U.S. GOVERNMENT PUBLISHING OFFICE

31–384 PDF WASHINGTON : 2018

EXAMINING THE CRYPTOCURRENCIES 

AND ICO MARKETS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

SECURITIES, AND INVESTMENT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

MARCH 14, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–79 

( 

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HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

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SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT

BILL HUIZENGA, Michigan, Chairman 

RANDY HULTGREN, Illinois, Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

TREY HOLLINGSWORTH, Indiana 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

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C O N T E N T S 

Page 

Hearing held on: 

March 14, 2018 ................................................................................................. 1 

Appendix: 

March 14, 2018 ................................................................................................. 41 

WITNESSES 

WEDNESDAY, MARCH 14, 2018 

Brummer, Chris, Professor of Law, Georgetown University Law Center ........... 7 

Lempres, Mike, Chief Legal and Risk Officer, Coinbase ...................................... 5 

Rosenblum, Robert, Partner, Wilson Sonsini Goodrich & Rosati ........................ 8 

Van Valkenburgh, Peter, Director of Research, Coin Center ............................... 10 

APPENDIX 

Prepared statements: 

Brummer, Chris ................................................................................................ 42 

Lempres, Mike .................................................................................................. 48 

Rosenblum, Robert ........................................................................................... 55 

Van Valkenburgh, Peter .................................................................................. 76 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Huizenga, Hon. Bill: 

Statement for the record from Liquid M Capital, Inc. .................................. 86 

Foster, Hon. Bill: 

Statement for the record from Sweetbridge ................................................... 92 

Lempres, Mike: 

Responses to questions for the record from Representatives Emmer and 

Hultgren ........................................................................................................ 94 

Rosenblum, Robert: 

Responses to questions for the record from Representative Hultgren ......... 100 

Van Valkenburgh, Peter: 

Responses to questions for the record from Representative Emmer ............ 106 

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EXAMINING THE CRYPTOCURRENCIES 

AND ICO MARKETS 

Wednesday, March 14, 2018 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:06 a.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Present: Representatives Huizenga, Hultgren, Stivers, Wagner, 

Hill, Emmer, MacArthur, Davidson, Budd, Hollingsworth, Maloney, 

Sherman, Scott, Himes, Ellison, Foster, Sinema, Vargas, and 

Gottheimer. 

Also present: Representative Hensarling. 

Chairman HUIZENGA. The committee will come to order. And 

without objection, the Chair is authorized to declare a recess of the 

committee at any time. The hearing is entitled ‘‘Examining the 

Cryptocurrencies and ICO Markets.’’ 

I now recognize myself for 4 minutes to give an opening statement. 

The cryptocurrency and initial coin offering (ICO) markets have 

grown rapidly in recent years, and actually it is more like recent 

months. Specifically ICOs have been increasingly used by companies to raise capital for their business and products. To that end, 

people often equate them with a new type of initial public offering 

or an IPO; however, an ICO is not an IPO. 

ICOs, whether they represent offerings of securities or not, offer 

potential for entrepreneurs to raise more effective, transformative, 

and efficient funding for an innovative project as opposed to a traditional IPO. 

Although an ICO has the same characteristics of raising capital 

and accessing new sources of investment, it does not involve an investment in some amount of equity in a company, which is afforded 

under an IPO, nor does it offer the same amount of investor protections. 

The size of the ICO market has grown exponentially in this past year and the Token Report estimates that approximately $6.6 billion was raised in coin offerings. In 2018 alone, just in the first few 

months, 480 ICOs are estimated to have raised $1.66 billion. 

Cryptocurrencies and ICOs provide an innovative vehicle for 

startups to potentially access capital and grow their businesses. 

Early investors in some cryptocurrencies have experienced massive 

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gains, and the ever-increasing number of ICOs has created opportunities for investors to diversify their portfolios in 

cryptocurrencies. 

Since the surge in popularity or crypto craze, there has been considerable attention attracted both by investors seeking to diversify 

their portfolios and startup enterprises in search of additional access to capital and to grow their businesses. 

This is also rightly garnered attention of the regulators. Additional scrutiny has surrounded the cryptocurrency and IPO markets due to the number of fraudulent IPOs that have raised money 

with no intention of ever providing a product or a return to the 

ICO purchasers. 

A soon to be published MIT study of the ICO market estimates 

that $270 million to $317 million of the money raised by coin offerings has, quote, ‘‘likely gone to fraud or scams,’’ end quote, according to MIT Professor Christian Catalani. 

The SEC (U.S. Securities and Exchange Commission) has the authority to bring enforcement actions against ICOs for any violation 

of the Federal securities laws. As part of this increased scrutiny of 

the ICOs, the SEC recently announced actions against two virtual 

currency organizations for engaging in unregistered securities offerings. 

Additionally, the SEC suspended trading in three issuers claiming involvement in cryptocurrency and blockchain technology. The 

Wall Street Journal also recently reported that the SEC has issued, 

quote, ‘‘dozens of subpoenas and information requests to technology 

companies and advisors involved in ICOs,’’ closed quote, including, 

quote, ‘‘demands for information about the structure for sales and 

presales of the ICOs,’’ closed quote. 

Further, on March 7 of this year, the SEC broadened its series 

of notice statements to exchange-type activity, warning that online 

trading platforms may also be violating the Federal securities laws. 

According to the statement, ‘‘If a platform is providing a mechanism for trading assets that are classified as securities under the 

Federal securities laws, then the platform is operating as an exchange and must register with the SEC as a national securities exchange.’’ 

Today’s hearing will examine the economic efficiencies and potential capital formation opportunities that cryptocurrencies and ICOs 

potentially offer to businesses and investors, and review the adherence to applicable laws so that investors receive the full protections 

afforded by the Federal securities laws. 

Additionally, the hearing will consider the current regulatory approach that regulators such as the SEC are using to monitor and 

oversee cryptocurrencies and ICOs and how to achieve further regulatory clarity in these markets. 

As further action on how to regulate cryptocurrency and ICO 

markets is considered, it is important that innovation in the area 

of digital currencies and capital formation are not stifled while ensuring that consumers are protected, fraud is prevented, and securities laws are followed. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison, for 2–1/2 minutes for an opening statement. 

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Mr. ELLISON. Mr. Chairman, thank you for calling this important 

hearing today. As important as it is, there are some other things 

happening that I want to address. 

The Senate is voting today to roll back some of the rules for the 

biggest banks in the country. Think about that for a minute. Just 

10 years after big banks crashed the economy, Senate Republicans 

and some Dems want to roll back the rules that we put in place 

to prevent the next crash. 

My colleagues may have forgotten about how bad the crash was, 

but I haven’t. Millions of people lost their jobs. One in 54 homes 

was in foreclosure. $2.6 trillion vanished from America’s retirement 

accounts. So why on earth are we going back there? Supporters of 

the bill say this is just about helping out the small community 

banks. No, no, not buying it. 

Community banks are doing pretty well. We are not saying they 

don’t need some attention, but this is not about them. The FDIC 

(Federal Deposit Insurance Corporation) says that 96 percent of 

them are profitable and these profits are higher than ever. 

Again, I want to be attentive and responsive to community 

banks, but this is not about the small banks. The banks that are 

going to benefit here, these are banks that got close to $50 billion 

in bailout money during the crisis and banks that can put their 

name on a football stadium. 

Some of these provisions in this bill roll back the rules for the 

very largest banks like Citigroup and JPMorgan Chase. This bill 

increases the chance of another crash and the nonpartisan Congressional Budget Office says the bill will increase the likelihood of 

another bailout. 

I am disappointed that the Senate is likely to pass this bill today, 

and I can promise this committee that I will do everything in my 

power to stop it when it comes over to the House. 

And I yield back. Thank you. 

Chairman HUIZENGA. The gentleman yields back. 

The gentleman from Illinois, the Vice Chairman of the committee, Mr. Hultgren is recognized for 1 minute. 

Mr. HULTGREN. Thanks, Chairman Huizenga. Thank you all for 

being here. 

According to CoinMarketCap.com, there are over 1,500 different cryptocurrencies for capitalization estimated at $350 billion. That 

is a staggering amount of money. 

As this market develops, Congress has a responsibility to ensure 

that investors are protected without unduly limiting opportunities 

for growth. Some of our most respected technology companies have 

expressed at least some uncertainty regarding cryptocurrencies. 

This is a complicated topic. 

For example, Google just announced it is banning ads promoting 

cryptocurrencies, exchanges, wallets, initial coin offerings, and 

firms providing advice. Congress needs a strong understanding of 

the technology and its application before we can understand how 

it fits into our existing regulations and how the laws we have on 

the books may encourage or inhibit an efficient market. 

For example, do we need clarification of what a cryptocurrency 

exchange is and if this word implies any investor protections? The 

SEC staff made this point the other day when noting, and I quote, 

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‘‘many online trading platforms appear to investors as SEC registered and regulated marketplaces when they are not,’’ end quote. 

Similarly, Chairman Clayton has expressed skepticism about no 

initial coin offerings being registered. There are a lot of questions 

in this. I think it important that we are having this hearing today. 

My time has expired, and I yield back. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman for 2–1/2 minutes. 

Mr. SHERMAN. Unfortunately, our colleague, distinguished Ranking Member was unable to be here this morning, and I ask unanimous consent to enter into the record the statement of the 

gentlelady from New York. 

Chairman HUIZENGA. Without objection. 

Mr. SHERMAN. Cryptocurrencies are a crock. What social benefit 

do they provide? They allow a few dozen men in my district to sit 

in their pajamas on the couch all day and tell their wives they are 

going to be millionaires. 

They help terrorists and criminals move money around the 

world. They help tax evaders. They help startup companies commit 

fraud, take the money and 1 percent of the time they actually create a useful business. But then again, I daresay that some tiny percent of all larceny and crime helps finance something that turns 

out to be useful. 

It hurts the U.S. Government in two ways. Our ability to have 

the dollar be the chief means of international finance is what has 

underpinned our ability to impose sanctions and stop tax cheating. 

And furthermore, when we have people take risk we don’t encourage gambling. We encourage investment in the real economy. 

But when you buy a Bitcoin are you financing a new factory? No. 

You are gambling on its value for no social benefit. Now, I know 

that these cryptocurrencies are popular. They are popular with 

guys who want to sit in their pajamas and tell their wives they are 

going to be millionaires. 

And they are popular with those who have read ‘‘Atlas Shrugged’’ 

and ‘‘Fountainhead’’ and believe that these are the new canons, the 

new divinely inspired documents of our age. 

But they are harmful and they are harmful in one other way, 

and that is—and I am going to mispronounce the word, seigniorage 

is the benefit that the U.S. Government gets by issuing currency. 

It is the float. It is the fact that we do not pay interest on newly 

created dollars. 

We lose that as well. And the Fed was able to return well over 

$50 billion to our Treasury in many of the recent years. We undercut that. 

And then finally, we have these initial coin offerings deliberately 

naming themselves to lie to the public and convey the image that 

it is like an initial public offering. They stole the intellectual property and trademark of legitimate investing and applied it to a fixed 

fraudulent gambling scheme of no social benefit. 

Aside from that, I think it is a good idea. I yield back. 

Chairman HUIZENGA. The gentleman yields back. 

And gentlemen on our panel, you are in for a lively conversation. 

No, this is not a Senate hearing about Dodd-Frank reform. You are 

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in the right place. We are here to talk about cryptocurrencies and 

blockchain technologies. But we are here to welcome today a great 

panel. 

And Mr. Mike Lempres, who is the Chief Legal and Risk Officer 

for Coinbase; Dr. Chris Brummer, who is a Professor of Law from 

Georgetown University Law Center; Mr. Robert Rosenblum, Partner at Wilson Sonsini Goodrich & Rosati; and Peter Van 

Valkenburgh, Director of Research for Coin Center. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. Having read the testimony, there is far 

more than 5 minutes of information in each one of yours, so good 

luck as you consolidate that down. 

We will then have a question period and we will without objection put your written testimony into the permanent record and part 

of the record as well. 

So with that, Mr. Lempres, you are recognized for 5 minutes. 

STATEMENT OF MIKE LEMPRES 

Mr. LEMPRES. Thank you and good morning, Chairman 

Huizenga, Ranking Member Maloney, and members of the subcommittee. Thank you for the opportunity to address this important topic at a significant time. 

My name is Mike Lempres and I am the Chief Legal and Risk 

Officer at Coinbase, the Nation’s leading digital currency exchange 

and wallet service. 

I commend you for holding this hearing on a technology that 

could transform capital formation, innovation, and our economy. It 

has tremendous potential. 

To fulfill that potential, we believe that responsible regulation is 

required, but the technology’s incredible benefits could also be stifled by regulatory or legal missteps. I am pleased to testify this 

morning on behalf of Coinbase. We view ourselves a as leader in 

the legitimatization and maturation of the crypto economy. 

We provide an onramp for acquiring, trading, and holding digital 

currencies. Through our strategy of operating the most trusted and 

easiest-to-use digital exchange and wallet, we have grown dramatically. We have very strong cybersecurity protections and compliance practices to ensure that we remain the most trusted company 

in this space. 

Our cybersecurity program is state-of-the-art and remains the 

critical core of our business. 

Similarly, our compliance program is designed to build upon the 

highest levels of compliance in our industry. In addition to our formal regulatory role, Coinbase continuously shares its expertise to 

make sure that our ecosystem is clean and compliant. We train 

more law enforcement agencies globally than anyone. 

I plan to discuss three items today: The model of the Coinbase 

exchange; our view on ICOs; and the broader regulatory environment. The Coinbase exchange operates a spot exchange that offers 

the ability to buy and sell four digital currencies. 

We do not offer margin or derivatives trading. There are more 

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sets is that each has been determined by regulators to be a virtual 

currency and therefore we believe not a security. 

One of today’s questions is how to approach ICOs. Coinbase currently does not trade ICOs or any other security tokens. Despite 

that, we believe that ICOs are inevitable and full of tremendous potential. 

We believe they can unlock the ability of entrepreneurs anywhere in the United States to raise money on a level playing field. 

Entrepreneurs won’t need to know funders in Silicon Valley or New 

York to access vibrant sources of capital. 

At the same time, there is a need for responsible regulation to 

ensure investor protection. We welcome that regulation. 

In order to fully enable ICOs, investors must have confidence in 

the integrity of the market. For this reason, we support enforcement actions where they are necessary to weed out bad actors and 

to protect investors. 

At the same time, we need to be sure that we are not chilling 

good innovation brought about by new technology and good actors. 

We believe there is no need for Congress to create a new regulator or a new regulatory scheme because Federal regulators already have sufficient authority to oversee this space effectively. 

There are at least four Federal regulatory agencies that can effectively protect investors and the markets: The SEC, the CFTC 

(Commodity Futures Trading Commission), FinCEN (Financial 

Crimes Enforcement Network), and the Federal Trade Commission. 

In addition, this Federal regulatory regime exists alongside vibrant State regulations. 

With respect to the U.S. regulatory environment, it is important 

to stress that not all tokens are alike and regulators need to be 

able to distinguish between various tokens to enable innovation. 

This requires regulators to coordinate and provide clear guidance 

to market participants. 

For example, some tokens may be a commodity and others a security. The SEC and CFTC should be able to draw a line to determine whether a token should be treated as a commodity or a security for compliance purposes. 

The agencies have done this before when new asset classes 

emerge, for example, in addressing stock indices and swaps. As 

mentioned in the beginning, we operate the most trusted and easiest-to-use platform to access digital currencies. We believe that 

trust is enhanced through partnership with regulators. 

At Coinbase, we are committed to working with you, the SEC, 

the CFTC, and other regulators to help shape a responsibly regulated market. We believe the decisions you are making now will 

help determine the future of innovation and capital formation. That 

future is not 20 years away. It is almost here today. 

Thank you for this opportunity to discuss these issues, and I look 

forward to answering your questions. 

[The prepared statement of Mr. Lempres can be found on page 

48 of the appendix.] 

Chairman HUIZENGA. Thank you. 

With that, we go to Dr. Brummer, who is recognized for 5 minutes. 

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STATEMENT OF CHRIS BRUMMER 

Dr. BRUMMER. Chairman Huizenga, members of the subcommittee thank you so much for inviting me here to testify at this 

hearing. My name is Chris Brummer and I am the Agnes and Williams Research Professor at Georgetown University Law Center. 

And I am here today solely in my capacity as an academic and I 

am not testifying on behalf of any entity. 

We are blessed in the United States to have one of the safest, 

deepest, and most liquid capital markets in the world. One of the 

reasons for this success is our system of information sharing and 

dissemination to investors. 

The disclosure system embodied in the Securities Act of 1933 is 

largely one where promoters share among other things material information publicly about the company, the management and the securities being offered, as well as the intended use of the proceeds. 

This information is then filed with the Securities and Exchange 

Commission where it is vetted, scrubbed, and analyzed. 

Most ICO disclosures, by contrast, are facilitated by unregulated 

white papers focusing largely on the existing technology or technology under development to be financed via an offering. 

There is, as a result, a large gap between the disclosures and 

many of the registered filings such as an S-1, and the information 

provided in most white papers. And this raises a number of red 

flags, to say the least. 

For our purposes today, I would like to highlight briefly some of 

the key disclosures one would expect and likely need in order for 

buyers of ICO tokens, whether they are investors seeking to profit 

or technology users seeking to support and participate in an innovative product, in order to make a purchase in an informed manner. 

These disclosures are relevant, especially relevant, I believe, as 

ICOs transition from technical expert ecosystems to the disruption 

of instruments that are ever more likely to attract everyday investors and the retail public. 

Disclosure number one, promoter’s location. At least one study 

has noted that in roughly 32 percent of ICOs, it is not possible to 

identify the issuing entities’ or promoters’ origin. This creates serious information asymmetries on the part of the investor. 

Without knowing the issuing entities’ or promoters’ origins it becomes impossible to know or identify what rules and legal protections might be afforded to investors. Further, investors have few 

means by which to contact relevant public authorities in the case 

of fraud, theft, or loss. 

ICO white papers should therefore set out a detailed statement 

beyond a simple P.O. Box of where the issuer, as well as its key 

management, are located. 

Disclosure number two, problem in proposed technology solution. 

For most of the history of U.S. securities laws, no information was 

more important for investors than an issuer’s financial statements. 

But ICOs tend to serve a different purpose from IPOs of the 1930’s. 

Instead of funding industrial companies transitioning to a more 

mature cycle of development, ICOs involve products developed by 

startups identifying technology-based problems and proposing the 

sale or financing of technology-based solutions. And in return for 

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financing, promoters offer coins of varying currency, utility, or securities features. 

For most of these offerings, as a rule, is not the company’s past 

performance or even financial statements that is most important. 

Instead, it is the ventures technology proposition. Consequently, 

ensuring that investors, including retail buyers, understand the 

basic contours of the underlying technology solution is paramount 

as ICOs become a more popular means of fundraising. 

To that end, you can envision a number of important reforms. An 

optimal disclosure system for IPOs would require, to the extent 

possible, a plain English description of the technology problem and 

solution. 

Furthermore for larger fundraises, more technical parts of the 

white paper would ideally be subject to a system of third-party validation, what could be termed a technology audit. 

And meanwhile, all code, regardless of the size of the fundraise, 

would be posted to a public code repository such as GitHub so potential buyers can either diligence the code itself or other proxies 

for the strength of the code. 

Promoters should avoid hyperbole when describing their solutions, an endemic problem in many white papers, and should be required to identify an objective basis for all forward-looking statements. 

Along these lines, disclosures should be made as to whether postICO financial statements will be provided to token holders. A description of the token is also useful. 

Promoters should be able to disclose whether or not and how the 

IPO ownership of the company’s protocol, as well as to detail with 

specificity, what legal rights holders of the tokens will enjoy, as 

well as how the tokens will be traded and on what system. 

They should also be required to provide disclosures for 

blockchain governance and the basic risk factors impacting not only 

the token itself but the industry at large. Thank you. 

[The prepared statement of Dr. Brummer can be found on page 

42 of the appendix.] 

Chairman HUIZENGA. Thank you. 

Mr. Rosenblum, you are recognized for 5 minutes. 

STATEMENT OF ROBERT ROSENBLUM 

Mr. ROSENBLUM. Chairman Huizenga, honorable members, first 

of all, let me thank all of you for holding this hearing. I think it 

is timely. I think it is very, very important and I think many people in the industry, those who want to get things right, will very 

much welcome your participation and your interest in the topic. So 

again, thank you for holding the hearing. 

I am a partner at the law firm of Wilson Sonsini Goodrich & 

Rosati, a Palo Alto law firm that is generally recognized as being 

a leading advisor to technology firms, to life sciences firms, and the 

like. I am the head of the firm’s blockchain and cryptocurrency 

practice. 

Now, I do need to say that I am appearing here on my own behalf, not on behalf of my law firm, not on behalf of any client. However, thank you for having me anyway. 

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In our capacity as being among if not the leading tech firm, we 

obviously handle a great number of initial coin offering and similar 

transactions. We represent a large number of ICO issuers, we represent a large number of funds that invest in initial coin offerings, 

we represent a large number of entities, often very sophisticated 

entities, that are investing in initial coin offerings. 

I will give you a quick observation that, about 9 months ago or 

so, the ICO market really started to become significant in the 

United States. I was concerned, as some of the comments we have 

already heard, as to whether there was really a there there. 

As I will talk about in a couple of moments, I think there really 

are some very important things happening in this market and 

again I think that is why it is so important for this subcommittee 

to be focusing on these issues. 

I actually have two basic proposals or two basic suggestions for 

this subcommittee: First, I think in the near term, Congress could 

greatly help the markets, the ICO markets, to facilitate good ICOs 

and to help guard against fraud. 

By authorizing the SEC or by authorizing and encouraging the 

SEC and other appropriate Federal regulators to both modify and 

amend their rules to better assist ICO issuers in meeting the requirements of the Federal securities laws. 

As Dr. Brummer says, there are already a number of disclosure 

issues, there are already a number of registration requirements to 

securities issuers. They don’t work well. They are not geared toward ICOs and to tokens and so the SEC can be doing a lot more. 

Although they are trying very hard, they can do a lot more to 

amend their rules and modify their rules and I think this committee can help. 

I think in the longer term, this committee can lead the way toward having a more unified disclosure approach, registration approach, overall legislative approach to how we handle ICOs and 

token use in the United States. 

Truthfully, I think it is too early to know exactly what the contours of that legislation are going to look like at this point. Again, 

we are only 9 months in really to ICOs. 

The industry is so dynamic and changing so quickly that I think 

it would be premature at this point to try to actually craft that legislation, but I do think that there are basic principles that can help 

us inform what that legislation will look like when you are able to 

get to it. 

I think there are three things though that in all of your legislative activities that we should be keeping in mind. One is there is 

tremendous innovation in the blockchain and cryptocurrency community. And by the way, cryptocurrency is a bit of a misnomer. 

There are some tokens, Bitcoin, Ether, for example, that really 

are cryptocurrencies. There are a number of other tokens, and 

those are most of those that we will probably be talking about 

today that have very specific purposes on very specific platforms, 

designed to do very special things. 

Second, there are tremendous capital-raising techniques and I 

hope during this hearing we will be able to discuss why those capital-raising techniques or opportunities are so significant and potentially so valuable to the U.S. economy. 

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Third, there is no getting around the fact that there is significant 

fraud, significant opportunities for market manipulation, significant opportunities for loss of privacy and data breaches. And those 

need to be part of and considered in any regulatory and legislative 

response. With that, let me end my remarks and thank you so 

much. 

[The prepared statement of Mr. Rosenblum can be found on page 

55 of the appendix.] 

Chairman HUIZENGA. Thank you. 

Mr. Van Valkenburgh, you are recognized for 5 minutes. 

STATEMENT OF PETER VAN VALKENBURGH 

Mr. VAN VALKENBURGH. Thank you, Chairman Huizenga and 

members of the committee. I am Peter Van Valkenburgh, Director 

of Research at Coin Center, an independent non-profit that is focused on the cryptocurrency public policy space. Today, I will start 

by describing the fundamental innovation of Bitcoin, then discuss 

the differences between cryptocurrencies and ICOs, and finally describe the regulatory landscape for these technologies. 

The fundamental innovation of Bitcoin is digital scarcity. So in 

the physical world a thing like gold is scarce because you can hold 

it in your hand. You can ask a lab to tell you that it is real and 

when you hand it to somebody else they have it and you don’t. But 

in the digital world, how can we know that a Bitcoin is scarce? 

We know that there are only 16.9 million Bitcoins in the world 

right now because their distribution and movements are described 

with perfect accuracy on a public ledger called the Bitcoin 

Blockchain. Anyone can independently read and mathematically 

authenticate the data in the blockchain just like anyone can independently verify the scarcity of gold. 

Now that digital scarcity can then be employed by innovative 

people for a variety of innovative purposes. A token that is scarce 

and transferrable from person to person can be used as money just 

like any other portable and transferable good throughout history 

from gold to seashells. That, in a nutshell, is Bitcoin. 

But a scarce token can also be automatically redeemable for a 

digital good or computing service provided by the same network of 

participants who verify the blockchain. And these are projects like 

Ethereum, Filecoin, and Blockstack and they are beginning to compete with incumbent service providers like Amazon, Facebook, and 

Google. 

A scarce token can also represent a legal agreement or a financial asset. So a public company or investment fund could issue and 

track its shares as tokens on a blockchain. 

Now, these blockchains are just records. Whether they are about 

money, assets, or computation, but rather than relying on a handful of corporations running vulnerable datacenters to keep the 

record, a blockchain version of the record relies on an open network 

of thousands, potentially millions of participants who have skin in 

the game and independently verify and secure that data. 

Those records will always be available until every last participant goes offline. In other words, they will likely always be available. 

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And those records will be accurate unless every participant has 

their individual computer hacked. In other words, they will likely 

always be accurate. It is this revolutionary-decentralized architecture that makes these systems effectively unhackable, at least 

using traditional methods of attack. 

Especially pertinent to today’s hearing, these technologies are 

also employed for capital formation. Scarce tokens like Bitcoin and 

Ether already exist in the world and they are in use. But other 

coins and tokens are merely theoretical because the software that 

will enable them has yet to be designed and built. 

Recently, various developers have raised money to fund the development of new blockchain software projects by selling a promise 

of future tokens to willing investors in so-called initial coin offerings or ICOs. 

From a regulatory standpoint, there is a fundamental distinction 

that must be made between, on the one hand, scarce tokens that 

exist on a blockchain and are used for payment or to obtain computing services, and, on the other hand, promises of future tokens 

representing the hopefully profitable efforts of a developer. 

The former, things like Bitcoin and Ethereum, they are effectively digital commodities. They are scarce items that may have 

value on open markets as money, as investments, or as inputs for 

valuable commercial and industrial processes. They are commodities, just digital. 

The latter, promises of future tokens, are securities. Promises 

from issuers to investors that efforts will be put forward to create 

profits. Now, both have investor protection risks, but they are distinct risks that are best addressed in different ways. A commoditylike token has no issuers upon whom investors rely. 

But the token does trade on speculative commodities markets. 

Policing these markets for fraud and manipulation is critical for investor protection. A promise of future tokens is a security with an 

issuer upon whom investors rely. Mandating accurate disclosure 

from these issuers is, as we have said, critical for investor protection. 

So the sensible and emerging investor protection regime is nothing new even though the underlying assets may seem like science 

fiction. The CFTC should use its existing authority to police commodities, spot markets for fraud and manipulation and the SEC 

should manage and mandate disclosures from issuers making securities offerings. 

But if policymakers get the line between commodity tokens and 

securities offerings wrong or if it isn’t made clear by regulators, it 

will destroy the viability of these innovations and cede leadership 

in this technology to the rest of the world. Thank you and I look 

forward to your questions. 

[The prepared statement of Mr. Van Valkenburgh can be found 

on page 76 of the appendix.] 

Chairman HUIZENGA. Thank you, and I appreciate all of your 

input. 

We are going to start with a 5-minute question period for myself. 

I recognize myself here. I want to try to cover a couple of quick 

things. Investor protections, first and foremost, the SEC versus the 

CFTC, and then use of blockchain technologies. 

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12 

So on that investor protections part, maybe Dr. Brummer you 

could illuminate for us here a little bit on what current protections 

you see or lack of current protections that are in place to really 

protect Mr. and Mrs. 401(k). We have institutional investors, sophisticated investors, and then we have more retail investors. 

So if you could address that quickly please? 

Dr. BRUMMER. At this point in time, the SEC is working on really operationalizing some of its own powers and authority under the 

33 Act, 34 Act, and the 40 Act for the mom-and-pops, for the investors who are increasingly having exposure to cryptocurrency markets, for the better in some instances, and for ill in others. 

There is a regulatory vacuum currently. That regulatory vacuum 

extends, to some extent, to the spot market in cryptocurrency. I 

think that where there are financial products that under traditional analyses would tend to be identified as commodities there 

are questions about disclosure that are required to be asked. 

I think that even in the securities law space the infrastructure 

on which many of these tokens are currently being traded are not 

entirely subject to the SEC’s oversight. So there are rules that are 

in place but it is a mishmash. 

Chairman HUIZENGA. I am going to get to Mr. Rosenblum here 

because you had said that, here is how I have encapsulated it here. 

The SEC is trying to do its job to protect investors and you say 

it needs to modify the rules to help facilitate ICOs but you say it 

is premature to draft legislation. 

Now, both Chairmen Clayton and Giancarlo had said, along with 

their current counterparts from the Department of Treasury and 

Federal Reserve and others, that they may come to Congress here 

in the coming months and we know that this has moved very 

quickly. 

In the last 9, 10 months we have seen this explosion of it. This 

panel, this Congress is not going to sit by idly with a lack of protection for investors and you have heard some of my colleagues express some skepticism of the legitimacy of cryptocurrencies and certainly ICOs. 

So I want to look at what, very quickly, what the role Congress 

may be to play in this and what chilling effect it may have from 

your opinion quickly. 

Mr. ROSENBLUM. Yes, thank you, sir. First, I think that there 

are, in particular, two parts of the legislation. I think there is an 

immediate set of legislation that needs to happen to authorize the 

SEC and other regulators to amend modified rules consistent with 

investor protection but also to facilitate capital development or capital investment. 

That is not to say there won’t also be additional grants of power 

or additional protections that Congress adds but what my other 

point is, this industry is moving so very rapidly. 

It is very difficult to know, here is one example, if you take 

blockchain, which has a tremendous capacity to store, record, and 

retain information and you mix that with artificial intelligence 

which is certainly something people are trying to do today. The capacity of artificial intelligence combined with the blockchain to potentially lead to tremendous new marketing, tremendous new busimcarroll on FSR431 with DISTILLER

13 

ness opportunities, tremendous scientific and sociological advances 

is tremendous. 

However, the opportunity to advance our agility to use that same 

technology for a manipulative conduct or a data breach, and for all 

sorts of other, what I will refer to as nefarious conduct, is really 

hard to predict right now. And so what I don’t want to do is lock 

us into a system too early. 

And I will give you one more— 

Chairman HUIZENGA. And I don’t disagree, and unfortunately I 

am running out of time. We will be able to hopefully explore this 

with some other questions. 

Mr. Lempres, I would like to get to you very quickly. Do you believe that there are any certain instances where initial coin offerings should not be regulated as an offering of securities? 

Mr. LEMPRES. Thank you for the question. It is difficult to answer because it is hard to imagine all the circumstances under 

which ICOs might be offered. I think that speaking on behalf of 

Coinbase, we do not support any initial coin offerings at the current time because we are not sure the way the regulatory structure 

is and inventory treatment is. 

It would be appropriate— 

Chairman HUIZENGA. In your written testimony you talked about 

the CFTC quite a bit, the SEC not so much, and I have had some 

express that they believe the CFTC has been more flexible and 

open and receptive to ICOs and in blockchain. I don’t know if that 

has been your experience as you have viewed it. 

Mr. LEMPRES. Yes. Let me say, our experience is we are waiting 

for the dust to settle between the CFTC and the SEC before we 

will actively engage in supporting ICOs. 

Chairman HUIZENGA. OK. 

Mr. LEMPRES. And once the rules are clear we will move in. We 

think there is tremendous potential. We want to be there to support it. I will say that there is an important distinction between 

what is a security and what is a commodity. They perform different 

functions and they do deserve to be treated differently. 

Chairman HUIZENGA. Yes. I am well over my time. There is no 

doubt though a token is not gold and a commodity as such, so I 

think that is some of the struggle that we have. So with that the 

Chair recognizes the gentleman from Georgia, Mr. Scott, for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. And Chairman Huizenga 

you have opened up a line of discussion here that I would like to 

follow up on. 

Mr. Lempres, in your testimony, you said that you believed there 

is no need for Congress to create a new regulatory regime. You 

have said you felt that the Federal authorities already had that authority and that it was basically just a lack of coordination. 

But Mr. Lempres, both the SEC’s Chairman Clayton and the 

CFTC Chairman Giancarlo have told me that neither one of them, 

the SEC nor the CFTC, have any regulatory authority. And, as a 

matter of fact, they said what regulation there is at the State level 

they are regulating these entities as if what they refer to as money 

transmitters. 

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14 

So it seems to me that there is some type of regulatory shortfall 

here and if you ask me it is a little bit of that and not just a lack 

of coordination. So you see my point there? 

Mr. LEMPRES. Yes, Congressman, thank you, I do. What I would 

say is that there are sufficient authorities in place today. And I 

would point out that there is a long— 

Mr. SCOTT. So you are saying that the Chairman of the SEC and 

the Chairman of the CFTC are wrong? 

Mr. LEMPRES. Of course not— 

Mr. SCOTT. They say that that is not so. 

Mr. LEMPRES. No. What I am saying, though, is I think in context what is happening is when you talk about money transmission 

licenses, that covers a portion of our activity as a business. We are 

in many ways an integrated business, a portion of which is licensed 

by the States for money transmission purposes. 

Mr. SCOTT. Yes, but it is done at the State level. There is none 

at the Federal level. 

Mr. LEMPRES. Well, respectfully, Congressman, I would also 

point out that, again staying at the State level, we have a 

BitLicense with New York State, which is indeed a comprehensive 

consumer protection license that covers crypto activity within the 

State of New York. 

On the Federal level, I would respectfully say there is regulation 

of commodity markets just the way there is regulation of commodity markets everywhere else and that this new asset, which is 

not a physical thing that you hold in your hand, still has many of 

the characteristics of a commodity. 

Mr. SCOTT. Well, my time is getting short, I want to—there is so 

much here. This is an exciting new area, and we are discovering 

a lot here but let me switch to the ICO issue. 

Now Mr. Rosenblum, in your testimony, you said you believe it 

is too early for Congress and the Federal regulators to enact a comprehensive legislative or regulatory scheme governing 

cryptocurrency. 

Now, I can assure you I am the Co-chairman of the FinTech Caucus and I can assure you that none of us on that caucus or on this 

committee want to be killing good innovation, especially one that 

is raising, as this is, billions of dollars of capital because it is very 

important for everyone to know and as CSPAN is broadcasting 

this, but it is important to know that as of February 2018 individuals and businesses raised $1.66 billion through initial coin offerings or ICOs. 

So I agree with you, Mr. Rosenblum. However, going back to the 

SEC and the CFTC, they have not proposed rules regarding the 

regulations of cryptocurrency and other digital assets and instead 

have relied on informal rulemaking or enforcement actions. 

So I want to ask you in particular Mr. Rosenblum, and others on 

the panel, what in your minds could the Federal regulators be 

doing better and do you believe that enforcement actions and other 

formal guidance are sufficient to regulating these emerging and exciting digital assets? 

Mr. ROSENBLUM. Congressman Scott, thank you for the question. 

I agree with the point that you are moving toward or that you are 

suggesting here, which is regulation by enforcement in an area 

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15 

that is as complicated and dynamic as this, is not the appropriate 

way to regulate. 

Enforcement is necessary, of course, however, I do agree with you 

entirely that we need clearer guidelines, a clearer understanding of 

how the SEC’s registration rules, its market trading rules, its exchange rules, its investment company and investment advisor rules 

should apply and do apply. And that is not something you can do 

by regulation through enforcement. 

And that is again one of the reasons I think this subcommittee 

and this hearing is so important to this process because we do need 

more guidance on precisely those areas. 

Mr. SCOTT. Thank you, Mr. Rosenblum. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the Vice Chairman of the committee, Mr. Hultgren for 

5 minutes. 

Mr. HULTGREN. Thank you, Chairman Huizenga. 

Thank you all for being here. I appreciate your work and this is 

something that we are all interested in learning as much as we 

can. 

I want to address my first question to Mr. Lempres if I could? 

Your testimony mentions that you store more than $20 billion 

worth of digital currency and have traded over $150 billion in assets. 

In light of the January 2018 hack of the Coincheck 

cryptocurrency exchange wherein $534 million was stolen, I have 

a few questions for you related to that cybersecurity side of this. 

I wonder what cybersecurity standards does Coinbase adhere to? 

Mr. LEMPRES. So thank you for the question. And the reason I 

am hesitating, this is not my area of expertise, and I apologize 

when we get into this stuff. But I will say that our cybersecurity 

protocols are, I believe, state-of-the-art. 

That we have an entire team, obviously, that does nothing but 

work with cybersecurity. Approximately 99 percent of the assets 

that we hold are held offline in what is known as cold storage, 

which makes them virtually immune to hack. 

We do have a hot wallet process for, in effect, if you think about 

it, the cold storage is akin to a vault, the hot wallet is akin to a 

teller window at a bank. The hot wallet is online obviously and we 

have that amount fully insured to protect the consumers and investors as to that. 

Mr. HULTGREN. Are there any, if you know about it and we can 

follow up in writing, too, or you can let us know who the person 

is that you recommend with Coinbase that we talk to, but is 

Coinbase legally required to follow any Federal cybersecurity laws 

and regulations, for example, financial institutions and some service providers are subject to Gramm-Leach-Bliley? 

Securities exchange and other SROs are subject to SEC’s Reg 

SCI (Regulation Systems Compliance and Integrity). Are there any 

other Federal cybersecurity laws or regulations that already apply 

to Coinbase and others like you? 

Mr. LEMPRES. Yes, first off, I am more than happy to get you the 

name— 

Mr. HULTGREN. That would be great. 

mcarroll on FSR431 with DISTILLER

16 

Mr. LEMPRES. —Of the head of our security. And second, I believe the cybersecurity standard that we most adhere to is New 

York State’s standard through their BitLicense, which takes quite 

a lot of work. 

Now, we are also working with a few of the big four accounting 

firms to develop appropriate standards to make sure everything is 

SOC 2 and other standards. 

Mr. HULTGREN. OK. I think you answered this, but maybe just 

for clarification? In the event of a hack of your platform that results in the loss of assets, is there a guarantee that is provided to 

the purchasers of the assets through your platform? 

Do you have any legal responsibility for safekeeping of client’s 

assets? And what other protections are afforded for your customers 

in the event that the hot wallet is hacked? You mentioned that but 

I—maybe just go into a little bit more detail on that if you have 

any? 

Mr. LEMPRES. Sure. So again, we do hold a little bit of fiat currency, USD—United States dollars. Those are held in banks which 

do have FDIC insurance as to those dollars. 

As to our cryptocurrencies, there is no Federal insurance program to which we belong. We have attempted to create a degree 

of comfort amongst our customers by insuring the hot wallet 

amount. I will note that to date we have not been hacked. We have 

never had to make a payment out under those insurance policies. 

Mr. HULTGREN. OK. Hope it continues that way. Your testimony 

also mentions that the exchange only support four assets because 

each has been determined by regulators to be a virtual currency 

and therefore not a security. However, you go on to note that regulators are not providing enough clarity for other cryptocurrencies. 

How did you establish the regulatory and legal certainty for 

those four currencies that you currently support or have; do the 

SEC or the CFTC individually provide guidance for those four currencies? Or did Coinbase make a determination about these four 

currencies based on the SEC-CFTC guidance? 

Mr. LEMPRES. Yes. We have received some guidance certainly as 

to those four examples. The CFTC has explicitly found and in fact 

published a primer that listed three of those assets as 

cryptocurrencies. The fourth, Bitcoin Cash is a hard fork which is 

in effect a derivative of Bitcoin. It would be covered by the same 

reasoning. 

Mr. HULTGREN. OK. 

Mr. LEMPRES. There are some court cases that refer to them as 

cryptocurrencies and the SEC itself has distinguished between 

cryptocurrencies and securities. Specifically in the DAO Report 

they referred to Ether as a cryptocurrency in the context of discussing securities. 

Mr. HULTGREN. OK. You also mentioned in your statement, and 

I am out of time, so we will—if that is OK if I can follow up? And 

I have questions for others. Sorry 5 minutes goes way too fast, but 

thank you all for being here. Again, we want to understand this as 

much as we can, but grateful for your testimony. And we will follow up with other questions if that is all right. 

With that, I will yield back. 

Chairman HUIZENGA. The gentleman yields back. 

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17 

And it may behoove the Chair at this time to note that we will 

be having an opportunity to forward questions through the Chair 

to the panel. And depending on our time, as well, and participation 

we may be able to get to a second round of some questioning so— 

with your indulgence. 

So we will continue to move along. And with that, Mr. Ellison 

from Minnesota is recognized for 5 minutes. 

Mr. ELLISON. Thank you. 

And now let us talk about cryptocurrencies a little bit. In my 

meetings with constituents over the last several months, I have 

had many of them say, ‘‘hey, what is going on with this 

cryptocurrency? I heard that it started at really low valuation; now 

it is really high and it is up and down. Should I get into it?’’ 

I am like, ‘‘well, look, I am no investor. I can’t tell you what you 

should do,’’ but it did occur to me that I should ask you experts. 

If somebody who is not sophisticated in this area wants to invest, 

what should they know in advance? Could you all talk about what 

the hazards might be for an unsophisticated investor in this area? 

Dr. BRUMMER. So that is a great question. It is an important 

question. And I would certainly say that given the complexity of 

many of these instruments it is very dangerous. 

One of the disclosures that I had suggested would be really critical, particularly as retail investors become more interested in this 

space, is to understand what the risks are when it comes to investing. It is not only that they can lose a lot of their money but they 

can lose all of it, and that it is not just the specific venture itself 

that creates risk. 

It is not even the cyber risks or the potential for hacking. But 

it is a very dynamic ecosystem, that there are certain kinds of 

changes in the nature of the technology where, say, Internet-based 

principles become embedded in the blockchain and leave some of 

the blockchain technologies that we are depending on now rather 

obsolete where the tokens tied to them then become ultimately 

worthless. 

That these are the kinds of risks that retail investors themselves 

may not necessarily understand even where they may have some 

basic—and if not only hazy understanding—of the technology itself. 

And as a result, because just like you, I will sometimes go to the 

gym and people will ask me, so tell me about bitcoin. 

I think that that is always the sign of trouble, of sometimes either a potential for investors to not be properly informed about 

where they are putting their hard-earned savings and, as a result, 

there is a need for much more fulsome communications with those 

who are seeking or who may be interested in participating in those 

markets. 

Mr. ELLISON. So over the course of 2017 we saw some precipitous 

increase in value. We saw some drop. We exchanged a lot. What 

do you think is driving some of those swings? Is it regulation or 

the threat or the possibility of it? 

Dr. BRUMMER. I think it is a product of speculation. I think it 

is a product of— 

Mr. ELLISON. Bubble? 

Dr. BRUMMER. —Yes, of a bubble certainly. It is a product of investors who are money chasing investments instead of investors 

mcarroll on FSR431 with DISTILLER

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chasing money. It is a product of inadequate disclosure. And as a 

result, I think, just to echo some of the comments here on the 

panel, that regulation can be very healthy for those markets. 

It can help to address some of the spikes in volatility and the 

patterns of fear, the bubbles. But that action is needed now. 

Mr. ELLISON. So we are—yes sir? 

Mr. VAN VALKENBURGH. I would only add that we have had a 

long history of technology bubbles. I think a lot of what is happening in blockchain technology looks rather like the dot com bubble of the late 1990’s, early 2000’s. 

And I think that is important for Main Street investors to understand, and educational programs from the CFTC like LabCFTC 

and educational advisories from the SEC are critical because in the 

late 1990’s it would have been extremely correct to say that 

Pets.com is overvalued, extraordinarily overvalued and they are 

going to blow all their money on a Super Bowl ad. And there are 

some projects in our space that look like that. 

But it would also be incorrect to say that Amazon.com was overvalued. And I think that is why we see the froth in these markets 

because a lot of these projects, say Filecoin or Ethereum or Zcash, 

are challenging major multinational corporations. 

And if any of them succeed they will be in the future as valuable 

and as critical as the infrastructure that those corporations created. But that is a highly speculative bet. 

Mr. ELLISON. I only have time for one last question from one last 

person. So we are talking about regulation here in the United 

States the discussion is on, but what about other countries and 

how does that impact this conversation? Anybody? 

Dr. BRUMMER. So we have been looking particularly over at 

Georgetown, some of my colleagues and other people certainly on 

the panel, at how interoperable are rules and approaches? The 

CFTC I know has been very interested in terms of information 

transfers, information exchanges between regulators. 

I think that one important component to these projects— 

LabCFTC was mentioned; I think that is certainly an important 

and healthy program, but to think through also how do we include 

more than just a market access component to those agreements 

and to push our regulators to also incorporate in the FinTech space 

questions of a coordinated regulatory design, information sharing, 

and enforcement? 

And I think that that would help to make sure that we can export some of our best values and approaches abroad and to take 

best lessons learned overseas and to incorporate them here. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the Chair recognizes the gentleman from Ohio, Mr. 

Stivers, for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. I really appreciate you 

holding this very important hearing on a topic that has a lot of people’s attention. 

The first question I have, and I am going to try to ask three 

questions, we will see how it goes—is to Dr. Brummer. Can you 

talk a little bit about the promise of blockchain technology? 

Let us take a couple steps backward and talk about the promise 

of blockchain technology to make our financial system more transmcarroll on FSR431 with DISTILLER

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parent and efficient and—well, not transparent—efficient. And 

what blockchain technology can mean, both for financial transactions and other things in our economy? 

Dr. BRUMMER. I think that the value in blockchain technology, 

and it is very useful for us all to remember that blockchain technology has its applications not only in the financial space but in 

other ecosystems, everything from pharmaceuticals and health and 

real estate and property. 

But it provides a platform whereby, in a very decentralized format, you can create a systems, a ledger, a methodology, and mechanism for tracking things and transactions in a way that is extraordinarily difficult to tamper with. And it allows for the 

disintermediation of certain kinds of folks in the middle that allow 

for a cheaper transaction experience. 

I think that precisely because it is embedded in online technologies the ability to fully lever—or right now I am going to talk 

about the upside for just a moment, because I have certainly been 

emphasizing that there are— 

Mr. STIVERS. And I would like you to wrap this up in about 15 

seconds. 

Dr. BRUMMER. In 15 seconds. 

Mr. STIVERS. Keep going, but— 

Dr. BRUMMER. Yes. The difficulty is that to the extent to which 

you are operating online there is more that the Federal regulators 

can do in terms of investor protection, but it also then raises questions. Someone had mentioned money transmitter laws as to how 

do you coordinate— 

Mr. STIVERS. That is my third question. We will get to that in 

a second. So— 

Dr. BRUMMER. All right. 

Mr. STIVERS. So my second question is for Mr. Van Valkenburgh. 

Can you help us understand the difference between a token that 

is used as a commodity and the promise of tokens that becomes a 

security? And if you can do it in about 2 minutes that would be 

great because we have 5. 

Mr. VAN VALKENBURGH. It is a great challenge and happy to try 

and answer. Thank you for having me. So we have a flexible test 

in the U.S. for what is a security. It is derived from a case called 

the Howey case. And that test can be applied for promises of future 

tokens. 

What you are really looking for are two things, an expectation of 

profits—I am simplifying—reliant on the efforts of an issuer or 

third-party promoter. 

So that is why this promise of future tokens is critical to thinking about why an ICO is a security even though other things might 

not be because we have a definable or discernible issuer who is 

promising to build something of profound economic value, but we 

are relying on them to actually keep that promise. And that is why 

it fits the test for an investment contract or a security. 

Now, a digital commodity might be a digital commodity for a 

number of reasons. We use commodities for money. We use commodities as investments. We use commodities as inputs for commercial industrial processes. And the same thing is true of digital 

mcarroll on FSR431 with DISTILLER

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commodities like Bitcoin or Ethereum or Filecoin, once Filecoin is 

built. 

Now, it is important to note that Filecoin is raising money to 

build itself, but once it is built it will be a commodity. 

And I will just quickly go through those three because they are 

great examples of what I mean by digital commodity. Bitcoin is 

nothing but something that is scarce and transferrable person-toperson. And that is why I make the metaphor to gold. It is very 

different than gold, but like gold I could hand it to another person 

and if that is valuable on markets that may be valuable and used 

as a medium of exchange or a store of value. 

Now— 

Mr. STIVERS. And I want to do one more question and I have 58 

seconds, so if you could— 

Mr. VAN VALKENBURGH. Yep, yep. 

Mr. STIVERS. —Give me the other two quickly? 

Mr. VAN VALKENBURGH. Ethereum is a computing system on the 

Internet and in order to get access to that computing system to get 

useful results you use Ether as a fuel to power that engine on the 

Internet. It is a commodity like oil. 

Mr. STIVERS. And the last one? 

Mr. VAN VALKENBURGH. And Filecoin, the last one, is rather like 

digital real estate. So you use Filecoin to get storage on the Internet. So it is a commodity like real estate, if you want to think of 

real estate as a commodity, measured in gigabytes instead of 

square feet. 

Mr. STIVERS. Great, thank you. 

And one last question for the whole panel, and I know this is 

slightly off topic but because it has come up, if folks could comment 

on whether they feel like FinCEN’s 2013 guidance on the appropriate level of anti-money laundering and Know Your Customer 

safeguards are appropriate. Or do you think that they are being 

abused out in the system? Do you think there is more information 

needed on those issues? 

If we could just go down the panel, anybody that is interested in 

answering that one? 

Mr. VAN VALKENBURGH. I think it is a very sensible piece of 

guidance. It was written early on in the space and it created a lot 

of clarity, especially for exchanges. And that is why all U.S. exchanges that I am aware of are collecting information on their customers and filing suspicious activity reports and keeping the financial system transparent even if it is cryptocurrency. 

Mr. STIVERS. Thank you. 

I yield back, Mr. Chairman. 

Chairman HUIZENGA. With that, the Chair recognizes the Ranking Member of the committee, Mrs. Maloney, for 5 minutes. 

Mrs. MALONEY. Thank you. My apologies. I had to Chair for the 

Democrats another meeting, but this is an incredibly important 

issue. Thank you, Mr. Chairman, for calling it. 

Mr. Lempres, as you know, my good friend and colleague Mr. 

Cleaver sent letters last month to the Bitcoin Foundation and the 

digital Chamber of Commerce asking what they are doing to prevent extremist groups like those involved in the White Nationalist 

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Movement from using cryptocurrencies to fund their campaigns of 

hate? 

And I have also seen evidence that cryptocurrencies are used 

heavily by sex traffickers to sell women. So this is a big problem 

and one that Ann Wagner and I have been working on. 

As Coinbase is one of the largest cryptocurrency exchanges in the 

world, what are you doing to prevent these extremists from using 

your exchange to fund their activities? Do you have a set of standards or—thank you. 

Mr. LEMPRES. Yes, thank you for the question. Let me first off 

say that we take that very seriously. Specifically with regard to 

hate groups, for example, we have a specific section of our terms 

of use that we rely on and we kick people off the platform anytime 

we see anything that constitutes— 

Mrs. MALONEY. Thank you. 

Mr. LEMPRES. —Either encouraging or facilitating hate on there, 

through our network. 

Speaking more broadly on bad actors and the things we do to 

track them down, one of the nice things about this technology is 

it actually gives you insights that you can’t get in any other financial instrument currently because of the nature of the blockchain, 

which is an immutable permanent record that is publicly available. 

We use both internally developed and commercially available 

blockchain analytic tools which actually give us quite a bit of insight into connections between individuals. If, for example, we 

identify some kind of bad node or some bad activity, we can track 

to see who has touched that and what relationship they would have 

with anybody else who might have touched that. 

I should mention that we are members of the Bank Secrecy Act 

Advisory Group. We work very closely with FinCEN. We file an 

awful lot of SARs. We have, just to show how important we view 

this space, nearly 20 percent of our total employees are dedicated 

toward compliance. 

Mrs. MALONEY. Thank you. And as I have said before, I am extremely concerned about virtual currencies because a lot of average 

people are using it and believing that it is an investment tool. They 

are pouring their life savings into virtual currencies and they stand 

to lose a lot of money when this bubble eventually bursts. 

Some people are treating these things as investments, not as currencies. And that is a huge problem because there are no investor 

protections like we have for stocks and bonds. 

So I am working on a bill that would regulate virtual currencies 

but not the technology, that have the characteristics of an investment like we have always regulated investments with robust investor protections, including disclosures, which will be regulated by 

the SEC. 

So Professor Brummer, let me start by asking you a question. Do 

you believe that the definition of a security in current law encompasses all virtual currencies? 

Dr. BRUMMER. No, I don’t believe so. The Howey test, which is 

long the standard for evaluating nontraditional financial products 

in determining whether or not they fall within the SEC’s regulatory perimeter, establishes several key characteristics and benchmarks that have to be satisfied. 

mcarroll on FSR431 with DISTILLER

22 

And I think that when you apply them to some of these virtual 

currencies like Bitcoin you get less than fulsome results according 

to those benchmarks. 

Mrs. MALONEY. So if we wanted to regulate virtual currencies 

that are being treated as investments and to require adequate disclosures to investors would Congress need to expand the SEC’s authority, in your opinion? 

Dr. BRUMMER. They would need to expand the SEC’s authority, 

yes. 

Mrs. MALONEY. And I liked the part of your testimony where you 

describe what kinds of disclosures should be made to people who 

invest in initial coin offerings. And I agree that the SEC can tailor 

the required disclosures so that they are appropriate for digital tokens and virtual currencies, which are different from traditional securities. 

Do you think that requiring these kinds of basic disclosures 

would stifle innovation in this space or harm the development of 

the blockchain technology? 

Dr. BRUMMER. I really don’t think so. The kinds of things like I 

outlined, adding mailing addresses— 

Mrs. MALONEY. And I have 15 seconds left. Professor Brummer— 

Chairman HUIZENGA. I am being generous with the time. 

Mrs. MALONEY. Oh, no, I know my colleagues need time, too. 

What do you think of the idea of subjecting virtual currency exchanges to minimum cybersecurity standards? Do you think this is 

necessary in light of the huge cybersecurity risks that virtual currency exchanges face? 

Dr. BRUMMER. I think that would be extremely helpful. Cyber-security is perhaps the number one challenge facing our financial 

markets infrastructure providers and, to the extent to which you 

want to provide those financial services, you should be subject to 

certain kinds of high expectations about the cybersecurity of your 

operations. 

Mrs. MALONEY. My time is more than expired. Thank you so very 

much. 

Thank all of you. Thank you. 

Chairman HUIZENGA. With that, the Chair recognizes the gentleman from Minnesota, Mr. Emmer, for 5 minutes. 

Mr. EMMER. Thank you, Mr. Chair, appreciate it. 

Appreciate all of you being here. This is a huge topic that cannot 

possibly be even scratched, in my mind, in 5 minutes with each of 

the people that are up here. I have a whole litany of questions, 

which I know my office will follow up through the Chair with each 

of you. 

I think where I want to go this morning after listening to you, 

because I find myself maybe not with my colleagues on some of 

this. I have a problem with, ‘‘Government is here to help us and 

we need more Government. We are going to have to go into this 

new frontier and we have to have more regulation.’’ 

I heard at the beginning we have a regulatory vacuum. That 

scares me to death. I tend to trust people before I distrust them. 

I tend to believe that people are in these things for good, that they 

are trying to improve their own lives and hopefully the lives of people around them, that old adage of ‘‘A rising tide lifts all boats.’’ 

mcarroll on FSR431 with DISTILLER

23 

And yet I hear elected officials who don’t have any concept of 

what we are dealing with here and how exciting it is talking about 

oh, my gosh, we have to run in. We have to regulate. We have to 

create more Government infrastructure. And by the way, I respectfully disagree with the idea that that won’t act as a wet blanket 

on this amazing new technology. 

What we are talking about here is blockchain. Blockchain technology applies all over the place. It can solve some of our 

cybersecurity issues. 

These are open transactions where—and Milton Friedman, of all 

people, predicted this back in 1999 when he said there will come 

a day in the financial services space where you will be able to do 

this over the Internet where A will have a transaction with B and 

it will be entirely open for people to see. But A won’t know B and 

B won’t know A. 

You can know that and you can see things. I think Mr. Lempres 

was talking about how you can see things through the blockchain 

that are going on. 

I love the fact that Mr. Rosenblum talked about examples of 

blockchain technology outside of this space. And I will tell you in 

Minnesota we have a company called BanQu that is using 

blockchain to provide digital identities to unbanked and underbanked individuals in order to build a credit history and access 

capital. 

That is something that Democrats and Republicans should be 

celebrating here in Congress, not going, ‘‘oh, my gosh, this is terrible. We don’t understand it. We need a new policeman or we have 

to take the policemen we already have and give them even more 

powers to start to invade this space and perhaps frustrate the development.’’ 

I have concerns. I realize there has to be some regulation, but 

it is the balance. And I have heard from the panel that we have 

regulation already in place; we just need clarity. 

Mr. Lempres, why don’t I start with you? You talked about we 

have to be able to say what is a security in this space? What is 

a commodity? I would add what is currency because these are all 

important definitions to whether or not certain agencies are within 

their jurisdiction. 

And to have you say two things, really scared me. One, that you 

haven’t made any offerings because you don’t have the certainty 

you need to know whether or not you can start to work in this 

space and second, to say that 20 percent of your workforce is working on compliance, that is nothing to be celebrating from this side 

of the table in my mind. 

So I would just ask you what about clarity in this area and what 

about the balance that I am concerned with? 

Mr. LEMPRES. Yes, thank you for raising it. It is obviously a very, 

very important issue. I can tell you that from our standpoint what 

we really need more than any particular approach is to know what 

that approach is going to be from the Government so we can plan 

and we can move. 

This system innovates very quickly and just knowing where the 

lanes are is extremely helpful for us. 

Mr. EMMER. If I can interrupt real quick? 

mcarroll on FSR431 with DISTILLER

24 

Mr. LEMPRES. Yes. 

Mr. EMMER. I am sorry because I am thinking of a conference 

that I was at last week, one of our very important and respected 

secretaries made a statement about everybody needs to register. 

There is no clarity around the law so all of a sudden people who 

are looking at being in this space or getting into this space, I heard 

from more people there after that comment that we can’t start our 

business in the United States. We are going to have to go somewhere else to start it. Does that concern you? 

Mr. LEMPRES. It does, although I will say that the entire world 

is struggling with these same issues. And with regard to the percentage of our team that is focused on compliance, the biggest piece 

of that is focused on Bank Secrecy Act and Know Your Customer 

obligations, these people are concerned about money laundering 

and counterterrorism and things like that. 

And that is an important element no matter which country we 

are operating in, and certainly in any developed country we will 

have those expectations. 

Mr. EMMER. And we should work with all of you to understand 

better those things that would work. I would just leave you with 

this. Right now this system gives advantage to the individual and 

not to the Government, and I am worried about giving advantage 

to the Government and taking away liberty from the individual. So 

hopefully we will be able to meet that balance as we go forward. 

Thank you, Mr. Chair. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the Chair recognizes the gentleman from Illinois, Mr. 

Foster, for 5 minutes. 

Mr. FOSTER. Thank you, Mr. Chairman. And before I begin my 

testimony I would like to ask unanimous consent to enter into the 

record a letter on behalf of Congresswoman Sinema from an Arizona-based blockchain company in support of this committee’s investigation into this area. 

Chairman HUIZENGA. Without objection. 

Mr. FOSTER. Thank you. Distributive ledger technology has tremendous promise and the value of a non-falsifiable ledger will have 

broad applicability to financial and non-financial transactions. It 

could reduce transaction cost, increase transparency, and provide 

for instant and final settlement in the areas ranging from cash 

transactions to real property records to securities. 

It also provides a platform for more speculative transactions, 

such as Bitcoin, that are backed by nothing more than perhaps 

their scarcity and the belief that there will, at some point, be a 

greater fool to take them off their hands at some unknown price 

in the future. 

But nonetheless, much of our daily lives will soon involve something like blockchain, so I think it is past time that Governments 

around the world have a look at these digital tokens and figure out 

where and how they should be used. 

And it strikes me there are three fundamental questions that I 

would like your reaction to that we have to face. The first is will 

there be a mechanism to bust trades or not? In the case of the 

Flash Crash, for example, the CFTC had very clear rules in place 

under which case market gyrations would result in trades being 

mcarroll on FSR431 with DISTILLER

25 

broken. There is no such mechanism, for example, in Bitcoin where 

if someone steals your Bitcoin codes they have it and you cannot 

get it back. 

Similar questions arise if a hacker absconds with the contents of 

your vault. Is there a higher authority that you can go to to break 

that trade? So that is the fundamental design question that I think 

you face and that we face as regulators. 

Second, is there a need for something equivalent to a consolidated audit trail? In the securities space we have learned by bitter 

experience of the need, if we are going to detect and prevent market manipulation, we need to have an electronic record of the timing and the beneficial owner behind every transaction. That could 

be designed into digital entities like this or it could not be. 

And third, related, is the authentication of participants. Will 

there be a mechanism if necessary an order of the regulator to 

unveil the identity of counterparties and issuers? That is something that could be present or could not be in any of these. 

And so I was wondering if you have a reaction to you think we 

should address those three issues: Busting trade, consolidated 

audit trail, and authentication of participants. I am just happy to 

go down the line here. 

Mr. LEMPRES. Sure, I am happy to start with that. Busting 

trades is tough—there are technological challenges to that. Once 

these trades occur or a transaction occurs, it has occurred. There 

is no opportunity for settlement 24 hours later or something else 

where you can look at it and pull it back. So that is a challenge. 

Mr. FOSTER. Yes, but there are technological means of doing that 

where every transaction would be conditional on the fact that some 

trusted set of entities haven’t publicized a code that invalidates the 

trade. 

Mr. LEMPRES. Yes, it— 

Mr. FOSTER. There are technologic ways of doing that but everyone has to understand that it is not like cash. If you steal cash it 

is yours, all right? And, with the exception of serial numbers and 

so on, you pretty much own that cash. But it could be designed differently and—all right. Then— 

Mr. LEMPRES. No, it absolutely could be. It absolutely could be. 

Mr. FOSTER. Right, so the consolidated audit trail? 

Mr. LEMPRES. Yes, unless those two items are put together the 

authentication of participants and any consolidated audit trail 

issue—certainly if you are trading on our platform we have information on it. 

We have your bank account information. Typically we have a lot 

of Know Your Customer information so we know the individuals. 

We know where they are. We verify their identity. We know the 

source of funds. We know quite a lot about them. And there is an 

immutable record once it is created. 

So in many ways we have—while it is not a consolidated audit 

trail in exactly the terms you are looking at, we have much of that 

information gathered on our platform that we are able to reconstitute it if it becomes necessary. 

Mr. FOSTER. OK. All right. 

Dr. Brummer, you want to take a swing at those? 

mcarroll on FSR431 with DISTILLER

26 

Dr. BRUMMER. Other than saying that I am sympathetic with 

your objectives, I would have to defer to Mr. Lempres as to how 

the internal operations work on it. 

Mr. FOSTER. OK. 

Mr. Rosenblum? 

Mr. ROSENBLUM. Sir, I think to take all of your questions we 

have to step back and look at a couple things. There are a number 

of different currencies and there are a number of different items 

being traded here. And there are a number of different places in 

which they get traded. 

So if you are talking about Bitcoin or other things that we will 

view as pure currencies, which is probably where this question 

starts from, I think there are one set of answers to those questions. 

I promise to get to those. 

But the second thing, though, is when we are talking about the 

new tokens and things that are being developed for particular platforms, those are very different. And there are at least two places 

where those can be traded, one is on the platform itself, second is 

on exchanges, most likely exchanges registered with the SEC. 

When we talk about exchanges registered with the SEC, I think 

your notion of having all three of those things exist will absolutely 

happen. I think the question of if we move—and I think with wellregulated, well-thought out platforms, that type of, at least to a 

large extent, all three things that you are talking about, identifying 

customers, having a consolidated audit trail, and being able to bust 

trades can happen on those platforms. 

I think when we move to something like Bitcoin, there I think 

you have a much more difficult problem with this because that 

genie is already way out of the bottle. And the ability to trade 

Bitcoin throughout the world is very difficult to put in at least to 

Know Your Customer rule or an identification rule. 

For example, you have a wonderful consolidated audit trail. You 

can follow Bitcoin throughout the trail. You just don’t know who 

it was who held it. So that one, I think, is the one that is going 

to be much more challenging for this subcommittee. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the gentleman from Ohio, Mr. Davidson, is recognized 

for 5 minutes. 

Mr. DAVIDSON. Thank you, Chairman, and I thank you all for 

your expertise on the topic in the rapid expiration of 5 minutes has 

been duly noted. So I will try to crank through this. 

I really appreciate the dialog that has been had about the differentiation between commodities and securities, and Mr. Van 

Valkenburgh, I wanted to spend a little bit of energy on that because as these securities are offered, in a way, I think you did a 

good job of highlighting what might look like a commodity with a 

test. 

But many times when people go to market, these aren’t shares 

in a company. If you think of them as an equity they are non-voting shares and some of them aren’t even committed to a dividend. 

And those that are committed to have some return in their structure, how is it that I make money for it, in some ways it looks almost like a bond. 

mcarroll on FSR431 with DISTILLER

27 

So could you say, look, if we were filing for securities, which people haven’t done yet, part A plus part D, part S, what does that 

look like to treat it as a security in common frame of reference for 

folks? 

Mr. VAN VALKENBURGH. Thank you, Congressman. I would first 

start out by saying that there are several developers who have sold 

their tokens through Reg D filings and they are not selling the tokens in that case. They are selling a promise, an investment contract in the true meaning and spirit of the Howey test wherein 

they are going to make efforts, people will rely on those efforts and 

the outcome will be something profitable. 

But the outcome in many of these cases is a brand new decentralized computing system that has baked into it tokens which can 

achieve some functionality. 

Once that system is built and the investors who bought in, say, 

a Reg D offering, is given the tokens, those tokens to me, assuming 

the network is functioning, that people are now relying on the 

blockchain instead of the issuer. They are relying on a blockchain 

the issuer created for proof of ownership for the functionality that 

that blockchain creates. 

At that point, it looks more like a commodity. At that point, 

maybe you can do something useful with the token like use it in 

an engine for cloud storage or use it in an engine for computation 

or hold it as a valuable and scarce commodity like gold or salt or 

things like that. 

Mr. DAVIDSON. Thank you. And in that sense shares have many 

of the same features, and, of course, they are treated as securities. 

Mr. Rosenblum, I want to spend a little bit of time talking about 

a lot of the companies that raise this capital are early-stage companies. And historically one of the paths to capital for early-stage 

venture. 

Venture is often considered smart money. You get the benefit of 

lots of experience helping small, early-stage companies navigate to 

scale up. ICOs don’t always have those features. Last year it was 

estimated that startups raised about $4 billion in ICOs. Can you 

talk a little bit about the concerns with respect to venture versus 

ICOs? 

Mr. ROSENBLUM. Thank you, Congressman. Actually let me say 

one quick thing. I am the only one on the panel who has not been 

asked about security versus commodity, so if somebody at some 

point wants to ask me, you are going to get a very different answer 

from me on that question than the other panelists. 

To answer your question, sir, one of the things we have seen in 

the ICO market to date has been a large number of people, a large 

number of companies raising money in ways that any securities 

lawyer would have told you, and truthfully did tell you, that you 

shouldn’t do. 

So for example, Dr. Brummer’s suggestions about how to improve 

a white paper to me make—I understand the notion, but no rational securities lawyer will advise their client to sell off a white paper. 

We always sell off of a private placement memo— 

Mr. DAVIDSON. Right. 

Mr. ROSENBLUM. —Or a disclosure document. We always have 

risk factors. We always take all the steps you need to for an ICO 

mcarroll on FSR431 with DISTILLER

28 

in exactly the same way that we do in a private placement for any 

other security. 

And so one of the things we have seen, and then I will—and I 

know time is short, sir, but one of the things we have seen are 

market practices that have been detrimental to the long-term development of the ICO market. 

Mr. DAVIDSON. Yes, thank you for that. And I think a very good 

distinction, and I like that you hooked back in this notion, of a 

white paper and how soft that is versus a private placement memorandum. And I guess to your point, if I could hear your perspective 

on commodities versus securities, I would appreciate that as we 

close. 

Mr. ROSENBLUM. Oh, thank you. Thank you so much for the invitation. So I think that the notion of trying to decide what is a security and what isn’t a security is something that would lead the 

market to distraction. 

To take the notion that once something becomes functional, once 

a platform becomes functional you no longer have a security that 

has to be wrong. You can be still relying very extensively on the 

efforts of the promoters. Trying to draw a line on when it is that 

you are no longer significantly relying on the efforts of promoters 

is so very difficult and so convoluted and so open to second guessing. 

My suggestion is don’t even bother. Come up with a simple, easy 

system to use eventually that is going to apply to all of these 

things regardless of whether they are a security or not. 

Mr. DAVIDSON. Thank you. 

And thank you, Chairman, for the additional seconds, and I 

yield. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the gentlelady from Missouri is recognized, Mrs. Wagner, for 5 minutes. 

Mrs. WAGNER. I thank the Chairman very much. 

Mr. Lempres, in your testimony you stated, and I quote, ‘‘we 

need to be sure that we are not killing good innovation brought 

about by new technology and good actors. For example, the State 

of New York requires a BitLicense, which has been unpopular 

causing companies to end their business relationships in the 

State.’’ 

Mr. Lempres, let me start off by asking you two questions. Since 

Coinbase is one of four companies who have received a BitLicense, 

do you believe New York’s model was appropriate for all industry 

participants? And second, what lessons can we learn from New 

York’s attempt to regulate the virtual currency market? 

Mr. LEMPRES. Yes. Thank you for asking, and we are one of four 

companies that has received it. I think an obvious lesson is New 

York made a very ambitious effort by the State to regulate in this 

space. 

The fact that they have only issued four licenses answers the 

question to a certain extent. They have chilled activity in the State 

of New York. 

Having said that, when you are at the scale that we are at now 

and the number of individuals and institutions that we are dealing 

mcarroll on FSR431 with DISTILLER

29 

with now, we do benefit from the comprehensive regulatory scheme 

the State of New York has put in so that people do trust more. 

We are doing the kinds of things they want to see when we have 

people who are used to dealing with financial institutions, and the 

State of New York is in effect treating, through its BitLicense, us 

and other companies the way they treat financial institutions. I 

think that sends a message to the market. 

So for a company of our size and again, there are four that have 

this license, we have found benefits in dealing with the State of 

New York on this. I would note that there are hundreds or thousands of companies in our space and obviously only four of them 

are operating in New York under that authority. 

Mrs. WAGNER. What are other State laws that regulate 

cryptocurrencies? 

Mr. LEMPRES. So we have 40 licenses in 38 States so they are 

primarily money transmission licenses that we deal with but they 

lead to full exams. We have, I believe had 28 exams to current various States coming into our offices. 

Mrs. WAGNER. OK. Switching topics somewhat, I wanted to talk 

about compliance a little bit. As a registered MSB, Coinbase is required to submit suspicious activity reports, or SARs, to FinCEN. 

Mr. Lempres, I understand that Coinbase includes blockchain analytics when filing their SARs. Can you explain to the committee 

how including this information allows FinCEN to get a more complete picture of what is going on? 

Mr. LEMPRES. Yes, and thank you. So you are correct in all of 

your parts there. Yes, we do file SARs with FinCEN and that we 

do include blockchain analytic information where it is helpful in 

that SAR. 

And the reason we do that is simply to do everything we can to 

put into context the information—we have access to information, 

that many Federal agencies don’t see on a day-to-day basis. We see 

it all the time. We try to tie it together to present as accurate and 

complete a picture we can so that if further investigation is warranted they at least have the broader context in which it is operated. 

Mrs. WAGNER. And to follow up, can you talk about how 

Coinbase coordinates with law enforcement and how your Know 

Your Customer program was developed? 

Mr. LEMPRES. Sure. So we are quite proud of our involvement 

with law enforcement. We have a group, our global intelligence 

unit, it’s focus is exclusively on law enforcement coordination and 

education. We train, I believe, more law enforcement agencies globally than anyone. 

We have trained hundreds of State and local agencies. And when 

I was talking about training, it is essentially how the blockchain 

works, how cryptocurrencies work. 

Mrs. WAGNER. Right. 

Mr. LEMPRES. What information is there and how a case can be 

put together if they need to put a case together. 

Mrs. WAGNER. Mr. Van Valkenburgh, in your testimony you 

mentioned that there is friction and mismatch between new technology and old regulatory structures when it comes to State-byState money transmission regulation. Can you explain, sir, how the 

mcarroll on FSR431 with DISTILLER

30 

current State regulatory approach poses issues with regard to 

cryptocurrency exchanges? 

Mr. VAN VALKENBURGH. Yes, thank you. The first thing I would 

say is these are naturally global technologies. They work on the 

Internet so when people use them they necessarily cross borders. 

And a company like, say, Coinbase, will have customers not only 

in every State but probably across the world. And that means that 

compliance, when it is done at a more local level, is very burdensome and often redundant. 

The 40th background check that your company gets will probably 

not make you more likely to be secure or to have a good reputation. 

It is just extra. 

Now, the other friction or mismatch between State money transmission licensing and these technologies, especially at the exchange 

level, is that money transmission licensing relatively exclusively focuses on this idea of transmission from A to B, not on the idea of 

custody as clearly defined but on the idea of transmission. 

And there are all sorts of people in the world who are developing 

these technologies who facilitate transmission because they write 

highly innovative software that help power these new blockchain 

technologies. They are critical to this innovation. And they don’t 

take custody of consumer funds, so they don’t actually put customers in risk. 

But depending on how a various State money transmission licensing statute is drafted, you could interpret it to say that that 

software writing activity is included as money transmission. And 

the penalties for being an unlicensed money transmitter are very 

grave. 

So if we could cleanup that statutory language State-by-State to 

make it clear, folks that hold people’s Bitcoin, like my colleagues’ 

company Coinbase, are licensed. 

But people who don’t actually hold it are not subject to a licensing requirement. That would be a very positive signal from the 

U.S. that we are willing to protect innovation where it doesn’t endanger consumers. 

Mrs. WAGNER. I thank you all for your testimony. My time is 

way expired. Thank you for your indulgence— 

Chairman HUIZENGA. We have been somewhat generous today on 

that, knowing how do you unravel this in 5 minutes is very difficult. 

And still while we are in this first round, welcome back Mr. 

Sherman, who is recognized for 5 minutes. 

Mr. SHERMAN. Thank you. 

The currency is both a store, a value, one you hope appreciates, 

and a medium of exchange. So let us focus on the medium of exchange. Is there any reason why I would need a cryptocurrency to 

pay for my groceries or anything else? Why wouldn’t that be adequately served by using dollars? 

Yes, Mr. Van—yes. 

Mr. VAN VALKENBURGH. Thank you, Congressman. No, not yourself I believe, sir, because you and I are— 

Mr. SHERMAN. You are assuming I am not a terrorist or a criminal and I thank you for that. 

mcarroll on FSR431 with DISTILLER

31 

Mr. VAN VALKENBURGH. No, I am assuming you are an American 

citizen, which I think is a pretty safe assumption. 

Mr. SHERMAN. Oh, that one is safe. The other two are questionable. Go ahead. 

Mr. VAN VALKENBURGH. You and I have the benefit of a wellfunctioning and extremely important financial infrastructure that 

surrounds us every day of credit cards, of bank accounts and most 

Americans do find it not too difficult to become banked. We have 

an unbanked problem in this country but it is not nearly as profound as other parts of the world. 

In other parts of the world— 

Mr. SHERMAN. Now, is there any part of the world where the 

unbanked couldn’t just as easily have access to transactions in real 

currencies rather than cryptocurrencies? 

Mr. VAN VALKENBURGH. So there are parts of the world where 

real currencies in those countries are being basically debased by 

their Governments or hyperinflated or they just don’t have actual 

purchasing power because of— 

Mr. SHERMAN. Right. So you could use dollars, euros, Swiss 

francs. Why are those not the adequate substitute? 

Mr. VAN VALKENBURGH. If you can find access to cash in your region of the world, U.S. dollars, that might be a very good means 

of exchange, but those will trade at extreme premiums. My only 

point is that cryptocurrencies are accessible. They are accessible financial tools only on the basic precondition that someone has a 

smartphone and an Internet connection. 

And I think there are regions of the world where people will 

sooner have smartphones and Internet connections than they will 

have access to a valuable and secure financial services from companies. 

Mr. SHERMAN. I wonder if someone else can comment on that? 

I don’t think on the tallest mountain of Tibet there is somebody 

with a $100 bill that they are holding onto. And on every cellphone 

there is a way to use dollars or euros, so does someone else have 

a comment? 

Mr. ROSENBLUM. Mr. Sherman, thank you for the questions. I 

want to divide your question into two different parts. One part relates to things like Bitcoin and other currencies, which is really 

what you are discussing. 

Second part is going to relate to tokens and similar types of 

things that have—instruments that have specific purposes on specific platforms that people can earn and generate in ways that you 

could not do with cash. 

Mr. SHERMAN. I have limited time—focus on what can’t you do 

with cash? 

Mr. ROSENBLUM. In a platform, for example, where we have a 

buyer of property, sellers, and then we have third parties who are 

performing important services to the platform to help the platform 

run, to help validate services, to help do other functions that are— 

Mr. SHERMAN. And why can’t these platforms use dollars? 

Mr. ROSENBLUM. Because there is nobody who is going to pay 

them. What happens on these platforms is that the platform 

itself— 

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Mr. SHERMAN. Wait a minute. I have a bank. I pay them one way 

or another. 

Mr. ROSENBLUM. No, no, see, you have to find a source. You have 

to find somebody who would have or who would be in the business 

of paying them and that costs money. So what you see in these 

platforms, what you see— 

Mr. SHERMAN. Sir, I have lived my whole life. I am as old as almost anybody in the room. 

Mr. ROSENBLUM. Oh, sir, that is very kind of you to say, but— 

Mr. SHERMAN. And various intermediaries have handled my financial transactions my entire life and none of them have gone 

hungry. 

Mr. ROSENBLUM. We are talking about a very different business 

model. And that is one of the things that is so important about this 

and what is so important about this— 

Mr. SHERMAN. —We know that this is a good method for terrorists, criminals, and tax evaders. So the question is, is there some 

great social purpose that cannot be met in any other way? And I 

will want to hear from a different witness, and I don’t see one volunteering. 

Dr. BRUMMER. Honestly I think it is an important question because you are getting ultimately to this question as to whether or 

not many of these cryptocurrencies, and I think the vast majority 

of the cryptocurrencies tied to ICOs are really just means by which 

you are raising capital as opposed to currency. 

I will say— 

Mr. SHERMAN. Raising capital but unregulated— 

Dr. BRUMMER. Oh, absolutely. 

Mr. SHERMAN. —Doing an IPO but calling it an ICO— 

Dr. BRUMMER. One of the key responses I was trying to mark for 

Mr. Rosenblum when discussing the adequate disclosures or the 

kinds of disclosures that one would like to see in a white paper is 

precisely in order to beef up those white papers so that they become more compliant with the expectations of our securities law, 

which I think is an expectation that all securities lawyers would 

enjoy. 

But I am very sympathetic to that. 

Mr. SHERMAN. But if I buy an ICO and the company sells great 

pizza and eventually makes billions, I don’t get any of that. I am 

not a stockholder? 

Mr. ROSENBLUM. But sir, the important thing on those tokens is 

the company that creates the platform may not have any financial 

success on the platform. And the fact that the platform becomes 

very successful may not redound to the benefit of the entity that 

created the platform. 

Mr. SHERMAN. OK. Perhaps we will have another hearing after 

some major terrorist event financed by cryptocurrencies, and I yield 

back. 

Chairman HUIZENGA. The gentleman yields back. 

With that, the gentleman from Connecticut, Mr. Himes, is recognized for 5 minutes. Currently pass, OK. 

We have some people potentially in transit, but if it is OK with 

my colleagues we would like to go on to a second round, which bamcarroll on FSR431 with DISTILLER

33 

sically means I get to ask another question finally after having a 

number of them. 

And Mr. Rosenblum, you asked for it. So differences between a 

commodity and a security? 

Mr. ROSENBLUM. So in this case, as I said before, it is very difficult to know where one begins and one ends. The notion of saying, 

something has usage if we go back to the citrus groves that were 

at issue in the Howey test, there is no doubt that the citrus groves 

had usage. They really produced citrus fruit that people really sold. 

Didn’t mean that the participation interest in those were anything 

other than securities. 

The problem that we face is that I can draw a line for you that 

says when the promoter’s efforts on the platform become less important than the commercial usage of the platform in driving the 

token value, probably it is no longer security under Howey. 

What I cannot tell you is a good test or a good set of factors to 

look at that tell you with any great certainty when you get to that 

point. So the thing that I keep suggesting to people on this is I 

think that in the long run we shouldn’t worry about that issue. 

We shouldn’t worry about the distinction between this is a commodity, this is a security, and how they travel back and forth between each other. But instead have a simple system, move to an 

environment where you have a simple system that works for both 

and we don’t have to have lawyers like me argue with other lawyers and argue with the courts and argue with the SEC over which 

side of the line it is. 

Dr. BRUMMER. So can I just jump in for one quick observation 

in response to something that you said, which I think is really 

quite useful? When you think about the citrus groves in the Howey 

case, this famous Howey case, you had oranges. The oranges themselves were commodities. 

It was the combination of the oranges of a service contract basically with an opportunity to invest in them. It is the combination 

of it all where the whole is greater than the sum of its parts. And 

then you end up in the world of a security. 

However, I would say that there is a difference in terms of how 

commodities are regulated under the CEA. And how securities are 

regulated. And securities regulators, for example, tend to put a little bit more of an emphasis on disclosure, the relationship that the 

SEC has with infrastructure providers and other market participants. There is a different level of reliance in the commodities 

world versus the securities world. 

And these are things that I think that you, as a committee, really ought to take into consideration when you are drafting any potential legislative response. 

And I would like to also emphasize that when we think about a 

commodity, one of the commonalities between the commodities 

world and securities world is an awareness that digital things tend 

to be more abstract and therefore they tend to be a little bit harder 

to understand and as a result there is a bit more attention that is 

focused and placed on those products. 

Gold is the quintessential commodity because it is finite. People 

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34 

thing that has value. Here we are debating a lot of that, and as 

a result our regulatory authorities and you as a— 

Chairman HUIZENGA. And so based on those regulatory authorities, and we saw my colleague, Mr. Emmer, talk a little bit about 

this, and I see the natural tension. You have people saying there 

is no way I want any Governmental regulation on this. In fact, we 

came up with it. Get out of it. This is a fire free zone and we like 

it that way. 

Government bureaucracies and agencies tend not to view the 

world through those lenses and I think there is a certain Governmental responsibility to protect those investors versus a known investor or a unique investor that is sophisticated in that. 

And I have a minute left here, and I am going to be tight on this 

5 minutes here, but I am curious, and anybody can answer this, 

will a Governmental central bank in any system recognize and utilize a cryptocurrency? Because I think until that point, this is going 

to be a bit of an outlier. 

And whether it would be some small country or some others, it 

seems to me the only way that there is going to be an ultimate 

legitimization of cryptocurrencies is whether a central bank somehow recognizes it. Anybody? 

Mr. ROSENBLUM. Mr. Chairman, I think several countries in Europe, for example, and in Latin America have already thought 

about and are already considering digitizing their currency. So I 

think that that is something that may very well happen. 

I wonder though whether to at least— 

Chairman HUIZENGA. But that is a little bit different. That is a 

Governmental-created currency versus a non-Governmental currency at this point, right? 

Mr. ROSENBLUM. That is right, but I wonder what the difference 

is. Once we have moved away from the Bretton Woods Treaty, and 

once we have currencies floating freely around with each other. I 

think in one sense what we are worried about is that Bitcoin isn’t 

backed by a state actor and that is about it. 

Chairman HUIZENGA. OK. 

With that, the gentleman from Georgia is recognized for 5 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. And, again, I 

am so excited about this new cutting edge, what I call the new 

frontier of our financial service industry and it is an exciting time 

for us. 

But let me give you all this scenario. We have millions of new 

investors who are literally pouring their savings into virtual currencies here, and it is a wonderful thing. As I said before, it is burgeoning up. It is billions of dollars in capital being raised. 

But then these facilities in this virtual currency are facilities 

that store and they transfer these digital assets for investors which 

are known as digital wallets. But here is the problem. These digital 

wallets have become targets for hackers. 

And hackers are using social media, phone calls, and ads on 

search engines to fool investors into providing them with sensitive 

personal information that they can use to gain access to accounts 

at digital wallet providers and steal literally thousands of dollars’ 

worth of virtual currencies. Hackers have also targeted the digital 

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35 

wallets themselves, exploiting the vulnerabilities in their 

cybersecurity systems. 

This was brought to my attention by SEC Chairman Clayton. He 

has pointed out that digital wallets storing or transacting digital 

assets that are securities, can trigger other registration requirements under the Federal security laws, including broker-dealer, 

transfer agents, or clearing agency registration. 

So panel, what I want to ask you is what are the benefits to investors of digital wallets registering with the SEC? Would that 

help to defer? These are the kinds of technical and complex questions that present us as Members of Congress because it all falls 

on our shoulders. And most certainly we want to be responsive. 

And as I said before, Co-chairman of the FinTech Caucus I am 

very proud of this industry. But I also know, for example, the OCC 

may come there. They are flirting from one position to the other 

of doing a special order charter for FinTechs. And then you have 

all these regulators boxing around how to identify them. 

But all this comes to our lap, and if they are registered with the 

SEC should these digital wallets be subject to enhanced 

cybersecurity protocols such as Chairman Clayton said, as the 

SEC’s regulatory systems compliance and integrity of Reg SCI? We 

are dealing here with an opportunity to get it right before we get 

it wrong. 

So tell me, Mr. Van Valkenburgh? 

Mr. VAN VALKENBURGH. Thank you, Congressman. I think the 

testimony of both Chairman Clayton and Chairman Giancarlo before the Senate Banking Committee is extremely important to take 

a look at, to think about how those two regulators are construing 

the space. 

Chairman Clayton, as you rightly said, talked about tokens that 

are securities either because the token does represent a legal 

agreement, it is a company saying these are shares of our stock, 

or because the token is a speculative promise of future efforts, fits 

the Howey test. 

But Chairman Clayton also talked about what he called pure 

cryptocurrencies. He used the term on several occasions. And the 

Chairman suggested that those are outside of SEC jurisdiction and 

if you look at one of his responses to the questions he said, ‘‘Do not 

misconstrue me saying that is outside of our jurisdiction as asking 

for more jurisdiction.’’ 

And I think that is probably because the colleague sitting to his 

left was Chairman Giancarlo of the CFTC, an organization that has 

expertise in policing markets for scarce commodities, which pure 

cryptocurrencies, I would argue, very much are. So I think we want 

to look to the institutional competencies of these two different 

agencies to protect investors. 

And that means the CFTC will continue to use its existing authority to police spot markets for fraud and manipulation if the 

spot market is trading commodities and the SEC will ensure that 

only tokens that are securities are traded only on ATSes or national securities exchanges, which will have to go through all of 

those cybersecurity requirements. 

Now, where there might be a gap, if there is any gap, is the fact 

that the spot markets for cryptocurrencies are policed by the CFTC 

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36 

ex post, not supervised by the CFTC ex ante, for things like transparency, cybersecurity standards, and the like. Instead, they are 

supervised by the States in a patchwork approach that includes the 

BitLicense and others. 

It might be time to rationalize and Federalize that supervision 

of cryptocurrency markets. 

Mr. SCOTT. And so if you saw those two agents— 

Chairman HUIZENGA. I am sorry. The gentleman’s time has expired. 

Mr. SCOTT. All right. Thank you, sir. 

Chairman HUIZENGA. With that, the gentleman from North Carolina, Mr. Budd, is recognized for 5 minutes. 

Mr. BUDD. Thank you, Mr. Chairman. And again, thanks to each 

of you for being here today. 

Peter, I want to publicly thank you for the private briefing that 

you and Jerry gave several weeks back and just say how helpful 

that was and just to encourage any other members, staff on either 

side of the aisle just to reach out. You guys have been very helpful 

in bringing us up to speed on this, so thank you again. 

Mr. VAN VALKENBURGH. Thank you. 

Mr. BUDD. So I want to make a statement and then ask a few 

questions. One, regulation in this space is something that the U.S. 

we have to get right because poor or rushed policy with respect to 

cryptocurrency and tokens, in my opinion, it really threatens America’s leadership in finance and in technology. 

So we have to be careful to avoid missteps. This technology has 

potential to become something great, so I just think that we should 

move with caution here. 

And on that note, I am curious about an idea that I have heard 

and being floated around as a potential regulation scheme for 

cryptocurrencies. So this idea would divide cryptocurrencies into securities and non-securities with security coins being regulated as 

securities and non-security coins being regulated as commodities. 

So the obvious difference between the two being the security 

coins would offer dividends or equity or anything that did not, 

again, be on the other side, would be on the commodity side. So I 

am curious, Peter, to get your thoughts on this idea first. 

And then Dr. Brummer, if you have any thoughts if you could 

answer that as well? 

Mr. VAN VALKENBURGH. Thank you, Congressman. The first 

thing I would point out is that this is a global technology, and U.S. 

laws are not a good fit for both the innovators and the investors 

as far as protecting them but also enabling markets, these technologies will move to other jurisdictions. 

The Congressman is, I think, correct that a sensible way of dividing these markets is between things that are more commodity-like 

and more security-like. And in the U.S. the flexible test for a security, the Howey test, is the tool for doing that. 

But it is not the tool globally. In Europe, for example there is 

more of a black letter law approach than a flexible test. Certain 

things have been identified in various European jurisdictions as securities and they are more of what you suggested, things that 

clearly offer a dividend or capital return on investment. 

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Finding a more bright line test may be useful, although the 

SEC’s flexibility with the Howey test can be very helpful in going 

after schemes that pretend to not be securities by not offering those 

formal things. 

So finding a way forward is not easy, but probably worth considering because at the moment you see many more of these truly innovative capital formation opportunities moving over to Europe. 

You see a lot in Switzerland. You see a lot in Germany. And these 

are not countries with lax securities regulations. These are just 

countries with a more certain legal test. 

So I think guidance from the SEC as to how they will interpret 

the Howey test with respect to token sales, they have already had 

a lot of very deliberate statements that have been very helpful, but 

further guidance might be helpful, especially with respect to exactly how you draw the line. And it might look more like what Europe is doing these days. 

Dr. BRUMMER. So I guess my first response is that Europe’s approach on this is very much uncertain, number one. 

Number two, they don’t have a definition in place firmly for virtual currencies under MiFID and other European Union regulations and rules. And they are grappling with these same issues just 

as we are today. And there is an enormous amount of uncertainty 

as to how that is going to just play out. 

I think when it comes to the commodity securities question, I 

agree with Peter. Maybe there is a little bit more of a difference 

of tone. Institutional competence is extremely important when 

thinking about who should be regulating different financial products. 

My testimony today emphasized the question of disclosure. And 

I think that even when it comes—I think that Bitcoin is not the 

same as gold and I think that people intuitively understand it a lot 

less. 

And so this creates very important questions as to what kinds of 

disclosures should be related to pure cryptocurrencies that may legally, under current law, resemble a commodity or be classified as 

as a commodity as opposed to a security because the disclosure 

process available under the CEA is more or less of a buyer beware 

approach versus a much more fulsome approach adopted under the 

SEC. 

And so a decision has to be made as to not just the competence 

but even under existing rules no matter which, excuse the pun, 

side of the coin you may fall, there will be subsequent rulemaking 

required in order to adopt and to adapt your existing regulatory 

processes to a virtual currency. And I think that it is important 

that people recognize this, that there is going to be work that will 

have to be done, both on the SECs and as well as under the CFTCs 

in order get it right. 

Mr. BUDD. Thank you both. 

I yield back. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The gentleman from Connecticut is recognized for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. I will yield my time to 

Mr. Scott. 

Mr. SCOTT. Thank you very much, Mr. Himes. I appreciate that. 

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Mr. Van Valkenburgh, you hit it on the head as to what I think 

we have an obligation both to this burgeoning industry here, as 

well as to the safety of the American people. All this technology 

that we have being applied in very sensitive areas makes us become almost a servant of the machine technology that was created 

to serve us. 

And we have to get this right in terms of what I think is a delicate balance of the right regulation that really helps to solve the 

problem. We have hackers out there that are at work and damaging great careers and jobs and just the lives of the American people. And they look to us here in Congress to try to solve that. 

And so when I brought that issue you brought up how the CFTC 

and the SEC would work together in working with this, which presents another problem that we have. And let me ask you in that 

situation the great need for harmonization because that is the 

problem we have. 

When we have these regulators involved and you have several 

regulatory agencies, it puts your industry in somewhat of an awkward position trying to figure out and try to make sure that they 

are both coming at it the same way. So would you recommend that 

whatever we do, knowing these different agencies, that Congress 

put in whatever we do a rule for harmonization? 

Mr. VAN VALKENBURGH. Yes. I do think harmonization is critical. 

Chairman Giancarlo, when he talks about policing authority over 

these spot markets for commodities, emphasizes that they don’t 

have any ex-ante authority. They don’t have the ability to supervise beforehand. They are not the regulator on point. 

And as I was briefly saying earlier, the regulator on point is 

largely the States, whether it is through the BitLicense or through 

money transmission licensing. And so it is not just anarchic as between Federal agencies potentially. It is anarchic as between Federal agencies and various State regulators. 

I think State-by-State money transmission licensing is both the 

biggest impediment to the technology because of the profound and 

redundant and nonproductive costs that it imposes on the industry 

and on the ecosystem. And it also is not an adequate way to protect 

consumers or investors. 

I think we need to start a conversation in Congress about Federal pre-emption of State money transmission licensing law that 

would also include sensible investor protections for those who become licensed by a Federal authority. 

And Chairman Giancarlo, in his testimony before the—I believe 

it was before the Ag Committee not Banking Committee in the 

Senate said what that will look like will be data reporting, capital 

requirements, cybersecurity standards, measures to prevent fraud 

and price manipulation and anti-money laundering and Know Your 

Customer protections. 

That is a sensible package to require from intermediaries in our 

cryptocurrency space, and it is the low-hanging fruit from a harmonization standpoint of what Congress can do soon. 

Mr. SCOTT. Thank you very much, Chairman. 

Chairman HUIZENGA. The gentleman yields back the time. 

So I would like to thank our witnesses for today. I thought this 

was illuminating in so many various areas and completely befudmcarroll on FSR431 with DISTILLER

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dling in others, which—welcome to Congress I guess. But it was 

very helpful and thank you for this. 

I believe that this is probably hello not good-bye. We are going 

to be continuing to have this conversation. 

I do have—without objection, I would like to submit the following 

statement for the record, a statement from Liquid M Capital, Inc. 

without objection, so moved. 

Without objection, all members will have 5 legislative days within which to submit additional written questions for the witnesses 

to the Chair, which I will then forward on to you all. And I would 

just ask our witnesses to please respond as promptly as possible. 

And without objection, all members will have 5 legislative days 

within which to submit extraneous materials for the Chair for inclusion into the record as well. 

So again, thank you very much for your time and your attention 

to this and your insights. And this hearing is adjourned. 

[Whereupon, at 12:07 p.m., the subcommittee was adjourned.] 

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(41) 

A P P E N D I X 

March 14, 2018 

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Written Testimony of 

Chris Brummer 

Agnes N. Williams Professor of Law 

Faculty Director, Institute of International Economic Law 

Georgetown University Law Center 

Before the United States House of Representatives 

Committee on the Financial Services 

Subcommittee on Capital Markets, Securities and Investment 

"What Should Be in an ICO White Paper?" 

Wednesday, March 14, 2018 

10:00 am 

2128 Rayburn House Office Building 
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What Should Be in an ICO White Paper? 

Chairman Huizenga, Ranking Member Maloney, and Members of the Subcommittee: 

Thank you for inviting me to testify at this hearing. My name is Chris Brummer. I am 

the Agnes N. Williams Research Professor of Law at Georgetown University Law 

Center, and the Faculty Director of the Institute oflnternational Economic Law, where I 

teach courses in securities law and international fmancial regulation, among other topics.! 

I am here today solely in my academic capacity and am not testifying on behalf of any 

entity. 

The rising popularity of Initial Coin Offerings-and an accompanying spate of fraud and 

market volatility-has prompted an important debate here in Washington, D.C., and 

indeed around the world, about proper government responses to ICOs and 

cryptocurrencies more generally.2 Some of the most pressing questions involve the 

appropriate division of authority between the CFTC and SEC, and whether their authority 

should reach deep into the heart of the cryptocurrency ecosystem, the spot market. 3 Still 

others contemplate whether or not an entirely new or alternative regulatory regime is 

needed for cryptocurrency and token fundraises, not only here but also in Europe and 

elsewhere.4 

My task today is a comparably more modest venture. Given the complexity and 

heterogeneity ofiCOs, and the limitations of our time, I believe it's important to start 

with the basics, and contemplate just what kind of informational features, backstops and 

l Georgetown's Institute oflntemational Economic Law is the focal point for the study oflaw and 

international economic policy at Georgetown University, and hosts dialogues, lectures, conferences and 

executive training for senior government officials and private sector professionals on issues relating to 

financial regulation, trade, tax and monetary affairs. For more, see http://iielaw.org. 

2 See, e.g., Jason Rowley, JCOs delivered at least 3.5x more capital to blockchain startups than VC since 

2017, at https://beta. techcrunch. com/20 I 8/03/04/icos-delivered-at-least-3-5x -more-capital-to-blockchainstartups-than-vc-since-2017/; Oscar Williams-Gmt, Only 48% of JCOs were successfUl last year- but 

startups still managed to raise $5.6 billion, at http://www.businessinsider.com/how-much-raised-icos2017-tokendata-2017-2018-1. 

3 Brian Fung, U.S. regulators stry they don't have enough power over cryptocurrency, at 

http://www .chicagotribune.com/business/ ct-biz-sec-cftc-cryptocurrency-exchanges-20 180206-story .htrnl. 

4 Chris Brummer, Whatever challenges the US faces in regulating cryptocurrencies, the EU has far more, 

at https://chrisbrummer.com/whatever-challenges-the-us-faces-in-regulating-cryptocurrencies-the-eu-hasfar-more. 
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rigor one would like to see in an ICO fundraise, and then reflect on the sufficiency of 

existing regulatory tools. 

With that in mind, my written comments below focus on disclosure. Evidence of fraud is 

rife in many I COs, necessitating welcome responses by regulators,5 but an awareness of 

the need for better policing of these markets is not in itself sufficiently instructive as to 

what one would like to see affirmatively disclosed in I COs, whatever the overlying 

regulatory architecture. And this is a critical issue for this subcommittee, and the greater 

regulatory community. Disclosure has long been the bedrock of U.S. securities laws, 

which have relied on information to serve as the primary tool with which to empower 

investors to make appropriate, informed risks with their life savings, and by extension 

allocate capital efficiently in the economy. 

The disclosure system embodied in the Securities Act of 1933 is largely one where 

promoters share, among other things, material information publicly about their company, 

management, and securities being offered, as well as their intended use of proceeds. This 

information is then filed with the Securities and Exchange Commission. Most ICO 

disclosures, by contrast, are facilitated via currently unregulated "white papers" focusing 

largely on the existing technology or technology under development or to be financed via 

the offering. 6 There is, as a result, a large gap between the disclosures required in an S-1 

(and arguably Form 1-A) and that which is provided in most white papers. 

For our purposes today, I would like to highlight some of the key disclosures one would 

expect, and likely need to have for buyers of ICO tokens-whether they are investors 

seeking to profit or technology users seeking to support and participate in an innovative 

product-to make a purchase in an informed manner.7 These disclosures are especially 

relevant, I believe, as I COs transition from technical expert ecosystems to the distribution 

of instruments that are ever more likely to attract everyday investors and the retail public: 

Promoter's Location and Contact Information 

Problem and Proposed Technology Solution 

Description of Token 

Qualifications of Technical Team 

Industry Risk Factors 

5 See, e.g., Joint Statement by SEC and CFTC Enforcement Directors Regarding Virtual Currency 

Enforcement Actions, at https://www.sec.gov/news/public-statement/joint-statement-sec-and-cftcenforccment-directors. 

6 I note "mostly" since disclosure can also occur outside of the white paper, in "virtual" public 

roadshows-for example, Ask Me Anything (or "AMA") sessions on Rcddit, Telegram, or Slackwhere the development team answers questions submitted by the public in real-time. 

7 Importantly, these are not concerns relegated exclusively to realm oflaw professors and regulators. At 

least one entrepreneur has ventured similar observations. See Andrew J. Chapin, What to Look for in an 

!CO White Paper, available at https://hackemoon.com/what-to-look-for-in-an-ico-white-paper-successfultoken-54eba3787139 
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Promoter's Location. At least one academic study has noted that in roughly 32% of 

I COs, it is not possible to identify the issuing entity's or promoter's origin.8 This creates 

serious information asymmetries on the part of the investor. Without knowing the issuing 

entity's or promoter's origins, it becomes impossible to know or identify what rules and 

legal protections might be afforded to investors. Further, investors have few means by 

which to contact relevant public authorities in case of fraud, theft or loss. ICO white 

papers should, therefore, set out a detailed statement (beyond a simple P.O. box) of where 

the issuer as well as its key management are located. Without a verifiable geographical 

address, ICO white papers should not be permitted for use in raising funds. 

Problem and Proposed Technology Solution. For most of the history of U.S. Securities 

law, no information was more important for investors than the issuer's financial 

statements. By being able to scrutinize balance sheets, cash flow- and income statements, 

investors could evaluate a company's past performance, make informed guesses about its 

future performance and profitability, and make an estimation of the value of a company's 

securities. And precisely because of the centrality of financial statements in securities 

offerings, an entire ecosystem of third party auditors, accountants and credit rating 

agencies were developed and relied on to ensure the accuracy of financial statements and 

their compliance with best practices. 

ICOs tend to serve a different purpose from most traditional IPOs. Instead of funding 

industrial companies transitioning into a more mature cycle of development, I COs 

involve products developed by startups identifying technology-based problems (like 

limited or volatile cloud storage needs) and proposing the sale or fmancing of 

technology-based "solutions" (like a peer-to-peer platform for buying and selling cloud 

storage space). In return for financing, promoters offer coins with varying currency, 

utility or securities features. 

For most of these offerings, it is not a company's past performance, or even financial 

statements, that are the window through which value is perceived, but more the venture's 

technology proposition. Consequently, ensuring that investors (including retail buyers) 

understand the basic contours of the underlying technology solution is paramount as 

I COs become more popular means of fundraising. 

To that end, an optimal disclosure system for I COs would require to the extent possible a 

"plain English" description of the technology problem and solution.9 Furthermore, for 

8 Dirk Zetzsche et. al, The ICO Gold Rush, It's a Scam, It's a Bubble, It's a Super Challenge for 

Regulators, Working Paper (Nov. 16, 2017), 12. 

9 Securities Act Rule 421(d) requires issuers of securities to write the cover page (front and back, inside 

and outside), summary and risk factors section of prospectuses in Plain English. For shorter white papers, 

or Form 1-A, there should be consideration of extending the rule throughout the document for investors 

unfamiliar with the sector. 
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larger fundraises, the more technical parts of the white paper would ideally be subject to a 

system of third party validation (what I will term a "technology audit") confirming that 

the solution disclosed in the white paper complies with sound engineering and 

mathematical principles. ICO promoters could be required to disclose just what if any 

third party audit of their solution was conducted (and ifthere was no such audit, then this, 

would be affirmatively disclosed), the material features of that auditing system, and the 

results of the audit. Meanwhile, all code, regardless of the size of the fundraise, would be 

posted to a public code repository, such as Github, so potential buyers can either 

diligence the code itself or other proxies for the strength of the code. 

Promoters should avoid hyperbole when describing their solutions, an endemic problem 

in white papers-and should also be required to identifY an objective basis for all 

forward-looking statements. Along these lines, disclosures should be made as to whether 

post-ICO financial statements will be provided to token holders. 

Description of the Token. Just as a clear description of the technology should be 

required, so should an adequate description of the token. Tokens can have a variety of 

different qualitative and economic features.IO With such variety, token descriptions 

should indicate the intended use of the coins issued in the offering, their quantity, when 

and whether the founders or advisors will hold reserve coins, and how they may choose 

to liquidate them (including whether there are any restrictions on their ability to sell). If 

the tokens will be based on a technological format that must comply with certain rules, 

such as the ERC20 standard, the disclosures should clarifY what that means to a typical 

holder. If special efforts will be made to list a token on a regulated exchange or 

alternative trading system (or ATS), or if there are trading restrictions on the security, 

those facts should be disclosed in a manner that is clear to the prospective token holder. 

Finally, promoters should be required to disclose the IF/ownership of the company's 

protocol (including which elements have been borrowed from elsewhere), as well as 

detail with specificity what legal rights holders of the tokens enjoy. 

Blockchain Governance. Investors should be informed as to how the supporting 

infrastructure operates, and how it will impact the governance of the token. Along these 

lines, the consensus mechanism for a virtual currency's blockchain should be disclosed, 

along with an overview of how governance decisions and other decisions effecting the 

network (e.g., software upgrades) will be coordinated among the various stakeholders 

(e.g., developers, users, miners). 

I 0 Some offerings more closely resemble traditional perks-based crowdsales, and offer tokens or coins that 

provide for access to specific services or features. These so-called utility tokens can also serve as the 

means to compensate or otherwise incentivize contributors, users, developers and other active participants 

in a network of like-minded technology users that is commonly called an ecosystem or community. Other 

tokens, by contrast, are built with more overt securities attributes offering participation interests, dividends, 

and promises of a management team to expend efforts in search of profits for the token holder. Still others, 

are adopting convertible characteristics that offer rights to vote on the technological direction of the token, 

or the right to exchange the coins for other coins in the future. 
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GEORGETOWN LAW 

Qualifications of the technical team. lnfonnation about the business experience of 

executive officers and directors is a common disclosure requirement in registered 

offerings. II They give investors a sense of the quality of management, and likely success 

of the company once a company goes public. In ICOs, where finns have limited histories 

and the technology at issue may be exotic, similar infonnation about the offering's 

technical team can be especially valuable. Coders have varying backgrounds, with some 

more (and much less) qualified, credentialed or experienced than others. In order to 

provide investors with some sense as to the expertise and credibility of the white paper, 

founders should be required to provide all material infonnation relating to key 

engineering experience, skills, qualifications and other relevant attributes. Where 

relevant, developers should also be required to provide links to their previous work on a 

public code repository. 

Risk factors. ICOs should include disclosures concerning the most significant risk 

factors affecting token holders in the offering document. Although most investors likely 

realize that even successful ventures might be later disintennediated by more efficient 

upstarts, a token holder may be surprised to find that the product does not yet function as 

intended or may develop a new use or purpose altogether depending on the development 

of the technology or, perhaps even less predictably, the wishes of the participants in the 

ecosystem. Holders should also understand the larger sectoral risks as well, including 

changes in the industry that could relegate some blockchain designs to more niche roles 

in the sector, and render many tokens worthless. Critically, buyers must be made fully 

aware of their potential vulnerability to hacking, data-loss, and disruption, as well as legal 

issues like privacy concerns and data portability across borders.l2 

I want to stress that there are undoubtedly additional, somewhat more technical 

disclosure requirements that would make sense under U.S. securities laws, though I 

believe it useful to start with the most obvious first as a basis of our discussion today. 

appreciate your time and look forward to your questions. 

lll7CFR229.401 

12 See Hackers Have Walked Of! With About 14% of Big Digital Currencies, available at 

https://www.bgov.com/core/news/#!/articles/P2R7Ql6S972B 
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Written Testimony of 

Mike Lempres 

Chief Legal and Risk Officer 

Coinbase, Inc. 

before the 

House Committee on Financial Services 

Subcommittee on Capital Markets, Securities, 

and Investment 

Hearing on: 

"Examining the Cryptocurrencies and /CO Markets" 

March 14, 2018 
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Good morning Chairman Huizenga, Ranking Member Maloney and members of the 

Subcommittee: 

Thank you for the opportunity to address this important topic at a significant lime. My name is 

Mike Lempres, and I am the Chief Legal and Risk Officer at Coinbase, the nation's leading 

digital currency exchange and wallet service. I commend you for holding this hearing on a 

technology that could transform capital formation, innovation and our economy. Moreover, I 

commend you for holding this hearing now because this technology is in an early, vulnerable 

state. It has tremendous potential. To fulfill that potential, we believe that responsible regulation 

is required. At the same time, we want to help ensure that the technology's incredible benefits 

are not inadvertently stifled by regulatory or legal missteps. 

I am pleased to testify this morning on behalf of Coinbase. For those of you who are not familiar 

with Coinbase, allow me to explain who we are and how we fit into this extraordinary 

ecosystem. Coinbase was founded in 2012 with a mission to create an open financial system for 

the world. From our inception, we sought to operate transparently under regulation and view 

ourselves as a leader in the legitimization and maturation of the crypto economy. We provide an 

onramp for acquiring, trading and holding digital currencies. Through our strategy of operating 

the most trusted and easiest to use digital currency exchange and wallet, we have grown 

dramatically. We now serve over 20 million customers; we store more than $20 billion worth of 

digital currencies; we have traded over $150 billion in assets; we support business in 32 

countries; and we have more than 250 employees in three offices (with full time contractors, we 

have nearly 1,000 dedicated personnel). We have received over $225 million in funding from 

some of the nation's leading venture capital and financial service firms. 

We operate a spot exchange that offers the ability to buy and sell four digital currencies. There 

are more than 1,400 currencies and tokens available, yet we limit our trading to four that have 

regulatory clarity: Bitcoin ("BTC"), Ether ("ETH")1

, Litecoin ("LTC") and Bitcoin Cash ("BCH"). 

We have very strong cybersecurity protections and compliance practices to ensure that we 

remain the most trusted company in this space. Our cybersecurity program is state of the art 

and it is the critical core of our business. Similarly, our compliance program is designed to build 

upon the highest levels of compliance in our industry. One measure of our commitment to 

compliance is the fact that nearly 20% of our employees work in our compliance group. Our 

Know Your Customer ("KYC") and Bank Secrecy Act ("BSA") programs are particularly well 

supported, and we have been recognized for this by being the only digital currency company 

serving on FinCEN's Bank Secrecy Act Advisory Group ("BSAAG"). 

'Ether has been recognized by both the CFTC and the SEC as a virtual currency. Ether is considered by 

many to be more functional than Bitcoin and is used as the backbone of many emerging 

blockchain-based projects. New ether tokens are mined by nodes validating new blocks in the blockchain 

- similar to bitcoin - and are not issued by a central entity to raise funds. 
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We have been registered as a money service business with FinCEN since 2013. Another 

federal agency, the CFTC, has asserted jurisdiction over our spot market based on their 

authority related to fraud and market manipulation. In addition. we have 40 licenses in 38 states. 

Most of these licenses are money transmission licenses. Significantly. we are one of only four 

companies that hold a Bitlicense from New York State's Department of Financial Services, the 

nation's only license specific to cryptocurrency regulation and supervision. 

In addition to our formal regulatory role, Coinbase continuously shares its expertise to make 

sure our ecosystem is clean and compliant. We train more law enforcement agencies globally 

than anyone. even the Department of Justice. We have a team of individuals who offer expert 

training on cryptocurrencies and the blockchain to the world's leading Jaw enforcement 

agencies, including: the Federal Bureau of Investigation, Drug Enforcement Agency, Marshals 

Service, U.S. Postal Service, Department of Homeland Security, U.S. Secret Service, Internal 

Revenue Service's Criminal Investigative Division, Europol, Interpol, Scotland Yard. the Royal 

Canadian Mounted Police. the Swiss Federal Police, the Spanish Federal Police and many 

state and local agencies. 

Coinbase Exchange: 

Coinbase operates a digital currency exchange that primarily serves institutional customers. The 

exchange only operates a spot exchange; there is no margin or derivatives trading. Coinbase is 

very deliberate about which tokens it supports on the exchange. Currently, the exchange 

supports only four assets (BTC, ETH, LTC and BCH). Part of the reason we trade only those 

four assets is that each has been determined by regulators to be a virtual currency and 

therefore not a security. We are studiously avoiding listing tokens that could be determined to 

be securities because we are not currently licensed to trade securities and cannot take the risk 

of inadvertently trading an asset that is later found to be a security. Not all exchanges give. such 

a priority to compliance with the Jaws, and many assets are currently available to investors 

outside of regulatory oversight. 

At Coinbase, we have worked to bring clarity to the issue of what assets we can support since 

2016. To help potential market participants. we published our Digital Asset Framework to 

provide transparency about how we consider listing new assets. A key factor in our framework 

analysis is a determination that the potential new asset is not a security under U.S. law. The 

absence of regulatory clarity has slowed our willingness and ability to Jist new assets. 

I should note again that the CFTC oversees our market for investor protection purposes. 

specifically to look for fraud and market manipulation by market participants. We welcome that 

oversight. 

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Our View on ICO's: 

We currently do not trade ICO's or any other security tokens. Despite that, we believe that 

security tokens are inevitable and full of tremendous potential. They can provide a much more 

efficient and effective method of capital formation. They can help spur innovation, launch new 

companies, create new jobs, and generate growth in the U.S. economy. Moreover, they can 

allow broader participation in capital markets by investors and companies. This means they can 

unlock the ability of entrepreneurs anywhere in the U.S. to raise money on a level playing field. 

Entrepreneurs won't need to know funders in Silicon Valley or New York to access vibrant 

sources of capital. At the same time, there is a need for responsible regulation to ensure 

investor protection. We welcome that regulation. 

In order to fully enable ICO's, investors must know they have the same kinds of protections 

when investing in ICOs as they have when investing in more traditional securities. Investors 

must have confidence in the integrity of the market. For this reason, we support enforcement 

actions where they are necessary to weed out bad actors and to protect investors. This is 

particularly important in the early stages of markets before they reach full maturity. I cannot 

speak directly to recent SEC enforcement actions because I do not know all the facts. 

However, it is important the SEC take enforcement actions when necessary to protect against 

bad actors, protect investors and help maintain public confidence in markets. 

At the same time, we need to be sure that we are not killing good innovation brought about by 

new technology and good actors. Unfortunately, the current regulatory environment- in 

particular regulation by enforcement without enough clear guidance on what is permissible -- is 

harming healthy innovation in the U.S. There is so much uncertainty about the definition of a 

security and the scope of regulatory control that the market is being chilled. This is bad for 

everyone because the technology won't stop - it will simply move overseas and we will miss out 

on the opportunity to cultivate the benefits in the U.S. 

For us, the chilling effect can be shown by the difficulty of determining with certainty when a 

token is not a security. Because we seek to comply with all applicable laws and regulations, we 

simply cannot take the risk that a token is later found to be a security. 

A Comprehensive Federal Regulatory Regime Exists Today: 

We believe there is no need for Congress to create a new regulator or a new regulatory scheme 

because federal regulators already have sufficient authority to regulate this space effectively. 

There are at least four federal regulatory agencies that can effectively protect investors and the 

markets: 

• the SEC has authority over securities transactions; 

• the CFTC has authority over spot markets in commodities for fraud and market 

manipulation, and it has full authority over commodity derivatives transactions; 

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• FinCEN has full authority for Know Your Customers (KYC) and Anti Money Laundering 

(AML) matters; and 

• the Federal Trade Commission ("FTC") has authority for false advertising and certain 

consumer protection. 

In addition, this federal regulatory regime exists alongside vibrant state regulations. As 

mentioned, we hold 40 licenses in 38 states, including a Bitlicense in New York state. That 

Bitlicense is intended to be a comprehensive consumer protection regime specific to operators 

of digital currency businesses. 

Regulators Need to Provide Clear and Consistent Guidance: 

Although regulatory coverage is deep and broad, it is not clear where one regulator's authority 

ends and transitions to another. This leads to a lack of clarity for companies who must make 

decisions prospectively about which regime applies at what time to each asset. Much clarity 

would come from coordination amongst regulators on this issue. Instead, today's environment 

calls to mind the parable of the blind mice and the elephant- each agency looks at tokens from 

its own narrow perspective: 

• the SEC says these assets, particularly ICO's, are probably securities; 

• the CFTC says tokens are commodities, unless they are securities; 

• the IRS says they are property; 

• FinCEN says tokens are money; and 

• other agencies see tokens through their own lens. 

This lack of coordination can be shown by the inconsistent tax treatment that hinders the 

development of this new asset class. The IRS views these assets as property and taxes them 

as such. This treatment undercuts the relative efficiency of tokens in raising capital. 2 It appears 

that, even issuing a security token that is compliant with all SEC obligations, will lead to tax 

treatment at the much higher rates that attach to property, which may be taxed as income. This 

relatively adverse tax treatment will chill the market for an otherwise compliant security token. 

More fundamentally, under current practices, it is difficult to determine whether a token is a 

commodity or a security. The SEC and CFTC could easily draw a line to determine whether a 

token should be treated as a commodity or a security for compliance purposes. The agencies 

have done this before when new asset classes emerge, for example in addressing stock 

indexes (generally narrow-based indexes are securities, broad-based indexes are commodities, 

with mathematical way to make determination) and swaps (generally the SEC has jurisdiction 

over swaps with securities as the underlying asset, the CFTC retains jurisdiction over all other 

2 IRS consideration of digital currency as property also hinders the development of the asset as a 

currency. By way of example, in purchasing a $3 cup of coffee with digital currency a consumer is 

exposed to being taxed on a capital gain and would be expected to track the basis of the fractional 

amount of currency used to make the small purchase. 

4 
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swaps). Agency coordination will enable companies to develop stronger compliance programs 

and will empower the many benefits of these tokens. 

The dividing line that defines securities comes from the 72 year old case of SEC v. W.J. Howey 

Co. (328 U.S. 293 (1946). Howey dealt with the sale of real estate contracts for the 

development of a citrus grove for housing. It's a long way from cryptocurrencies in 2018, but the 

basic principles behind the Howey test can still work. One challenge of the Howey test is that. 

different analysts can apply the same facts and reach different conclusions. The difficulty of 

accurately predicting an agency's Howey analysis chills responsible exchanges. We cannot 

take the risk of supporting an asset that is later determined to be a security. The agencies 

should provide guidance about the application of Howey to distinguish between what is and is 

not a security. In order to provide clarity in this very important distinction, the agencies will have 

to distinguish utility tokens from investment contracts and other forms of security. 

This New Technology Can Offer Utility Separate from Investment: 

One way in which tokens may differ from traditional asset classes is that these assets can offer 

a path to utility. In other words, tokens can be used to purchase access to services, and their 

value can be determined by the worth of those services. For example, tokens can be used to 

access or acquire data storage space or to pay users to receive advertising. These utility 

tokens provide access to goods or services provided by decentralized networks or ecosystems 

of users rather than services provided by individual companies. 

The emerging new technology of utility tokens is well beyond anything that existed at the time of 

Howey, and they do not fit neatly into that framework. Congress should insist that the SEC and 

CFTC coordinate, as they have in the past, to clarify how companies, markets and investors can 

determine whether an individual token is a security or a commodity. The agencies can clarify 

rules around what constitutes a security in this space by looking at issues such as whether there 

is a central issuer and the role of investment contracts at the time of issuance. There are new 

applications, but the basic principles remain consistent with today's regulatory framework. 

The U.S is a World Leader in this Important New Technology: 

The U.S. is perfectly positioned to take advantage of the benefits of this new technology. We 

are the most innovative and entrepreneurial country on earth. If permitted, capital will flow into 

this country because we are the best place on earth to create companies that meet new 

opportunities. This will create benefits for both U.S. investors and entrepreneurs. However, 

capital in this space can move around the world nearly without friction. If the U.S. does not 

provide a clear, thoughtful regulatory environment, the investment can move very quickly to 

other countries. 

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Conclusion: 

As mentioned at the beginning, we operate the most trusted and easiest to use platform to 

access digital assets. As our markets mature and go ever more mainstream, being the most 

trusted is more important than ever. We believe that trust is enhanced through partnership with 

regulators. 

Thank you for addressing this important innovative technology early enough in its development 

to help guide it to spur new capital formation and protect investors. Clarifying the U.S. legal and 

regulatory system to meet those twin goals will lead to innovation, job creation and increased 

U.S. competitiveness. 

At Coinbase, we are committed to working with you, the SEC, the CFTC and other regulators to 

help shape a responsibly regulated market. We believe the decisions you are making now will 

help determine the economic future of innovation and capital formation in the future. That future 

is not 20 years away; it's almost here now. 

Thank you for this opportunity to discuss these issues today. Please consider us a resource if 

we can be of any help as you address these issues. I look forward to answering your questions 

today. 

6 
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Testimony on 

"Examining the Cryptocurrencies and ICO Markets" 

by 

Robert Rosenblum 

Partner, Wilson Sonsini Goodrich & Rosati 

Before the 

Capital Markets, Securities and Investment Subcommittee 

of the 

House Committee on Financial Services 

United States House of Representatives 

March 14, 2018 

Chairman Huizenga, Ranking Member Maloney, and Honorable 

Members of the Subcommittee, I am honored to be here today, and I am 

delighted that the Subcommittee is holding this hearing. I believe that 

Congress should pass legislation in the near term that will authorize and 

direct regulators to modify or eliminate regulations that needlessly impede 

the innovation and capital formation opportunities offered by the 

development ofblockchain and cryptocurrency technologies, 1 while at the 

1 One of my clients describes a blockchain, non-technically but helpfully, as a spreadsheet that 

resides on no single computer but that is accessible from any computer. In this formulation, the 

terms "cryptocurrency," "coins" and "tokens," which I generally refer to as "tokens" or as 

"cryptocurrency," are things that are tracked on the spreadsheet, and they can generally have 

almost any properties the token developer sets. In general, the company that issues the tokens or a 

related entity or foundation (collectively, the "Token Company") also develops a blockchain-based 

platform that permits the tokens to be used in connection with specified types of commercial 

transactions, such as the purchase and sale of certain goods or services. The platform also may 

permit users to earn tokens by performing some service that is useful to the platform, such as by 

verifying the accuracy of information, or by providing information, that is relevant to the platform. 

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same time assuring that appropriate provisions are in place to protect token 

investors and token users. 

I also believe that in the longer term, Congress should pass legislation 

establishing a comprehensive legislative and regulatory system governing 

blockchain and cryptocurrency in the United States. While I believe it is 

currently too early to know exactly what such a system would look like, I 

believe there are some principles and approaches that Congress can identify 

now, and that these can serve as a framework to begin developing that 

legislation. 

My goal today is to describe the legislation that I believe Congress 

should adopt as soon as reasonably possible, and to also describe a 

framework for the more comprehensive legislation Congress may enact in 

the future. 

Introduction 

At the outset, I would like to introduce myself, and to briefly describe 

why I am so pleased to have the privilege of appearing before this 

Subcommittee today. I am a partner in the Washington DC office of the 

Palo Alto-based law firm Wilson Sonsini Goodrich & Rosati. Wilson 

Sonsini generally is recognized as the premier legal adviser to technology, 

life sciences and other growth enterprises worldwide. The views I present 

today are my own, and are not necessarily the views of Wilson Sonsini or 

of my partners and other colleagues. I also am not appearing here today on 

behalf of any client or any third party, and my clients might not agree with 

all or parts of my testimony. 

I am the head of Wilson Sonsini's Blockchain and Cryptocurrency 

practice. I represent a large number of companies in their coin and token 

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offerings (often referred to as initial coin offerings, or "I COs"). 2 I also 

represent, among others, institutional investors in connection with their 

investments in I COs, private funds that invest in I COs, companies that 

assist issuers in conducting I COs, and companies that will provide advice 

to ICO investors. I have practiced in the securities and financial services 

field for over 30 years, and during that time I have represented public and 

private companies, private funds, registered funds, investment advisers, 

broker-dealers, fin tech companies, law firms and a variety of other 

companies. I started my career at the Securities and Exchange Commission 

("SEC"). 

Blockchain Innovation. In the ten months or so since I COs started 

becoming wide spread in the United States and throughout the world, I 

have had the pleasure of working with some amazingly talented and 

creative entrepreneurs who hope to use blockchain technology and tokens 

to: 

• solve difficult issues, ranging from improving internet security 

to helping low- and moderate-income people obtain credit; 

• create new types of businesses, such as businesses that permit 

individuals to determine whether and how to release private 

information, and to compensate those individuals for releasing 

that information; and 

• dramatically reshape existing businesses, such as: (i) the way 

electrical power is delivered in the United States and other 

2 The terms "initial coin offering" and "ICO" are something of a misnomer. They likely are 

meant to refer to a public offering of tokens to the retail public. However, the SEC takes the 

position that most tokens are securities, and that it generally is illegal to sell tokens to the retail 

public unless, for example, the tokens are publicly registered or are qualified for public sale under 

Regulation A+. As a result, most initial offerings of tokens in the United States now involve private 

placements to accredited investors. In addition, in many of these offerings, the issuer actually sells 

an agreement to deliver tokens at some point in the future; this agreement often is referred to as a 

simple agreement for future tokens, or "SAFf." For convenience, I will refer to the initial sale of 

both tokens and SAFTs as an ICO, regardless of whether the sale is public or private, and regardless 

of whether the instrument sold is a token or a SAFT. 

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developed countries, as well as the way it is delivered in thirdworld countries that lack developed power grids; (ii) the way 

people use and interact with each other through social media; 

and (iii) the way people determine the validity of the news they 

read and hear about. 

Capital Formation Opportunities. I also have had the opportunity to 

represent Token Companies and token investors in what may be a new type 

of capital raising transaction that seems to potentially offer significant 

benefits to both. Until recently, a company that wanted to raise venture 

capital or other early-stage financing might sell common or preferred stock, 

convertible debt or other securities that give investors an economic interest 

in the company. A company seeking to raise traditional venture capital 

financing often is limited to raising small amounts at the earliest stages 

(often in the range of $1 million to $2 million), and the amount it can raise 

in later rounds (such as series A rounds and beyond) often is based on a 

negotiated valuation of the company (which does not necessarily reflect a 

fair valuation of the company). 

I COs may appropriately give certain Token Companies the ability to 

raise significantly more money than they could in traditional venture 

capital financings. Tokens generally do not provide holders any economic 

or voting rights in the company that sold them. 3 Instead, the value of the 

tokens is intended to increase or decrease in tandem with the increasing or 

3 At least in the early stages of most platforms, however, the token investors still may rely to a 

significant extent on the Token Company, such as to continue to develop, maintain and operate the 

platform; to market the platform to new users; perhaps to make continuing improvements to the 

platform, and perhaps to take other actions such as listing the tokens on an exchange or otherwise 

assisting in providing liquidity for the tokens. In addition, many Token Companies retain a 

significant number of the tokens, many of which they may sell or otherwise release in the future. 

This is a key reason that the Securities and Exchange Commission ("SEC") takes the position 

that most or virtually all tokens are securities. Investors in tokens pay money or other compensation 

for the tokens, they seek to profit through an increase in the value of the tokens, and they rely to a 

significant extent on the efforts of the Token Company for the expected increase in the value of the 

tokens. See SEC v. W. J. Howey Co., 328 U.S. 293 (1946). 

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decreasing commercial success of the platform: as more people use the 

platform to engage in the intended commercial activities, more people need 

to purchase or obtain tokens to engage in those commercial activities, and 

this increasing demand for tokens should cause the value of the tokens to 

increase. 

The value of the tokens, therefore, often is tied to investors' 

expectations of the likely commercial demand for the tokens, and the value 

investors assign to the tokens in an ICO often is largely independent of the 

value of the Token Company that issued them. 4 If token investors expect 

the platform to be commercially successful, investors may be willing to 

invest significantly more in the related tokens than they would be willing to 

invest in equity or debt securities of the Token Company; in such a case, 

the Token Company is able to raise more money in an ICO than in a 

traditional venture financing transaction. 5 

For example, and entirely hypothetically, consider a commercially successful token-based 

platform that permits users to rent construction equipment from entities that have construction 

equipment that is not currently being used, and that requires the rental payments to be made in 

tokens. The company that created the platform and issued the tokens may find that in its location it 

is not able to profitably rent out its unused construction equipment, and instead the commercial 

success of the platform may be based on the success of other entities renting construction equipment 

in other locations. The token holders would be largely indifferent to the lack of commercial success 

by the token-issuing company. 

An important, if challenging, point to keep in mind is that in many cases the Token Company 

does not "own" the platform, and the Token Company may or may not derive significant revenues 

from the platform it created. For example, many platforms are forms of marketplaces where many 

sellers and buyers of particular goods or services come together. In those types of platforms, the 

Token Company that created the platform may profit by, for example, providing goods and services 

on the platform, performing services for compensation on the platform, or holding tokens related to 

the platform that may over time appreciate in value. On the other hand, if the platform is successful 

but the Token Company is not a successful competitor on the platform, the Token Company may not 

get much or any revenue from the platform, even though other participants on the platform might 

generate significant revenue from it. 

Of course, token platform models take many forms, and some platforms are set up specifically to 

provide continuing revenue streams to the Token Company that created the platform. For example, 

some Token Companies may be the exclusive provider of services on the platforms they create, or 

they may charge fees on platform transactions or activity regardless of their role in the transaction. 

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ICO investors effectively are able to crowdfund the development of 

the platform (a type of crowdfunded project finance), may be able to get 

liquidity in the tokens far sooner than they can get liquidity in a traditional 

startup or venture capital investment, and may also use the tokens to 

transact business on the related platform. 

Fraud and Misconduct Concerns. Unfortunately, as various recent 

SEC and CFTC actions have demonstrated, blockchain and cryptocurrency 

technology also offer opportunities for fraud and a variety of other potential 

misconduct. As a result, I believe that there needs to be an appropriate and 

tailored regulatory scheme that encourages and facilitates innovation and 

capital formation, while at the same time guarding against fraud and other 

misconduct. I believe Congress should play an important role in 

establishing that regulatory scheme. 

A Suggested Two-Step Legislative Approach 

I believe it is too early for Congress and the federal regulators to 

enact a comprehensive legislative or regulatory scheme governing 

cryptocurrency. With a few exceptions, widespread efforts to develop 

tokens and token platforms began in earnest late last spring, so that for the 

most part we have had less than a year's experience with tokens and token 

platforms. 

To date, we have seen a number of token and SAFT offerings, but we 

have very few examples of functioning token platforms. Outside of Bitcoin, 

Ether and a few other general purpose cryptocurrencies, we have very few 

examples in the United States of freely tradeable or freely-trading tokens. 

We do not yet have any tokens that have been publicly registered or that 

are qualified under Regulation A+. And we don't yet have any exchanges 

or alternative trading systems that are authorized to trade tokens that are 

securities. 

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All of these things will happen, and they hopefully will start to 

happen fairly soon. Once they do, the markets will undoubtedly develop in 

ways we can't predict, we likely will find unexpected regulatory barriers 

and hurdles, and we may find that we need significantly new ways of 

combatting concerns like money laundering, data falsification, and identity 

theft. 

We also don't have a clear sense of the types of uses blockchain 

technology can be used for, so we don't yet know all the parameters that 

need to be considered in developing well-tailored legislation. As one 

example, artificial intelligence, or AI, may be combined with the 

significant capabilty ofblockchain systems to obtain and store information; 

this opens the possibility of entirely new businesses and scientific 

advancements based on predicting individual or group behavior or 

attributes to ever-greater degrees of accuracy, and in ever-widening spheres 

of activity. On the other hand, it also opens the possibility of nefarious 

actors using the same technology to improperly manipulate individual or 

group behavior, to fraudulently obtain and misuse confidential personal and 

business information, and to potentially manipulate trading and other 

markets and activities that rely on particular people (such as stock analysts 

and market makers) receiving and acting upon accurate information. 

As a result, I believe that we don't know enough - yet - about the 

emerging cryptocurrency markets and businesses to develop a 

comprehensive legislative or regulatory framework. There is a significant 

risk that even the best-intentioned framework will have unanticipated 

negative consequences. 

We see this law of unintended consequences, perhaps, with New 

York's "Bitlicense" statute, which requires issuers and exchanges to obtain 

a special license to issue or trade cryptocurrency in New York State. The 

statute was written at a time when Bitcoin was essentially the only major 

cryptocurrency, and arguably an underlying premise of the statute is that all 

cryptocurrency will be currency that can be used for purchases and sales of 

any goods or service - that is, that all cryptocurrency will be like Bitcoin. 

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It turns out that most cryptocurrency is not like Bitcoin and instead is 

intended to be used only for specific purposes primarily on one or more 

designated token-based platforms. As a result, very few businesses have 

sought or obtained a Bitlicense, and perhaps the most significant impact of 

the Bitlicense statute is that many token issuers now exclude New York 

residents -- often alone among United States citizens -- from participating 

in their token or SAFT offerings. 

Also, cryptocurrency is a global phenomenon, and different countries 

do and will regulate cryptocurrency differently. It would be extremely 

helpful for major countries to develop legislative and regulatory approaches 

to cryptocurrency that at least mesh well with each other. A country that 

regulates cryptocurrency in a significantly different and more onerous 

manner than other countries faces the risk, like New York State, that many 

issuers of cryptocurrency will simply avoid that country. On the other hand, 

given the potential dangers and risks of fraud and from nefarious actors in 

the blockchain and cryptocurrency industry, the United States and other 

responsible countries should not engage in a "race to the regulatory bottom" 

either. 

I believe that there is important legislation that Congress can and 

should consider now, and I believe that Congress and others should begin 

thinking about what a comprehensive legislative and regulatory approach to 

cryptocurrency eventually might look like. I will address both of these in 

the remainder of my testimony. And I again thank the Subcommittee for 

holding this hearing, because I believe this hearing is an important step to 

moving forward on both legislative efforts. 

Current Legislative Focus 

I believe that Congress could immediately provide significant and 

appropriate assistance to emerging blockchain and cryptocurrency 

companies by passing legislation that achieves three aims: (1) appointing a 

single federal regulator, presumably the SEC, to have primary jurisdiction 

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over I COs, tokens and token-related platforms (collectively, "Token 

Activities"); (2) authorizing and directing the SEC and other federal 

regulatory agencies to modify or waive various of their rules and 

regulations as they apply to Token Activities; and (3) preempting certain 

state substantive laws, such as State money transmitter laws and State 

securities registration provisions, as they apply to Token Activities. 

Need for a Primary Federal Regulator. In addition to the innovation 

and capital formation opportunities that Blockchain and Token Activities 

offer, they sadly also offer the potential for fraud and other misconduct. 

Federal and state regulators naturally and appropriately will attempt to 

regulate against bad conduct that arguably falls within their spheres of 

influence. As a result, we already have seen the SEC, the CFTC and 

FinCEN assert jurisdiction over aspects of Token Activities, and it would 

not be surprising to see other federal regulators assert jurisdiction as well. 

Congress should clarify that a single federal regulator has primary 

jurisdiction over Token Activities. This will provide regulatory certainty to 

the markets, and will help the token industry avoid unnecessary regulatory 

costs and burdens trying to comply with multiple regulatory schemes each 

aimed at addressing the same underlying Token Activities. The most likely 

federal regulator to have primary authority would seem to be the SEC, 

because the capital raising, investor protection and market regulation 

aspects inherent in regulating Token Activities all seem to fall well within 

the SEC's statutory and regulatory expertise, and because the SEC already 

is deeply involved in thinking about and regulating Token Activities. 

To be clear, the CFTC, FinCEN and other regulators should retain 

their important regulatory roles in the regulation of Token Activities. 

Some tokens or agreements related to tokens may be futures contracts or 

swaps that properly are regulated by the CFTC. Some token platforms may 

in effect be money services businesses that quite properly fall within the 

ambit ofFinCEN. And certainly the Department of Treasury, the Internal 

Revenue Service, federal banking regulators and other federal regulators 

will have important roles in the regulation of tokens and cryptocurrency. 

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Nonetheless, I believe it will be helpful to the cryptocurrency markets, and 

to federal regulators, for Congress to clarifY that the SEC is the primary 

regulator of Token Activities. 

Authority for the SEC to Modify and Waive Rules. As I discussed 

earlier, I COs present a novel form of capital raising, in which the token 

investor's primary concerns are the likely future commercial viability of 

the related token platform, and (usually) the ability of the Token Company 

to develop, maintain and operate the token platform and the token economy. 

This is very different from the situation in traditional capital raising 

techniques, such as the sale of stock and bonds, in which investors are 

primarily concerned with the future economic activities and well-being of 

the company that issued the stock or bonds. Not surprisingly, a securitiesregulatory scheme developed for stocks and bonds does not fit perfectly for 

tokens and token platforms. 

I believe that Congress should authorize the SEC to, and direct the 

SEC to, modify or waive existing rules and regulations, as appropriate and 

with due regard for investor protection, to facilitate Token Activities. 

Examples of some rules and regulations that should be waived or modified 

include: 

• Registration Provisions: Many Token Issuers will eventually 

register their tokens, either in a full public offering on Form S-1, 

or under Regulation A+. This will permit the tokens to be freely 

tradeable. However, there are still a number of outstanding 

questions and issues regarding how registration will work, 

including: 

o ClarifYing that Regulation A+ is available to Token 

Companies (the SEC staff has indicated informally that it 

is); 

o ModifYing the requirement that an issuer have a registered 

transfer agent, since there are no registered transfer agents 

for tokens, and the notion of a transfer agent is seemingly 

needless in a blockchain context, since all sales and 

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purchases of tokens on the blockchain are publicly visible 

(even if the identity of each holder is not known); 

o Modifying the prospectus delivery rules to permit a Token 

Company to satisfy this requirement by posting the 

prospectus on the relevant platform; 

o Expressly permitting the Token Company to offer through 

the prospectus tokens that are "mined," that are earned by 

platform users for providing services to the platform, or 

that otherwise are generated algorithmically by the 

platform, rather than sold out of the Token Company's 

inventory of tokens; 

o Clarifying the ability of the Token Company and the 

platform to rely on the prospectus to permit the 

commercial use of the tokens on the platform; 

o Clarifying that Token Companies may use the prospectus 

for a "continuing offer" of tokens, which would cover all 

of the Token Company's token sales, all token uses on the 

platform and all of the token generation events on the 

platform for as long as the prospectus was current; 

o Permitting additional latitude for selling token holders to 

sell their tokens under Regulation A+. Currently, the 

value of the tokens owned and sold by selling token 

holders in an initial Regulation A+ offering cannot exceed 

30% of the total value of tokens sold. In some cases, 

Token Companies may have sold significant numbers of 

tokens to accredited investors in a private placement prior 

to the Regulation A+ qualification, and it may be 

beneficial for the Token Company to be able to qualify 

those tokens under Regulation A+, even if the value of 

those tokens exceeds the current 30% limit; and 

o Permitting "air drops" and other free distributions of 

tokens pursuant to the prospectus. 

• Trading Rules: In order for many token platforms to function 

efficiently, users of the platform will need to be able to buy and 

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sell tokens, and the Token Company may need to sell and 

receive tokens on a continuous basis. The SEC should amend 

its rules to: 

o Permit the Token Company to sell tokens at the same time 

that it may receive tokens for performing services or 

selling goods on the platform, notwithstanding Regulation 

M and Rule 1 Ob-18 under the Securities Exchange Act of 

1934, which generally prohibit an issuer from buying and 

selling its own securities at the same time. These 

simultaneous purchases and sales might be subject to 

appropriate and tailored requirements to limit the 

opportunity for manipulation of the price of the tokens; 

o Permit the Token Company to offer a link to one or more 

registered token exchanges or alternative trading systems 

that permit platform users to buy and sell the tokens 

needed to use that platform, without forcing users to leave 

the platform, go to the exchange to buy or sell the tokens, 

and then come back to the platform to continue engaging 

in the commercial activities for which the platform is 

designed; 

o Permit the Token Company and other platform service 

providers that are regularly engaged in commercial 

activities on the platform, which require them to buy, hold 

and sell tokens (which may be securities), to do so without 

being deemed to be a broker or a dealer that needs to 

register with the SEC and FINRA; and 

o Permit intermediaries to act as finders and receive 

compensation, including in the form of tokens, for 

introducing to the Token Company accredited investors 

who invest in the tokens in a private placement, without 

the finder being required to become a registered 

representative of a broker-dealer. Such a finder should, 

however, be subject to disclosure and antifraud rules. 

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• Exchange and Alternative Trading System Rules: Currently, 

there are no exchanges or alternative trading systems authorized 

to trade tokens that are securities. The SEC and FINRA should 

be encouraged to be flexible in authorizing exchanges and 

alternative trading systems, notwithstanding concerns such as, 

for example: 

o Limited initial trading volume and difficulty of valuing 

cryptocurrency. In many ways, these types of issues pose 

a "chicken-and-the-egg" problem; the regulators may be 

reluctant to approve token markets until there is (for 

example) more trading volume and better pricing 

mechanics, but trading volume and pricing mechanics will 

improve only when there are trading markets; and 

o Clearance and settlement, registrar and transfer agent 

functions will take very different forms in token trading 

than in trading in more conventional securities. 

In addition, the SEC and FINRA should be encouraged to 

authorize exchanges and alternative trading systems for tokens that 

permit trading of any freely-tradeable tokens, including tokens that 

are freely tradeable after a designated period of time pursuant to Rule 

144 or RegulationS under the Securities Act or 1933, and not just of 

tokens that are freely tradeable by virtue of being publicly registered 

or qualified under Regulation A+. 

• Investment Company and Investment Adviser Rules: The SEC 

should be encouraged to address various issues that arise under 

the Investment Company Act and the Investment Advisers Act, 

including the following: 

o The SEC should make it clear that tokens held by the 

Token Company that issued them should not cause the 

Token Company to have to register as an investment 

company. In general, a company that holds a significant 

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to register under the Investment Company Act. Since the 

SEC treats most tokens as securities, and since many 

Token Companies hold a significant number of tokens that 

they intend to issue in the future, some Token Companies 

could be deemed to be investment companies simply by 

holding their own tokens; 

o The SEC should revise the custody rules to accommodate 

tokens. Both investment companies and investment 

advisers are subject to a requirement that, in general, they 

hold assets with a bank, a broker or another qualified 

custodian. The admirable purpose of these custody rules 

is largely to prevent theft by insiders. Transferring 

ownership of tokens to a bank or other custodian poses 

difficulties and risks that are not generally present with 

other securities, including the risk associated with 

someone hacking the custodian's token wallet, and the 

difficulty of making fairly frequent purchases and sales of 

tokens, especially in volatile markets, when the orders 

must (for example) be sent to the custodian, so the 

custodian may execute the order or transfer the tokens to 

another party so that the order may be executed. The SEC 

should work with the industry to develop other methods, 

perhaps based on blockchain technology, to meet the 

objectives of the custody rule while also permitting more 

effective trading of cryptocurrency; and 

o The SEC should reconsider recent statements of its Staff 

suggesting that it would not approve registration 

statements of registered funds that seek to engage in 

cryptocurrency trading. The Staff raised valid 

considerations, such as concerns related to the valuation 

and liquidity of tokens, that might apply to mutual funds 

and exchange traded funds, which need daily liquidity and 

accurate daily pricing of their assets. But these concerns 

should not prevent closed-end funds and business 

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development companies from investing in tokens, since 

these funds do not make daily offers and sales of their 

securities, and therefore are less directly affected by the 

lack of liquidity and lack of pricing sources for tokens. 

Also, retail and other investors might be far better 

protected if they were able to invest in a diversified token 

fund with professional investment management, rather 

than investing in individual tokens without professional 

investment management assistance. 

My suggestions here are not intended to imply that the SEC is not 

trying to do some of these things already. They are. But Congressional 

authorization and direction could still be very helpful. 

Authority for Other Federal Regulators to ModifY and Waive Rules. 

As I discussed above, even with the SEC as the primary regulator of Token 

Activities, other federal regulators will still have important roles in 

regulating various aspects of Token Activities. These other federal 

regulators also should be authorized and directed to modifY and waive 

applicable rules and regulations, as appropriate, to facilitate Token 

Activities, consistent with investor and token holder protection; consistent 

with privacy, anti-money laundering and similar concerns; and with a view 

to minimizing systemic risks (such as could exist in the future if systems 

develop to permit highly leveraged trading in tokens or in synthetic token 

instruments). 

In addition, the Department of Treasury should be authorized and 

directed to adopt rules and regulations that clarifY the taxation of tokens 

and token transactions, and that facilitate the use of tokens to compensate 

and reward employees of, and independent contractors to, a Token 

Company. Currently, each time a U.S. taxpayer sells a token or other 

cryptocurrency whether for dollars or other fiat currency, or in exchange 

for another type of cryptocurrency or tokens that transaction may give 

rise to taxable income. This adds significant costs and accounting burdens 

to buyers and sellers of cryptocurrency. 

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The Department of Treasury should consider alternatives such as 

developing a "like-kind exchange" rule for tokens and cryptocurrency, so 

that (for example) exchanges of tokens and cryptocurrency are not taxed 

until they are exchanged for dollars or other fiat currency. 

Similarly, sales of tokens by a Token Company (whether in a private 

or public sale of tokens) generate income to the Token Company that often 

is immediately subject to tax. The Department of Treasury also should 

consider rules that would permit a Token Company to better match the 

recognition of income from selling tokens to the expenses of developing 

the platform on which the tokens will be used; those development efforts 

may take years. 

There also are myriad tax and tax deferral issues involved with 

granting SAFTs and tokens to employees and independent contractors. The 

Department of Treasury and the Department of Labor should work with the 

cryptocurrency industry to help address these tax issues, so that Token 

Companies can more easily use tokens for employee incentives, and in 

some cases as employee compensation. 

Preemption of State Money Transmitter and Similar Laws. A number 

of States have laws that require businesses that transmit money to satisfy 

registration and substantive requirements. A principal, although not an 

exclusive, focus of many of these statutory schemes is to require money 

transmitters to conduct anti-money-laundering ("AML") and similar 

checks on customers and to maintain sufficient reserves to meet their 

payment obligations. 

Many of these State laws are sufficiently broad that many Token 

Companies and their related platforms could fall within those laws. The 

cost and time of attempting to comply with the laws of all 50 States can be 

prohibitive, and since the vast majority of Token Companies intend to offer 

their platform throughout the United States - and often throughout the 

world - it is reasonable for a single federal regulatory money transmission 

scheme to apply to virtually all Token Companies and their platforms. 

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I propose that Congress expressly preempt these State laws, and give 

the SEC, in consultation with FinCEN, the sole responsibility of 

determining when, and to which token-related entities and platforms, AML 

and similar requirements should apply. As FinCEN recently noted, the SEC 

already is responsible for applying AML and similar requirements to 

brokers, exchanges and other regulated entities, and it likely would be most 

efficient and effective for the SEC to make similar determinations for 

Token Companies, token platforms, token markets, and other token-related 

entities. 

State laws also should be preempted with respect to capital and other 

substantive requirements. Token platforms typically should not be subject 

to capital requirements, because typically (at least today) those platforms 

do not act as a principal in the transmission of tokens from one user to 

another; as a result, there generally should not be a risk that the platform's 

(or Token Company's) lack of resources will affect the completion of a 

token transaction, which makes capital requirements unnecessary. If the 

SEC determines that there are certain token-related entities that perhaps 

should have capital requirements applied to them (in addition to the capital 

requirements already applicable to regulated entities), the SEC should 

adopt rules or seek Congressional approval to impose those capital 

requirements. 

Federal Preemption of State Securities Registration Provisions. I 

propose that States be preempted from imposing substantive registration 

requirements on Token Companies that publicly register their tokens on 

Form S-1. Under Section 18 of the Securities Act of 1933, many tokens 

that are registered in a public offering on Form S-1 would not be eligible 

for preemption from State registration, and the registration statement for 

those tokens would need to be approved by the SEC and the securities 

commissions of each of the 50 States. By contrast, Regulation A+ -- which 

mandates a less comprehensive disclosure regime than is applicable to 

public offers on Form S-1 -- does provide Token Companies with 

preemption from State registration requirements. 

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There are significant costs and time delays in seeking 50 additional 

reviews and approvals of a registration statement already approved by the 

SEC, and given the SEC's (proposed) federal preeminence in regulating 

Token Companies and other token-related entities, it does not seem that 

any potential benefits from those additional reviews outweigh their costs. 

This is particularly true since virtually all tokens will be used throughout 

the United States (and often throughout the world), so that no single State 

or group of States should have a unique interest in registering token offers. 

Also, as indicated above, there is no obvious reason to offer Token 

Companies preemption from State registration provisions pursuant to 

Regulation A+, and to not offer the same preemption for public offerings 

on Form S-1. 

Longer-Term Legislative Focus 

As I discussed earlier, I believe it is too early to enact comprehensive 

legislation governing the blockchain and cryptocurrency industry. I do 

think, though, that even at this early juncture, Congress can begin 

identifying key themes that the comprehensive legislation should contain. 

Here are some thoughts about those themes: 

• Simplicity. Any comprehensive legislative scheme should be 

simple and inexpensive. 

o The system that exists today, which is generally a private 

placement of a SAFT or of tokens, and which in many 

cases will be followed by a public offering on Form S-1 

or under Regulation A+, is complicated and time 

consuming. A comprehensive legislative scheme should 

permit Token Companies to prepare and post a 

standardized, simple and informative disclosure form, and 

then beginning selling tokens to the public; 

o To follow up on the last point, the registration statements 

and prospectuses that will be used in the near term will be 

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lengthy documents that almost no retail investor likely 

ever will read cover to cover. A comprehensive 

legislative approach should identify the token-related 

information that is important for token investors and 

token users, and should encourage Token Companies to 

deliver that information in a format most likely to be 

obtained and understood by those investors and users; and 

o The comprehensive legislative scheme should generally 

avoid causing Token Companies or others to have to 

make fine legal distinctions as to whether a particular 

token is or is not a security, and at what point in the future 

the token might stop being a security. In general, the 

legislative scheme should apply to virtually all Token 

Companies and to most tokens; 6 

• Tailored. Any comprehensive legislative scheme should be 

carefully tailored to address the needs of token investors and 

token users. 

o For example, as I discussed earlier, a token investor and a 

token user have very different interests than an investor in 

a company's common stock or debt. Any disclosure 

requirements imposed on Token Companies or others 

should be tailored to address only information that is 

relevant; 

6 It is important to be cautious on the goal of having the legislative scheme apply to all tokens. 

Some tokens are just digital representations of common or preferred stock, or of debt securities. 

These tokens are really just a form of book entry security, and likely should be regulated in the same 

way as any other equity or debt security. Similarly, tokens may not be eligible for the type of 

comprehensive legislative scheme described in the text if, for example, the tokens give holders the 

right to participate in profits, revenue, dividends or other income from a particular company or 

business, or give holders the right to convert their tokens into equity, debt or similar securities. As a 

starting point, Congress might limit the availability of the comprehensive legislative scheme to 

tokens that are securities solely because they are "investment contracts" as defined in Howey and 

subsequent cases. In fairness, this approach may inadvertently exclude some categories of tokens 

that ought to be able to rely on the contemplated comprehensive statutory scheme, so this approach 

should be viewed only as a starting point for discussion. 

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o As an example of the last point, current disclosure 

regimes, rightly, place great importance on audited 

financial statements of the issuer of common stock or debt 

securities. The financial statements of a Token Company 

may be much less important to token investors and token 

users, especially over time if the Token Company's 

participation in the token platform and the token 

ecosystem is greatly diminished, or if the Token 

Company has escrowed or otherwise segregated sufficient 

assets to support the operations of the token platform and 

token ecosystem for the foreseeable future; and 

o On the other hand, a comprehensive legislative scheme 

may need to address issues unique to Token Companies, 

such as what obligations, if any, a Token Company and 

its Board owe to token holders (although admittedly this 

may be a State law corporate issue as opposed to a federal 

question), and what rights, if any, token holders should 

have to participate in the operation and management of 

the related token platform. 

• Protective. In addition to protecting the interests of token 

investors and token users, a comprehensive legislative scheme 

also should guard against systemic risks posed by blockchain 

and cryptocurrency technologies, including by: (i) 

appropriately balancing privacy concerns with law enforcement 

needs; (ii) balancing free speech rights with the need to protect 

the integrity of data and information stored on the blockchain 

and accessible to AI and other technologies; and (iii) balancing 

capital formation and innovation goals with the need to guard 

against manipulative or coercive marketing or other tactics. 

These may well be some of the most challenging parts of 

creating a comprehensive legislative scheme governing 

blockchain and cryptocurrency technology, and we likely are 

only at the earliest stages of even being able to identify the 

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potential issues, much less to develop sound policy and 

legislative responses to them. 

CONCLUSION 

Thank you again for the opportunity to testifY before you today. I am 

delighted this Subcommittee is focusing on blockchain and cryptocurrency 

technologies, and I believe your leadership can greatly facilitate the 

continued development of these technologies, while at the same time 

appropriately protecting investors in these technologies and users of these 

technologies. I would be delighted to answer any questions. Also, as you 

move forward with your work on these issues, if you think I may be of any 

assistance, I would be delighted to help. 

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@J) COIN CENTER 

TESTIMONY OF 

Peter VanValkenburgh 

Director of Research of Coin Center 

BEFORE THE 

United States House of Representatives Committee on Financial Services 

Subcommittee on Capital Markets, Securities, and Investment 

"Examining Cryptocurrencies and ICO Markets" 

March 14,2018 
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I am Peter VanValkenburgh, Director of Research at Coin Center, an independent 

nonprofit focused on the public policy questions raised by cryptocurrencies and open 

blockchain networks.1 

The fundamental achievement of Bitcoin2 and follow-on cryptocurrencies3 is digital 

scarcity. We know there are only 16.9 million bitcoins in the world right now because their 

distribution and movements are described with perfect fidelity on a public ledger that anyone 

can independently read and mathematically authenticate. 4 That ledger is called the Bitcoin 

blockchain.5 Just as anyone who owns an ounce of gold can independently assay the metal and 

1 Based in Washington, D.C., Coin Center is the leading independent non-profit research and advocacy 

center focused on the public policy issues facing cryptocurrency and decentralized computing 

technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these 

technologies and to promote a regulatory climate that preserves the freedom to innovate using 

permissionless blockchain technologies. We do this by producing and publishing policy research from 

respected academics and experts, educating policymakers and the media about blockchain technology, 

and by engaging in advocacy for sound public policy. See Coin Center, Our Work, 

httns://coincenter.org:lour-work. 

2 Bitcoin was first described in a white paper circulated over Internet mailing lists in late 2008. The 

author(s) used a pseudonym, Satoshi Nakamoto. Satoshi Nakamoto, "Bitcoin: A Peer-to-Peer Electronic 

Cash System" (2008), https:/!bitcoin.orgjbitcoin.pdf. The Bitcoin network itself did not begin running on 

the Internet until January 3, 2009 when the first block in the bitcoin blockchain was mined. See "Block 0" 

Bitcoin Block Explorer, (last accessed Dec, 2015) 

bttp·l/h]ocl<explorer com/block 1()QQ()Q()()Q{l019d6689c085ae 165831 e934ff763ae46a2a6c 1 Z?h3fl h60a8ce26f 3 Tbe software that powers the Bitcoin network is open source. That means that it can be freely copied 

and modified without seeking a copyright license or paying the original creators. Because of this 

openness, several thousands of cryptocurrency and token projects have emerged by borrowing software 

code or developing new software inspired by Bitcoin. Wbile there are now thousands of cryptocurrency 

projects, only a handful are actively used online and have more than a trivial total value. See 

https://en wikipedia.org/wiki/List of cryptocurrencies. 4 Tbe total supply, distribution, and full history of all bitcoin transactions can be observed by running the 

bitcoin core software client on an Internet connected computer. Alternatively, one can visit a website 

that publishes the data in the blockchain in a more convenient and easy to access format. See, e.g., 

http://blockchain.info. See https:/lblockchain.info/charts/total-bitcoins for an up to the minute accurate 

tally of the total number ofbitcoins in circulation. New bitcoins are released to network participants who 

perform verifiable work securing the blockchain according to a diminishing schedule that is described in 

the bitcoin software. Ultimately, this schedule dictates that there will only ever be 21 Million bitcoins in 

circulation. 

5 The bitcoin blockchain is broken up into blocks. Each block comprises the authoritative list ofbitcoin 

transactions that settled in a given period that is, on average, 10 minutes long. For an up to date list of 

recent blocks and the transactions included within them, see https://blockchain.info/blocks. 

2 
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have proof that what they hold is real, scarce, and valuable, anyone can check the data in the 

Bitcoin blockchain and verify that bitcoins they've received are provably scarce and valuable! 

An open set of computers running the free Bitcoin software works together to store, 

update and verify that blockchain 24 hours a day, 365 days a year. Anyone can join that network 

of computers and independently check the work of every other participant, independently store 

their own copy of the blockchain, and independently contribute computing power to validate 

the integrity of that data. 7 Honest and verifiable contributions to help secure the network are 

rewarded with automated payments in bitcoins, and attempts at fraud are revealed and 

punished by automatically withholding bitcoin-denominated rewards and ignoring fraudulent 

transactions. This is how these networks establish trust in the integrity of the record, and, by 

extension, trust in the inherent scarcity ofbitcoins or any other token, coin, or unit whose 

distributions and movements are tracked on an open blockchain. 

This digital scarcity can enable a wide variety of new, follow-on innovations: 

• A scarce token can be developed to be nothing more than scarce and transferrable 

person to person. That, in a nutshell is Bitcoin.8 Because it is transferable and 

scarce it can be used as money just like other portable and scarce goods 

throughout history have been used as money-from gold to seashells. 

6 Truly verifying that data requires familiarity with cryptographic functions used to sign and chain 

together the relevant transaction data going back to the beginning of the network in 2009. This is not 

easy for a lay person, however it is a deterministic technical process that any expert in the field of 

cryptography can perform, much like any expert metallurgist could verify the quality of an ounce of gold 

via chemical analysis. 7 Participating in this verification is koown as mining. For a comprehensive explanation of the mining 

process See infra Attachment 2, Framework for Securities Regulation of Cryptocurrencies, Appendix 1. The 

Bitcoin Mining Mechanism: Proof of Work Consensus. 8 To to quote Fran~ois Velde of the Chicago Federal Reserve, "Bitcoin is a system for securely and 

verifiably transferring bitcoins." 
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• A scarce token can be developed that is automatically redeemable for a digital 

good or service (like cloud storage or digital identity credentialing) that is 

provided by the same open network that keeps the blockchain. Projects like 

Ethereum, Filecoin, or Blockstack follow this model and they may soon challenge 

centralized computing service providers like Amazon, Facebook, and Google that 

specialize in the provision of services like cloud storage, social networking, or 

digital identity. 9 

• A scarce token can be developed as a representation of a legal agreement or 

financial asset: a public company could track its shares as tokens on a 

blockchain, 10 or a network of banks could settle accounts by trading tokens that 

represent debt obligations on their balance sheets.11 

• A scarce token could even represent a real world identity document like a 

diploma, a driver's license, or a deed to land.12 

Looking at it one way, these blockchains are just records, whether they be records about 

money, assets, identity, or computation. But rather than relying on a variety of major 

corporations or institutions to keep track of these important records in data centers that each 

have the potential to go offline or get hacked, a token-powered blockchain version of the record 

relies on an open network of thousands or potentially millions of economically motivated 

participants. Those records will be available until every participant goes offline. In other words, 

9 See infra Attachment 1, What are Appcoins? 10 See, e.g., Cade Metz, "Overstock Begins Trading its Shares via the Bitcoin Blockchain" Wired (Dec. 

2016) https:l/www.wired.com/2016!12/overstock-com-issues-stock-vja-bitcoin-blockchain/. 11 See, e.g., Adam Kissack, Utility Settlement Coin: A Pioneering Form Of Digital Cash (Sep. 2017) 

https:/!www.clearmatics.com/utility-settlement-coin-pioneering-form-digital-cash/. 

"See, e.g., Laura Shi, "The First Government To Secure Land Titles On The Bitcoin Blockchain Expands 

Project" Forbes (Feb. 2017) 

https ://www.forbes.com/sites!laurashin/2017 /02/07/the-first-government-to-secure-land-titles-on-thebitcoin-blockchain-expands-project/#4b232elf4dcd. 
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they will likely always be available. Additionally, those records will have fidelity unless every 

participant has their individual computer hacked and compromised. In other words, they will 

likely always have perfect fidelity. It's this revolutionary architecture that makes these systems 

effectively unhackable, at least using traditional methods of attack. 

Especially pertinent to today's hearing, these technologies have also been employed 

for capital formationY Scarce tokens like bitcoin and ether already exist in the world and are 

used as currencies or to obtain computing resources and services from the decentralized 

networks that power them. Other scarce tokens, however, are merely theoretical, because the 

software that will enable them has yet to be built. Recently, various developers have raised 

money to fund the development of their new blockchain software projects, by selling a promise 

of future scarce tokens to willing investors in a so-called initial coin offering or "ICO." The 

pitch is simple: If you give me money today, I'll give you a blockchain token in the future that 

will be redeemable for valuable computing services. 

From a regulatory standpoint there is a fundamental distinction to be made between, on 

the one hand, scarce tokens that exist today and are used for payment or to obtain computing 

services, and, on the other hand, promises of future scarce tokens that represent the hopefully 

profitable efforts of a developer. The former (things like bitcoin and ethereum) are effectively 

digital commodities: scarce items that may have value on open markets as money, investments, 

or inputs for valuable commercial and industrial processes. They are commodities, just digital. 

13 By some estimates, I COs raised a cumulative $5.6 billion last year for early stage blockchain software 

companies. See Fabric Ventures and Token Data, The State of the Token Market Gan. 2018) 

httos :/!static l.squarespace .com/static/5al9eca6c027 d8615635f80 llt!Sa73697bc8302551711523ca!1517 5 

13088503/The+State+of+the+ Token+Market +Final2 .pdf. 
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The latter, tokens promised in so called initial coin offerings, are securities: promises from 

issuers to investors that efforts will be put forward to create a profitable enterprise.14 

Both have investor protection risks, but distinct risks that are best addressed in different 

ways. A commodity-like token has no issuers upon whom investors rely, but it trades on 

speculative spot markets. Policing these markets for fraud and market manipulation is critical 

for investor protection. A promise of future tokens is a security with an issuer upon whom 

investors rely. Mandating accurate risk disclosures and transparency from these issuers is 

critical for investor protection. The sensible and emerging investor protection regime is 

nothing new even though the underlying assets may seem like science fiction: it is the existing 

investor protection authority of the CFTC to supervise commodities derivatives markets and 

police spot markets for fraud and manipulation, 15 in conjunction with the existing authority of 

the SEC to mandate disclosure from issuers making public securities offerings.16 

Where there are frictions and a mismatch between new technologies and old regulatory 

structures, is state-by-state money transmission regulation. Today, commodity-like token spot 

markets, known generally as cryptocurrency exchanges, are in some states regulated as money 

transmitters like Western Union or Paypal. This is not ideal for entrepreneurs because 

14 For a comprehensive look at why some cryptocurrencies and tokens likely don't qualify as securities 

under the relevant legal tests while others do qualify as securities, see Attachment 2, Framework for 

Securities Regulation of Cryptocurrendes. 

""[T]he CFTC DOES have enforcement jurisdiction to investigate through subpoena and other 

investigative powers and, as appropriate, conduct civil enforcement action against fraud and 

manipulation in virtual currency derivatives markets and in underlying vittual currency spot markets." 

Chairman J. Christopher Giancarlo, Written Testimony of Chairman J. Christopher Giancarla before the 

Senate Banking Committee, Washington, D. C. (Feb. 2018) available at 

http:l!y.ww.cftc.gov/PressRoom!PressReleases/opagiancarlo37. 

16 "There should be no misunderstanding about the law. When investors are offered and sold securities -

which to date I COs have largely been -they are entitled to the benefits of state and federal securities 

laws and sellers and other market participants must follow these laws." Chairman Jay Clayton, Chairman 

fay Clayton Testimony before the Senate Banking Committee an Virtual Currendes: The Roles of the SEC and 

CFTC (Feb. 2018) available at 

https:l/www.sec.gov/news/testimonv/testimony-virtual-currencies-oversight-role-us-securities-and-exc 

hange-cornrnission. 
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obtaining money transmission licenses from 53 states and territories is costly and duplicative. 

This is also not ideal for consumers or investor protection, because money transmission 

regulation focuses only on the risks of custodying customer funds while in transmission, not in 

running highly liquid markets in commodity-like assets. As Chairman Giancarlo and Chairman 

Clayton have both suggested, it may be time to revisit the wisdom of a state-by-state approach. 

17 A federal solution might be desirable both to reduce barriers to entry and enhance 

competition amongst exchanges, and also to better protect investors. 

Thank you and I look forward to your questions. 

17 "[C]onsideration should be given to shortcomings of the current approach of state-by-state money 

transmitter licensure that leaves gaps in protection for vittual currency traders and investors. Any 

proposed Federal regulation of virtual currency platforms should be carefully tailored to the risks posed 

by relevant trading activity and enhancing efforts to prosecute fraud and manipulation. Appropriate 

Federal oversight may include: data reporting, capital requirements, cyber security standards, measures 

to prevent fraud and price manipulation and anti-money laundering and 'know your customer' 

protections. Overall, a rationalized federal framework may be more effective and efficient in ensuring the 

integrity of the underlying market.• Chairman J. Christopher Giancarlo, Written Testimony of Chairman J. 

Christopher Giancarlo before the U.S. Senate Agriculture, Nutrition, and Forestry Committee, Washington, 

D.C. (Feb. 2018) available at http://www.cftc.gov/PressRoom/PressReleases/opagiancarlo38. See also 

Chairmen Jay Clayton and J. Christopher Giancarlo, "Regulators Are Looking at Cryptocurrency" Wall 

Street Journal (Jan. 2018) 

https :/lwww.wsi .com/artjcles/regulators-are -looking -at -cryptocurrencv-1516836363. 
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Attachment 1: 

Peter VanValkenburgh and Jerry Brito, "What are Appcoins?" Coin Center (Oct. 2016) 

What are Appcoins? 

Cryptocurrencies and open blockchain networks have created a new way to raise 

money to develop and maintain novel products and services-whether devices on 

the Internet of Things, new cloud services on the Internet, or even financial 

products and investments. This is an unprecedented form of crowdfunding that 

may raise various legal and policy questions. Developers and investors are eager to 

have answers to these questions so that they can safely take advantage of this 

innovative model. 

How It Works 

Let's take a common web service as an example: cloud storage. The traditional 

model for building this service is Dropbox, which allows users to pay Dropbox a 

monthly fee to store their files on the company's Internet-connected hard drives so 

that the files can be available anywhere. Dropbox is a private company that raised 

money from private investors to finance the development of the service, and the 

service is built on private company-owned infrastructure (e.g. server farms) that 

connects to the open Internet. 

Two things can be different than this traditional model when an open blockchain 

network is employed. (1) Developers get paid differently. Instead of raising money 

from investors, developers can use a blockchain to keep track of a scarce token, 

sometimes called an "appcoin" (short for application coin). Developers can sell or 

give away that token to people who want to use the storage service or those who 

want to support its development. The sale of these tokens can finance the 

development or maintenance of the service, and that sale can happen before, 

during, or after the development of the service. (2) The service is peer-to-peer. The 

users of the cloud storage service, themselves, comprise the infrastructure that 

powers the service (there is no server farm) and individual users can be rewarded 

for their contributions to that infrastructure (e.g. the spare space on their 

individual Internet-connected hard drives) with the token. 

These Tools Offer a New Way to Fund Open Platforms 

A closed platform for messaging (e.g. Apple's iMessage or Google's Hangouts) only 

allows users to message other registered users of the service while an open 

platform (e.g. email or SMS text messaging) allows users to message anyone with an 

Internet- or cellular-connected device. With closed platforms necessary software 

may be proprietary, access may come with a fee, and various services may not 

intemperate (e.g. music purchased on iTunes can not be moved to Google Play if 

the user decides to switch from one music store platform to the other). A 

Attachment l: What are Appcoins? 
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traditional company, once built, may not have a motivation to open up their 

platform. 

Open platforms have proved difficult to create because it has been historically 

difficult to monetize them even if they become successful-by nature they are 

public goods. Now, however, the developers of a cloud storage service can 

incorporate a scarce access-token, an appcoin, into the design, distribute that 

token to users, retain some amount of the token for themselves, and if the platform 

proves popular, the token (alongside the holdings of the developers) will grow in 

value and remunerate the developers for providing a public good. This new model 

challenges the concept of equity as traditionally understood, and carries entirely 

different risks and rewards. 

Appcoin Crowdfunding is Happening Now 

Developers of these services and their potential investors are already moving to 

take advantage of these new opportunities. Services for cloud storage are being 

developed by IPFS, Slmj, Swarm, and may be supported by tokens (Filecoin, 

StOijcoin, or Ether respectively). Services for cloud computing power are being 

developed by Ethereum, Counterparty, and others, while utilizing tokens (Ether and 

XCP respectively). Services for content-curation and attribution are being 

developed by~. Mediachain, and others (some, like Steemit, are already 

supported by a token, others are not but may wish to include tokens in the future). 

This list is incomplete and new projects and new developers emerge weekly. 

Simultaneously, investors interested in helping finance applications built on open 

networks have begun looking at whether they can buy and hold tokens rather than 

take ownership interests in the firms developing these networks. 

Attachment I: What are Appooins? 
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Attachment 2: 

Peter Van V alkenburgh, "Framework for Securities Regulation of Cryptocurrencies" Coin Center 

(Jan. 2016). 

Omitted from Print Copy to Save Paper. Please see electronic copy or visit: 

https://coincenter.org/entry/framework-for-securities-regulation-of-cryptocurrencies 

Attachment 2: Securities Framework 
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March 12, 2018 

The Honorable William Huizenga 

Chairman 

Subcommittee on Capital Markets, 

Securities and Investments 

2129 Rayburn House Office Building 

Washington, DC 20515 

The Honorable Carolyn Maloney 

Ranking Member 

Subcommittee on Capital Markets, 

Securities and Investments 

2129 Rayburn House Office Building 

Washington, DC 20515 

Re: Written Testimony before the Subcommittee on Capital Markets, Securities and 

Investments 

Dear Hon. William Huizenga and Hon. Carolyn Maloney, 

Liquid M Capital would like to submit the attached as written testimony before the 

Subcommittee on Capital Markets, Securities and Investments of the House Financial Services 

Committee for the Committee's March 14 hearing entitled "Examining the Cryptocurrencies and ICO 

Markets." liquid M is very familiar with the regulatory challenges faced by Fin Tech firms that are issuing 

and trading digital assets and using blockchain technology. We would like to thank the Committee for 

their efforts in addressing these regulatory challenges and for the opportunity to submit this written 

testimony. 

Please do not hesitate to call me at 646-595-1737 or our counsel, Richard B. Levin of Polsinelli 

02-772-8474 if you have any questions regarding the petition or any other matter. 

Ve 

Vine 

Chief Executive Officer 

Liquid M Capital, Inc. 

1 627-U772.4 
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STATEMENT OF VINCENT MOLINARI 

Chairman Huizenga, Ranking Member Maloney, and the distinguished members of the 

Committee, thank you for the opportunity to submit testimony for the record. I offer my testimony as a 

representative of Liquid M Capital, Inc. ("Liquid M"), a financial technology ("Fin Tech") company and 

broker-dealer registered with the U.S. Securities Exchange Commission ("SEC") and the Financial 

Industry Regulatory Authority ("FINRA"). Liquid M is the operator of an alternative trading system 

("ATS") for the secondary trading of digital assets that are securities.' Given our experience in the 

industry, we commend the Chair and the Ranking Member for holding this hearing on this important 

issue and the role of Congress in helping to ensure that Fin Tech and the growing field of digital assets 

are properly regulated. As stated recently by Chairman Giancarlo of the U.S. Commodity Futures 

Trading Commission ("CFTC"), "[w]e are entering a new digital era in world financial markets."2 

We believe it is critical for regulators to foster the value of innovation in Fin Tech without stifling 

it through unclear regulations. Chairman Clayton of the SEC and Chairman Giancarlo of the CFTC both 

noted in recent testimony before the Senate Banking Committee the great potential that distributed 

Ieger technology has to revolutionize the financial services industry.' We echo these sentiments and 

support the critical role of regulators in ensuring that this revolutionary technology is able to develop in 

a sustainable manner that benefits both industry participants and protects consumers. 

For the purposes of this testimony, we will limit our comments to the securities laws of the 

United States because it is the area in which we have the most experience. The SEC has been very active 

over the past year, making its position on the regulation of digital assets increasingly clear through 

informal means, including enforcement actions and policy statements4 We agree with the SEC in their 

belief that most, if not all, digital assets that have been issued to the public through initial coin offerings 

("ICOs") and other means qualify as securities, and therefore must only be offered pursuant to a 

registration with the SEC or an exemption from registration. While we believe the existing laws can be 

1 The terminology used by the Fin Tech industry and regulators to refer to these types of assets has varied between 

agencies, including property with the IRS, cryptocurrency with the CFTC, and digital assets with the SEC. For the 

purposes of this testimony, we will refer to such assets as digital assets. 2 Written Testimony of Chairman J. Christopher Giancarlo before the Senate Banking Committee, Washington, D.C. 

{February 6, 2018) available at: http://www.cftc.gov/PressRoom/PressReleases/opagiancarlo37 ("Giancarlo 

Testimony"). 

' See Written Testimony of Chairman Jay Clayton before the Senate Banking Committee, Washington, D.C. 

{February 6, 2018), available at: https://www.banking.senate.gov/public/ cache/files/a5e72ac6-4f8a-473f-9c9ce2894573d57d/BF62433A09A9B95A269A29E1FF13D2BA.clayton-testimony-2-6-18.pdf {"Ciavton Testimony''); 

Giancarlo Testimony. 4 See Munchee Inc., Securities Act Release No. 10445 {Dec. 11, 2017) available at: 

https://www.sec.gov/litigation/admin/2017/33-10445.pdf; SEC v. REcoin Group Foundation, LLC, DRC World Inc. 

a/k/o Diamond Reserve Club, and Maksim Zaslavskiy, 17 Civ. [ ] (Sept. 29, 2017) (Complaint); Public Statement, 

SEC Chairman Jay Clayton Statement on Cryptocurrencies and Initial CoinOfferings, SEC (Dec. 11, 2017), available 

at: https:Uwww.sec.gov /news/public-statement/statementclavton-2017-12-11. 

2 

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applied to the regulation of blockchain technology and digital assets, we believe there is a need to 

modernize the laws to keep pace with these new technologies and to not stifle innovation. 

A. The SEC has taken important first steps in regulating digital assets. 

Our commitment to the regulation of these new technologies as securities is evidenced by the 

petition for rulemaking by the SEC we filed on March 13, 2017, asking the SEC to publish a concept 

release and proposed rules for public comment on changes to existing rules to better address the 

regulation of digital assets.' As we noted in the petition, we support the SEC's efforts to perform its 

core duties: (i} to protect investors; (ii} to maintain fair, orderly, and efficient markets; and (iii) to 

facilitate capital formation• The SEC has taken significant steps over the past year to provide guidance 

to the industry regarding the regulation of digital assets, through enforcement actions, investigative 

reports, investor alerts, testimony, and public speeches. Such actions, have played an important role in 

shaping innovation and indicating to the industry that the sale and dissemination of digital assets cannot 

occur without regulation.' Though valuable first steps, we believe the size and continuing expansion of 

this industry demands more tailored and comprehensive regulation. 

B. The financial services industry needs clearer rulemaking regarding the regulation of digital 

assets. 

We believe the existing rules that apply to the sales of securities and the exemptions from 

registration with the SEC, such as Rule 506 of Regulation D, and Regulation A, though helpful, do not 

fully meet the needs of companies seeking to issue digital assets. While the securities laws have served 

our capital markets well since their adoption on the 1930s, Congress and the SEC have recognized that 

at times those laws require amendments to address technological innovations" 

SEC enforcement actions have provided some guidance regarding when digital assets are 

securities, but have not fully addressed the needs of the financial services industry. Liquid M believes 

the publication of a concept release regarding the regulation digital assets is a meaningful first step in 

providing guidance to the industry. However, such guidance will only prove beneficial if it is followed by 

5 See Petition for Rulemaking (Mar. 13, 2017}, available at: https:Uwww.sec.gov/rules/oetitions/2017/petn4-

710.pdf. At the time this petition was published, Liquid M operated as Ouisa Capital, LLC. 6 Michael S. Piwowar, Acting Chairman, SEC, Remarks at the "SEC Speaks" Conference 2017: Remembering the 

Forgotten Investor (Feb. 24, 2017), available at: https:Uwww.sec.gov/news/speech/piwowar-remembering 

theforgotten-investor.html. 

7 See supra note 4; see a/sa Clayton Testimony; Report of Investigation Pursuant to Section 21(a) of the Securities 

Exchange Act of 1934: The DAO (July 25, 2017} (the "DAO Report"), available at: 

https:Uwww.sec.Qov/litiQationlinvestregort/34-81207.pdf: Dave Michaels and Paul Vigna, SEC Chief Fires Warning 

Shot Against Coin Offerings, Wall Street Journal. Nov. 9, 2017, available at: https:ijwww.wsi.comlarticles/secchief-fires-warning-shot-against-coinofferings1510247148?mg=prod/accounts-wsi. 

8 Congress has historically taken opportunities to update federal securities laws, including the Securities Act 

Amendments of 1975, the National Securities Markets Improvement Act of 1996, and the Jumpstart Our Business 

Startup Act of 2012. 

3 

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the SEC adopting a new rule on the regulation of digital assets - Regulation DA.9 We believe that 

Fin Tech and the regulation of digital assets present the SEC with an opportunity to satisfy its statutory 

duties by engaging in a constructive dialogue with the industry on how to regulate digital assets. 

The current guidance on the regulation of digital assets as securities requires a facts and 

circumstances based analysis by qualified counsel to determine if an asset is a security and if a firm's 

activities require registration as a broker-dealer, an exchange, or an ATS. Such analysis is often cost 

prohibitive to the early stage companies that drive much of the innovation in FinTech. Further, issuers 

are restricted by the current regulatory framework for securities offerings, which include artificially low 

caps on the funds that may be raised or the number of holders of record. We believe the existing 

securities laws need to be amen.ded to promote capital formation, and the SEC needs to amend existing 

rules or adopt new rules specifically tailored to digital assets. Should the Committee desire a more 

thorough evaluation of current regulations and how they may be modified to better regulate the 

issuance of digital assets, we are happy to provide it. 

C. Issuers of digital assets prior to guidance to the DAO Report should be provided on 

opportunity to remediate their potentially illegal offerings. 

Though the lack of regulatory clarity creates difficulties for companies seeking to raise capital in 

the future, billions of dollars have been raised through ICOs over the past year that were more than 

likely sold in a manner that was not compliant with federal securities laws. We do not believe the 

majority these issuances were deliberately not compliant, but were rather the result of a lack of 

regulatory clarity. As the SEC's position on ICOs has become clear, FinTech firms have learned that 

digital assets generally must registered with the SEC or sold pursuant to an exemption from registration. 

However, this position was not clear to the industry prior to the publication of the DAO Report. 

Recognizing this issue, liquidM submitted a petition for rulemaking to the SEC on January 23, 2018, 

asking the agency to offer issuers of digital assets that were sold in possible violation of the securities 

laws the opportunity to remediate their offeringsw 

We encourage the SEC to provide an opportunity for issuers of digital assets through ICOs that 

took place prior to the publication of the DAO Report the opportunity to remediate their potentially 

illegal offerings. While we believe there are still uncertainties regarding the regulation of digital assets 

and blockchain, the regulatory climate has become increasingly clear in recent months following the 

publication of the DAO Report and various recent enforcement actions by the SEC against ICO issuers'' 

9 We believe that the current regulatory challenges surrounding digital assets are analogous to challenges 

presented by the promulgation of electronic communications networks ("ECNs") in the mid-1990s that prompted 

the SEC to publish a concept release on how to regulate ECNs and other ATSs. The concept release afforded the 

industry an opportunity to engage in a productive discussion with the SEC staff on how to regulate ECNs and other 

ATSs, and eventually resulted in the adoption of Regulation ATS in 1998, which established how ECNs, ATSs, and 

exchanges would be regulated going forward and provided meaningful guidance to innovative firms that were 

launching ATSs. 10 See Petition for Rulemaking (Jan. 23, 2018), available at: https:f/www.sec.gov/rules/petitions/2018/petn4-

719.pdf. 

11 See supra note 4. 

4 62743772.6 
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We propose that the SEC offer issuers of digital assets that may have violated the securities laws the 

opportunity to remediate their offerings by retroactively engaging in the appropriate filings under Rule 

506 of Regulation D, Regulation A, or Regulation CF. This type of retroactive registration should be 

accompanied by a right of rescission to all purchasers of the digital assets or the chance to receive a 

new form security that was offered in compliance with the securities laws. This SEC provide issuers with 

a 180 day window to remediate their initial offerings by engaging in either an appropriate registration or 

exemption under the federal securities laws. We believe that by affording Fin Tech firms the opportunity 

to remedy their conduct, the SEC will be able to advance its interests in regulating securities while 

fostering innovation and regulatory compliance, meeting the agency's regulatory mandates. 

D. The innovative nature of the technology demands an innovative approach to regulation. 

We believe that the innovative nature of this industry demands an innovative approach to 

regulation. Though there has been guidance from the SEC regarding the treatment of digital assets as 

securities, we believe that there is likely a middle ground between the view that all tokens are securities 

and that all tokens are not securities. Though we agree that a majority of the tokens issued to date 

through ICOs have many of the attributes of securities and should be regulated as such, a rapidly 

expanding number of platforms in the FinTech space are being created that operate using a native 

digital asset, functioning as a currency, for the exchange of value on their platform. We believe 

regulations either need to be created or modified to better suit this type of business model, as 

registering digital assets as securities is impracticable for these companies. 

We have identified three examples of offering structures that we believe would be compliant 

with securities law. It is important to note that in all cases, the digital asset must include a digital 

currency that has attributes like Bitcoin, including being distributed in exchange for work and not issued 

through some type of presale or crowd sale. First, we believe that a company could issue an equity 

security that would pay a dividend in a digital currency. Second, we believe that a company could issue 

a bond that would be sold as a security and then repaid in digital currency. Finally, we believe a 

company could issue a profit participation interest that would be paid in digital currency. To be 

compliant with federal integration doctrine, we believe that each example must be include the option 

for the purchaser to be paid in the digital currency, fiat currency, or a combination of the two. 

Innovative offering structures like these will help the issuances of digital assets to fit within securities 

laws, while also meeting the needs of the novel, innovative technology that is being developed in this 

space. 

E. Conclusion 

Innovation drives the American economy, and distributed Ieger technology is at the heart of 

innovation in the financial services industry. While the SEC has taken important steps to provide 

guidance to FinTech firms on the regulation of digital assets, and our capital markets are the most 

dynamic in the world, there is a need for a more thorough update to the regulatory framework. 

Congress has amended the federal securities laws in the past to keep up with market changes, and we 

believe that the current developments with digital assets necessitate a similar amendment. It is critical 

5 62743772.6 
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regulators take thoughtful steps to better regulate digital assets in order to promote innovation and to 

ensure the protection of the public. If Liquid M or we can be of any further assistance to you in this 

matter, please do not hesitate to contact me. 

6 62743772.6 
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•±• Sweetbridge • 

March 13, 2018 

The Honorable Kyrsten Sinema 

U.S. House of Repres~;mtatlves 

1725 Longworth House Office Building 

Washington, D.C. 20515 

Dear Representative Slnema: 

+ 1 (415) 663·5000 

www.aweotbrldge.com 

SWEETBRIDGE 

515 E. Grant street, Sullo 150 

Phoenix, Artzona 65004 

America Is the world's technology leader. From automobiles to airplanes, computers to smartphones, the Internet 

to apps, America has been at the forefront of technological Innovation for over a century. But today It Is on the 

verge of ceolng this elite status by falling to embrace and promote blockchaln and cryptocurrenoy technology. 

Bloekchaln technology enables the cryptographically-secure recording of transactions on a decentralized network 

of computers. By requiring each computer to approve a transaction before It Is locked onto the network, a 

bloekchaln eliminates the need for Intermediaries that have traditionally been reliec upon to verify a transaction. 

Cryptocurrencles operate similarly to government-Issued flat currencies In that they represent a digital medium of 

exchange allowing owners to transfer value to others without the need for a bank or landing Institution. 

Cryptocurrencles have captured the Imagination of American businesses, entrepreneurs, Investors, and 

consumers. This ground-breaking technology will revolutionize global trade, governance, and economics, 

unleashing asset liquidity and providing access to affordable financing. Unfortunately, the true potential of 

cryptocurrencles and blookchaln has been overshadowec by focus on Bltcoln's price volatility, fly-by- night coin 

offertngs, and allegations of fraud. 

Federal regulators have responded to these Issues with a myriad of overlapping and confusing rules that leave 

many Innovators, Including Sweetbrldge, unsure of how to offer their products to American consumers In 

adherence to the law. Federal regulators cannot agree on who has jurisdiction and how to approach the 

technology. While the SEC Is ramping up enforcement actions against cryptocurrency sales, the CFTC has 

enterec Into a cooperative agreement with the United Kingdom to promote Information sharing about blookchain, 

has not objected to the sate of Bltcoln futures products, and has authOrized · • 

employees to trade cryptocurrencles. 

Federal regulators cannot even agree on the status of cryptocurrencles- the SEC 

classifies oryptocurrencles as a security, the CFTC treats them as a commodity, 

the IRS has classified them as property for Income tax purposes, and Treasury's 

~ ~ 
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Financial Crtmes Enforcement Network (FinCEN) has declared them currency for money transmitter licensing 

requirements. Innovators must also contend with a similarly cumbersome patchwork of state laws. 

The sale of cryptocurrencles through !COs and the exchange of cryptocurrencles on secondary markets have 

garnered the lion's share of regulalors' attention. While many oryptocurrencles are designed, sold and traded like 

securities and should be regulated as such, many cryptoourrencles - or more correctly, digital tokens - are not 

designed to and do not function as securities. 

Sweetbrldge Is a not·for-pro!lt alliance of global blockchaln projects designed to streamline global supply chain 

management, provide liquidity to supply chain and Individual assets, and engineer new ways for businesses and 

government to engage In commerce. The Sweetbrtdge platform Is utilized through a dual token model. Brldgecoln 

Is a stable currency pegged to government-Issued currency such as the U.S. dollar or euro and programmed for 

commercial exchange. Sweetcoln Is a discount token that enables an Individual, business, or government to 

borrow against their assets with reduced or eliminated fees, Including low Interest rate liquidity. Unlike many of the 

cryptocurrenclas on the market today, the Sweetbrldge tokens obtain their value through customers' use of the 

platform. Also unlike many of the recent !COs, which were Initiated to raise capital on the promise. o! a future 

blockohaln product that never materialized, the Sweetbridge platform Is ready to launch, and ths tokens are an Integral part of the platform's functionality. 

sweetbrldge Is not unique In Its design and use of digital tokens. Many other Innovators are designing blockchaln 

products that enable the purchase of goods or services, consumer lending, mortgages and real estate 

transactions, record management, supply chain oparaflons, Identity management, and much more. But many 

American Innovators are leaving the United States and net offering their products to American customers, Instead 

launching !hair blookchaln projects In foreign countrtes that have embnsoed the technology. In the absenca of 

clarity from federal regulators, particularly the SEC, Sweetbridge will be forced to join them. While this may satisfy 

the regulatOry goal to protect retail buyers from bad actors, It will have a longer-term effect of driving good &ctors 

with significant Innovations that could provide real value to consumers offshore. 

Ths Capital Markets, Securltfes, and Investment Subcommittee hearing on March 14, 2018, entitled "Examining 

the Cryptocurrencles and lCO Markets' presents an Important and timely opportunity for members of Congress to 

examine the myriad of ladera! regulations that are prevendng many blookohaln Innovators from offering their 

products to American customers. I command the subcommittee for engaging In thls much-needed oversight and 

encourage Congress to explore ways to provide regulatory olarlty and guidance to American Innovators like 

Sweetbrtdge. 

Thank you lor your attention to this Issue. I look forward to working with you and your colleagues to overcome the 

regulatory barriers to blockchaln Innovation. 

Sincerely, 

./~ Scott Nelson 

Chairman and CEO 
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Rep. Emmer: 

Questions for the Record 

Responses Respectfully Submitted by Mike lempres 

Chief legal and Risk Officer 

Coinbase,lnc. 

Examining Cryptocurrencies and ICO Markets 

Subcommittee on Capital Markets, Securities, and Investments 

Committee on Financial Services 

March 14, 2018 

1. To what extent do regulators need to clarify so-called utility tokens and other products in this 

space are commodities or at least not securities, and are simple enforcement actions enough to 

get there? 

Current regulatory uncertainty around the line between security tokens and non-security tokens 

has chilled innovation in the digital asset marketplace, particularly among firms that are focused 

on regulatory compliance. 

Regulation through enforcement, while understandable as a first step while regulators gain an 

understanding of a new asset class, is an insufficient regulatory approach to the security versus 

non-security issue. First, regulation by enforcement is by its nature retrospective, making it 

difficult to know whether a particular structure will incur liability in the future. Second, regulation 

by enforcement does not offer a good framework with which to analyze new products; market 

participants can only see which tokens the regulators believe are securities, not which tokens are 

not securities. Third, regulation by enforcement is inherently arbitrary in terms of which tokens 

are ultimately the subject of an enforcement action; with an estimated 1,400 tokens in circulation 

currently, there is no way for the regulators to address every token. Each of these issues makes 

guidance from the regulators-- through speeches, no-action letters, published guidance, and 

notice and comment rulemaking -- a much preferable method than enforcement actions alone. 

2. Specifically, what is the difference between a token that operates as a commodity and one that 

operates as a security? 

We believe that a token that operates as a commodity, rather a security, may have at least two key 

differences. First, the primary purpose of the commodity token would be actual use, which would 

increase the functionality of the platform for which it is issued. We believe that a token so 

designed and used would be less likely to meet the definition of an "investment contract" as set 

forth by the Supreme Court in SEC v. W.J. Howey.1 In contrast, a token that is issued for the 

328 U.S. 293 (1946). Under the Howey test, an investment contract is defined as an 
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purpose of investment, rather than consumption, would be more likely to be deemed a security 

under Howey. 

Second, we believe that a token would operate as a commodity if the value of that token did not 

derive primarily from the entrepreneurial or managerial efforts of others. Most platforms that 

issue tokens are very decentralized, with minimal involvement or direction from the sponsor. 

Moreover, token holders may be dispersed, and only identifiable by a blockchain address. We 

believe that these factors would make it difficult for those token-holders to join together to effect 

change or to exercise meaningful control, and that this characteristic, especially if coupled with a 

lack of a central sponsor, would make it more likely that such tokens would operate as a 

commodity. 

3a. Many have discussed the concept of a "utility token," where the token is issued solely for use 

on the platform of the company. Do you believe that such a "utility token" could theoretically exist 

without necessarily being a security? 

Yes. We believe that a token that is issued solely to be used on the platform for which it was 

issued could be defined as a "utility" token. As discussed in response to Question 2, we believe 

that a token whose purpose is actual use rather than investment may be more likely to not meet 

the Howey test. 

3b. Do you think that at one point an ICO could be a security at time of issuance and then 

theoretically become a commodity once the company's platform has been developed for the token 

to be used on? 

Yes. The intended structure and functionality of a token may change over time, especially if the 

token is issued before the underlying platform has been fully developed. As such, a token that may 

be deemed to be an investment contract (and therefore a security) under the Howey test at the 

time of the token's issuance may no longer be deemed to be a security as the platform becomes 

fully operational, and the utility of the token increases. For example, if a token is issued before the 

underlying platform is operational, and if the token is intended to be used solely or primarily in 

connection with that platform, that token may be less of a utility token initially than when the 

platform becomes fully operational. Similarly, if changes to the token are made after it is issued to 

further disaggregate the operation of that token, e.g., to further limit the ability of a core group of 

persons to make changes to the functionality of that token, then this may also cause the token to 

be deemed a commodity rather than a security. 

investment of money in a common enterprise with a reasonable expectation of profits to 

be derived from the entrepreneurial or managerial efforts of others. The Securities 

Exchange Act of 1934 defines a security to include, among other things, an investment 

contract, and the SEC has previously used the Howey test in determining whether a token 

is an investment contract, and therefore a security. See. e.g., Report of Investigation 

Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Securities 

Exchange Act Release No. 81207 (July 2S, 2017). 
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To the extent a token is issued that is ultimately deemed a commodity, rather than a security, one 

of the challenges is to determine the appropriate treatment of a token before it becomes a 

commodity. For example, a token that is initially deemed to be a security would have to be 

registered under the appropriate securities laws (or find an exemption from registration). 

However, if that token is subsequently deemed to be a commodity, the securities laws (and any 

corresponding registration statements) will no longer be applicable, and the token will transition 

from regulation as a security to regulation as a commodity. Coin base is unaware of precedent for 

this kind of transition, and believes that it highlights the difficulty of definitively classifying a token 

prior to its ultimate end state. 

3c. Does something like the Simple Agreement for Future Tokens (SAFT) help properly address 

this distinction between the security issuance and the utilization of tokens on a platform? 

Coin base believes that SAFT helps in addressing the distinction between a token at the time of 

issuance versus its ultimate utilization. Under the SAFT framework, an investor will fund a token 

issuer so that the issuer can develop utility tokens, which will be delivered to investors once 

functional. In most cases, Coin base believes that the interest created by a SAFT is an investment 

contract. While it has been asserted that the fully functional tokens issued pursuant to a SAFT 

may not be securities, the utility tokens may be linked back to the SAFT agreement, especially if 

those tokens have been purchased at a discount pursuant to the SAFT agreement. As such, we 

believe that further clarification as to the regulatory status of a SAFT token is needed. 

4. The CFTC has created LabCFTC, which is similar to what in other jurisdictions is known as a 

regulatory sandbox. Do you believe that the SEC should create a similar regulatory sandbox for 

digital assets that are securities? 

Response: 

The LabCFTC regulatory sandbox has been a beneficial avenue for fintech firms to discuss 

emerging issues with regulators. Coin base would support similar efforts by the SEC in 

approaching fin tech innovations. In particular, Coin base would encourage a regulatory sandbox 

approach that could allow firms to offer and trade digital assets that may fall within the definition 

of a security. 

Rep. Hultgren 

1a. Your testimony mentions that you store more than $20 billion worth of digital currencies and 

have traded over $150 billion in assets. In light of the January 2018 hack of the Coincheck 

cryptocurrency exchange wherein $534 million was stolen, I have a handful of questions for you 
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related to cybersecurity. What cybersecurity standards does Coinbase adhere to, if any? For 

example, does Coinbase adhere to the NIST Cybersecurity Framework? 

Coin base is currently required to adhere to the following standards or frameworks that involve 

cybersecurity: 

PCI-DSS 

GLBA 

NY Bitlicense 

NYCCR 

GDPR 

FFIEC 

Coinbase additionally voluntarily aligns to the following standards or frameworks that involve 

cybersecu rity: 

NIST Cybersecurity Framework (Note: this framework, unlike other items listed in this section, is 

not prescriptive, rather it is a framework for thinking about security) 

Center for Internet Security Controls 

Privacy Shield: While serving as a data transfer mechanism, Privacy Shield requires specific data 

protection controls related to cybersecurity. Coinbase has applied for EU-U.S. Privacy Shield 

certification. 

lb. Is Coin base legally required to follow any federal cybersecurity laws or regulations? 

Please refer to the previous answer. 

lc. In the event of a hack of your platform that results in the loss of assets, do you provide any 

guarantee to those who purchase assets through your platform? Do you have a legal responsibility 

for the safekeeping of your clients' assets? What protections are afforded to your customers in the 

event their Coinbase digital wallet is hacked? 

Response: 

Coin base considers all customer digital assets on our platform to be held under a custodial 

arrangement. As a result, we do have a legal responsibility to maintain those customer assets in a 

safe manner. 

Coin base maintains insurance policies that exceed the full value of digital assets held in our hot 

wallets at any point in time. In the event of a hack of Coin base, these policies would be triggered 

to cover losses. 
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2a. Your testimony mentions that the exchange only supports four assets because each has been 

determined by regulators to be a virtual currency and therefore not a security. However, you go 

onto note that regulators are not providing enough clarity for approximately another 1,500 

cryptocurrencies. How can the SEC/CFTC improve upon their process for providing guidance 

about whether a cryptocurrency is a security or a commodity? For example, why is it important for 

them to look at whether there is a central issuer and the role of investment contracts in providing 

guidance? 

Response: 

The SEC and CFTC to date have provided most guidance on the status of digital assets as 

securities or commodities through enforcement actions, including the SEC's DAO Report Both 

CFTC and SEC Chairmen have provided additional guidance through speeches, and the CFTC 

provided further guidance through the LabCFTC's primer on virtual currencies. This constellation 

of guidance, however, has only addressed a handful of digital assets with any degree of specificity. 

The speed at which this market has developed have put the regulators in a difficult position. 

Coinbase applauds the SEC and CFTC for their efforts to date to provide some degree of guidance 

without issuing blanket statements that could squelch the still-developing digital asset market. 

However, comprehensive regulation in this area is probably not feasible at this point in time 

because the marketplace is still developing; the lead time for proposed regulations, public 

comment periods, and final regulation drafting would make any regulation outdated by the time it 

becomes effective. 

Coin base would encourage the SEC and CFTC to use informal measures at their disposal, such as 

no action relief, to help the industry develop under agreed upon conditions that would allow 

financial innovation while still providing the market integrity and consumer protection that the 

securities and commodities laws are designed to protect. 

Coin base would also encourage the SEC and CFTC to establish a framework between the agencies 

to define their jurisdictional scopes in the context of digital assets-- much as the agencies have 

done in the past in the context of stock indices and swaps. Because regulations on trading 

securities, spot commodities, and commodity derivatives are fundamentally different, market 

participants and exchanges need a framework when determining what regulatory regime will 

apply to a given asset. 

2b. Would there be value in the SEC/CFTC providing specific guidance for whether or not an 

individual cryptocurrency is a security or a commodity? 

Response: 
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Coin base would certainly welcome guidance on whether individual tokens are securities or 

commodities. The more points of reference there are for understanding the dividing line between 

the SEC and CFTC's jurisdictions, the better that the market will be able to offer new products 

that can be created, traded, and used in a regulatorily compliant manner. However, guidance on a 

larger framework would be better than guidance on· individual tokens, given that there are an 

estimated 1,400 tokens in existence today and certainly more to come as the industry develops. 
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RESPONSE TO 

QUESTION FOR THE RECORD FROM 

THE HONORABLE RANADLL HULTGREN, 

UNITED STATES HOUSE OF REPRESENTATIVES 

BY 

Robert Rosenblum 

Partner, Wilson Sonsini Goodrich & Rosati 

September 18,2018 

On March 14, 2018, I had the privilege oftestifying before the Capital Markets, 

Securities and Investment Subcommittee of the House Committee on Financial 

Services. It is my further privilege to respond to a follow up question from that 

testimony posed by Congressman Hultgren. For convenience, I will repeat the text of 

Congressman Hultgren's question, and my response will follow that question. The 

views I present here are my own, and are not necessarily the views of Wilson Sonsini 

Goodrich & Rosati, the law firm for which I work, or of any of my partners or 

colleagues at Wilson Sonsini. The views I present here also do not necessarily 

represent the views of any client of Wilson Sonsini. 

Question: In July of 2017, the SEC's Division of Enforcement released a 

report on its investigation of The DAO and Slock.it for potential violation offederal 

securities laws. I understand the Division of Enforcement has since used this report as 

the basis for additional actions. 

1. Is there anything in the report that requires clarification? I believe it's important 

that market participants, at a minimum, understand the expectations of the 

Division of Enforcement, especially in this unchartered territory. 

Response: In my view, the Securities and Exchange Commission's ("SEC" or 

"Commission") Division of Enforcement's DAO report (the "DAO Report") was a 

very helpful first step in expressing the views of the Commission on the regulatory 

treatment of cryptocurrency in the United States. Of critical importance, the DAO 

Report made it clear that cryptocurrency could be a security if it met the test set forth 

by the Supreme Court in SEC v. W. J. Howey Co., 328 U.S. 293 (1946). 

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Since the DAO Report, the SEC has brought a number of enforcement actions 

against participants in the cryptocurrency markets. Most of these actions have 

appeared to involve what might be described as "garden variety" fraud, such as 

actions against cryptocurrency issuers that made false or misleading statements about 

how they intended to use the proceeds of their cryptocurrency offerings. More 

recently, the SEC brought an action against a cryptocurrency hedge fund for 

substantive violations of, among others, the Investment Advisers Act of 1940 and the 

Investment Company Act of 1940,1 and the Commission brought an action against the 

sponsor of a web site that sold cryptocurrency for substantive violations of, among 

other things, the broker-dealer registration provisions of the Securities Exchange Act 

ofl934.2 

Notwithstanding these SEC enforcement actions, there are a number of 

enforcement-related questions that are still unclear, and that are causing confusion in 

the cryptocurrency markets. Among these are: 

• What is the Division of Enforcement's view on cryptocurrency issuers who 

may have offered cryptocurrency to retail investors in violation of Section 5 

of the Securities Act of 1933, but who did not engage in fraudulent conduct? 

To date, we have seen only one (relatively modest) enforcement action 

against such an issuer.3 Does this mean that the Division of Enforcement 

generally has decided not to take action against these issuers, and especially 

against these issuers who completed their offerings prior to the release of the 

DAOReport? 

• What is the Division of Enforcement's view on exchanges and other 

secondary trading platforms that permit US investors to buy and sell 

cryptocurrency in secondary transactions? To date, we have seen only one 

enforcement action against such a platform, and the Commission alleged 

there only that the sponsor was an illegally unregistered broker, and did not 

1 In the Matter of Crypto Asset Manager LP and Timothy Enneking, Securities Act Release No. 

10544 (Sept. 11, 2018). 

2 In the Matter ofTokenlot LLC, Lenny Kugel and Eli L. Lewitt, Securities Act Release No. 

10543 (Sept. 11, 2018). 

3 In the matter ofMunchee Inc., Securities Act Release No. 10445 (Dec. 11, 2017) (settled cease 

and desist order finding that the respondent violated Section 5 of the Securities Act of 1933 because 

the respondant's "utility'' tokens were securities by virtue of being an investment contract). 

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also allege that the platform was an illegally unregistered exchange.4 The 

SEC also has not yet approved any applications for an alternative trading 

system (often thought of as a "mini-exchange") for cryptocurrency. Does 

this mean that the Division of Enforcement largely has decided not to take 

action against unregistered cryptocurrency exchanges, at least until the 

Commission authorizes a cryptocurrency alternative trading system? 

• Notwithstanding the DAO Report and subsequent Staff statements to the 

effect that most types of cryptocurrency appears to be securities, there are 

still a number of cryptocurrency participants who take the position that that 

their cryptocurrency is a "utility token" that is not a security. While the 

DAO Report and other Staff statements make it clear that whether a 

cryptocurrency is or is not a security is a fact-based inquiry, it appears that 

the Staffs view that most types of cryptocurrency are securities differs from 

the views of some market participants who have concluded that a number of 

types of cryptocurrency are in fact not securities. Does this mean that the 

Division of Enforcement believes that there are, in fact, many types of 

cryptocurrency that are in fact not securities? 

In addition to the open questions about the views of the Division of 

Enforcement, there are significant questions about the views of other SEC divisions. 

• As noted earlier, the Division of Trading and Markets has still not approved 

an alternative trading system for cryptocurrency trading, and that Division 

has not publicly discussed, for example, the types oflisting standards, 

clearance and settlement systems, trade reporting and other important 

features it would expect to see in a successful alternative trading system 

application. 

• The Division of Corporation Finance has yet to approve a registration 

statement or a Regulation A+ offering for cryptocurrency, and that Division 

has not publicly discussed the information that it thinks is needed for a 

successful offering. 

• In a related vein, many of the platforms on which cryptocurrency will be 

used, as well as the underlying blockchains for cryptocurrency, present 

potential broker-dealer, transfer agent, clearing agency and Regulation M 

issues (among others), and the Division of Trading and Markets has not 

publicly discussed its views on any of those issues. 

4 In the Matter ofTokenlot LLC, Lenny Kugel and Eli L. Lewitt, Securities Act Release No. 

10543 (Sept. 11, 2018). 

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• The Division oflnvestment Management sent a letter to the Investment 

Company Institute in January expressing its views that, due to uncertainties 

in valuation and liquidity in the cryptocurrency markets (among other 

reasons), it would not permit registrations of cryptocurrency funds. 5 While 

this letter has the advantage of clearly stating the Staff's views, it also is 

debatable whether the best answer for the markets and the investing public is 

to completely prohibit retail investors from having access to an important 

class of professional investment management services as they seek to invest 

in cryptocurrency. 

• In addition, there still are a number of open questions that the Division of 

Investment Management has not addressed, such as how can registered 

investment companies that inadvertently and unintentionally receive 

cryptocurrency deal with their custody and other obligations, and how can 

investment advisers that advise clients on cryptocurrency meet a variety of 

their statutory and regulatory obligations, including their custody rule 

obligations. 

• The Division oflnvestment Management also has not expressed its views on 

whether a cryptocurrency issuer can become an investment company simply 

by holding its own cryptocurrency (if the cryptocurrency is a security, and 

the value of that cryptocurrency exceeds 40% of the company's total noncash assets, the company could be deemed to be an investment company). 

Finally, it is worth noting that on September 13, 2018, SEC Chairman Jay 

Clayton issued a statement (similar to a statement made by a number of other 

regulators) that SEC Staff statements are non-binding and create no enforceable rights 

against the Commission or other parties; instead, only the Commission itself can adopt 

rules with the force oflaw.6 While this statement is undoubtedly true, and generally 

reiterates the long-standing understanding of SEC practitioners, this statement does 

have the (perhaps inadvertent) effect of calling into question the continuing validity of 

a number of recent Staff statements- and statements by the Chairman and by 

individual Commissioners- on cryptocurrency, many of which have been very 

important. 

5 Engaging on Fund Innovation and Cryptocurrency-related Holdings, SEC Staff Letter to Paul 

Schott Stevens, President & CEO, Investment Company Institute (January 18, 2018). 

6 SEC Chairman Jay Clayton, Statement Regarding SEC Staff Views (September 13, 2018). 

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For example, William Hinman, the Director of the Division of Corporation 

Finance, recently gave a speech in which he suggested, among other things, that in his 

view the Etherium blockchain's native token, Ether, should not be treated as a 

security. 7 The market has generally understood that this was not a Commission 

statement, and instead a statement by a Staff member- albeit a very senior and 

important Staff member. The industry has to a large extent relied on Director 

Hinman's statements, especially in the absence of any Commission statements 

suggesting that the Commission disagrees with Director Hinman. Chairman Clayton's 

statement could have the (possibly unintended) effect of negating the views expressed 

by Director Hirnnan, and more broadly undermining the ability of Director Hinman 

and other senior Staff members to provide useful guidance that the industry can feel 

comfortable relying upon (at least unless and until the Commission provides different 

substantive guidance). 

Put another way, before Chairman Clayton's statement, the general view in the 

cryptocurrency industry (and more broadly) might be summarized as "we can rely on 

Staff statements unless and until the Commission makes a contrary statement." 

Following Chairman Clayton's statement, there is at least some view in the industry 

that might be summarized as "we cannot rely on any Staff statements unless and until 

the Commission confirms the Staffs view." I don't believe that is what Chairman 

Clayton intended, and it might be helpful for the Chairman to provide additional 

guidance on how he believes the public should view statements such as Director 

Hinman's. 

In summary, the DAO Report was a helpful first step in explaining the 

Commission's views on the appropriate treatment of cryptocurrency under the federal 

securities laws. As discussed above, however, there are number of important 

questions that the Commission and the SEC Staff have continued to leave open, often 

to the detriment of the cryptocurrency community. And recently, the Chairman has 

introduced uncertainty as to the Staff's ability to even address these questions. It 

would be extremely helpful for the Commission to publicly address the types of issues 

I have highlighted here, and to clarifY the Staff's role in providing guidance to the 

cryptocurrency community (and to the investing public more broadly). 

7 William Hinman, Director, SEC Division of Corporation Finance, Digital Asset Transactions, 

When Howey Met Gary (Plastics) (Jun. 14, 2018). 

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Please feel free to contact me ifl can provide any additional assistance or 

information. Thank you for the opportunity to present my views on these important 

subjects 

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@~ COIN ENTER 

Date: 4/20/2018 

From: Peter VanValkenburgh 

Coin Center 

718 7th St NW, 

Washington, DC 20001 

peter@coincenter .org 

To: The Honorable Tom Emmer 

315 Cannon House Office Building 

Washington, DC 20515 

Dear Congressman Emmer, 

Thank you for the opportunity to testify before The House Financial Services Committee 

Subcommittee on Capital Markets regarding cryptocurrencies and !COs. In response to your 

additional questions, I would like to submit the following for the record: 

1. To what extent do regulators need to clarify so-called utility tokens and other 

products in this space are commodities or at least not securities, and are simple 

enforcement actions enough to get there? 

While the SEC has done a thorough job explaining that some token sales do qualify as 

securities issuance (both in the 21a report on The DAO and subsequent enforcement 

actions) at no point has the SEC openly declared that any open blockchain token or 

cryptocurrency does not qualify as a security. The flexibility and subjectivity of the 

relevant legal test for securities leaves this area uncertain. This uncertainty persists 

even though there are good reasons why neither of the following-at the very 

least-should qualify securities under a reasonable interpretation of the relevant test: 

(a) highly decentralized cryptocurrencies such as bitcoin and (b) tokens widely utilized 

for decentralized computing applications such as ether. 

Enforcement actions alone will never generate clarity on this subject unless either (a) 

every token is deemed a security and enforced against or (b) an enforcement action 

against a utility or commodity-like coin or token is challenged in court and the SEC 

loses that challenge. Neither of these outcomes is desirable given that they would make 

the US a uniquely hostile home for innovation in financial and decentralized computing 

technologies. 

As an alternative, the SEC could issue interpretive guidance further delineating the line 
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between securities and non-securities (as they did with, for example, condominium 

developments in the 1970s1

) or letters of no-action to specific token projects/developers 

(as they did with, for example, professional sports seat licenses'). 

2. Specifically, what is the difference between a token that operates as a commodity 

and one that operates as a security? 

Two qualities separate a token that operates as a commodity from one that operates as a 

security. Those qualities are (1) usefulness and (2) decentralization. 

Usefulness: tokens can either be valuable as a claim on profits derived from the future 

efforts of an issuer or they can be valuable as an item useful in commerce. Useful in 

commerce may mean that the token is used as a store of value and medium of exchange 

because of its mathematically and cryptographically verified scarcity and its 

transferability over peer-to-peer networks. In other words, Bitcoin and other 

currency-like tokens are useful. Useful in commerce may alternatively mean that the 

token can be utilized as a fuel for powering a decentralized application. 

Decentralized applications, in general, are computer systems that can provide digital 

services (data storage capacity, computation, shared data verification and distribution) 

to users on the internet without requiring reliance on any particular intermediary or 

service provider. For example, rather than relying on Dropbox, the company, to store 

files, a user of a decentralized storage application would acquire the storage token and 

use it power an automated engine that will encrypt, copy, and distribute their files such 

that they are stored redundantly and in fragments across hundreds or thousands of 

participant computers across the Internet. Each person or business running these 

participant computers is incentivised to provide these storage resources because the 

automated engine also distributes tokens as a reward for honest and verifiable resource 

provision. In this sense the token is less like a currency (a medium of exchange between 

two consenting persons in commerce) and more like a fuel (a material necessary to 

power some automatically regulated engine for performing work). In both the case of a 

physical currency (e.g. gold) and the case of a physical fuel (e.g. oil) we rightly treat 

these assets as commodities because they provide their holder with a value derived from 

use in commerce (rather than some promise of future profits derived from an issuer's 

efforts). 

Decentralization: If a token was useful but that functionality was entirely contingent on 

the continued efforts of a company then there would still be a colorable case for 

treatment of that token as a security. 

' SEC, Guidelines as to the Applicability of the Federal Securities Laws to Offers and Sales of Condominiums or 

Units in a Real Estate Development, (1973) https://www.sec.gov/rules/interp/1973/33-5347.pdf. 2 SEC, No Action, Interpretive and/or Exemptive Letter: The Ticket Reserve, Inc. (2003) 

https://www.sec.gov/divisions/corpfin/cf-noaction/ticketreserve091103.htm 
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Imagine, for example, if Dropbox created 50,000 units ofDropbox Coin, promised not to 

create any more, allowed for or created mechanisms for secondary trading of dropbox 

coin, and promised that dropbox coin would always be redeemable for some percentage 

of the total amount of cloud storage available on Drop box. In some ways Drop box Coin 

would be a voucher, loyalty point, or closed-loop gift card. However, unlike loyalty 

points, our hypothetical Dropbox Coin is freely traded and it has a speculative future 

value that's based on the continued growth and vitality of Dropbox as a company (if 

they expand their server capacity then each coin will entitle the holder to more storage). 

Holders are still relying on promises made by Drop box and if the company goes out of 

business the coin will be worthless. 

Compare this hypothetical with Bitcoin or Ethereum. Both Bitcoin and Ethereum are 

services (online payments and shared computing, respectively) and both allow for 

fractional ownership of a scarce token used by the network (bitcoins and ether, 

respectively). Unlike the Dropbox Coin example, however, no entity corporate or 

otherwise is essential to the future functionality of the service and value of the token. 

Each service is powered by open source software that is developed openly and without 

restrictive copyright protection by hundreds of unafiliated developers. Each service is 

maintained by thousands of unafiliated persons running that software on 

Internet-connected computers (e.g. miners). If Dropbox was to shutter, the coin would 

go away. There is no entity whose departure from the space would gravely affect the 

continued functioning of the bit coin or ethereum networks. 

Thus at least some tokens, Bitcoin and Ether among them, are both useful in commerce 

and free of any reliance on a third party for that usefulness. These factors together make 

them much more like gold or oil (useful in commerce and not dependent on any 

particular person or corporation to guarantee that usefulness) than like securities 

(valuable primarily as investments and reliant on some discernible person or 

corporation to deliver promised profits). 

3. Many have discussed the concept of a "utility token," where the token is issued 

solely for use on the platform of the company. Do you believe that such a "utility 

token" could theoretically exist without necessarily being a security? 

Yes. If the token possessed both the qualities described in the earlier answer, usefulness 

and decentralization, then it does not fit the relevant test for classification as a security. 

a. Do you think that at one point an ICO could be a security at time of 

issuance and then theoretically become a commodity once the company's 

platform has been developed for the token to be used on? 

Yes. If a developer wants to build a decentralized app that will be 
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token-powered, and if they want to raise money by pre-selling some number of 

the tokens that will one day be a fuel for that app, then that presold promise of 

future tokens may fit the relevant tests for classification as a security. The 

tokens themselves are not securities; the security is the contractual promise of 

tokens itself. Imagine, for example, that I took investor funds and promised to 

use them to build an orange grove and then deliver to my investors some 

fraction of the total oranges that I intend to grow every year. The agreement for 

future oranges is a speculative investment contract in my talents as a farmer. 

The oranges, once delivered, however, are certainly not securities. 

b. Does something like the Simple Agreement for Future Tokens (SAFT) help 

properly address this distinction between the security issuance and the 

utilization of tokens on a platform? 

Yes, a SAFT contract is designed to be treated as a security because it is, in many 

ways, an investment contract between buyers and the developers upon whom 

buyers rely. The tokens delivered, should they meet the requisite usefulness and 

decentralization described earlier, are anticipated by the drafters of the SAFT to 

not be securities. The SEC has not explicitly sanctioned this approach, however. 

If the SEC chose to offer clarity with regard to which tokens are not securities (as 

discussed in the first answer), then useful and decentralized tokens derived 

initially through SAFT sales should also be designated as non-securities; the fact 

that they were initially sold through a SAFT should not be relevant to the 

question of classification once the network is functioning and the token is useful 

and decentralized. 

4. The CFTC has created LabCFTC, which is similar to what in other jurisdictions is 

known as a regulatory sandbox. Do you believe that the SEC should create a 

similar regulatory sandbox for digital assets that are securities? 

In general, the term regulatory sandbox is used to describe efforts recently undertaken 

by financial regulators in the UK and Singapore. These sandboxes allow a firm with an 

innovative product or service to petition their regulator to be exempt from the standard 

set of rules that would otherwise apply and instead enter into an enforceable 

compliance agreement tailored to the specific firm, its product, and the risks it 

generates (and doesn't generate) for consumers. This provides some real benefits to 

companies: they can find more flexible paths toward financial regulatory compliance, 

and work with regulators to sensibly tailor their compliance obligations. 

At present, no U.S. regulator offers this sort of sandbox approach. The CFTC's LabCFTC 

is a more modest attempt at encouraging innovation and greater legal certainty. It 

focuses on providing a point of contact for innovators within the agency, an open dialog 

about regulatory issues, and educational materials for regulators, innovators, and the 
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general public. It does not, however, allow innovators systematic means by which to 

enter into compliance agreements or be exempted from the standard set of CFTC rules 

that otherwise apply. 

US innovators would be more competitive and better regulated if there were more 

efforts like LabCFTC underway in other agencies. However, a true sandbox approach (as 

found in the UK and Singapore) would be of even greater benefit. A true sandbox 

approach would, however, likely require legislation that would empower agencies to 

create binding compliance agreements and bind agencies to follow those agreements 

once established. 

Thank you for being generous with your time, and please do not hesitate to reach out if you 

have any further questions or concerns. 

Sincerely, 

Peter VanValkenburgh 

Director of Research, Coin Center