During a House Financial Services Committee hearing prior to the congressional recess, Rep. Bill Foster (D-IL) spoke about the need for federal regulation of the digital assets market.
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00:00The gentleman yields back. The gentleman from Illinois, Dr. Foster, who's the ranking member on the Subcommittee on Financial Institutions, is recognized for five minutes.
00:07Thank you, Mr. Chair, and to our witnesses.
00:10As we think further about the regulatory finality for cryptoassets, we're going to be struggling with the same three issues we've been struggling for the last decade,
00:20that is anonymity, finality, and prevention of criminal activity.
00:25And until we get our arms around these, we need, I think, frankly, the same set of considerations have taken many decades to develop in our regulated financial markets,
00:36and we're going to make the crypto markets a success.
00:39We are going to have to come to terms with those three issues.
00:43Our regulated markets have become the envy of the world, and that position has only strengthened as we strengthen the oversight of those markets.
00:51There are reasons why people don't like to trade in Chinese markets, just to pick on China again.
00:59This stability has been driven in large part because investors believe that bad actors will be held accountable for fraud, market manipulation, and other abuses.
01:08This committee has struggled with how to create similar trust in digital assets,
01:12and I believe a vast majority of these issues come down to these three issues of anonymity, finality, and prevention of criminal assets.
01:21You know, in 2024, the blockchain analytics firm Chainalysis identified nearly 74,000 tokens issued that were likely associated with pump-and-dump schemes,
01:31and estimated more than 51 billion in crypto was received by illicit addresses, including those associated with scammers, criminal organizations, sanctions, evaders, and other bad actors.
01:41But our regulated markets continue to do very well.
01:46In contrast, just consider for a moment the NFT market, the crypto NFT market, which has sort of collapsed in a heap of wash trades, front-running, and other market abuses.
01:56And so I wonder, you know, I've been thinking of how we can actually rescue that.
02:00What are the things we're going to have to do to make the NFT markets, for example?
02:05You know, how do we, in those markets, prevent foreign running and all the other ancient frauds?
02:11And this, you know, this collapse was driven by lack of regulation.
02:15And if you look at what is it about our regulated markets that really makes them work well, the starting point is you can't be truly anonymous.
02:23You need a trader ID if you're going to trade nickel futures, all right?
02:26And it's because you don't, when you're trading those, you don't need to know who's on the other side of the trade,
02:32but you need to know that if that person does something illegal, market manipulation or something,
02:37there is a regulator that will be able to see that this trade that you thought was a fair market price was, in fact, a wash trade.
02:43They will identify that and, you know, drag them into court and, you know, make them accountable.
02:51And until we get that, and I don't think there's any hope that things like the NFT markets will really be able to, you know, survive and thrive.
03:03So for the last decade, I've been asking, is there any way in a truly anonymous self-hosted wallet system to prevent wash trades, for example?
03:12Does anyone, I've been asking that, the answer has been no for a decade.
03:15And I, unless any of you have new information, it's still no, and that's a fundamental problem we have to fix.
03:21I believe there are ways to do this, and I, and it'd be interesting to, to hear your reaction to a proposal that would essentially allow a kind of NFT, for example,
03:34that would have license plates on all participants.
03:38You know, you can think of it as an automobile license plate, where you're driving down the highway, you don't know.
03:42You know, I have no idea who it is, but you know they have a valid license plate, and if they do something illegal, that can happen.
03:49So that means you have to register your wallets with a regulator who can see the true identity,
03:55and, and thereby detect front-running wash trades, the whole list of market abuses.
04:00So my question to, to everyone in our panel, if such a thing was an option for someone issuing NFTs into a, into a market,
04:10would, would that have a chance of making more of a success out of the NFT market, for example?
04:17Ms. Thornton?
04:20Yeah, I, I think it depends.
04:22The information has to go in all directions, so currently with securities we have tapes, you know,
04:29alternative trading systems, and all kinds of things that help you know what orders are being placed,
04:35by whom, how much, and so I, it's hard for me to tell, based on what you said,
04:41whether so-called license plates would achieve all of that, but I do think there needs to be a central place
04:47where everyone can see what's being traded, by whom, how much.
04:52Yeah, Ms. Smith?
04:56I, I, I agree with Ms. Thornton that that's a, it's a complicated question to unpack,
05:01but I do think, to one of your earlier questions, there, there are types of data analytics that do give some,
05:09not direct identity, but give you some idea of who owns particular wallets.
05:13But, would, unless they can identify that it's a wash trade, that these are the same beneficial owner behind both,
05:20it won't work, I believe that's true, and my time's up, yield back.