During a House Financial Services Committee hearing prior to the congressional recess, Rep. Bryan Steil (R-WI) spoke about the need for market structure legislation in handling digital assets.
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00:00I want to begin. I'm going to now recognize myself for five minutes for the purpose of asking questions.
00:07I want to stage set because I think it's really important that we're talking about why we're crafting legislation for digital assets market structure a little bit in the first place.
00:15I want to start with you, Mr. Sierra, if I can.
00:19I want to walk this through in three stages.
00:21So who's involved in that early phase to get projects off the ground?
00:25Are there founders, engineers, lawyers, investors, community leads?
00:29Is that kind of the broad structure of who's involved?
00:32Thank you for the question.
00:33When I usually get the first call or email, it's from a couple of developers that have a new idea to develop a new protocol.
00:41And the first decision that we go through is where are we going to form a legal entity?
00:46What structure is it? Is it in the U.S. or elsewhere?
00:50The second question is usually how are we going to finance this, right?
00:54There are two basic approaches.
00:56Most projects will raise funds from venture capital funds.
01:02Other projects try to do a more grassroots fundraising where they try to distribute tokens.
01:08However, the current regulatory regime makes getting those tokens into a distributed token holder base close to impossible.
01:17Okay.
01:17So then let's say you navigate through that.
01:19I'm going to let that hang for a second.
01:22And now let's shift into the issuance phase.
01:26Talk to me about how this is different than traditional securities.
01:31Kind of think about let's maybe start with centralized intermediaries.
01:35Digital asset space, how does that play out?
01:37So I think in the context of securities, it's usually thought of as a fundraising transaction, right?
01:45It's like some promoter wants to do a business and then they raise capital from the public to go and do that business.
01:51In the context of crypto, the token issuances are largely permissionless and are usually intended, instead of for capital raising, to distribute the governance and the token holders to the token holder base.
02:04And how is the recording different between securities and digital assets?
02:09Well, most digital assets are native to a blockchain, right?
02:14So it's an entry on a ledger.
02:17Most securities today are, you know, digital securities and custody by big custodians like DTCC and reflected in brokerage accounts.
02:26And then talk to me about how long the process can take in traditional securities and in digital assets.
02:32Well, in traditional securities, it really depends on whether you're doing a registered offering or an exempt offering.
02:39A registered offering, which is, you know, commonly known as an IPO, is a, you know, close to a years-long process where an issuer would pay a firm like mine or Mrs. Smith's hundreds of thousands of dollars,
02:51maybe millions of dollars, and then fill out a form that has, refers to a bunch of other forms and includes voluminous disclosure, and then get that approved by the SEC.
03:02If you're doing an exempt offering, you can do that much quicker, usually a matter of a couple of weeks.
03:07In the context of crypto, that can be almost instantaneous and permissionless.
03:11And so let's build on that then.
03:13Let's go to the next phase.
03:14If I can, I'll go to you, Mrs. Smith.
03:16When we think about the secondary market, trade-friving relying on dealers and brokers, digital assets relying on what, Mrs. Smith?
03:26So digital assets rely on either centralized platforms or decentralized protocols.
03:32And how is the timing different between traditional securities and digital assets for those to be, for those settlements to occur?
03:41So as far as settlements go, most securities transactions settle on T plus one to the next day.
03:49Digital asset transactions typically settle immediately.
03:52And what are the trading hours between digital assets and traditional securities?
03:57Traditional securities trade, the markets are open from nine to five in the U.S.
04:02Digital assets trade 24-7 globally.
04:04And which is more opaque?
04:07Which provides more visibility, the traditional securities model or the digital asset model that's available on the blockchain?
04:15Arguably the digital assets model, which is available via the blockchain, as you stated in your question, would be more visible because you can view everything that's happening on the blockchain.
04:25So I want to use this kind of as a stage sharing.
04:27So what we're seeing is significant difference between traditional securities and digital assets,
04:31which builds on this need for a framework to be put in place from a legislative side.
04:35So let me come to you, Mr. Warwick, because you have a lot of experience in looking at some of these non-financial projects on the Polygon network.
04:44Briefly, can you just explain your thoughts on why a one-size-fits-all approach may not work?
04:49Your microphone may not be on.
04:54Yeah.
04:55So many projects provide, for example, the ability to register and log the titles for real estate,
05:05making it unnecessary to have title companies review title and make sure transfer is correct,
05:10or health care records or your own identification can all transfer on the blockchain.
05:14Thank you very much.
05:15I think all of your testimony shows the need for market structure legislation from Congress.
05:19I now will yield to the gentleman, Mr. Lynch, the ranking member, for five minutes.