U.S. GOVERNMENT PUBLISHING OFFICE

56–000 PDF WASHINGTON : 2024

REGULATORY WHIPLASH: EXAMINING THE 

IMPACT OF FSOC’S EVER-CHANGING 

DESIGNATION FRAMEWORK ON INNOVATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON DIGITAL ASSETS, 

FINANCIAL TECHNOLOGY, 

AND INCLUSION 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED EIGHTEENTH CONGRESS 

SECOND SESSION 

JANUARY 10, 2024 

Printed for the use of the Committee on Financial Services 

Serial No. 118–67 

( 
(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

PATRICK MCHENRY, North Carolina, Chairman 

FRANK D. LUCAS, Oklahoma 

PETE SESSIONS, Texas 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

ROGER WILLIAMS, Texas 

FRENCH HILL, Arkansas, Vice Chairman 

TOM EMMER, Minnesota 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

WARREN DAVIDSON, Ohio 

JOHN ROSE, Tennessee 

BRYAN STEIL, Wisconsin 

WILLIAM TIMMONS, South Carolina 

RALPH NORMAN, South Carolina 

DAN MEUSER, Pennsylvania 

SCOTT FITZGERALD, Wisconsin 

ANDREW GARBARINO, New York 

YOUNG KIM, California 

BYRON DONALDS, Florida 

MIKE FLOOD, Nebraska 

MIKE LAWLER, New York 

ZACH NUNN, Iowa 

MONICA DE LA CRUZ, Texas 

ERIN HOUCHIN, Indiana 

ANDY OGLES, Tennessee 

MAXINE WATERS, California, Ranking 

Member 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DAVID SCOTT, Georgia 

STEPHEN F. LYNCH, Massachusetts 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

JIM A. HIMES, Connecticut 

BILL FOSTER, Illinois 

JOYCE BEATTY, Ohio 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

SEAN CASTEN, Illinois 

AYANNA PRESSLEY, Massachusetts 

STEVEN HORSFORD, Nevada 

RASHIDA TLAIB, Michigan 

RITCHIE TORRES, New York 

SYLVIA GARCIA, Texas 

NIKEMA WILLIAMS, Georgia 

WILEY NICKEL, North Carolina 

BRITTANY PETTERSEN, Colorado 

MATT HOFFMANN, Staff Director 
(III) 

SUBCOMMITTEE ON DIGITAL ASSETS, 

FINANCIAL TECHNOLOGY, AND INCLUSION 

FRENCH HILL, Arkansas, Chairman 

FRANK D. LUCAS, Oklahoma 

TOM EMMER, Minnesota 

WARREN DAVIDSON, Ohio, Vice Chairman 

JOHN ROSE, Tennessee 

BRYAN STEIL, Wisconsin 

WILLIAM TIMMONS, South Carolina 

BYRON DONALDS, Florida 

MIKE FLOOD, Nebraska 

ERIN HOUCHIN, Indiana 

STEPHEN F. LYNCH, Massachusetts, 

Ranking Member 

BILL FOSTER, Illinois 

JOSH GOTTHEIMER, New Jersey 

RITCHIE TORRES, New York 

BRAD SHERMAN, California 

AL GREEN, Texas 

SEAN CASTEN, Illinois 

WILEY NICKEL, North Carolina 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

January 10, 2024 .............................................................................................. 1 

Appendix: 

January 10, 2024 .............................................................................................. 35 

WITNESSES 

WEDNESDAY, JANUARY 10, 2024 

Dinwoodie, Jeffrey T., Partner, Cravath, Swaine & Moore LLP ......................... 9 

Gerety, Amias, Partner, QED Investors ................................................................ 11 

Hulse, Bill, Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ....................................................................... 6 

Kim, Ji Hun, General Counsel & Head of Global Policy, Crypto Council 

for Innovation (CCI) ............................................................................................. 8 

Kupiec, Paul H., Senior Fellow, American Enterprise Institute (AEI) ............... 4 

APPENDIX 

Prepared statements: 

Dinwoodie, Jeffrey T. ....................................................................................... 36 

Gerety, Amias ................................................................................................... 46 

Hulse, Bill ......................................................................................................... 60 

Kim, Ji Hun ...................................................................................................... 72 

Kupiec, Paul H. ................................................................................................. 80 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Waters, Hon. Maxine: 

Written statement of Hilary J. Allen, Professor of Law, American University Washington College of Law .................................................................. 95 

Dinwoodie, Jeffrey T.: 

Written responses to questions for the record from Representative 

Waters ............................................................................................................ 107 

Hulse, Bill: 

Written responses to questions for the record from Representative 

Waters ............................................................................................................ 109 

Kim, Ji Hun: 

Written responses to questions for the record from Representative 

Waters ............................................................................................................ 111 

Kupiec, Paul H.: 

Written responses to questions for the record from Representative 

Waters ............................................................................................................ 112 

(1) 

REGULATORY WHIPLASH: EXAMINING THE 

IMPACT OF FSOC’S EVER-CHANGING 

DESIGNATION FRAMEWORK ON INNOVATION 

Wednesday, January 10, 2024 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DIGITAL ASSETS, 

FINANCIAL TECHNOLOGY, 

AND INCLUSION, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:22 p.m., in room 

2128, Rayburn House Office Building, Hon. French Hill [chairman 

of the subcommittee] presiding. 

Members present: Representatives Hill, Lucas, Emmer, Davidson, Rose, Steil, Timmons, Flood, Houchin; Lynch, Foster, 

Gottheimer, Sherman, Green, and Casten. 

Chairman HILL. The Subcommittee on Digital Assets, Financial 

Technology, and Inclusion will come to order. 

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

the subcommittee at any time. 

I want to thank our great witnesses for being here with us today. 

And I now recognize myself to give an opening statement. 

Today’s hearing is entitled, ‘‘Regulatory Whiplash: Examining 

the Impact of FSOC’s Ever-Changing Designation Framework on 

Innovation.’’ 

We are holding this hearing after the Financial Stability Oversight Council (FSOC) finalized its revised guidance for nonbank financial company designations in November. The new guidance is 

intended to enhance protections for our financial system, but, in 

practice, this revision paves the path for potential abuse and unintended consequences, and raises serious questions about whether 

FSOC is taking the best approach to actually address systemic 

risk. 

For example, it removes the requirement for FSOC to conduct 

cost-benefit analysis when evaluating an entity’s potential to pose 

systemic risk under a Section 113 designation. 

Even the district court, in the case, MetLife v. FSOC, which considered the legality of MetLife’s prior designation as a systemically 

important institution, stated that the refusal to consider costs of 

the designation to MetLife was arbitrary and capricious. The revised guidance flies in the face of the district court’s opinion and 

the Supreme Court precedent underpinning that decision. 
2 

Not only that, but the new guidance also rejects the approach 

taken under the prior Administration to implement a more appropriate designation process, which includes an activities-first approach and a commitment to work with the primary regulator. 

I think what is really damaging, too, is the consistent, constant 

whiplash every time that we have a change in the occupant at 1600 

Pennsylvania Avenue. Just this morning, in our Capital Markets 

Subcommittee, we dealt with precisely that same issue on the Department of Labor fiduciary rule. 

I will remind all of us that we are on our third designation 

framework in three Administrations now. And although the new 

guidance states that it aims to establish a durable process, it seems 

that this pattern of three changes in three Administrations is anything but durable. 

In this Congress, our committee has scrutinized the repeated and 

proactive efforts by certain Biden financial regulators to take aggressive agency actions against disfavored industries through guidance, rulemaking, supervision, and enforcement. And I would argue 

that FSOC, which is mostly comprised of those same regulators, is 

taking a similarly-mistaken approach with its revised guidance for 

designations. 

Let’s look at the 2023 annual report. FSOC considers digital assets as a priority, and as recently as October 2022, FSOC recommended that Congress pass legislation to establish a comprehensive framework for stablecoins, and that a new Federal regulatory 

authority should be provided over spot markets for digital assets 

that are not considered securities. 

Well, look, that is what this committee has been working on 

since this Congress, the 118th Congress, was initiated. This subcommittee and our full committee have done precisely that. We 

have crafted a regulatory framework for digital assets, and we have 

crafted a regulatory regime for stablecoins. We don’t need FSOC to 

be involved in that. What they need to do is support our legislative 

efforts. 

And I am proud, in both those efforts, both on stablecoins and 

the regulatory framework, that we had a very strong bipartisan effort, working with both Democrats and Republicans to craft that 

approach. We moved these bills out of committee, and we look forward to continuing the work with our colleagues on the Hill and 

the Administration to move that legislation forward. 

FSOC needs to tread very carefully when entertaining the idea 

of sidestepping Congress and congressional intent. FSOC designations, in my view, are not the proper approach; a legislative fix is. 

It is clear that some rogue regulators threaten consumer protections in the digital asset market as much as any bad actor. I think 

we have just witnessed the latest in Washington’s technological 

vulnerabilities yesterday, and a real low point for the SEC. Full 

Committee Chairman McHenry and Subcommittee Chairs Wagner, 

Huizenga, and I will be sending a letter to SEC Chair Gensler 

today to start the process of getting to the bottom of how it happened that the SEC Twitter account was hacked and investors 

were misled yesterday on the subject of an ETF being approved for 

digital assets in bitcoin. 
3 

Should we insert this letter in the record? Okay. We will do that 

later. 

I now recognize the ranking member of the subcommittee, Mr. 

Lynch, for his opening comments. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I would also like to welcome our witnesses. Thank you for your 

willingness to support this subcommittee’s work. 

Let us first remember that the Financial Stability Oversight 

Council, or FSOC, was originally established in 2010 in the aftermath of a global financial crisis that cost the American people and 

the U.S. economy more than $20 trillion. 

I served on this committee when we developed and enacted the 

landmark Dodd-Frank Wall Street Reform and Consumer Protection Act. In response to the destabilizing impact of reckless financial practices undertaken by AIG and other interconnected 

nonbank entities, Congress specifically empowered FSOC with the 

authority to designate nonbank financial institutions as systemically important only when warranted. In the interest of mitigating 

risk to our financial system, designated entities are subject to Federal Reserve regulation and supervision. 

For the sake of maximum transparency and accountability, 

Dodd-Frank also contemplated that every nonbank financial company is unique in its own way and in the context of risk evaluation. 

That is precisely why the law sets forth multiple factors that FSOC 

must consider in determining whether a particular institution is 

systemically important. These factors include the extent of leverage 

and off-balance-sheet exposures and the degree to which a company 

is already subject to regulation. 

To date, FSOC has only designated four nonbank entities as systemically important financial institutions, or SIFIs. Currently, 

there are none that hold that designation. 

Following a series of misguided efforts to undermine its designation authority during the Trump Administration, FSOC recently 

approved an interpretive guidance and analytical framework that 

seeks to build upon the systemic risk oversight goals that are set 

forth in Dodd-Frank. 

Importantly, FSOC has finalized these proposals amid the continued prevalence of shadow banking—the escalating migration of 

core banking activities to nonbank financial companies that fall 

outside the scope of traditional bank regulation. As recently reported by the Financial Stability Board (FSB), the value of total 

global financial assets held by nonbank financial intermediaries 

currently stands at over $461.2 trillion, or 47.2 percent of all global 

financial assets. 

Cryptocurrency firms also carry the potential to present significant risk to financial stability. Over the past couple of years, we 

have witnessed the catastrophic collapse of FTX, the violation of 

Federal anti-money laundering and sanctions laws by Binance, and 

legal and operational issues facing several other crypto companies, 

just to name a few. 

Moreover, the recent failures of Silicon Valley Bank, Signature 

Bank, and Silvergate Bank have given rise to serious concerns regarding the cascading impact of crypto market volatility on the traditional financial sector. 
4 

And just last month, FSOC, for the first time, identified the use 

of artificial intelligence (AI) in financial services as a new vulnerability in our financial system. 

Clearly, the fundamental statutory mission of FSOC is to identify 

and assess emerging threats to U.S. financial stability, which has 

become even more critical. At the same time, our systemic risk policy must continue to embrace the myriad benefits of evolving innovations in the financial services sector. 

Towards this end, both FSOC and the Biden Administration 

have issued recent recommendations and strategies that underscore the importance of facilitating responsible innovation, with appropriate oversight structures in place to minimize risk and safeguard consumers and investors. 

I look forward to discussing these and other issues with our witnesses. And again, I thank you, Mr. Chairman, and I yield back the 

balance of my time. 

Chairman HILL. The ranking member yields back. 

We will now turn to our witnesses. Today, we welcome the testimony of: Dr. Paul Kupiec, a senior fellow at the American Enterprise Institute, where he studies systemic risk and the management and regulation of banks and financial markets; Mr. Bill 

Hulse, senior vice president of the U.S. Chamber of Commerce’s 

Center for Capital Markets Competitiveness; Mr. Ji Hun Kim, the 

general counsel and head of global policy at the Crypto Council for 

Innovation; Mr. Jeffrey Dinwoodie, a partner at Cravath, Swaine & 

Moore, where he advises clients on a broad range of regulatory enforcement matters in traditional finance and financial technology; 

and Mr. Amias Gerety, a partner at QED Investors, a venture capital firm investing in the fintech industry. 

We thank each of you for being with us today. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. And without objection, each of your 

written statements will be made a part of our official record. 

Dr. Kupiec, you are recognized for 5 minutes for your opening 

comments. 

STATEMENT OF PAUL H. KUPIEC, SENIOR FELLOW, AMERICAN 

ENTERPRISE INSTITUTE (AEI) 

Mr. KUPIEC. Chairman Hill, Ranking Member Lynch, and distinguished members of the subcommittee, thank you for convening today’s hearing and for inviting me to testify. I am a senior fellow 

at the American Enterprise Institute, but my testimony today consists of my personal views. 

In theory, the FSOC’s activities should enhance financial stability and prevent new government bailouts. In practice, the FSOC 

has inappropriately designated nonbank financial firms, failed to 

identify and, importantly, failed to motivate its members to take 

proactive actions to mitigate the risks associated with factors that 

subsequently cause financial instability. 

The FSOC’s 2022 annual report highlighted the need for its 

members to monitor the interlinkages between digital asset and 

traditional financial firms. It also recommended that banking supervisors, ‘‘continue to ensure that banks maintain adequate cap-
5 

ital and liquidity, sound interest-rate risk-management practices, 

and well-developed operational resiliency plans.’’ 

But events a few short months later revealed that bank supervisors had not ensured that banks maintained adequate capital 

and liquidity, sound interest-rate risk-management practices, or 

well-developed resiliency plans. 

The FSOC and its bank regulatory members failed to identify 

and guard against the biggest financial stability risk: unrealized 

interest-rate losses from maturity mismatches in the banking system. These risks came home to roost as depositor runs and bank 

failures required a systemic-risk exception and emergency Federal 

guarantees to quell a crisis. 

I think that the FSOC earns a failing grade on its legislative responsibility to, ‘‘eliminate expectations on the part of shareholders, 

creditors, and counterparties of financial firms that the government 

will shield them from losses in the event of failure.’’ 

Instead of performing as a body that objectively identifies financial stability risk and promotes transparent improvements in financial safety and soundness supervision and regulation, the FSOC’s 

recommendations have been highly politicized. FSOC changes the 

standards and procedures it uses to guide designations every time 

the party in the White House changes. 

The FSOC’s 2023 revisions to its definition of, ‘‘financial instability,’’ and the elimination of the need for a cost-benefit assessment and an estimate of the likelihood a designee might experience 

material financial distress have made FSOC Section 113 designations easier. 

Published guidance says FSOC designations will target the largest, most-interconnected nonbank financial firms. Unless an FSOC 

designation is required to establish that a designee is on the verge 

of financial instability, an FSOC designation is effectively punishment for the designee’s success. A designee gets new, costly supervision by the Federal Reserve Board—a financial regulator that, 

itself, is losing $2 billion per week and has a $1.3 trillion unrealized interest-rate-related loss on its balance sheet. 

In order to escape an FSOC designation, nonbank financial firms 

have to shrink their size and jettison some of the key financial 

businesses that made them large and prosperous. Democrat-controlled FSOCs have never de-designated a nonbank financial firm. 

Designation reversals occurred with successful litigation or by 

FSOC votes taken in 2018, when FSOC was controlled by a different party. 

Until 2021, no FSOC annual report mentioned climate change at 

all, let alone as a systemic risk threatening financial stability, yet 

quashing climate-change systemic risk is the holy grail of this Administration’s FSOC. 

As my written testimony explains, the FSOC scheme to impose 

climate-change regulation on banks and other financial institutions 

is not the result of objective data analysis but, instead, is the implementation of a political plan to discourage fossil-fuel investments—a plan hatched well before the current Administration was 

even elected. 

Common sense and a significant body of research suggest that 

regulatory uncertainty discourages private-sector investment. The 
6 

impact of policy uncertainty is bigger when investments are irreversible, as they are in the crypto industry. There is a need for certainty in crypto-related regulations, but that certainty can only be 

provided by comprehensive congressional legislation, not FSOC 

designations. 

If Congress is not willing to repeal the FSOC Section 113 powers, 

it should at least alter the way the FSOC votes. Congress could require FSOC reports and designations to be approved by the ranking member of an appropriate congressional committee in both the 

House and the Senate, where the voting member is from the party 

not controlling the Executive Branch. 

Thank you very much. 

[The prepared statement of Dr. Kupiec can be found on page 80 

of the appendix] 

Chairman HILL. Mr. Hulse, you are now recognized for 5 minutes. 

STATEMENT OF BILL HULSE, SENIOR VICE PRESIDENT, CENTER FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE 

Mr. HULSE. Chairman Hill, Ranking Member Lynch, and members of the subcommittee, my name is Bill Hulse. I am the senior 

vice president at the Chamber’s Center for Capital Markets Competitiveness. In this role, I oversee the Chamber’s work on policy 

related to financial regulation and the financial sector. Individually, I lead the division’s work as it relates to consumer finance 

and digital assets. 

Before this, I was an advisor to former Congressman Randy 

Hultgren, who was a member of this committee, and I am honored 

to return today as a witness for this important hearing. 

I will begin by emphasizing what it means for a nonbank financial company to be designated as systemically important. This is 

not an insignificant matter. Designating a nonbank financial company as systemically important stands to fundamentally change 

the functioning of the entire entity, not just one or two business 

lines, and transform the company’s entire business model. 

After FSOC designates a company as systemically important, the 

Federal Reserve Board must institute capital-liquidity and stresstesting requirements and supervise it for compliance. These requirements are designed for large, complex banking organizations, 

such as global systemically important banks (G-SIBS), but in this 

case apply to a nonbank financial company. 

Companies that FSOC may consider designating include digital 

assets companies, nonbank mortgage servicers, hedge funds, private equity funds, asset managers, and insurance companies, just 

to name a few. 

FSOC’s recent budget indicates it has doubled its staff in recent 

years, suggesting that it will be much more active. 

I want to highlight the Chamber’s primary concerns with the November 2023 guidance. 

First, we are concerned about FSOC deprioritizing an activitiesbased approach to addressing potential systemic risk. Despite the 

FSOC’s assertion that the activities-based approach remains a part 

of its toolbox, we remain deeply concerned that the changes to its 
7 

procedures reflect FSOC’s intention to make the designation of individual entities its primary approach. 

Second, the Chamber is concerned that FSOC’s updated guidance 

would not require it to consider whether a company is vulnerable 

to material financial distress, consistent with a 2016 ruling in the 

D.C. Circuit. 

Third, the Chamber is concerned the updated guidance does not 

afford due process for companies that may be designated as systemically important. 

My written testimony includes numerous recommendations that 

FSOC could adopt or that Congress could require. 

In addition to FSOC’s authority to designate nonbank financial 

companies as systemically important, it also publishes an annual 

report. This report can be an important transparency tool for its 

work and its views about risks to the financial system. 

Last month, FSOC published its 2023 annual report. The report 

identifies dozens of market developments and potential risks, but, 

in many cases, it fails to demonstrate a nexus of these risks to the 

financial stability of the United States. In FSOC’s view, almost 

anything and everything can be deemed risky, which begs the question of whether resources are being prioritized to address actual 

threats to financial stability—an entirely different standard. 

A few examples in the report I would like to highlight include 

discussions of digital assets, complex fintech partnerships, and artificial intelligence. 

Regarding digital assets, the 2023 report states, ‘‘financial stability vulnerabilities may arise,’’ as support for its recommendation 

that, ‘‘Congress pass legislation to provide for the regulation of 

stablecoins and the spot market for crypto assets that are not securities.’’ 

No crypto company that has failed in recent months, including 

instances of fraud and other breaches of consumer trust, pose a 

risk to the stability of the U.S. financial system. Policymakers 

should be careful to not conflate, for example, consumer protection 

and anti-money laundering regulations with systemic risk regulations like capital liquidity requirements. 

Finally, I want to underscore the importance of Congress enacting legislation to limit the regulatory whiplash that nonbank financial companies must navigate under the new status quo. This regulatory uncertainty makes it extremely difficult to innovate, especially given the looming threat of being designated as systemically 

important and subject to bank-like regulations. 

The House Financial Services Committee has a strong record of 

advancing bipartisan legislation to institute stronger due process at 

FSOC. One such bipartisan bill currently pending before the committee is the FSOC Improvement Act, which would require FSOC 

to consider alternative approaches before determining that a 

nonbank financial company shall be supervised by the Federal Reserve Board. 

Thank you again for the opportunity to testify. I look forward to 

your questions. 

[The prepared statement of Mr. Hulse can be found on page 60 

of the appendix.] 

Chairman HILL. Thank you. 
8 

Mr. Kim, you are now recognized for 5 minutes. 

STATEMENT OF JI HUN KIM, GENERAL COUNSEL & HEAD OF 

GLOBAL POLICY, CRYPTO COUNCIL FOR INNOVATION (CCI) 

Mr. KIM. Thank you, Chairman Hill, Ranking Member Lynch, 

and members of the subcommittee, for the opportunity to testify 

today on how the FSOC’s final guidance on the nonbank financial 

company designation process will impact the digital assets industry. I am grateful for the engagement and leadership of the subcommittee. 

I am pleased to represent the Crypto Council for Innovation 

(CCI), a global alliance of industry leaders across the digital assets 

space. We believe that constructive partnership between government and business stakeholders is critical to crafting sound policy 

and regulation that benefits consumers, investors, and industry. 

The topic of today’s hearing is an important one. CCI strongly 

supports sound, fit-for-purpose regulation that can safeguard consumers and markets, while fostering the innovation necessary to 

maintain U.S. leadership in an evolving global economy. 

As a threshold matter, CCI recognizes and appreciates that the 

FSOC has been tasked by Congress to play a critical role in identifying and assessing systemic risk to U.S. financial stability. Given 

the importance of this mandate, however, FSOC should remain focused only on risks of such magnitude that require FSOC’s unique 

intervention, while respecting the constitutionally and congressionally defined roles of State and Federal regulators to oversee the 

vast majority of financial services and broader market activity. 

Indeed, FSOC was established by Congress to identify and mitigate the most serious of risks that rise to the level of being systemic, which is deliberately a very high bar. We are also supportive 

of ensuring a transparent and durable process for FSOC in using 

its nonbank financial company designation authority, which would 

include appropriate due process and procedural protections for 

nonbank financial companies reviewed for potential designation. 

Digital assets and related technologies are already improving 

how individuals and businesses are able to access and engage in financial transactions. Tokenized assets and new blockchain-based 

transaction rails can improve financial access and inclusion, reduce 

counterparty risk, enhance transparency, improve operational efficiencies, and lower costs. 

The industry is working to improve on the legacy financial system and software gaps that have systematically harmed lower-income and historically-disadvantaged populations. 

As just one example, stablecoins allow for lower-cost and moreefficient cross-border transactions, making it easier for individuals 

to send money through remittance payments to their families 

abroad. While remittance through a traditional financial institution 

costs between 5 and 10 percent of the transaction, the cost to conduct the same transaction through crypto is typically around 1 percent. For a global remittance market of $600 billion, that is expected to reach $1 trillion by 2026, this reduced cost represents 

critical savings for consumers and their families. 
9 

Yet, as previously substantiated by the FSOC, the size, scale, 

and interconnectedness of the digital asset industry is dwarfed by 

the legacy system it seeks to improve. 

First, by one recent estimate, the total size of the entire global digital asset market measured approximately $1.7 trillion. For 

comparison, the market cap for U.S. equity markets is approximately $45 trillion, more than 25 times the total size of the global 

digital asset market. 

Additionally, the total market cap of the top five U.S.-dollar- pegged stablecoins is below $150 billion, a figure that is smaller 

than many U.S. publicly-traded companies. 

Second, digital asset exchanges and intermediaries are typically 

nonbanks, which mean they lack direct access to critical financial 

services infrastructure, including Federal Reserve payment systems, instead relying on traditional institutions to serve as gatekeepers to such infrastructure. 

Third, digital assets lack significant interconnectedness with traditional financial systems, a point underscored by FSOC itself in 

its 2022 report on digital asset stability risks. 

Appropriate regulation is necessary to mitigate risks, including 

potential risks to stability. But as outlined in greater detail in my 

written testimony, to the extent there are risks posed by digital assets, they are largely contemplated and mitigated by existing State 

and Federal regulation. 

While I agree that a comprehensive Federal regulatory framework is necessary to provide further clarity and consistency for digital assets, it is the job of Congress, this institution, to establish 

such a framework and address any outstanding gaps. 

FSOC has urged Congress to pass appropriate legislation that 

provides Federal financial regulators with explicit rulemaking authority over the spot market for crypto assets and for a comprehensive framework for stablecoin issuers that would address the associated market integrity, investor and consumer protection, and payment risks. 

Fortunately, this committee has reported out two bills that seek 

to do these very things: the Financial Innovation and Technology 

for the 21st Century Act; and the Clarity for Payment Stablecoins 

Act, respectively. 

CCI is very supportive of advancing these pieces of legislation 

and agrees with the FSOC that it is critical for Congress to provide 

additional regulatory certainty through thoughtful and forwardleaning legislation. 

Thank you again, and I look forward to answering your questions. 

[The prepared statement of Mr. Kim can be found on page 72 of 

the appendix.] 

Chairman HILL. Thank you very much. 

Mr. Dinwoodie, you are now recognized for 5 minutes. 

STATEMENT OF JEFFREY T. DINWOODIE, PARTNER, CRAVATH, 

SWAINE & MOORE LLP 

Mr. DINWOODIE. Chairman Hill, Ranking Member Lynch, and 

members of the subcommittee, thank you for inviting me to participate today. 
10 

I would like to note that I am presenting my own views today 

and not those of my law firm or any client of the firm. 

My remarks will focus on three points. 

The first point: Recognizing the important role and function of 

FSOC. As we all know, in the United States, we have divided oversight over our economy and markets across many regulatory organizations that have different statutes and missions. So, there is tremendous benefit in having a formal mechanism, like FSOC, that is 

responsible for bringing together experts to identify, monitor, and 

spearhead responses to risks across the financial system. 

FSOC also serves as a catalyst for interagency coordination and 

cooperation. It creates connective tissue across agencies, which 

helps mitigate regulatory siloing. Regulatory coordination is important at all times but is absolutely essential when crises occur. I experienced this firsthand throughout 2020 when I was working at 

the SEC and the Treasury Department. 

Point number two: Nonbank SIFI designations. Only time will 

tell what will be the practical effects of FSOC’s recent decision to 

replace the 2019 guidance and place FSOC’s nonbank SIFI designation authority on, ‘‘equal footing,’’ with FSOC’s other powers. 

My hope is that the decision to place the designation authority on 

equal footing with FSOC’s other powers proves to be only a symbolic change and that nonbank SIFI designation remains, in practice, a tool-of-last-resort. 

Indeed, it is difficult to understand how the SIFI designation of 

a company would be the most-effective first step to respond to a 

perceived threat. It is unclear, for example, how designating an 

asset manager—and thereby subjecting it to Federal Reserve supervision and prudential standards—would reduce systemic risk. 

This would be a peculiar approach, given that the Federal Reserve 

does not appear to have much experience regarding the asset-management industry. 

These questions also apply in the context of many other types of 

companies. 

The most effective way to identify and respond to risk to financial stability is an activities-based approach, where FSOC focuses 

its efforts on industry- and economy-wide assessments and works 

closely with Congress and relevant regulators to respond to any 

perceived threat. 

It is heartening that FSOC has noted that its new guidance does 

not make designation FSOC’s default method of addressing risks. 

FSOC has also stated that it expects to continue to address most 

risks through its collaboration with primary financial regulators. 

Let’s hope this remains the case. 

My third point: FSOC’s areas of focus going forward. FSOC and 

its member agencies have finite resources to bring to bear, so it is 

essential that the Council remain disciplined in its approach. FSOC 

should resist any attempts to be used to advance policy or regulatory agendas or narratives in support of such agendas that are 

unrelated to FSOC’s mandates. 

At the same time, FSOC must stay focused on providing a sober 

assessment of the factors and areas that truly present 

vulnerabilities, risks, and threats to financial stability. 
11 

Based on a review of FSOC’s recently-published annual report, it 

appears that the Council is not sufficiently focused on the 

vulnerabilities and risks that arise from the government and state 

actors. Make no mistake, actions and policies of the government 

create risks and vulnerabilities and should be examined and monitored. 

To name just one example, many concerns have been raised regarding potential effects on the financial services sector and the 

broader economy of the large volume of financial regulatory rulemaking initiatives advanced over the past 3 years. Given the number of significant proposals, and the questions raised concerning 

their potential cumulative effects, this is a topic the Council should 

be actively examining and monitoring. 

In closing, I thank you again for inviting me to participate today, 

and I look forward to addressing any questions. 

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

36 of the appendix.] 

Chairman HILL. Thank you. 

And Mr. Gerety, you are now recognized for 5 minutes. 

STATEMENT OF AMIAS GERETY, PARTNER, QED INVESTORS 

Mr. GERETY. Thank you very much, Chairman Hill, and Ranking 

Member Lynch. Thank you for the opportunity to testify today and 

to support this committee’s work. 

In my written testimony, I covered three topics. 

First, I offered some historical perspective on the creation of 

FSOC and why its ability to create accountability directly responds 

to weaknesses that we saw in the lead-up to the global financial 

crisis. 

Second, I discussed the importance of FSOC’s authority to require supervision of complex, nonbank financial companies and 

why the most-recent guidance restores balance for an activitiesbased approach and the Council’s narrow entity-based approach focused on designation. 

Third, in my written testimony, I covered why FSOC’s work is 

more important than ever as we round 15 years from the height 

of the financial crisis. 

As we begin, however, I want to highlight one story about the nature of FSOC’s work and to offer some reflections that may assist 

this committee in its engagement. Most importantly, I want to 

highlight that we cannot have an innovative financial system if financial risks can build up without oversight and if regulators are 

unable to coordinate across markets. 

In the early days of FSOC, memories of the crisis were fresh. We 

were motivated, and we had much work to do to create an infrastructure for FSOC to fulfill its mandate. 

For example, in July of 2011, FSOC published the first-ever Financial Stability Report of the U.S. Government. It was a mammoth undertaking, and we completed it with incredible collaboration from economists and analysts across the member agencies. 

But I remember a blog post that I read a few weeks later, which 

made fun of FSOC for putting so much effort into its monitoring. 

The blog pointed out that financial crises rarely come one after another, and so the summer of 2011 was a time that the Council 
12 

should have been taking a breather, not doing its important work, 

confident that the probability of another crisis happening on its 

watch then was close to zero. 

But that is not FSOC’s job. FSOC’s job is, in fact, to try to analyze low-probability, high-severity events, and it is their duty to try 

to prevent those events. 

Because we have a dynamic financial system, we cannot know in 

advance the nature of the risks or the innovations that may come 

in time. Therefore, the strength of FSOC is not its few target authorities but, rather, its unique purview of the financial system. 

FSOC’s two main approaches complement each other—one focused on activities, which the Council has stated will be how it addresses most risks; as well as its narrow authority to bring 

nonbank financial companies who could pose a threat to financial 

stability under enhanced prudential standards. 

I know that many on this committee believe in a wait-and-see 

approach to innovation—wait to regulate until the risks are clear. 

Looking through this lens underscores how important designation 

authority is to support innovation. 

Imagine a new financial services activity that has an uncertain 

risk profile. The market participants in this activity could include 

a large number of small players, mostly unlevered, and, let’s say, 

one extremely large player with a 25-to-1 leverage ratio on its balance sheet and $1 trillion of exposure. How should regulators address that risk? 

Certainly, they could consider activities-based approaches. But 

could this company be considered too-big-to-fail? Would that consideration by other market participants give it an unfair competitive 

advantage? 

What is the appropriate response to this risk? Is it appropriate 

to put regulatory burdens on a large number of small participants 

when the risks are associated with one giant, highly-levered market participant? Doing so would still leave unfair market distortions in place. 

As I close this testimony, I know that some on this committee 

have concerns about FSOC’s interest in a number of new and 

emerging trends. To take three hot-button examples—AI, crypto, 

and climate—I would argue that the financial stability risks from 

climate, crypto, and AI are all currently limited, but it is the wisdom of the statutory language to require the Council to focus on 

potential and emerging risks. 

This may seem counterintuitive from the language we usually 

use about systemic risks, because systemic risks sound like they 

should be everywhere, everything, all at once. But it is precisely 

the wisdom of the statutory mandate to be forward-looking. And 

considering risks that haven’t yet materialized is the only thing 

that can give us some hope that FSOC may make financial crises 

less common and less severe. 

Thank you. 

[The prepared statement of Mr. Gerety can be found on page 46 

of the appendix.] 

Chairman HILL. Thank you. 

I thank all of our witnesses. 
13 

We will now turn to Member questions, and the Chair recognizes 

himself for 5 minutes for questions. 

Last June, when Commodity Futures Trading Commission 

(CFTC) Chairman Behnam testified before the House Agriculture 

Committee, he talked about FSOC’s recommendation that Congress 

enact legislation to fill the regulatory gap over the spot market for 

bitcoin and for all digital assets that weren’t deemed securities. He 

expressed support for our market structure legislation, which he 

said would provide his agency with additional authority to do just 

that. 

I couldn’t agree more. And that is why, as I noted in my opening 

statement, many Democrats and Republicans came together in this 

committee and in the Agriculture Committee to work on legislation 

to protect consumers, provide regulatory clarity, improve the broken status quo, and to actually fill that gap that FSOC had noted. 

Likewise, we have been working on stablecoin legislation, which 

also was noted by FSOC, and it is one issue that I think is important to deal with, so we have taken action in both committees 

there. 

Mr. Hulse, would attempting to sidestep Congress be overreach 

by FSOC, from your study of how FSOC has worked over the past 

decade? 

Mr. HULSE. As a general matter, I am concerned that the November 2023 guidance gives FSOC more supervisory leeway to 

sidestep Congress as you describe. It has made it much easier for 

FSOC to designate a nonbank financial company, such as a digital 

assets company, or a payment stablecoin issuer, as systemically important. 

As it relates to digital assets, FSOC is effectively telling Congress, in my view: If you don’t do things our way, we are going to 

consider designating a nonbank financial company, such as a digital assets company, as systemically important. 

This would not be the carefully tailored approach that is being 

considered by the Financial Services Committee and the Agriculture Committee. And, importantly, it would mean only companies that FSOC has designated as systemically important would be 

subject to these heightened standards, not the rest of the market. 

Chairman HILL. Yes. 

Mr. HULSE. Therefore, the rest of the market would not receive 

that clarity that Congress is trying to provide. 

Chairman HILL. So, making that designation is a tool, but it is 

not a way to take care of an entire framework-type issue. That is 

why it is interconnected, that is why it is large, that is why it is 

activities-based, et cetera. 

Mr. Kupiec, did the bank regulators notice the interconnectedness and risks associated with uninsured deposits last year? I 

missed out on any warning before Silicon Valley Bank went down. 

Were they not alerted to something, that 175 banks had over 50 

percent of their deposits in an uninsured capacity? Could that have 

been considered a systemic risk? Would some analyst at the Treasury Department not have noticed that? 

Mr. KUPIEC. The bank regulators clearly really blew that. 

The interactions with the crypto industry were at Signature 

Bank and Silvergate Bank, but the actual problems that caused the 
14 

failure of that and SVB were the interest-rate mismatch that those 

banks had invested—— 

Chairman HILL. Yes. My point is that was a major systemic 

threat and that some institutions within the depository category of 

institutions were more at risk than others. Would it bring down the 

entire financial system? I don’t know. But that is the whole point, 

I thought, of FSOC sort of looking out and doing surveillance 

across-the-board. And that is one that is right under their nose, 

that is not remotely new or esoteric or emerging. And that is somewhat troubling, I think. I think that is why we saw the regulators 

come to this committee and do a major mea culpa on that topic. 

Mr. Kim, over the last 2 years, the FSOC has made digital assets 

one of its top priorities. Do you think it makes sense for FSOC to 

list digital assets as one of its top-four priorities, given the relative 

size of the digital asset market compared to the example that was 

used in testimony, for example, that the equity market gap is $45 

trillion compared to $1.7 trillion? 

Mr. KIM. Thank you for your question. 

While I understand the need to monitor new developments, I believe any analysis of the digital assets industry were reflected as 

not a systemic risk—a fact that FSOC itself has acknowledged. 

When it comes to mitigating any risks and providing the regulatory clarity, that is, again, the role of Congress, this institution, 

to provide that clarity through a comprehensive Federal framework 

that addresses market oversight for spot crypto assets as well as 

for payment stablecoin issuers—again, a fact that FSOC has recommended and acknowledged itself. 

So, that clarity has to come from Congress, not from the FSOC. 

Chairman HILL. Mr. Dinwoodie, I would like you to take this 

question maybe offline, and just submit a written answer to it, 

talking about the third-party reviews. That was also noted in 

FSOC as risk in the fintech arena. I would like for you to send me 

your thoughts specifically on third-party risk that really rises to 

the level of FSOC’s consideration. 

And, with that, I will yield back, and recognize the ranking member for 5 minutes for his questions. 

Mr. LYNCH. Thank you, Mr. Chairman. 

Last month, FSOC released its annual report on emerging 

threats to U.S. financial stability. And, importantly, for the first 

time, the Council identified the use of artificial intelligence in financial services as an emerging vulnerability in the financial system. 

Now, I suppose basic AI has been very helpful. I know that a lot 

of the firms are using it for personalized consumer services and, in 

some cases, consumer loan underwriting, some risk-management 

auditing at a very basic level, and I think it has actually helped 

the efficiency and cost reduction of those services. 

However, the evolving use of AI, especially the deep-learning 

models, presents some corresponding risks. For example, FSOC 

warns that varying AI technologies—again, those deep-learning 

models and systems—present a so-called, ‘‘black box’’ problem. 

Mr. Gerety, the systems are so complex and opaque that 

interpretability of the system—in other words, making that nexus 
15 

between inputs and outputs—is impossible in many cases, or, as 

they put it, astronomically improbable. 

We have asset managers that are using AI right now. And, as 

we have seen recently, we had a major pension fund—the Canadian teachers pension fund lost $95 million when FX went down. 

In cases like that, where you have a major loss on the part of 

a client, especially a pension fund that is trying to protect the longterm interests of those employees, how do we make sure that we 

protect consumers and investors if the AI algorithms are actually 

promoting uniformity or herding behavior—which, again, is a real 

threat—or the interpretability to understand what is actually going 

on with the AI system is not there? 

Wouldn’t it make sense to have FSOC have undiluted power to 

be able to review activity like that in order to carry out their statutory mandate? 

Mr. GERETY. Mr. Lynch, I think this is a really important question and, actually, as you highlight, a really difficult one. 

The truth is that AI research is not mainly being driven by the 

financial services industry. And that is a change from 10 or 20 

years ago, where financial services was actually much more on the 

cutting edge of AI, so they would have the more advanced AI models. We are now seeing the AI models become much more advanced 

and much more powerful outside of the financial services industry. 

And I think this is a legitimate challenge. 

At the same time, as you point out, just to take one example that 

you mentioned, the possibility of AI giving high-quality advice to 

consumers for low cost, that is actually a tremendously hopeful 

thing that we could have. 

I have a colleague who has a company doing that in Mexico. He 

brought it to an executive in the Philippines, and they said, ‘‘Well, 

does your AI speak Tagalog?’’ And all of a sudden, boom, wow, 

training in Mexico can provide advice to people in the Philippines. 

This is near-magic. But, as you say, it is a really important question. 

I think the one thing I would point out in response to your question is that, actually, the statutory and legal framework here is 

pretty consistent with how the financial services thought in the 

past, which is: model validation—so outputting model outputs, not 

just inputs—and making sure that the managers need to understand what their models do before they are allowed to use them. 

Even that is put under pressure, but I think that is initially 

where we have to start. 

Mr. LYNCH. Right. We won’t have enough time for this, but 

maybe you can respond offline. Many of these asset management 

firms are actually purchasing—they are not building their own AI. 

They are purchasing it from an outside party, which is not subject 

to regulation. That creates a regulatory gap, and I am struggling 

with how to deal with that. 

But thank you, Mr. Chairman. I yield back. 

Chairman HILL. The gentleman yields back. 

Mr. Emmer, the Majority Whip of the House, is recognized for 5 

minutes. 
16 

Mr. EMMER. Thank you, Chairman Hill. And thank you for holding this important hearing today to examine the unchecked, frequently-weaponized Financial Stability Oversight Council. 

This Dodd-Frank-era body of unelected financial bureaucrats 

wields immense power, deciding whether an entity or industry is 

deemed, ‘‘systemically risky,’’ and therefore should be subjected to 

the Fed’s iron fist of regulation. However, the Financial Stability 

Oversight Council has morphed into a political weapon for the administrative state, circumventing congressional oversight and stifling American innovation. 

While many Financial Stability Oversight Council members are 

individually accountable to Congress and the public, the DoddFrank Act created a troubling loophole. By empowering these same 

officials to sit on the Financial Stability Oversight Council, it established a body effectively immune to congressional oversight, raising 

concerns about a potential disconnect between its actions and the 

will of the American people. 

These unchecked bureaucrats abuse their positions on the Financial Stability Oversight Council to bypass elected representatives 

and crush politically-unpopular industries and companies. 

Case in point: digital assets. In 2022, the White House threatened to unleash the Financial Stability Oversight Council on the 

digital asset industry unless Congress enacted the White House’s 

draconian anti-crypto legislation. This action wasn’t about regulation or consumer protection; it was about killing an entire industry 

the Administration doesn’t like. 

Why? Because the Financial Stability Oversight Council operates 

in a, ‘‘black box,’’ as we heard, shielded from both the American 

people and their elected representatives in Congress. This is unacceptable. 

This is why since my first term in office I have fought for accountability and transparency. In 2015, I introduced legislation to 

subject the Financial Stability Oversight Council to the annual appropriations process, ensuring the Council answers to the very 

body they are supposed to be accountable to: Congress. 

This bill passed out of the House in the 114th Congress, and this 

week, I reintroduced the Financial Stability Oversight Council Reform Act to continue this effort. This legislation will give Congress 

the ability to conduct oversight over the Financial Stability Oversight Council, and it will force the Council’s research arm to consult with the public before wielding its regulatory club. 

We must instill transparency and accountability. We must protect American innovation from the political whims of unelected bureaucrats. Let’s ensure that America remains the land of opportunity. Let’s restore accountability, protect American innovation, 

and finally rein in the weaponized Financial Stability Oversight 

Council. I urge my colleagues to support this legislation. 

And, Mr. Chairman, I yield back the balance of my time. 

Chairman HILL. The gentleman yields back. 

The gentleman from Illinois, Dr. Foster, is recognized for 5 minutes. 

Mr. FOSTER. Thank you, Mr. Chairman. 

And thank you to our witnesses, and Mr. Hulse, actually, for his 

kind shout-out of my FSOC Improvement Act, a bipartisan bill that 
17 

we have been trying to move in various forums for several years 

now. 

Let’s see, how do I say this? As a new member of this committee, 

I spent one of the most unpleasant evenings of my life reading a 

report entitled, ‘‘AIG: Is the Risk Systemic?’’, where I got to just 

understand, finally, how the risk of a giant nonbank operation had 

put our entire economy at risk, and just how complex and interconnected our system is. 

And so, I understand and I appreciate the mission of FSOC to 

look across the whole economy, to look at things that appear to be 

safe and are, in fact, not. 

AIG was famously referred to, if I remember correctly, by the Republican Federal Reserve Chair, Ben Bernanke, as a, ‘‘healthy and 

well-run insurance company with a hedge fund grafted onto it.’’ 

And that is not something that can be allowed to happen in a wellregulated economy. 

And, Mr. Dinwoodie, I share your expectation that designating a 

nonbank firm as systemically important remains but one tool in 

FSOC’s toolbox for fighting systemic risk. Under the revised guidance, FSOC may also take an activities-based approach, direct 

interagency coordination, and submit recommendations to Congress. 

Another famous saying came in this room several years ago, that 

if you have a bazooka and everyone knows you have a bazooka, you 

might not have to use it. So, I think that giving the FSOC the ability to designate as a last resort is an essential element of the power 

they have to fix problems, short of a full designation. 

So, SIFI designation of nonbank firms should always be considered, as should alternatives, when they present systemic or nearsystemic risk to the economy. And that is the point of my bill, the 

FSOC Improvement Act. 

If we need an example of why oversight of nonbank financial 

firms is essential, we can look at China today. Last Friday, the 

China-based trust company, Zhongzhi Enterprise Group, filed for 

bankruptcy with gigantic amounts of debt. And it is only one of 

many elements of the collapse of the nonbank structures that have 

been allowed to grow in China without adequate regulation. 

Those are real risks that are going to continue to cause China 

trouble for at least the rest of this decade. Evergrande is another 

China-based trust company that has famously been failing. 

Mr. Gerety, thank you for joining us today. Do you believe the 

Council is going to, as a result of the new guidance, really take the 

decision lightly to issue nonbank SIFI designations? Can you describe the other tools that are available to them? 

Mr. GERETY. It would be my pleasure. And I think it is a very 

important point that the designation authority is quite narrow. In 

fact, if you think about the FSOC’s authorities, activities-based approaches are really all of the tools of all of the regulators. And the 

designation authority is a very small tool. It should only be used 

to address the risks associated with individual institutions. 

And I think, as you point out with the Chinese trusts, it is not 

uncommon in the history of finance for nonbank companies to use 

financial tools to go create very significant risks in the economy. 
18 

And it is precisely that type of behavior for which the FSOC needs 

to be on the lookout. 

Mr. FOSTER. If you just imagine the staircase as an entity or a 

sector starts ramping up in risk, how would you envisage FSOC 

using its authority, short of designation? 

Mr. GERETY. I think many of the examples that have been raised 

as things to be worried about are actually examples of the system 

working. 

For example, I would argue that the FSOC’s report on crypto assets and its making recommendations to Congress is a perfect example of how, when an issue is probably not a financial stability 

threat at this stage, it should be monitoring it, making recommendations, and seeking to work with Congress. So, that would 

be one example of a first step. 

Another step is, when there is clear authority in one of the member agencies, you can make recommendations, you can look at the 

money market fund and mutual fund reforms that were suggested 

by FSOC and ultimately carried out by the SEC. 

And I think only in very narrow instances—and to the point earlier, Mr. Kupiec said that no companies were de-designated, but, in 

fact, the Obama Administration did de-designate GE Capital. 

So, you can see there are a number of steps both up and down 

the ladder. 

Mr. FOSTER. Thank you. 

I believe my time has expired, so I yield back. 

Chairman HILL. The gentleman yields back. 

Mr. Davidson, the Vice Chair of the subcommittee, is recognized 

for 5 minutes. 

Mr. DAVIDSON. I thank the chairman, and I thank our witnesses 

today. 

And I am glad that we are focusing on FSOC. Frankly, since 

FSOC was created, it has had an important role in shaping our 

markets, and we want to make sure they are used for good and not 

for other agendas. 

Mr. Hulse, unlike the 2012 guidance, the 2023 guidance does not 

include any quantitative bright lines, like asset thresholds, that 

should be considered when initially considering SIFI designations. 

Given that much of the 2023 final guidance reverts back to the 

2012 interpretation, why do you think the Administration omitted 

these bright lines? 

Mr. HULSE. I will say as a general matter, bright lines are helpful to providing the market an understanding of what direction a 

regulatory body like FSOC might take; however, an asset threshold 

should not be an indicator of systemic risk in and of itself. It 

should be one of many measurements that FSOC uses to understand whether or not an entity or a market is systemically important. 

I am not exactly sure why FSOC chose to veer away from using 

this going forward, but it’s certainly something on which this committee should be focused. 

Mr. DAVIDSON. Here is the concern. Frankly, FSOC met on a Saturday several months ago, and on a Sunday, they seized the assets 

of Signature Bank. Now, Signature Bank wasn’t insolvent, wasn’t 

in default. And one of their board members, a former chairman of 
19 

this committee whose portrait hangs right over there, Barney 

Frank, said that he believed that it was a war on crypto that motivated this—not a systemic risk of crypto, not even a systemic risk 

of crypto related to Silicon Valley Bank, let alone the entire market. 

But it does seem like there is a coordinated effort underway, 

with FSOC being kind of the common hub for some of these regulators, that it has been termed, maybe inappropriately, maybe appropriately, Choke Point 2.0, 3.0, 6.0—some iteration of some agenda-driven war on the financial sector. And, of course, Operation 

Choke Point was termed after the Obama Administration’s targeted attack of, essentially, its own enemies list—not necessarily 

systemic risk, but political enemies mostly. 

Given Elizabeth Warren’s 2024 campaign theme of a war on 

crypto, and her digital assets bill, and frankly, her influence over 

the appointees to the people who end up holding these positions 

that Democrats select for leadership, people suspect there is a lot 

of truth to this war on crypto. 

Does anyone else feel like that is part of the motivation? Any 

concerns about the same things? 

Anyone? 

Mr. KUPIEC. I think the FSOC’s agenda is very politicized and 

it is very influenced by those kinds of views. And the banking regulators probably aren’t predisposed to want crypto-type transactional 

functions to grow and prosper, because it takes away from the 

banking industry. 

And the banking industry that was doing crypto-related activity, 

and Signature Bank, was, in fact, approved by the Comptroller of 

the Currency in their letter. They created a private blockchain system to trade dollar balances between members. So, it was actually 

an approved banking activity. 

But I agree, the agenda is very politicized. 

And, by the way, I think GE Capital was de-designated because 

they jettisoned all their financial—they sold all their financial businesses and fell below the 85-percent threshold for nonbank financial firms that the FSOC could designate, if my memory serves me 

right. 

Mr. DAVIDSON. Yes, thank you. Not because of a systemic risk 

from them, for sure. And a good concern for how it has been used 

in the past. 

Mr. Kupiec, just one final thing. As a result of not just Signature 

Bank but other failures—a lot of it related to this concern over targeting crypto in particular, but some, definitely, when you look at 

Silicon Valley Bank, real problems—the Federal Reserve created 

this expansion of the FDIC, and it seems that there may also be 

a war on smaller banks, an effort to consolidate banks for the benefit of the biggest banks. 

Does anyone share that concern? 

Mr. KUPIEC. The Federal Reserve Board has special powers over 

the largest banks and bank holding companies, and community 

banks are a different breed entirely. I don’t know that there is a 

war on community banks, but community banks certainly have experienced a large reduction in numbers over the last—— 
20 

Mr. DAVIDSON. Thank you. I wish had more time to explore this. 

And if you have any other opinions, please follow up in writing or 

reach out to our office. 

My time has expired, and I yield back. 

Chairman HILL. The gentleman yields back. 

Mr. Sherman of California is recognized for 5 minutes. 

Mr. SHERMAN. I have a few comments. 

It is said that the FSOC is immune to oversight from Congress. 

I think every one of its members testifies before Congress, gets 

questions about FSOC. 

I have seen the crypto folks say, ‘‘Crypto will shape the world!’’ 

And now, they are here to say, ‘‘We are just a little feather floating 

down, and FSOC shouldn’t pay any attention to us.’’ 

Then, we are told that it is politics involved in crypto. There is 

tremendous political power pushing us toward accepting crypto, 

minimizing the effect of the U.S. dollar as an international medium 

of exchange, leading to a tremendous decline in the wealth of the 

average American family who has lower interest rates because of 

the role that the U.S. dollar plays. 

And the fact is that we have now pending before the SEC, the 

powers of Wall Street trying to get into crypto. I hope the SECis 

able to say, no. But to say that the big banks are trying to stop 

crypto—no, the big banks are trying to make money off of crypto. 

Not every risk that our economy faces is because of SIFIs involved. Our giant Federal deficit is perhaps the biggest threat to 

our economy. China may be the biggest threat to our economy. But 

neither the U.S. Government nor the Chinese Government can be 

designated a SIFI. 

I believe the SIFI designation should be limited to where a particular company’s decline or demise can severely hurt our economy. 

But we saw with Silicon Valley Bank that an entity’s demise may 

not, itself, imperil our economy but may be viewed as the domino 

that causes other similar companies to go down. 

I think that SIFIs should be designated based on their liabilities, 

not the size of their assets, although there is a real connection in 

most of the financial world. Lehman Brothers didn’t hurt us because they had too many assets; they hurt our economy because 

they had too many liabilities that they did not fully pay, or would 

not have fully paid had there not been intervention. 

Mutual funds don’t have major liabilities, except if they have a 

contingent liability if there is fraud or theft from the institution. 

We do have to look at a company’s liabilities and its contingent 

liabilities. And AIG, which the gentleman from Illinois brought up, 

is a good example. They had contingent liabilities for insured risks 

that were properly regulated by the State insurance regulators, 

and those individual subsidiaries did just fine. Then, they had 

enormous contingent liabilities for credit default swaps, which were 

not regulated at all, and that is what could have taken down our 

entire economy had there not been intervention. 

Mr. Dinwoodie, what considerations should we take into account 

as to whether an entity is a SIFI when it comes to asset managers? 

They don’t have liabilities, they don’t borrow money, but they certainly advise with regard to huge chunks of capital. 
21 

Mr. DINWOODIE. I actually think that the SIFI designation concept doesn’t make sense when applied to asset managers, in part 

because the result of SIFI designation is supervision by the Federal 

Reserve and prudential standards applied by the Federal Reserve. 

It is not clear if the Federal Reserve knows anything about asset 

managers, and it is unclear whether those requirements would address any perceived risk. 

Mr. SHERMAN. You certainly don’t have reserves if you are a mutual fund, for example. 

On the other hand, I am certainly concerned with the whole depository issue. I think we have good checks on depositories, but if 

there was ever a question of whether my Vanguard mutual fund 

actually had the security there, boy, that would shake the economy 

up. 

So, whether it is SIFI or something else, we have to make sure 

that we are ultra-careful on the depository issue. 

And I could go on and on, except the chairman will cut me off, 

so I yield back. 

Chairman HILL. Indeed, the gentleman’s time has expired. 

The gentleman from Oklahoma, Mr. Lucas, is recognized for 5 

minutes. 

Mr. LUCAS. I want to thank the witnesses for agreeing to testify 

and to thank the Chair for holding this hearing. 

Mr. Dinwoodie, in 2019, FSOC prioritized an activities-based approach and applied a cost-benefit analysis as a part of the designation process. 

Could you discuss what led to that change and the difference between the guidance finalized in November? 

Mr. DINWOODIE. I think there are two things. 

First is just the common-sense concept of—and I think we all do 

it at home—when you are making any decision, you weigh the pros 

and cons and do some analysis. And that is the, ‘‘common-sense’’ 

point. 

The second point is that the court, in MetLife, as was mentioned 

earlier, struck down the designation, pointing out that the decision 

was arbitrary and capricious because there was no cost-benefit 

analysis done. 

So, I think you put the two of those together and that was the 

thinking. 

Mr. LUCAS. Again to you, in your testimony, you indicated that 

the designation should be used only as a backstop. Could you describe the immediate impact a designation would have on a firm 

and explain the conversations that FSOC would have with the firm 

prior to the designation? 

Mr. DINWOODIE. The designation process in general will take a 

year-and-a-half. Just as an aside, there is a question as to, if there 

is really a threat, does designation actually address the threat, as 

opposed to legislative or regulatory action? 

And so, once there is a designation, the Federal Reserve is 

tasked with developing prudential standards to apply to that entity. Now, back when GE Capital was designated, that took 2 years. 

And if you stop and think about it, we are looking at 3 years before the perceived benefit of designation would apply. That is why 

my view is that the more common-sense approach is: Let’s look 
22 

across the industry, and work, as needed, with Congress. If there 

is a gap, this body would address it or the primary regulator. 

Mr. LUCAS. Mr. Hulse, in your testimony, you touched on how 

even the Federal banking agencies concede that proposals such as 

Basel III could push activity out of banks and into nonbanks, which 

the banking agencies could then use to justify authority and regulation over nonbanks. 

Could you elaborate on this potential self-perpetuating outcome 

and how to properly align FSOC’s focus? 

Mr. HULSE. Thank you for the question. By driving activity outside of the regulated banking system, which the Basel III capital 

standards absolutely have the risk of doing, and moving it into the 

nonbanking system, Federal banking regulators—specifically, 

Chairman Gruenberg made a speech on this last fall—described 

the solution as imposing bank-like regulations on these nonbanks. 

From the Chamber’s perspective, we think a much more, I think, 

constructive approach that would lead to economic growth would be 

for there to be healthier competition in the banking system that allows them to compete with nonbanks. 

Mr. LUCAS. Mr. Hulse, I was here when we did the Dodd-Frank 

Act and went through that horrible, hideous conference committee 

process. 

Could you outline the deviation between FSOC’s new designation 

guidance with the statutory authority granted under the DoddFrank Act? Where does it fall short? 

Mr. HULSE. There are numerous places where the updated guidance deviates from FSOC’s statutory authority and is inconsistent 

with the MetLife decision. 

Primarily I would like to focus my answer here on the MetLife 

decision, which the last witness pointed out was part of the, I 

would say, impetus or drive for instituting the 2019 guidance. 

Primarily, the updated guidance finalized in November fails to 

emphasize the vulnerability of a company to material financial distress and, instead, really simply emphasizes that a company might 

be significant or large. But that, in and of itself, does not mean a 

company might be vulnerable to material financial distress or be 

a risk to the financial stability of the United States. 

Mr. LUCAS. That conference committee that created Dodd-Frank 

was the most fascinating process, where the House work product 

was dropped in the trash can at the first meeting and we took up 

the Senate document. I learned a lot about the legislative process 

that day. 

I yield back, Mr. Chairman. 

Chairman HILL. The gentleman from Oklahoma yields back. 

The gentleman from Illinois, Mr. Casten, is recognized for 5 minutes. 

Mr. CASTEN. Thank you, Mr. Chairman. 

Thank you all for being here. 

I am reminded as I sit here, there was this great line, I think 

back in 2019, when Ben Bernanke and Hank Paulson issued a 

statement saying that, ‘‘financial risk tends to migrate around regulatory obstacles like a river flows around rocks.’’ 

I see a lot of heads nodding. Is there anybody here who disagrees 

with the wisdom of Mr. Bernanke and Mr. Paulson on that? 
23 

There are a lot of references to 2008 here because one of the 

ways that risk could migrate around a rock was to park itself at 

an insurance company. That sat outside of FSOC, and, of course, 

we saw where that sits at this point. 

We thankfully did not have any systemic risk from the failures 

back in March of Signature Bank and Silicon Valley Bank, but I 

also don’t think we should lose sight of the fact that what we call, 

‘‘stablecoins,’’ break the buck more often than a money market fund 

does. The algorithmic stablecoins broke the buck. The only reason 

USDC is trading at a dollar today is because their reserves were 

in uninsured deposits and the FDIC bailed them out. 

They are smart capitalists, right? They ducked risk. They parked 

their risk in something that wasn’t there. But there is still that 

real risk. And I think Mr. Lynch had mentioned the recent FSOC 

report where they emphasized that the financial stability vulnerability still exists from the potential of risk runs on stablecoins. 

Mr. Gerety, I am curious if—and this is purely speculative—the 

next time a stablecoin breaks the buck, because, statistically, it is 

going to happen—if there is a run or some wave of redemptions, 

what do you think we should be concerned about? Is it Treasuries? 

Is the barn door closed on uninsured bank deposits? Where is the 

risk? Why are they too small to matter? 

Mr. GERETY. First of all, I think it is an important question. One 

of the big challenges with stablecoins is that they look and feel like 

a bank deposit. And we have a long history of things that look and 

feel like bank deposits not being regulated like bank deposits. This 

is one of the constant struggles for the financial system. As you 

say, risk flows like a river around a rock. And one thing that people really like is things that look and feel like a bank deposit but 

aren’t bank deposits. That is just a constant of history. 

I think you are right to say that the first place we are going to 

look is towards uninsured deposits, in part because some of the entities, like USDC, are actually trying to be responsible. They are 

trying to keep their assets in the safest possible place and trying 

to tie them one-for-one. 

I think that is the first place to look, especially in the U.S. market. I think, globally, it is basically impossible to tell. And I think 

this is one of the risks that we in the FSOC and the FSOC members, we here in this room, need to be worried about. 

Mr. CASTEN. Yes. 

Mr. GERETY. But I don’t know what the answer is. 

Mr. CASTEN. I think I speak for everyone in this room: We would 

like to see a robust, audited balance sheet for Tether someday. 

I was going to ask you about, sort of, a balance between activities-based and entity-based regulation, and you did such a good job 

in your opening statement, I don’t think I need to ask. But was 

there anything you wanted to add on that? Because I appreciated 

what you said about the need for balance and what lives in there. 

Mr. GERETY. I think the one thing I would say is—and Mr. 

Dinwoodie talked about the timing here—the timing only works if 

the Council can act in a preventative measure. Designation is not 

something that you could do in a crisis. It would not make a difference in a crisis. Nor would regulation. It is the nature of regula-
24 

tion that we always give companies months or even a year to conform with that regulation. 

So, the Council’s work only makes sense if it is done far enough 

in advance of a concern. And it is just the nature of financial crises—in June of 2008, people were thinking, oh, we are through it. 

And it is just the nature of a financial crisis that by the time you 

can see the crisis coming, it is too late for that preventative measure. 

Mr. CASTEN. I realize I am short on time, but maybe I would just 

make a general observation, just for the chairman and everyone on 

the committee. It strikes me that crypto markets are either systemically risky right now because of all their entanglements or they 

are so full of wash trades and illegal activity that they basically 

don’t matter. And I don’t think we have enough robust balance 

sheets to know the answer to that. 

But we do know that there are significant, significant risks that 

remain out there. The State of Florida right now is considering socializing their insurance industry because insurers are pulling out 

of the State. At what point does that create a risk that actually 

hits the banking sector? 

The Trump CFTC reported that the more likely you are to be in 

a flood-prone area, the more likely it is that the banks are going 

to offload your risk onto the taxpayers in Fannie Mae and Freddie 

Mac. 

These are not regulated by the bank supervisors, but we have to 

be watching for those risks. And I think my general observation is 

we need more, not fewer, rocks in that river right now. 

I yield back. 

Chairman HILL. The gentleman’s time has expired. 

The gentleman from Tennessee, Mr. Rose, is recognized for 5 

minutes. 

Mr. ROSE. Thank you, Chairman Hill, for holding this hearing. 

And thank you to our witnesses for taking the time to be with 

us today. 

Mr. Kim, I believe that my colleagues on both sides of the aisle 

are proponents of expanding and ensuring access to capital and financial freedoms for all Americans. Digital assets provide investors 

with financial freedoms that some would not have access to from 

a traditional banking system. However, opponents scapegoat the 

digital assets industry and push unneeded regulation in the name 

of consumer protection. 

I believe it is important that we use a light-touch approach, as 

outlined in Chairman Hill’s Financial Innovation and Technology 

for the 21st Century (FIT21) Act, to maintain innovation while providing consumer protection. This legislation would establish robust 

consumer protections and clear guardrails for market participants. 

Mr. Kim, would the digital asset space benefit from added consumer protections as outlined in the FIT for the 21st Century Act? 

Mr. KIM. Thank you for your question, Congressman. 

Yes, it absolutely would. I think the digital assets industry needs 

certainty and clarity, which FIT21 provides. 

It provides for various ranges of categories for registration purposes. And, to your point, it also provides for enhanced robust consumer and investor protection standards—customer disclosures, 
25 

segregation of funds, clear prohibition on co-loaning of funds, and 

making sure that you can’t trade on your own exchange, for example. 

All of this provides certainty to the market, to the investors, and 

to the consumers, as well as allows responsible innovation to continue to flourish here in the United States, which is important, especially as other jurisdictions outside of the U.S. are developing 

regulatory frameworks in their respective countries. And what the 

digital assets industry wants is that clarity and certainty, which 

will benefit both the market participants as well as investors and 

consumers themselves. 

Mr. ROSE. Thank you. I appreciate that. 

Mr. Kim, it strikes me that there is a stark difference in size and 

scale between the digital assets industry and industries that have 

previously been regulated by the Financial Stability Oversight 

Council. To put it in context, just 2 of the previously designated 

nonbank financial companies, together, had a total of $8 trillion in 

life insurance exposure. That figure is nearly 5 times the size of the 

entire global crypto market. 

Mr. Kim, can you discuss why this incredible difference in size 

is important to the conversation, and what other differences currently exist between digital assets and other nonbanks? 

Mr. KIM. Absolutely. As you just pointed out, Congressman, the entire global digital asset market cap is $1.7 trillion, compared to 

your example of $8 trillion with two insurance companies. There is 

a big, significant difference in terms of the scale and size between 

the digital assets industry versus insurance companies that you 

identified. 

The other difference is a lack of significant interconnections between the two examples here. Insurance, of course, is a key risk 

mitigation tool which could pervade the entire economy, the broader financial system, and could create a cascading effect. Digital assets, as I mentioned in my written testimony in more detail, lack 

significant interconnections with the broader, traditional financial 

services system and infrastructure. 

Those are two things that I would highlight for you. 

Mr. ROSE. Thank you. 

Mr. Dinwoodie, as you mentioned in your testimony, in December 

2019, FSOC adopted the activities-based approach to monitoring 

and addressing systemic risk. However, in November of 2023, 

FSOC revised their approach and shifted to an analytical framework. 

Can you explain the criticism from the courts that led to the December 2019 activities-based approach? 

Mr. DINWOODIE. There were two criticisms, primarily, from the 

court. The first was that FSOC failed to follow its own procedures 

in the designation. And second, a failure to conduct a cost-benefit 

analysis as part of the designation process was arbitrary and capricious, according to the court. 

Mr. ROSE. Can you elaborate on the detail and effort that went 

into the development of the activities-based approach? 

Mr. DINWOODIE. At the beginning of the Trump Administration, 

the President instructed the Treasury Department to develop recommendations for improvement of FSOC’s SIFI designation author-
26 

ity. That led to a Treasury Department report with a number of 

recommendations. And ultimately, that led to the development of 

the 2019 guidance, the activities-based approach. 

So, it was a few years long of an approach leading up to that. 

Significant engagement with the public, not to imply that there 

wasn’t engagement with the public in the 2023 guidance—there 

was a comment period—but there was a longer run-up to it. 

Mr. ROSE. Thank you. 

And I see my time has expired, so I yield back. 

Chairman HILL. The gentleman yields back. 

The gentleman from Texas, Mr. Green, is recognized for 5 minutes. 

Mr. GREEN. Thank you very much, Mr. Chairman. I thank the 

ranking member as well. 

Mr. Chairman, I am concerned about climate change as an 

emerging and rising threat. Apparently, FSOC, in 2021, identified 

it as such a possibility in a report on climate-related financial risk. 

This is important to me because I happen to live in Houston, 

Texas, where we happen to have experienced Hurricane Harvey, 

with over 1 trillion gallons of water—1 trillion—in a 4-day period. 

There was water all over Harris County. Places that had never 

flooded before, flooded. In that time, there were 68 deaths from the 

hurricane, and $125 billion in damages caused by Hurricane Harvey across Texas. 

So, you can well imagine that a person who lives along the Gulf 

Coast, who experiences these acts of God quite regularly, would be 

concerned. 

I would like to ask you, those of you who would care to answer— 

I won’t pick on you, unless you force me to—what would you say 

to me in terms of this being an emerging threat? Do you not perceive it as such, as it relates to financial institutions that may be 

located within this area along the Gulf Coast? 

And perhaps, we will start with Mr. Gerety. 

Mr. GERETY. First of all, thank you for the question. I do think 

it is an important issue. 

And the number-one observation that I would have, looking at 

what we see in examples like Hurricane Harvey or the wildfires in 

California or across the West Coast of the United States, is that 

these impacts are very nonlinear. To your example about a trillion 

gallons of water, these are impacts where the risk has been building for many years but we are now seeing impacts that far exceed 

what we were, sort of, capable of imagining. 

And I think that is precisely the type of risk that can create a 

real threat to financial stability, when something—you think you 

understand it, right? This is sort of what happened in 2007 and 

2008. We thought we understood what was going on in subprime 

mortgages, we thought it was self-contained, and then, it turned 

out that it was connected in many more ways than we realized. 

I think, for now, it is probably right to say that climate change 

isn’t going to directly undermine the U.S. financial system in the 

near future, but we know that it is changing, and we know that 

it is changing very significantly, and that is why it is a really important potential emerging threat to monitor. 
27 

Mr. GREEN. I think that the word, ‘‘emerging,’’ is operative. My 

hope is that we don’t wait until it becomes an apparent threat that 

is right before our eyes, because I am not sure what you do about 

a threat that is already upon you. Do you have the same advantage 

that you have if you start to deal with it as it emerges? 

Your response, Mr. Gerety? 

Mr. GERETY. Certainly, you don’t. 

I think one of the reasons why it is important for the Financial 

Stability Oversight Council to think about this—and I will give a 

similar example. The FSOC was actually the first financial stability body globally to highlight cybersecurity as a threat. Before 

that, everyone was thinking about the issues that come with the 

crisis. They hadn’t thought about cyber. And now, people recognize 

that cyber is absolutely one of the top threats. 

I think, to your point, Mr. Green, this is exactly why we need to 

start identifying these threats for analysis before the risk to our financial system may be readily apparent. 

Mr. GREEN. And just to edify, not to contend that this is a part 

of the nexus of the threat to the greater financial market, but insurance companies should have realized that it is a threat. We 

have insurance companies that are bailing out along the Gulf Coast 

and in California, too. But these threats don’t occur instantaneously. They emerge. And, as such, we have to be prepared to deal 

with them at some point in the future, and what better time to 

start than now? 

To my other friends who are on the panel, I said that I would 

give you an opportunity to respond. So, if you will kindly do so in 

writing, I would greatly appreciate it, and I look forward to reading 

your commentary. 

Thank you, Mr. Chairman, for the time. I yield back. 

Chairman HILL. The gentleman yields back. 

The Chair of the House Administration Committee, the crafter of 

the new 118th Congress pin that everybody has received today, Mr. 

Steil of Wisconsin, is recognized for 5 minutes. 

Mr. STEIL. Thank you very much, Mr. Chairman. 

The focus of today’s hearing is on FSOC, the Financial Stability 

Oversight Council, but we see a general aversion to digital assets 

innovation across most regulators in Washington right now. 

The best way to support jobs, innovation, and consumer protection is to put in place clear, fair, and transparent rules of the road. 

That is exactly, actually, what this committee worked on to do this 

past summer by passing bipartisan legislation establishing frameworks for stablecoins and digital asset markets. If we fail to do 

this, we will continue to allow regulators to stifle innovation and 

we will see more businesses migrate overseas. 

Mr. Hulse, in your testimony, you explained that the proposed 

changes to FSOC’s designation process could actually contribute to 

great systemic risk. 

Can you describe why you think FSOC’s 2023 guidance would 

have that effect? And can you explain why the 2019 framework is 

a more appropriate process? 

Mr. HULSE. Thank you for the question. If we have more 

nonbank financial companies that are afraid to innovate, as you 

point out, due to fear of designation, you will have less competition 
28 

within our financial system. We need healthy competition between 

banks and nonbanks. 

As you drive homogeneity within our system by regulating 

nonbanks as banks, you are going to reduce, not just innovation, 

but competition. And as you have more nonbanks designated as 

systemically important and regulated as banks, you are going to 

drive that homogeneity. 

And so, this is kind of where we start to see some of these market distortions that the 2023 guidance would enable, and should instead be focused on the 2019—— 

Mr. STEIL. Let me dig into this a little bit. 

You have CFPB Director Chopra, who has called the cost-benefit 

analysis, in the context of SIFI designation, an unnecessary stricture. Can you explain why it is important, especially in this context, to consider the tradeoffs associated with the designation? 

Mr. HULSE. Yes. Absolutely, the cost-benefit analysis and considering the tradeoffs between designation and not designating, I 

think is important for any sort of policy decision—supervisory, regulatory, or otherwise. There are clearly tradeoffs to imposing banklike regulations. 

Mr. STEIL. Thank you. 

I am going to come to you, Mr. Kupiec, if I can, and I want to 

stay on the topic of tradeoffs and weighing the costs and benefits. 

MetLife prevailed in its case when a U.S. district court judge for 

the District of Columbia overturned its designation. In that opinion, the judge stated that FSOC focused exclusively on presumed 

benefits of this designation and ignored attendant costs. 

Under this new guidance, is FSOC able to revert to its prior approach which led to the unreasonable designation? 

Mr. KUPIEC. Yes, until it is successfully challenged in court. 

The court in the MetLife case cited a Supreme Court ruling that 

said that a favorable cost-benefit analysis was mandatory before a 

regulator could apply new regulations. So, you need a firm with 

deep pockets and the willingness to litigate against the government, and MetLife was the only one that has been willing to do 

that so far. And I am sure it was costly for them. 

Mr. STEIL. Thanks. 

I am going to shift gears and come to you, Mr. Kim. In my opening comments, I talked a little bit about, kind of, the international 

aspect as it relates to digital assets more broadly. 

Can you comment on how U.S. regulatory approaches are impacting international competitiveness in digital asset innovation? 

Mr. KIM. Thank you for your question. 

I know I sound like a broken record today, but it is about clarity, 

consistency, and cohesion. And why I mention that is because, in 

other jurisdictions, they are developing or are about to develop or 

implement different regulatory frameworks. What we need do here 

in the United States is establish that comprehensive Federal 

framework as well—— 

Mr. STEIL. How do you analyze the framework, then, that was 

passed from this committee last summer in a bipartisan manner? 

Mr. KIM. It definitely addresses that, Congressman. Both FIT21 

and the Clarity for Payment Stablecoins Act would address regulatory gaps, further mitigate risks, and provide clarity and cer-
29 

tainty for industry, as well as increase and implement robust consumer investment protection standards, and it would increase competition as a result of that. 

Mr. STEIL. And would that bring people back onshore, or would 

it develop more operations here, or a combination of both? 

Mr. KIM. I think it would be both, Congressman. I think, again, 

it would provide clarity and certainty for the industry to know that 

they know these are the rules of the road that they need to comply 

with to build their operations here, to keep innovation here in the 

United States, and not seek jurisdictions elsewhere as a result. 

Mr. STEIL. Thank you very much. 

I appreciate you all being here. 

And, Mr. Chairman, I yield back. 

Chairman HILL. The gentleman yields back. 

Mr. Timmons of South Carolina is recognized for 5 minutes. 

Mr. TIMMONS. Thank you, Mr. Chairman. 

The latest developments regarding the Financial Stability Oversight Council represent yet another layer of government redundancy in the financial sector. 

I am concerned that the FSOC’s proposed changes to its designation process for nonbank financial institutions and the Council’s 

hostile posture towards digital asset and financial technology firms 

will have an overwhelmingly negative impact on innovation in the 

United States and also reduce the U.S. economy’s competitiveness 

in the global economy going forward. 

Mr. Kim, is it possible that FSOC’s suggestion that it will designate a nonbank financial company, specifically a digital asset 

firm, for Federal Reserve supervision and prudential standards, result in digital asset firms leaving the U.S. for other jurisdictions? 

Mr. KIM. Thank you for your question, Congressman. 

The FSOC designation process creates what I would describe as 

an overhang of regulatory uncertainty. Again, it doesn’t provide the 

clarity and certainty for digital asset firms. 

And the most recent guidance moving away from an activitiesbased approach to an entity-based approach without providing 

quantitative metrics and thresholds as to when an entity could be 

potentially systemic adds to the lack of clarity and certainty for the 

market. 

Mr. TIMMONS. And this uncertainly would likely cause them to 

consider going offshore? 

Mr. KIM. Yes. Again, it is about certainty and clarity, and this 

designation process could lead to companies going elsewhere to 

these other jurisdictions that I mentioned. 

Mr. TIMMONS. Thank you. 

Mr. Hulse, last April, CFPB Director Chopra spoke in favor of 

the new guidance, essentially stating that the lack of systemicallyimportant-designated entities demonstrates FSOC ineffectiveness. 

Is this the proper way to measure success? 

Mr. HULSE. I couldn’t disagree with that statement more. 

I think the appropriate measure of success is FSOC working via 

an activities-based approach to address systemic risks in the market—based on activities, based on products—and, in the event they 

believe that there is risk concentrated at one individual entity, 
30 

working with that entity to give it the opportunity to de-risk before 

subjecting it to bank-like capital requirements. 

This is not the end game. This is, kind of, the last-resort tool 

that FSOC should be considering. 

Mr. TIMMONS. Thank you for that. 

In your testimony, you explained that the proposed changes to 

the designation process could actually contribute to greater systemic risk. 

Can you describe why you think FSOC’s 2023 guidance would 

have this effect? And can you explain why the 2019 framework is 

the more appropriate process? 

Mr. HULSE. Congressman Steil asked me a similar question. If 

you have more nonbanks that are regulated like banks and subject 

to a very similar, if not identical, regulatory framework, it will 

drive homogeneity within the financial system. 

We need financial institutions of different structures and 

strengths in order to drive competition. If all the financial institutions look the same, they will be subject to very similar risks. And 

when you have one of these events that we are talking about today, 

that could potentially cause the risk of instability to the U.S. financial system, you will have all of these same companies being subject to those same risks. 

Mr. TIMMONS. Thank you for that. My friend from Wisconsin, Mr. 

Steil, often takes my questions, so that is not a surprise. 

Mr. Dinwoodie, in your testimony, you mentioned that coordination and communication between the FSOC members is critical to 

the Council fulfilling its mission. Can you describe how FSOC may 

better facilitate coordination and communication between FSOC 

members? 

Mr. DINWOODIE. Just to underscore, I think that is such an essential point in our multi-agency system. For it to work, there has 

to be day-to-day coordination amongst regulators, both looking in 

between seams at regulatory issues, finding gaps, and working 

closely with Congress. 

From my experience as the FSOC deputy from the SEC, the coordination was actually quite excellent in terms of biweekly meetings, and the staff of the SEC working closely with other agency 

staff on working-group issues. 

So, broadly, coordination and cooperation are essential. My experience in the government is that it was working pretty well. I obviously don’t have visibility into what is going on right now. 

Mr. TIMMONS. Thank you for that. 

By asserting or even implying its regulatory authority over these 

developing technologies and categorizing them as likely to become 

systemically important, FSOC not only risks disrupting market dynamics but also front-runs the efforts of Congress to craft legislation around these issues. 

Considering the significant expansion of services offered by 

nonbank financial institutions, such as fintech companies, and the 

previous approaches of certain FSOC members towards these entities, there is a potential threat that FSOC could stifle innovation 

under the pretext of addressing systemic risk. This approach will 

likely lead to the relocation of emerging industries to foreign mar-
31 

kets, which would threaten U.S. national security and the supremacy of the U.S. economy overall. 

The U.S. Government needs to carefully craft a regularity framework to mitigate risk, protect the American people, and, most importantly, maintain the U.S. economy’s competitiveness in the global economy. 

And with that, Mr. Chairman, I yield back. 

Chairman HILL. I thank the gentleman. 

The gentleman from Nebraska, Mr. Flood, is recognized for 5 

minutes. 

Mr. FLOOD. Mr. Chairman, with your permission, I will waive 

this opportunity to allow the gentlewoman from Indiana the opportunity to ask her questions, and then I will go after her. 

Chairman HILL. Very good. 

The gentlewoman from Indiana, Mrs. Houchin, is recognized for 

5 minutes. 

Mrs. HOUCHIN. Thank you, Mr. Flood, Mr. Chairman, and Ranking Member Lynch. 

And thank you to the witnesses for providing testimony, and 

coming here to speak with us today. 

Digital assets and payment stablecoins have the potential to 

bring enormous investment, opportunity, and growth to communities across the United States, including in rural communities like 

mine in southern Indiana. Under the Biden Administration, however, we have seen an attack again and again on this new and innovative field. 

The Financial Stability Oversight Council, or FSOC, was established in the aftermath of the 2008 and 2009 recession to determine and address big, systemic risks in our financial system. 

Under this Administration, however, FSOC has been used as another tool to push innovation overseas and prevent Americans from 

engaging in this growing industry. 

Mr. Hulse, FSOC’s 2023 annual report emphasizes that the 

Council remains prepared to act to address risks related to 

stablecoins in the event that comprehensive legislation is not enacted by Congress. This statement suggests that FSOC retains the 

authority right now to take action. 

In your view, is this overreach by FSOC, and would this lead to 

any viable regulatory process? 

Mr. HULSE. FSOC does maintain significant authority right now 

under the statute and has provided itself more significant leeway 

to act based on the updates in this November 2023 guidance. What 

I would like to emphasize, though, is the action it would take 

would not necessarily be—and would likely be far from—the carefully tailored approach that has been considered by this committee 

and by the House Agriculture Committee. 

Subjecting digital assets, payment stablecoins, or addressing 

some of the questions as it relates to market structure regulation 

is not necessarily the purview of the Federal Reserve Board. It 

doesn’t necessary retain the expertise to deal with these questions, 

nor the appropriate regulatory tools. 

I want to make sure we are not conflating systemic risk regulation with some of the other, I think, very relevant regulatory ques-
32 

tions, such as consumer protection and anti-money laundering that 

are part of the conversations in the committee today. 

Mrs. HOUCHIN. Thank you. 

Mr. Dinwoodie, in FSOC’s 2023 annual report, the Council explained that its new guidance and analytic framework would, ‘‘enable the Council to more nimbly respond to the evolving landscape.’’ 

Do you agree with this assertion by FSOC? 

Mr. DINWOODIE. Thank you for asking that. It is an interesting 

question in terms of, on the one hand, an activities-based approach—what I think is the better approach—working with the primary regulator or Congress, enacting legislation or a rule to address a perceived issue. 

On the other hand, it takes a year and a half to make the designation when you go through the process. And then, as we saw in 

the past, for good reason, not to blame the Federal Reserve, it took 

them 2 years to develop the applicable standards. Again, it was an 

industry they were learning about, so they were put on the spot. 

So, you are looking at 3, 31⁄2 years on the designation authority 

to effect the change. As we have seen recently, regulation can be 

put into place really quickly. It all depends on the regulator and/ 

or Congress. 

Mrs. HOUCHIN. Thank you. 

You also note in your testimony that one of your concerns with 

the nonbank SIFI designation framework is that the Federal Reserve, in many cases, does not have the relevant expertise to supervise any given company. 

Can you just expand on that concern? 

Mr. DINWOODIE. It is no slight against the Federal Reserve. They 

have a focus. And you can actually put yourself in their shoes: ‘‘Oh, 

great, I am put on the spot. This company has just been deemed 

significant. I know nothing about this industry. And now, I am 

taken away from my day job—monetary policy, the banking system, pretty important things—and I am putting together on the fly 

prudential standards to apply to this industry I know nothing 

about.’’ 

Mrs. HOUCHIN. Yes. And thank you. I appreciate that. 

I have noted before that FSOC spent a great deal of time looking 

at climate risk versus systemic risk in the lead-up to the bank failures, and I felt like they were taking their eye off the ball. I think 

this is a similar circumstance, in terms of what they are trying to 

engage in. I find it concerning that not only are they overstepping 

their boundaries when it comes to digital asset regulation but its 

component agencies also lack the expertise necessary to do that supervision. 

As we in Congress continue to work to establish a clear regulatory framework for digital assets and stablecoins here in the 

United States, we also need this Administration and government 

bureaucrats to stop putting unnecessary hurdles in our way and 

stop overstepping their authority. It does nothing to provide the 

clarity that this industry needs and it hurts innovators and consumers alike. 

And, with that, thank you for your testimony. 

I yield back, Mr. Chairman. 
33 

Chairman HILL. The gentlewoman yields back. 

The gentleman from Nebraska, Mr. Flood, is now recognized for 

5 minutes. 

Mr. FLOOD. Thank you, Mr. Chairman. 

In FSOC’s 2020 annual report, it stated that, ‘‘The Council recommends that Federal and State regulators continue to support responsible innovation by examining the benefits of and potential 

risks to the financial system posed by new and emerging uses of 

digital assets and distributed ledger technologies.’’ 

Mr. Hulse, this is a noticeably different tone than the 2023 annual report, where FSOC threatens to act itself. In your view, why 

did FSOC change its approach? 

Mr. HULSE. I agree it is a shift in tone. I can’t speak for FSOC, 

and I am not sure why they would have shifted their approach 

here, but it is not clear to me what market developments or increases in systemic risk would have motivated that shift in tone. 

There are certainly gaps related to, potentially, consumer protection or, again, anti-money laundering that are being worked on by 

this committee to provide clarity for the regulation of digital assets. 

But those gaps and those types of regulations in and of themselves 

do not necessarily mean that there are systemic risks. Risk and 

systemic risk are very different standards. 

Mr. FLOOD. The FSOC 2023 annual report and previous reports 

from the Executive Order highlight potential risks associated with 

digital assets and related activities. To help mitigate these risks 

and provide certainty to digital asset entities, the Financial Services Committee, as we have talked about today, has passed digital 

asset legislation out of committee on a bipartisan basis. 

Mr. Hulse, in your view, why is legislation needed from Congress 

on this issue? 

Mr. HULSE. For at least two different reasons. One, as I have 

mentioned, legislation from Congress will provide a much more 

clearly-crafted approach that is designed to address the specific 

risks of the digital asset marketplace, much more carefully tailored 

than any sort of regulation the Federal Reserve Board might come 

up with. Again, the Federal Reserve Board just isn’t necessarily 

equipped to answer these types of questions, especially as it relates 

to things like the spot market for digital assets that are not securities. 

Also important, too, for Congress to act is that it will provide 

much more stability in terms of understanding the regulatory 

structure for digital assets. Outside even just digital assets or financial regulation, one thing the business community finds very 

frustrating is that when there is a new Administration, the rules 

of the road change dramatically. 

So, when Congress acts, especially in a bipartisan manner, to set 

rules of the road or at least a framework for the rules of the road 

that will stand the test of time, that is what drives investment, 

that is what drives innovation, and that is what will make the U.S. 

market more competitive. 

Mr. FLOOD. And I would argue that that is what has made the 

financial services system in the United States so attractive worldwide, is that we are stable, and this instability, I think, breeds 

trouble for American innovation. 
34 

I would like to just briefly reiterate what I have been saying on 

this committee repeatedly over the last year. We have a regulatory 

framework ready to go that would address many of the concerns 

around digital assets in the financial ecosystem. We have a plan 

that strikes the correct balance between investor protection and ensuring we don’t stomp on or stamp out innovation, and the Biden 

Administration regulators should take that plan seriously. 

Next, I would like to switch gears to artificial intelligence. 

Mr. Dinwoodie, you mentioned in your testimony that artificial 

intelligence was categorized by FSOC as an emerging vulnerability, 

in part because of, ‘‘safety and soundness risks, like cyber and 

model risks.’’ 

However, the report further states that, ‘‘without proper design, 

testing, and controls, AI can lead to disparate outcomes, which may 

cause direct consumer harm and/or raise consumer compliance 

risks.’’ 

In your view, are potential disparate outcomes and consumer 

compliance risks associated with AI relevant to FSOC’s mandates? 

Mr. DINWOODIE. It is an important issue that Congress and regulatory authorities should be thinking about, no doubt. It is unclear 

to me how that fits within financial stability or FSOC’s remit. I included it in my testimony, but I don’t want to make too big of a 

thing of it. It could have been dicta in the testimony, but I wanted 

to use an example—— 

Mr. FLOOD. I might stop you there, just because I am running 

out of time. 

I would like to close quickly by addressing something that was 

raised earlier in this hearing. 

I believe that AI raises some potential risks for our broader economy that should be discussed. However, I am very hesitant to provide, ‘‘undiluted power,’’ to a regulator in any circumstance. In 

Congress, we need to make sure we protect some of our own authority when it comes to addressing problems that may emerge in 

the economy of the future. 

Thank you, Mr. Chairman, and I yield back. 

Chairman HILL. The gentleman from Nebraska yields back. 

I want to thank all of our witnesses. It has been a very informative panel, a great panel. We are grateful for your testimony 

today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

I ask our witnesses to please respond as promptly as possible. 

This hearing is adjourned. 

[Whereupon, at 4:09 p.m., the hearing was adjourned.] 
(35) 

A P P E N D I X 

January 10, 2024 
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