Testimony of Todd Phillips, U.S. Senate Committee on Agriculture, Nutrition, and Forestry, 'Legislative Hearing to Review S.4760, the Digital Commodities Consumer Protection Act'

Abstract

Crypto assets exist and trade on blockchains, a relatively new form of technology that can be used for many public and private purposes. Blockchain technology is unique in that data are shared among the nodes of computer networks and organized as irreversible chains of blocks. But at their core, blockchains are functionally similar to traditional databases or ledgers in that their basic purpose is to store information. The novelty and innovative nature of the technology does not change the fact that assets that are stored on blockchains are the same types of assets that have always existed. Just as the evolution of stocks from physical pieces of paper to digitized certificates stored in computer depositories did not change the fundamental economic characteristics of the assets, for example, the fact that a token representing the sale of a security exists on a blockchain does not mean it should be treated any differently than traditional securities from an economic or regulatory standpoint. When traded publicly, crypto assets that exist on blockchains can be securities, commodities, banking products, or non-fungible tokens, subject to existing statutory provisions.

• Securities are fungible (i.e., interchangeable) and tradeable financial instruments—including stocks, bonds, notes, and other evidences of indebtedness—that are used by corporations, governments, and other entities to raise capital. Crypto assets are “crypto securities” when they meet the same legal requirements as other securities.

• Commodities are “goods sold in the market with a quality and value uniform throughout the world.” Commodities are fungible, do not represent legal claims, and have prices that float based on supply and demand, and crypto assets that meet this categorization are “crypto commodities.”

• Banking products can be functionally equivalent to securities or commodities, but when issued by a bank they may be subject to different regulatory provisions.

• Non-fungible tokens (NFTs) are unique crypto assets that can be used to represent something else, such as physical or virtual assets. Much like works of art, NFTs can be bought and sold by collectors with prices that fluctuate due to demand for NFTs with certain characteristics (e.g., location of the represented real property, identity of the issuer).

Statutes that Congress has enacted over many decades to protect investors and the financial system give regulators broad authority to address many of the risks posed by crypto assets, even though those risks are fairly new. Like traditional financial products, some crypto assets or crypto market infrastructure may be under the jurisdiction of multiple regulators. Importantly, despite the age of these laws, they are sufficiently flexible to allow regulators to amend existing regulations or simply apply them to new situations in ways that protect investors and consumers while still permitting legitimate financial services companies to operate and grow.

Keywords: crypto, digital commodities