```

[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]

                   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
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
56-000 PDF                  WASHINGTON : 2024                    
          
-----------------------------------------------------------------------------------   

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
    Chairman                         JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                     
                    SUBCOMMITTEE ON DIGITAL ASSETS, 
                  FINANCIAL TECHNOLOGY, AND INCLUSION

                    FRENCH HILL, Arkansas, Chairman

FRANK D. LUCAS, Oklahoma             STEPHEN F. LYNCH, Massachusetts, 
TOM EMMER, Minnesota                     Ranking Member
WARREN DAVIDSON, Ohio, Vice          BILL FOSTER, Illinois
    Chairman                         JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 RITCHIE TORRES, New York
BRYAN STEIL, Wisconsin               BRAD SHERMAN, California
WILLIAM TIMMONS, South Carolina      AL GREEN, Texas
BYRON DONALDS, Florida               SEAN CASTEN, Illinois
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
ERIN HOUCHIN, Indiana
                            
                            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

 
                   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.
    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.
    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.
    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 
capital 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 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 
stress-testing 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 
activities-based 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 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.
    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 
more-efficient 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.
    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 forward-leaning 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.
    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.
    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 
activities-based 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 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.
    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 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 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 long-term 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.
    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 
Dodd-Frank 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 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 well-regulated 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 near-systemic 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. 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 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----
    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.
    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 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 Dodd-Frank 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?
    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 regulation 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, 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 authority. 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.
    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 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 bank-like 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 certainty 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 
activities-based 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 
systemically-important-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, 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 markets, 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 questions, 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, 3\1/2\ 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.
    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.
    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.]

                            A P P E N D I X

                            January 10, 2024
                            
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