S. HRG. 115–453 EXPLORING THE CRYPTOCURRENCY AND BLOCKCHAIN ECOSYSTEM HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED FIFTEENTH CONGRESS SECOND SESSION ON EXPLORING THE OPPORTUNITIES AND CHALLENGES SURROUNDING THE CRYPTOCURRENCY AND BLOCKCHAIN ECOSYSTEM OCTOBER 11, 2018 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: https://www.govinfo.gov/ U.S. GOVERNMENT PUBLISHING OFFICE 34–525 PDF WASHINGTON : 2020 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS MIKE CRAPO, Idaho, Chairman RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio BOB CORKER, Tennessee JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey DEAN HELLER, Nevada JON TESTER, Montana TIM SCOTT, South Carolina MARK R. WARNER, Virginia BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada JERRY MORAN, Kansas DOUG JONES, Alabama GREGG RICHARD, Staff Director MARK POWDEN, Democratic Staff Director JONATHAN GOULD, Chief Counsel KRISTINE JOHNSON, Economist LAURA SWANSON, Democratic Deputy Staff Director ELISHA TUKU, Democratic Chief Counsel COREY FRAYER, Democratic Professional Staff Member DAWN RATLIFF, Chief Clerk CAMERON RICKER, Deputy Clerk SHELVIN SIMMONS, IT Director JAMES GUILIANO, Hearing Clerk JIM CROWELL, Editor (II) CONTENTS THURSDAY, OCTOBER 11, 2018 Page Opening statement of Chairman Crapo ................................................................. 1 Prepared statement .......................................................................................... 21 Opening statements, comments, or prepared statements of: Senator Brown .................................................................................................. 2 Prepared statement ................................................................................... 21 WITNESSES Nouriel Roubini, Ph.D., Professor of Economics, Stern School of Business, New York University ........................................................................................... 3 Prepared statement .......................................................................................... 22 Peter Van Valkenburgh, Director of Research, Coin Center ................................ 5 Prepared statement .......................................................................................... 36 Responses to written questions of: Senator Heller ........................................................................................... 103 Senator Sasse ............................................................................................ 103 Senator Cotton ........................................................................................... 108 Senator Reed .............................................................................................. 112 Senator Warner ......................................................................................... 113 Senator Cortez Masto ................................................................................ 117 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Letters to the Committee submitted by Chairman Crapo and Senator Brown .. 121 (III) EXPLORING THE CRYPTOCURRENCY AND BLOCKCHAIN ECOSYSTEM THURSDAY, OCTOBER 11, 2018 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:01 a.m., in room SD–538, Dirksen Sen- ate Office Building, Hon. Mike Crapo, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN MIKE CRAPO Chairman CRAPO. This hearing will come to order. Today the Committee will continue its exploration of the opportu- nities and challenges surrounding the cryptocurrency and blockchain ecosystem. Prior to the introduction of Bitcoin and underlying blockchain ledger in 2009, there was no similar solution to the double-spend problem—where the same digital currency could be spent more than once—which did not require a third-party intermediary. While Bitcoin, the first decentralized cryptocurrency, has been around for nearly a decade now, cryptocurrencies have gained par- ticular attention in the past 2 years, due in part to their meteoric rise and subsequent fall in value last year. Advancements since Bitcoin’s creation have expanded blockchain’s uses and given way to things like ‘‘Initial Coin Offer- ings,’’ a method of crowdfunding that has become popular in the cryptocurrency community. While the technologies underpinning cryptocurrencies have the ability to transform the composition of, and ability to access, cap- ital and the financial system, much of the recent news about cryptocurrencies has been negative, focusing on enforcement ac- tions, hacks on international exchanges, and concerns raised by various regulators and market participants. To that end, in February of this year, the Committee held a hear- ing with the SEC and CFTC to examine their oversight roles of cryptocurrency-related products and activities under their respec- tive jurisdictions. Since that hearing, the agencies have made strides to provide further clarification on their thinking surrounding cryptocurrency- related issues. But some regulatory and oversight questions still re- main. The regulatory questions, price volatility, and reports of things like pump-and-dump schemes have raised a lot of questions (1) 2 surrounding the cryptocurrency and blockchain ecosystem that need to be better understood. Blockchain networks have the potential to improve processes for things like smart contracts, payments and settlement, identity management, and even things yet undiscovered. In order to move forward in a productive way and give these in- novations the room to flourish and develop in a safe and sound way, we need to sort through the static and better understand what exactly are the opportunities and challenges facing this eco- system. For example, the Committee would benefit to hear about: the use of cryptocurrencies and derivative products as a store of value or medium of exchange or payment; the current and potential applica- tions of blockchain technology; and the regulatory issues sur- rounding the various facets of the ecosystem and how they can be improved. I look forward to hearing about this and other issues from our witnesses today. Senator Brown. OPENING STATEMENT OF SENATOR SHERROD BROWN Senator BROWN. Thank you, Chairman Crapo, for holding this hearing. And thanks to the two witnesses. Mr. Van Valkenburgh, welcome, and, Dr. Roubini, welcome to the Committee. Today’s hearing happens to fall just shy of the tenth anniversary of Bitcoin and the blockchain being introduced to the world—Octo- ber 31, 2008. We were in the midst of a global financial crisis. You cannot blame some Americans for hoping that an alternative bank- ing system could be created that would be superior to the one in shambles at that time. Bitcoin, and other cryptocurrencies like it, promised to make pay- ments faster and easier and cheaper, and to eliminate our reliance on risky financial institutions whose failures harmed workers and families in all of our communities. The last 10 years, unfortunately, have shown that misconduct, fraudulent investment schemes, and cybersecurity threats are not unique to the traditional financial system. When a cryptocurrency goes bust or a poorly supervised exchange fails, it is often hard- working Americans left holding the bag. We want to see innovations in the financial system, innovations that help Americans keep more of their money by avoiding fees or that make it easier to borrow for a small business startup. But so far, despite all the energy and investment dedicated to finding a use for the blockchain, there are few real-world applica- tions and an alarming number of scams. Cryptocurrency prices have swung wildly over the last year. In- experienced investors who were hoping to get in on the next big fi- nancial innovation have seen the value of these investments fall by more than 75 percent from their peak. Though they have raised billions of dollars from investors, few if any Initial Coin Offerings (ICOs) have registered with the SEC. Chair Clayton told this Committee in a February hearing, ‘‘Every Initial Coin Offering I have seen is a security.’’ 3 Last month, the New York Attorney General released a report on several cryptocurrency trading platforms that pointed to evidence of widespread manipulation and identified several exchanges that do not follow ‘‘anti-money-laundering’’ or ‘‘know your customer’’ re- quirements. With a decade of experience, much of the irrational exuberance around cryptocurrencies and blockchain technology has subsided, and we have an opportunity to set more realistic expectations for how these innovations might be used to promote a fairer and more competitive economy. I hope this technology will prove useful, particularly in helping people who are unbanked or underserved by the traditional finan- cial system. I understand why individuals might be interested in it. But at this point, it is easier to see the malign impacts on soci- ety as a whole than the constructive ones. That is why we look for- ward to your testimony. Thank you. Chairman Crapo. Thank you, Senator Brown. Today we are fortunate to have two witnesses from different per- spectives whose in-depth knowledge of cryptocurrencies will