a robust and reasonable regulatory framework, 
especially for stablecoin. And I want to focus my questions on 
kind of better understanding how consumer protections should 
work for stablecoin and how they might work under the GENIUS 
Act in particular.
    So Mr. Massad, let me ask you. So under current law, 
financial institutions are subject to the Bank Secrecy Act. So 
that means the financial institutions are required to actively 
work to detect and prevent money laundering and terrorism 
financing and other illicit uses of our financial system. So I 
want to understand how this would work under the GENIUS Act.
    So as I understand it, the GENIUS Act would extend these 
obligations under the Bank Secrecy Act to issuers of payment 
stablecoins. Is that how you understand it?
    Mr. Massad. That is correct, yes.
    Senator Smith. OK. And so then under this legislation, what 
would happen once a payment stablecoin is issued on the public 
blockchain? What happens to those Bank Secrecy Act obligations 
once the stablecoin is issued?
    Mr. Massad. Thank you for the question, Senator. The 
challenge is that those stablecoins can then be transferred 
without going through a centralized intermediary. Our entire 
BSA/AML/CFT framework relies on centralized intermediaries.
    All transactions run through those centralized 
intermediaries in some way. And so we've imposed obligations on 
those intermediaries, banks and others, to do the compliance 
checks that we want. Stablecoins are very different in that 
once they've been issued, they can be transferred, exchanged 
for other crypto assets without going through a centralized 
intermediary.
    So we have to sort of creatively rethink how we achieve 
these goals. And I think that includes extending the regulatory 
perimeter, if you will, but also looking at a lot of other 
creative measures requiring stablecoin issuers to aggressively 
monitor transactions, fees, stablecoins, looking at ways to 
design the smart code of a contract so that a transaction 
doesn't go through unless someone has effectively been cleared 
by an appropriate authority. And there are other measures as 
well that I talk about in my testimony.
    Senator Smith. And so as the bill is written right now, 
network participants comes along after to facilitate 
transactions. They wouldn't be required as the bill is written 
right now in your understanding to meet the obligations of the 
Bank Secrecy Act?
    Mr. Massad. Unless they're a money service business 
registered with Treasury, it would not be.
    Senator Smith. OK, OK. So let me ask you another question. 
When bank regulators review applications for charters or for 
deposit insurance, they consider a bunch of factors, including 
the character and the fitness of management. And that seems 
reasonable to me.
    You want to make sure that if you're opening up a bank or 
you're safeguarding somebody's money that management is up to 
the task. And the boards follow basic risk management and so 
forth. So my question--my next question is this.
    Stablecoin issues, they serve a--perform a similar 
function, I would argue. Consumers give them their money. And 
in exchange, they get a stablecoin and a promise that they can 
always come back and redeem that stablecoin for a fixed price. 
Would the GENIUS Act or should the GENIUS Act or should our 
regulatory framework require stablecoin issues to be vetted for 
character and fitness as we do for other financial 
institutions?
    Mr. Massad. Excellent question, Senator. My reading of the 
GENIUS Act is it does not require that. I think it should 
require that. It should include that as a part of the 
application review process that was contained in the McHenry-
Waters proposal that was negotiated in the House.
    Senator Smith. Right.
    Mr. Massad. Similar standards are in the European 
legislation and in other countries' legislation.
    Senator Smith. The concern would be--I mean, literally, 
somebody like Sam Bankman Fried could issue a payment of 
stablecoin and regulators wouldn't have any legal grounds to 
deny his application based on his history just as a sort of 
maybe an extreme example. But let me just----
    Mr. Massad. Cor----
    Senator Smith. ----get at one more thing in the short time 
I have left. There's this risk of--there's a need to protect 
from theft and fraud. If somebody falls victim to a hack or a 
scam, their assets could be gone for good, and there's no 
reversing that transaction.
    And we've seen this, of course, happen with digital assets. 
So if a consumer's bank account is hacked or their debit card, 
for example, is stolen, people are protected, right? Their 
liability is limited.
    Mr. Massad. Correct.
    Senator Smith. And what laws----
    Mr. Massad. That's the Electronic Funds Transfer Act which 
does----
    Senator Smith. Right.
    Mr. Massad. ----apply in those cases. It's very murky with 
respect to stable coins. It's not clear whether stablecoins 
would be treated as funds, whether the accounts would be 
covered. The CFPB put out a proposal----
    Senator Smith. Right.
    Mr. Massad. ----a couple of weeks ago. But obviously, 
that's not moving anywhere given the effective----
    Senator Smith. Mothballing.
    Mr. Massad. ----closing of the CFPB. But those are very 
challenging issues, particularly again because these are bare 
instruments that can travel on a decentralized blockchain. 
Certainly, though, with respect to entities that are providing 
accounts or entities that are interacting intermediaries, we 
should have similar protections as we have under the EFTA with 
banks.
    Senator Smith. It seems to me that there is no specific--
there's no mention----
    Mr. Massad. Correct.
    Senator Smith. ----anywhere of the Electronic Funds 
Transfer Act or CFPB. It seems to me that that would strengthen 
this bill----
    Mr. Massad. I agree with you, Senator.
    Senator Smith. ----if it was clarifying that. I thank you 
for your lenience, Madam Chair. I appreciate this hearing very 
much. And I want to say that I think establishing a robust 
framework for stablecoins is extremely important. And I look 
forward to the ongoing work that we can do to make sure that 
these consumer protections are addressed in the bill.
    Chairman Lummis. Thank you very much. The Chair recognizes 
Mr. Tillis for 5 minutes.
    Senator Tillis. Thank you, Madam Chair. Welcome, all of 
you. I've had the belief that we do need a regulatory regimen, 
but it has to be Goldilocks just right for us to really 
reemerge.
    I think, Mr. Jachym, you said that we're behind but poised 
to catch up and maybe surpass. I think that we have to figure 
out the way the markets and activities are properly regulated. 
But we also have to make sure that we don't have flight to 
foreign jurisdictions if we get this wrong.
    So I guess one question I'll have for you, Mr. Jachym, is, 
what country is the best practice? Fill in this blank if you 
agree with it. If we would only implement a regulatory regimen 
like, blank, we would be the head of the pack. Is there an 
answer to that question, anybody here on the panel? I'll start 
with you.
    Mr. Jachym. Thank you for the question, Senator. Look, I 
think the U.S. needs to design rules and policy that are fit 
for the U.S. markets. I think we can look to other 
jurisdictions for examples.
    Senator Tillis. In doing so, how do we develop competitive 
advantage jurisdictionally speaking with what you consider to 
be a best practice today? What country is that and why are they 
a best practice today?
    Mr. Jachym. I think if you look to the European Union, for 
example, and the United Kingdon and again other G20 markets, 
they've kept it simple. And they've said, look, these are a 
diverse group of asset class. We've listed over 300 assets on 
our platform.
    There's bitcoin, there's stablecoins, and many others. And 
they have very diverse characteristics. But if you start 
drawing complex lines and complex text and bifurcate markets, 
that becomes problematic. So I think we can look to simplicity 
as an example.
    Senator Tillis. Ms. Massari, do you have anything to say to 
that?
    Ms. Massari. I think this is a great question. I think 
maybe I'll focus a little bit on the stablecoin front.
    Senator Tillis. Yeah.
    Ms. Massari. I think proposals in the EU might make some 
mistakes. Proposals in the U.K. might make some mistakes, 
either in getting the reserve requirements too restrictive. 
Very few are too permissive. My concern with overly restrictive 
reserve requirements is it really makes it difficult for new 
entrants to come into the market. And instead----
    Senator Tillis. Have you looked at any of the proof of 
reserves proposals up here in Congress?
    Ms. Massari. I haven't actually on the proof of reserves 
point. But I think if we get to your point, the Goldilocks 
positioning just right, we can have better competitive markets 
for stablecoin issuance which I think is what's really needed. 
I don't think we have that today with our duopoly.
    Senator Tillis. Mr. Cohen, where do you think the biggest 
gaps are for the--if you were instructing us on prioritizing 
tranches of regulations, what must come in the first tranche?
    Mr. Cohen. Thank you, Senator. One point you asked about 
regarding other jurisdictions and the U.S. and what we can take 
away, it's important to bear in mind the U.S. is a bifurcated 
market regulatory structure with the CFTC and the SEC. So right 
off the bat, one of the first things that needs to be done is 
have a clear policy around how market participants can 
determine, am I engaged in a securities transaction, am I not?
    That's caused immense consternation for everyone in this 
space, be they centralized exchanges, people who act as broker-
dealers, issuers, and others. So as a priority matter, the 
Lummis-Gillibrand Responsible Financial Innovation Act would 
provide such a clear and bright line test. Is the asset one 
that's been issued by someone who's a legal issuer?
    Where that's not the case, the transaction which those 
assets are sold may attract a securities treatment. But 
secondary trading between Bob and Alice are not securities 
transactions. Once we put a line in the sand, the market can 
respond by creating appropriate frameworks for each of these 
two categories, those that appropriately require disclosures of 
issuers and those that are more commodities--like and are 
treated in a similar way to Bitcoin and Ether.
    Senator Tillis. Mr. Massad, I'm really worried. I got a 
briefing from DEA, a classified briefing a couple years ago. 
And just look at the--any of the things that transnational 
criminal organizations are carrying along suitcases of money 
now.
    I haven't paid attention to how illicit money laundering is 
occurring today. And it's mainly on these various platforms, 
particularly crypto platforms. How do we--you're absolutely 
right.
    Architecturally, we're not--AML/BSA architecturally dealing 
with a centralized sort of process. Is there any jurisdiction 
out there that's found the secret sauce on how to, on the one 
hand, make the participants of payments and settlements 
responsible and the other hand really be able to identify any 
of the kinds of patterns that we use for SARs and AML 
activities?
    Mr. Massad. It's an excellent question, Senator. I don't 
think any jurisdiction has found the secret sauce yet.
    I think everybody is focused on this. I think it's going to 
be a combination of things. One is extending the kind of 
current framework to jurisdictions, to intermediaries who 
aren't complying. That's a big part of the problem.
    A second, though, is looking at this technology and trying 
to think about ways that we can sort of reach the same goals. 
And these ideas of essentially being able to program smart 
contracts so that transactions can't go through unless someone 
has been properly vetted is one that at least I hear a lot of 
conversation about.
    You can also put more obligations on the stablecoin issuers 
than I think the current proposals do. We've seen Japan do 
that. We've seen other countries do that where they require 
more aggressive monitoring and freezing of stablecoins.
    Senator Tillis. It's easy for some class of stablecoin 
issuers. If you happen to be a bank, it's not so easy with some 
of the other ones. So we look forward to the continued 
discussion. Thank you.
    Mr. Massad. Thank you.
    Chairman Lummis. We're pleased to welcome Senator Warner. 
Do you need a minute?
    Senator Warner. I'm always willing to pontificate. But 
could you give me a minute more?
    Chairman Lummis. Absolutely. I'll ask one question. Would 
you like another question, Mr. Gallego?
    Senator Gallego. Yeah, whatever you want to do.
    Chairman Lummis. OK, great. Mr. Cohen, the SEC has tried to 
advance a legal argument that digital assets embody an 
underlying investment contract. So is this supported in case 
law? And what would be the effect of using that legal argument 
as a statutory requirement or definition?
    Mr. Cohen. Senator, that is a very important question. The 
reality is that the SEC has developed a novel theory when they 
failed at other approaches in this regard. Initially, the SEC 
characterized all digital assets as crypto asset securities and 
they very plainly said this in their complaints and court 
filings.
    After that approach was rejected by courts, the SEC under 
the prior administration attempted to adopt a new theory, that 
a digital asset may not itself be a security but that it 
embodies in some way some sort of scheme. The problem with that 
theory, Senator, is that how do you know? Just because one says 
so?
    There's nothing about a digital asset that suggests that a 
third party examining that asset could make any determination, 
does it or does it not embody something? I can say this bottle 
of water here embodies my plan to do something. But you can't 
examine the bottom of water and reach that conclusion.
    Several courts have very clearly rejected that theory by 
the SEC. Obviously, we're now in a period where some of this 
litigation has ceased. And I think we can all be thankful for 
that. But I do believe, Senator, that if the legislation 
continued, that theory would've been rejected by Federal 
courts.
    Chairman Lummis. Thank you, Mr. Cohen. Mr. Gallego.
    Senator Gallego. Thank you. The bills under consideration 
do have a variety of penalties for violating the provisions. 
Some will be civil penalties while others have additional 
criminal penalties. Mr. Cohen and Mr. Massad, given that 
bankers face criminal penalties for failing to comply certain 
banking laws, shouldn't we also apply somewhat of the same 
standard when it comes to digital assets?
    Mr. Cohen. I guess I'll go first, Senator. Thank you. Yes, 
I would agree. Those criminal or civil penalties should be in 
line with equal activity when done in other markets. So for 
example, issuers can face both civil and criminal penalties if 
they sell securities on the basis of misleading statements. If 
they're deliberate and intentional fraudulent activity, they 
can face criminal as well as civil penalties. That should not 
be differentiated when the securities transaction involves 
digital assets. However, we shouldn't create new penalties that 
are specific simply to the technological means by which those 
securities transactions occur.
    Senator Gallego. Mr. Massad.
    Mr. Massad. Excuse me. I would agree with that. We do need 
to incorporate criminal and civil penalties and have a very 
clear enforcement mechanism. The GENIUS Act to my mind doesn't 
have that. The STABLE Act doesn't have that. And I think that's 
not just important for the substance. I think it sends a strong 
signal too. It sends a signal that we won't tolerate violations 
of the law.
    Chairman Lummis. Mr. Warner, you are recognized for 5 
minutes.
    Senator Warner. Thank you, Madam Chairman. And I appreciate 
you and Senator Gallego. I'm still in the catchup with these 
guys in terms of learning this stuff.
    About 4 or 5 years ago, I had some of it in my head, but I 
think it's long gone. I come to this with the notion from my 
role on the Intel Committee. So I think we've got to make sure 
we get national security right.
    I agree with my colleagues. We've got to get consumer 
protection right. And I think at the end of the day, we've got 
to make sure we've maintained the resiliency of the Treasury 
market which frankly is the backbone. And there are huge 
opportunities here. But I think there are challenges.
    One of the things as we think about AML and Senator Tillis' 
comment, AML and BSA, I do know a number of the stablecoin 
operators, issuers who are actually doing KYC. I think, Mr. 
Massad, you've mentioned that. But I'm still trying to 
understand that there are--even if they do KYC from their time 
as an issuer, do they convert back to a fiat currency?
    In that transition, there's some potential challenges. I 
think you and your comments have addressed that. Could you all 
address that? I'll start with you, kind of like the enhanced 
monitoring of the blockchain during that transition.
    Mr. Massad. Sure. It's a bare instrument, Senator. So a 
stablecoin issuer issues the stablecoin, although in some 
cases, it licenses a third party to do that. It can do KYC. But 
once that stable coin has been issued, it can be transferred--
--
    Senator Warner. Many, many times so that there's no 
requirement to follow that customer.
    Mr. Massad. That's correct.
    Senator Warner. Because again, as you said, it was bare 
demand.
    Mr. Massad. Yeah, and I can transfer it from a self-hosted 
wallet to another self-hosted wallet. And that can happen 
several times. And that's why we've seen these things be used 
to evade sanctions and for money laundering by Russian 
smugglers, by Hamas, and by others.
    Senator Warner. Were others--because listen, I want to get 
to a regulatory framework that works. But I have seen echoing 
what others have said from the classified side. Oh, my gosh, a 
whole bunch of bad stuff. So help me figure out--and I 
recognize some people, the anonymity and the intermediation 
role that blockchain plays. But how do we put some minimum 
protections from issuer all the way back to conversion to fiat?
    Ms. Massari. I'm happy to jump in, Senator, for a moment. I 
agree with you. I think the risks to stablecoin markets, 
issuers, and to be honest, the use of stablecoins at all as a 
true means of payment is dependent on our ability to get it 
right when it comes to combating illicit finance and enforcing 
sanctions. I think everyone must agree with that.
    I think as Chair Massad was saying, when a stablecoin 
issuer sells stablecoins into the market, they are KYC'ing 
everybody that they're directly transacting with. That's one 
place KYC happens. You're exactly right that when transactions 
happen between self-custody wallets, there isn't KYC 
obligations on those.
    And so those can happen without KYC. But there is an 
immutable on-chain record of those transactions that can be 
monitored not only by the issuer but third parties, including 
law enforcement. And I think that happens quite a bit today. 
And then----
    Senator Warner. But isn't there that process, the mixtures 
where you can--following it through that path, you may still 
have the blockchain to follow the entity. But you may not know 
who really that entity is without a KYC next to it, right?
    Ms. Massari. Absolutely right. I think people can use a 
variety of different technologies on purposes to obfuscate 
their financial transactions. I think that's true on 
blockchain. That's true in traditional financial payment 
services as well.
    I think it's a really important issue, and I agree that we 
need to continue as the industry has done to continue to 
develop new tools to address these issues. I think one other 
piece is when KYC happens is when a user transfers a stablecoin 
to a custodial wallet. So an exchange, another wallet service, 
that's another point of KYC, right?
    So the gap, I think, is largest when you're talking about 
unhosted wallet transfers. And in some sense, it's, like, 
slightly better than digital--or slightly better than paper 
cash in this sense, right, because there is the on-chain 
history.
    Senator Warner. Right, right.
    Ms. Massari. Is it sufficient? Should we be satisfied?
    Senator Warner. But I think Senator Tillis said people are 
not walking around with bags of cash.
    Ms. Massari. It's heavy. Yeah, it's heavy to carry cash, 
right? It's not heavy to carry stablecoins. And I think that is 
a difference that matters, and we have to always seek to do----
    Senator Warner. Madam Chair, could I go ahead and get the 
other two to make a comment? Gentlemen.
    Mr. Jachym. Senator, I think it's important to distinguish 
in the stablecoin context between primary issuance and 
transacting on secondary markets. So Kraken's role in the 
market is as a centralized intermediary. And we have a platform 
where we know who's coming in, who's coming out.
    We track not only KYC. So we know everyone coming into our 
platform, anything that leaves our platform, if there's any 
risk of it hitting a sanctions address, it's blocked. There's 
enhanced monitoring tools.
    So I think again back to the role centralized 
intermediaries play, this is why we believe it's so essential 
for the United States to move forward with market structure 
legislation that would put that basic market regulation, create 
a level playing field for all centralized intermediaries. 
Ninety percent of transactions today, almost up to 90 percent, 
are conducted through centralized intermediaries. And my 
colleague, Mr. Massad, is absolutely correct.
    There is an ecosystem out there that is outside of 
centralized intermediaries. But the surveillance, the 
traceability that is available because of blockchain technology 
is unparalleled. And we've seen this with hacks, right. The 
ability to quickly find, track, trace financial crime is 
unparalleled to any technology we've seen in history.
    Senator Warner. All right. Mr. Cohen, can you----
    Mr. Cohen. I'll just quickly comment to say again, I agree 
with my colleagues here. You're right. These are difficult 
questions.
    But there are tradeoffs involved in any new technology. I 
think we briefly alluded to the ability with crypto assets to 
freeze and seize. That's different from tracking. But it can 
mean that if a stablecoin issuer identifies that a particular 
amount of stablecoin is at an address controlled by an illicit 
actor, they can functionally turn that off at that time.
    That's not a feature that we have today with paper money 
that once achieved or other assets. It's important to remember 
illicit finance occurs through many ways through valuable, 
moveable assets. And stablecoin in many ways are a step change 
better than a lot of other assets.
    Senator Warner. Right. But if we're saying this is better 
than bags of cash, I would agree. I grant you that. Whether 
this is something that we ought to fully embrace and I want to 
get the S.
    So I want to be clear. I want to get the S. But in our 
whole financial system and trying to measure the risks, I think 
back about the Colonial Pipeline hack where we were able to 
recover about a third.
    And I need to get from the classified side why we couldn't 
get the other two-thirds. But I need further--and I get the 
intermediary role, going in, going out. But you obviously lived 
through a lot.
    I can still remember when the Meta boys came up with their 
initial plan a number of years back. But you got to help those 
of us who want to get there and how we can not get rid of the 
innovation and bring this back to America. Clearly having it 
onshore is better than offshore. Entities like Tether, it'd be 
great to bring them back. But you got to help us fill this out, 
and I'll keep listening, Madam Chair. Thank you.
    Chairman Lummis. Thank you. Before I recognize Mr. Moreno--
oh, we have another Committee Member here. So I will recognize 
Mr. Moreno for 5 minutes.
    Senator Moreno. Thank you, Madam Chairman, for putting this 
Committee together. And I'll take off right where Senator 
Warner ended. So let me see if I can help you get the yes. And 
maybe the four of you can chime in for me.
    So let's always start with the things that we agree on. So 
you don't have to chime in necessarily unless you disagree. 
There should be certainty, correct? No disagreements? OK. Look 
at that. See, progress. We should make certain that the----
    Senator Warner. How are you defining certainty?
    Senator Moreno. Well, certainty means, like, you know what 
the rules are? Like, you know what the rules of the road are. 
Does that make sense? There's also transparent. In other words, 
you don't find out through an enforcement action.
    You don't find out--like, for example, I guess I would use 
a car analogy. You're driving down 95. You don't know what the 
speed limit is until a cop pulls you over and tells you. That's 
stupid. We can agree on that, right? There's signs. Tell you 
what the speed limit is.
    So we agree on that. We agree it should be fair, right? We 
shouldn't have unfair agreements. And then most importantly, 
and this is where I think we're having problems here.
    And I honestly understand it a little bit and don't 
understand it because coming from the private sector, this 
place is decently perplexing to me because I look at this and 
go, OK, well, Government has this total complete desire to 
control things. And if feels like if someone is not perfect, 
the Government's role is to make something perfect. There could 
never be a problem because if there's ever a problem, the 
Government is going to stop it.
    So let's go back to some other technology. So none of you 
are this old. So I'm going to ask you, like, if you were the 
regulator with this kind of mindset in 1900, would cars be 
allowed?
    I mean, cars have caused hundreds if not millions of 
deaths. So you say, my God, how do we have millions of deaths 
over the last hundred years? We should've never allowed the car 
to exist. That obviously today would seem like an idiotic 
comment.
    Now Ohio, probably not Pennsylvania because we always know 
Ohio is better, has invented the airplane. But airplanes crash. 
Lots and lots of people have died in airplanes and, by the way, 
have empowered foreign countries to be able to fly over our 
airspace and the airspace of our allies and cause all kinds of 
damage. But we wouldn't ban airplane because that, again, would 
be idiotic.
    Personal computers, a pretty good invention. I remember 
sitting in my dorm room in college in 1985. I'll confess to 
that. And my roommate saying, what the hell is that thing? I 
said, it lets me send a message to somebody anywhere on earth. 
He goes, what a dumb idea. He's currently a roofer.
    All right. So then you look at the internet. The internet 
we can look at and say is amazing opportunities that it's 
unlocked but now a lot of problems. I mean, human trafficking 
and sex trafficking and child trafficking existed for as long 
as civilization has existed. The internet didn't create that, 
but we don't ban the internet.
    If you look at social media, my God, social medial is a 
total and complete disaster in a lot of ways. But to a lot of 
people, it's connected people that otherwise wouldn't be 
connected. And so here we are with smartphones. They've caused 
a lot of havoc too.
    The point I'm trying to make is why all of a sudden when we 
got to digital currencies did we decide here in Washington, 
D.C., no, no, no, we are going to decide the pace of 
innovation, the way technology should work? So this isn't so 
much of a question as I would like each of you to quickly 
comment. Make the case to why we shouldn't create the lightest 
touch possible petri dish for innovation to grow and thrive 
because there's no way any of us know today what's going to 
roll out in the next 4 or 5 years.
    So should it be the mandate that says, hey, look, 
Committee, a bunch of smart people up here. I know you have 
this impulse for control. But light tough is going to create 
innovation, and things will go wrong and being able to know 
that happens. I'll start with you, Mr. Cohen. What are your 
thoughts? Am I crazy? Should we ban the automobile?
    Mr. Cohen. Not at all. I think we need to recognize, 
though, what is the automobile doing? So for example, in 1900, 
the potted roads may have required automobiles to go at 20 
miles an hour. Now that we have smooth highways, you don't have 
automobiles still going at 20 miles an hour.
    You change the rules to adapt to the situation. And I think 
with digital assets, we do the same thing. We don't need to ban 
them, but we need to be thoughtful about how we apply the rules 
to them.
    When people engage in fundraising activity with digital 
assets, when people entrust their capital to others, it is 
appropriate to think of those as investment activities. When 
two people exchange digital assets for whatever reason, I'd 
like to use some bitcoin today to send money via Lightspark, 
that's not a securities transaction. There are many things that 
are not. So we should have--I wouldn't say a light touch or a 
heavy touch but a right touch set of litigation based on the 
actual use cases involved.
    Senator Moreno. Jonathan.
    Mr. Jachym. Senator, I think it's important to understand 
what we know today and where innovation is still developing. So 
I think what we know today is we have centralized actors, 
centralized intermediaries that process most of the 
transactions of these markets, regulators, lawmakers that know 
how to apply rules to centralized intermediaries, market 
integrity rules, operational resilience rules, customer 
protection rules, disclosures. Let's get that first step done.
    I think there's other areas of this market and it is a very 
diverse ecosystem. When you look at decentralized protocols, 
you cannot take centralized rulebooks and bluntly apply them to 
these centralized protocols. And decentralization is a broad 
term, absolutely.
    But we've seen other jurisdictions grapple with this topic, 
take pause, study, evaluate, and learn. And I think let's do 
what we know what we can do first which is put market structure 
rules in place. Continue to look at the decentralized 
ecosystem. It's not to say protection should not be in place. 
But we can't take old rulebooks and apply it to new innovation.
    Senator Moreno. So don't let perfect get in the way of good 
and progress?
    Mr. Jachym. Precisely.
    Senator Moreno. Ms. Massari.
    Ms. Massari. I agree with you. I think we are dealing in 
financial services here obviously. And so I think there are 
some baselines that we must meet, right? Users need to trust 
the products they're working with.
    They need to have disclosure about them. They need to know 
that their regulatory frameworks for stablecoins, for instance, 
that make stablecoin good money and create competition. I think 
that's an appropriate role for regulation.
    I think to your point which I think you've stated really 
nicely, we have a tendency in financial services to try to take 
the new thing and cram it into the old because we understand 
the old. And the risk there is that we kill any innovation, 
right? And I think that could do more harm than good because 
it's happening anyway. It's happening outside of the United 
States if it doesn't happen here.
    Senator Moreno. Perfect. Chairman, I'll venture back to 
you. Oh, sorry. Ohio State, we always worry about Harvard guys. 
But the----
    Mr. Massad. Can I speak?
    Senator Moreno. Go ahead.
    Mr. Massad. Thank you.
    Senator Moreno. It's up to the chair. We're way over time, 
but it's up to you.
    Chairman Lummis. You certainly may.
    Mr. Massad. Thank you very much. Senator, the devil is 
always in the details. But when I think of light touch, I think 
that's what weak countries do that are trying to pull business 
away from the strong countries.
    That's what I saw happen with swaps. We created basically a 
very good framework. Smaller jurisdictions tried to undercut us 
by having weaker rules. And we basically had to work very hard 
to harmonize rules which we did. And now the swap market, I 
think, works pretty well.
    In the case of stablecoins, look, right now, Europe and 
Japan are ahead of us. They've implemented some very good 
frameworks. Most of the things I'm suggesting today are in 
those frameworks. There may be a few things as Ms. Massari 
pointed out that we don't want to emulate in what they've done. 
But I think we can do a lot better than the bills currently 
before that have been introduced, the GENIUS Act and the STABLE 
Act.
    Chairman Lummis. Thank you. The Chair recognizes Mr. 
McCormick for 5 minutes.
    Senator McCormick. Thank you, Madam Chairwoman. Thank you 
all for being here. Innovation is the driver of economic 
growth, and we've all lived through waves of innovation in the 
United States with everything from the internet to 5G to 
artificial intelligence.
    Digital assets and blockchain are the next big wave. It 
creates enormous opportunity for all of us and particularly in 
Pennsylvania. And it's our job as policymakers to create an 
environment where that innovation can thrive while at the same 
time protecting consumers along the way. And I saw this 
firsthand as the CEO of a software company in the late '90s in 
Pittsburgh where there was--it was sort of a go-go world. And 
we didn't have that certainty.
    So it's critical that Congress must pass meaningful 
legislation, and I appreciate the Chairwoman and Chairman 
Scott's commitment to this task. I want to talk about 
international competitiveness because in the absence of U.S. 
leadership, other major jurisdictions are rushing ahead as 
you've said in your testimony. We risk having our entrepreneurs 
moving overseas because of those existing frameworks.
    So Mr. Jachym, I'd like to start with you. Could you 
discuss how innovators in the United States in specific terms 
are disadvantaged due to the development of regulatory regimes 
in other jurisdictions?
    Mr. Jachym. Thank you for the question, Senator. The lack 
of regulatory certainty in the U.S. is absolutely impeded 
investment and growth. And that's businesses like ours who 
operate as centralized intermediaries. That's businesses like 
developers, project teams, protocols that have operated without 
clear guidelines as to the legal status of what they're 
building.
    You cannot run a business like that. I think what we've 
seen primarily in Europe but in other major G10, G20 markets is 
efforts to put step one in place, basic foundations that 
provide regulatory clarity for secondary market transactions in 
centralized markets. There is no question that there are many 
other issues to explore and we'll have to continue to explore.
    To my colleague, Mr. Massad's point, let's also learn 
lessons from our legislative past here with the swaps reforms. 
The toughest part about that was not domestic implementation. 
It was rationalizing the cross border market access framework. 
And we run a global business. If we want to get this right, the 
U.S. needs to move forward with this market structure bill, get 
a seat at the table, and work with their counterparts to 
develop a clear international framework.
    Senator McCormick. Thank you. Mr. Cohen, we talked about 
the threat of litigation and how that curtails investment. 
Could you say a little bit about that? How do innovators think 
about that threat of litigation and what are the implications?
    Mr. Cohen. Thank you, Senator. As someone in private 
practice, that is one of the very first questions that our firm 
gets. If we endeavor to take this innovative technology 
forward, what is our litigation risk?
    And it's a constant threat and concern. It was both on the 
civil litigation side and also from regulators, particularly 
those who took overly aggressive stances. It made it very 
difficult for entrepreneurs here in the United States to start 
businesses when they had the threat of overhang of litigation.
    And I think Senator Moreno made the point. You're driving 
on a highway and nobody tells you what the speed limit is until 
after they pull you over. And that was the feeling that many of 
our clients had around the risk of litigation. They simply did 
not know when they were crossing a line. And as a lawyer in 
private practice, it's very frustrating for us not to be able 
to give that advice to our clients.
    Senator McCormick. Very good. Thank you. Ms. Massari, just 
one quick last question. One of the benefits of stablecoins is 
U.S. dollar dominance because stablecoins are largely 
denominated in the U.S. dollar. Can you talk about that in a 
little more specificity on how the evolution of stablecoins can 
be a real force for good in terms of dollar strength?
    Ms. Massari. Thank you for the question, Senator. I think 
actually today--and we see this in how stablecoin issuers often 
talk about their products. I think they think of stablecoins as 
a way for those outside the United States who don't have U.S. 
bank accounts and so on and so forth to have access to the U.S. 
dollar in new ways.
    And I think that's really one aspect of dollarization. I 
don't think it fundamentally changes how much demand outside 
the United States that are going to be for dollars. But 
certainly, stablecoins are an easy way for a lot of consumers 
outside the United States, whether it's businesses or 
individuals who want to make payments to hold and use dollar 
value. Senator McCormick. Very good. Thank you, Madam Chairman. 
I yield the remaining time.
    Chairman Lummis. Thank you. The Chair recognizes Mr. Van 
Hollen for 5 minutes.
    Senator Van Hollen. Thank you, Madam Chair. Thank you and 
the Ranking Member. And good to be on the Subcommittee. I thank 
you all of you for your testimony. Sorry I'm running late. I 
was just on the Senate floor. There's a lot going on today as 
you and my colleagues know.
    And coming to this with an open mind, we're all, over many 
years, been trying to really understand these currencies and 
stablecoins in particular. And I know the GENIUS Act has been 
proposed as one way forward on stablecoins.
    Mr. Massad, just a couple questions. And you may have tread 
this territory a little bit. But if you could take a little 
deeper dive, both in terms of the vetting of stablecoin issuers 
under this proposal, whether it has the checks and safeguards 
that you think are necessary to protect consumers.
    And the other issue would be if, for some reason, one of 
these issuers were to go belly up and you had to resolve 
claims, my understanding is it's a bankruptcy type procedure as 
opposed to some of the procedures we currently have for people 
who need to claim lost monies from a banking loss or something. 
Could you zero in on those and any other concerns you have as 
we approach this?
    Mr. Massad. Certainly, Senator. Thank you for the question. 
On the vetting, I think the GENIUS Act has some of the 
provisions you'd want in there for vetting. But it's not 
comprehensive enough.
    Senator Smith asked the question about the fitness of 
management. That's not in there. I think we just need a broader 
framework of criteria. The McHenry-Waters proposal, I think, 
has that in terms of vetting.
    But the other aspect of vetting is who does it. Is it done 
at the Federal level or is it done at the State level? And 
that's where we are trying to strike a balance. I think the 
approach in the GENIUS Act tries to do that by saying the State 
framework has to be substantially similar to the Federal one, 
meaning the criteria and so forth. And the issuer can't have a 
market cap larger than $10 billion.
    I think that notion of a trigger that puts you into the 
Federal bucket, if you will, doesn't allow a stablecoin issuer 
to go to the State is a good one. But I would strengthen it in 
a few ways. I would probably lower that threshold. Europe has a 
threshold for its significant e-money tokens of 5 billion 
Euros. And I would still insist on some minimal Federal 
standards that the States have to follow.
    On the bankruptcy issue, you're right that today what would 
happen in the absence of any special provisions is a normal 
corporate bankruptcy would apply. You'd have the automatic stay 
which would mean token holders would not get their money until 
the conclusion of that process. They would also be pari passu 
with unsecured--other unsecured creditors.
    The GENIUS Act at least says they have a priority claim. 
But it doesn't deal with that timing issue. And so I would 
prefer to see some sort of dedicated bankruptcy process or 
resolution process that's fast, both from the standpoint of the 
interest of holders but also to prevent any sort of collateral 
damage.
    If you've got a situation with a large stablecoin issuer 
and you're going through a very lengthy process before the 
holders get their money, you could have consequential defaults 
too. We saw that even with the small Terra algorithmic 
stablecoin. So ideally, you'd have a dedicated process.
    At minimum, you'd want to say you have segregation of those 
reserves. They're held in trust for the benefit of the holders. 
Ms. Massari argued that they should be available to be given to 
the holders right away. Those sorts of concepts I think you 
could look at. But truthfully, a dedicated process could work 
and should be must simpler than a bank because the business 
model of these entities is going to be fairly simple.
    Senator Van Hollen. I appreciate that. Just to take us off 
track a little bit from stablecoins but to deal with digital 
assets, much has been said and written about memecoins. You 
have been somebody who supports responsible innovation among 
digital assets.
    Of course, the President issued a memecoin which I 
understand has gotten about $100 million worth. Do you have 
concerns that creates all sorts of conflict of interest 
problems? And I'm interested in other people's thoughts on that 
as well in closing.
    Mr. Massad. Absolutely, Senator. I've said publicly this 
was plainly wrong. I think it's a black eye for crypto. I think 
it's brazen corruption, and I'm disappointed that more people 
in the crypto industry as well as frankly Members of Congress 
have not said similar things.
    Senator Van Hollen. I appreciate that. I'd just ask each of 
the witnesses whether you share Mr. Massad's view on that.
    Ms. Massari. Take a bigger step back and I say this in my 
written testimony as well, we've seen some of the worst scams 
and frauds and grifts using crypto. And that is, I agree, a 
black eye in the industry. It hurts those of us trying to build 
something that has real value and that has real utility.
    I actually think legislation that clarifies the legal 
framework for crypto markets, for stablecoins will help fight 
against the sort of worst of the bad behavior because it will 
provide clear lines and will let law enforcement and regulators 
easily distinguish between the good and the bad. And that has 
to be the right answer.
    Senator Van Hollen. Worst of the bad behavior. Gentlemen.
    Mr. Jachym. Senator, with respect to the memecoin market, I 
think facts are important here. So take, for example, our 
platform at Kraken. We have over 300 assets listed. Less than 
10 percent of those are memecoins. Memecoins are not a new 
phenomenon. Dogecoin, I think, is over 10 years old, maybe 
around there. So this is not a new thing. It's trending now.
    I think part of the reason there's been a focus on 
memecoins is because there's been regulatory uncertainty in the 
United States to create much of anything else, right? We've had 
developers that are looking to build protocols and technology 
that have many different use cases. It's clear that memecoins 
are not securities and thus I think they're trending at the 
moment.
    Our role as a marketplace, however, is to ensure whatever 
is traded on our market, right? We run these assets through 
rigorous due diligence tests, cybersecurity tests, legal tests 
and make sure everyone that is participating in our market is 
subject to KYC and sanctions. So I think, again, putting this 
in perspective, yes, it's trending now. But there's a much 
bigger ecosystem here that we need to focus on.
    Senator Van Hollen. Thank you. Mr. Cohen.
    Mr. Cohen. Yeah, I would concur on that view. This is open 
technology, Senator, at the end of the day. And people around 
the world will do with it as they will. I think it's really 
important that we focus on the use cases that drive adoptions 
around the world. And I strongly support that.
    Senator Van Hollen. Thank you, Madam Chair.
    Chairman Lummis. Mr. Warner.
    Senator Warner. I'm sorry. Next time. It's unfair because I 
wanted to answer Senator Moreno and he left. You can convey I'm 
all for innovation. Thank God. When he was looking at that 
computer in the mid-'80s, I was already in the wireless 
business.
    And because there was allowance to have competition in the 
wireless industry, I did pretty well. I started a company 
called Nextell. But I didn't agree with certain rules.
    But I guess one of the things that I feel like here is one 
of our best assets, one of our most essential assets is the 
stability of the dollar, is our financial markets. And I 
candidly believe even while there's been this innovation abroad 
that if we do this right, every offshore is going to rush to 
America. That's where they want to be.
    And I would just--what I would've asked my colleagues and 
Senator McCormick as well is I think back to the SVB crisis 
when I had some of my most libertarian friends say, we don't 
want the Government touching anything until the shit hit--
excuse me, the stuff hit the fan. And everybody said, we need 
the Federal Government to step in and bail us out. If we're 
going to touch our Federal markets, if we're going to do while 
stablecoin is completely divorced from the rest of the 
financial system, maybe light touch would work.
    But if we're going to ultimately intertwine this with the 
financial system which is why I think companies would want to 
come here to be connected to our overall financial system, we 
don't want to stifle innovation. But nudging our entities a 
little further along the line, that's the risk balance I'm 
trying to get to. And I think there is a spot here, and I 
really support you and the Ranking Member and particularly the 
Chairwoman who's worked so hard and so long on this.
    I think reasonable people can get there. And I think we can 
get there in a way that maintains the integrity of our 
financial system, makes us far and away the most attractive 
place for the legitimate entities, finds a way to keep the bad 
guys out as much as possible and still preserves innovation. 
But that may not be light touch for the sake of light touch 
because I would love to get my colleagues--I wish they'd been 
on the line when some of the biggest funders in this industry 
were calling around the SVB crisis and saying, gosh, we need 
the fed to bail us out.
    So I'll try to share that directly with Senator Moreno 
later. But just I really appreciate the chance and I didn't 
mean to cut you off.
    Chairman Lummis. Thank you, Mr. Warner. I like to conclude 
hearings by asking our panel, is there anything that you wish 
you had been asked but were not? I would like you each to 
respond to that question but very briefly. And let us begin and 
go the opposite direction. Mr. Massad?
    Mr. Massad. I don't believe there is, Senator. I think it's 
been a very full hearing. I'm happy to answer any questions 
that come to you afterward. I've given you a long, written 
testimony that addresses a lot of other issues.
    Chairman Lummis. Ms. Massari.
    Ms. Massari. First, thank you for having this hearing. 
Nothing in particular. I just really think it's important for 
us when we're thinking about stablecoins to really focus on the 
competitive landscape and think about a diverse, open, well 
regulated, but competitive ecosystem for stablecoin issuance. 
Stablecoin issuers are not as risky as deposit-taking banks. We 
should treat them accordingly and let there be open 
competition. I think we'll all benefit from that.
    Chairman Lummis. Thank you. Mr. Jachym.
    Mr. Jachym. Chairwoman, I think Senator Tillis asked about 
examples abroad, who got it right. I think we can look here in 
the United States to certain State frameworks. And speaking on 
behalf of a special purpose depository institution, I think if 
you look at what Wyoming has done, they've taken old rulebooks 
and they've tailored them.
    And they've created a bespoke product that creates and 
solves for unique risks in this system, especially respect to 
custody. You cannot run a safe custody business in the crypto 
ecosystem the same way you do in the traditional markets, 
right? And States have looked at two examples like that. So I 
think let's look internally what the States have done 
creatively to solve for the unique risks in the ecosystem.
    Chairman Lummis. Thank you. Mr. Cohen.
    Mr. Cohen. Thank you so much again, Senator, Ranking 
Member, for including me today and to all the great work that 
you and this Subcommittee are going to be doing. I would just 
quickly add, I guess, a question not directly asked. But we've 
alluded to the importance to the financial system in the U.S. 
of stablecoins and in particular Treasury backed stablecoins.
    I recently saw a chart which plotted amount of Treasury 
bonds and debut held by China over the last 10 years. And it, 
of course, went down like this. And the amount of that same 
debt that's now held by stablecoin and similar issuers back in 
crypto assets, the reality of things is that one of the things 
this country does very well is create debt of our own 
Government.
    And the question is if we now have one of our major off 
takers of that debt no longer taking up that slack, is this a 
way to achieve that goal? And I think that's something as we 
think about this that really is critical. That does not exist 
if we don't have the crypto rails to allow that activity to 
take place.
    This is all very interconnected. And I also would just say 
quickly we didn't talk about real world assets. But it's a very 
important topic. Real world assets that can be tokenized, run 
on crypto rails. And so there are many reasons why we do need 
to get this right, Senators. And I'm excited to be part of that 
process.
    Chairman Lummis. With special thanks to our panel and to 
this Committee for its first hearing, I want to thank you all 
for your thoughtful consideration of today's topic. We'll be 
consulting you again over time. We had consulted several of you 
prior to today, and that's why we recognize you as the 
expertise we wanted to hear from today. The Committee is 
adjourned with our thanks.
    [Whereupon, at 4:11 p.m., the hearing was adjourned.]
    [Prepared statements and additional material submitted for 
the record follow:]
                   PREPARED STATEMENT OF LEWIS COHEN
                  Partner, Cahill Gordon & Reindel LLP
                           February 26, 2025
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                 PREPARED STATEMENT OF JONATHAN JACHYM
    Deputy General Counsel and Global Head of Policy and Government 
                Relations, Kraken Digital Asset Exchange
                           February 26, 2025
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                   PREPARED STATEMENT OF JAI MASSARI
                    Chief Legal Officer, Lightspark
                           February 26, 2025
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                  PREPARED STATEMENT OF TIMOTHY MASSAD
Research Fellow and Director of Digital Assets Policy Project, Kennedy 
                School of Government, Harvard University
                           February 26, 2025
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Additional Material Submitted for the Record
              
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                             [all]