At a House Financial Services Committee hearing prior to the Congressional recess, Rep. Byron Donalds (R-FL) questioned witnesses about cryptocurrency and decentralized networks.
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00:00The gentleman yields back. The gentleman from Florida, Mr. Donalds, is recognized for five minutes.
00:06Thank you, Mr. Chairman, and I want to thank all the witnesses for being here.
00:10Mr. Seyra, in your testimony, you explain that certain types of crypto assets,
00:15such as the native tokens of decentralized networks, differ from securities in fundamental ways.
00:22Can you explain what a native token of a decentralized network is
00:28and describe why it's fundamentally different than a security?
00:31Yes, thank you for the question.
00:34The taxonomy of digital assets is still being worked out,
00:37but I think the easiest way to understand this is to first understand what I mean by decentralized networks.
00:44As people, we all like to organize in groups, and most of those groups are hierarchical and centralized.
00:50Decentralized networks are just another way to organize as a group,
00:54but instead of being centralized and hierarchical, they're spread out.
00:58And tokens are basically a tool that enables participants in these networks to have economic incentives,
01:07and therefore it either incentivizes or can penalize certain types of activities.
01:12And the key concept here is that these tokens in the centralized networks are not deriving their value
01:19from any specific centralized issuer.
01:22They don't even derive their existence from a centralized issuer.
01:25So, for example, Satoshi, the pseudonymous founder of Bitcoin, disappeared,
01:29and Bitcoin has continued to exist and thrive.
01:33There's no – that couldn't happen in the context of a security, right?
01:37If a company goes bankrupt, you can't think of a share of stock persisting after that.
01:41So they're fundamentally different.
01:43So let me ask you this question.
01:44Are all digital assets native tokens –
01:46are all digital assets native tokens of decentralized networks?
01:49And what functions and roles do these other types of digital assets serve?
01:55No, I think digital assets encompass a wide range of uses.
02:00Hester Peirce, for example, Commissioner Peirce put forth her taxonomy,
02:05and there's been other taxonomies.
02:06So I think meme coins are different.
02:08I think NFTs are different.
02:10I think you can also have things like tokenized securities,
02:13just a share of stock on blockchain rails,
02:15which shouldn't be treated any different than if it was on a piece of paper.
02:19Mr. Warrick, can you describe blockchain uses and applications
02:23outside of the crypto ecosystem, such as the tokenizing of real-world assets?
02:30Yeah.
02:31Thank you for your question.
02:32I can speak about real-world assets.
02:35Was that your question?
02:36Yeah.
02:37Yeah.
02:37Yeah, sure.
02:39So real-world assets are difficult to sometimes transfer or to lend against or to trade.
02:50And so the tokenization of real-world assets allows, you know, for example,
02:55a piece of real estate can be fractionalized, let's say, into 10 different fractions,
02:59and then those 10 owners of that one piece of real estate then can have, you know,
03:06a reflection of that asset memorialized on the blockchain,
03:10and then that title can be transferred from owner to owner or it can be lent from one owner to another.
03:19So that's one example of the tokenization of a real-world asset.
03:23To simplify it, I would say for people who watched this hearing, is it safe to say that tokenizing real-world assets
03:29is essentially a more efficient form of a limited partnership where you might have a general partner,
03:36but then you have a suite of limited partners who have a piece of that investment?
03:40Is that fair?
03:41Yeah.
03:42Yeah, that's exactly.
03:43That is another example of a way to tokenize, you know, an investment in a fund.
03:48For example, your ownership in that fund could be reflected by a token on the blockchain,
03:53and then you could lend against it or you could transfer it via the blockchain.
03:59Ms. Smith, how will the current accredited investor rule impede retail investing in tokenized securities?
04:07So I'm going to unpack the question a little bit.
04:11So retail investors are not accredited investors, so they can't participate in any offerings that are restricted or private placements.
04:20Separately, tokenized securities, that market is still developing.
04:23So if we're talking about tokenizing public shares, then presumably those would be available to retail investors.
04:30What if we were in a position to tokenize restricted offerings?
04:34If we tokenized restricted offerings, assuming that the token behaved like the actual underlying stock,
04:41it would be restricted to retail investors as well.
04:44What's the limiting principle that would that create?
04:47If you have a more efficient way to fund restricted offerings, but retail investors are limited because of the accredited investor rule?
04:54I mean, the restriction would be the accredited investor rule, right?
05:00So we would make the offering more efficient, but because the rule which goes to the offering,
05:06because it is a securities transaction, retail investors would still not be able to participate.
05:11All right.
05:11Chairman, I know I'm over time, and this is one of the reasons why I think the time has now since come
05:16to get rid of the accredited investor rule or make some modifications to expand the ability for investors
05:21at the retail level to be engaged in all forms of finance.
05:25With that, I yield back.