deceptive regulator

A federal judge may be close to sanctioning lawyers with the Securities and Exchange Commission (SEC) for allegedly lying to the Court about a request to seize assets without informing the defendant. Fortune’s Leo Schwartz and Jeff John Roberts reported on Friday,  “In his Thursday order, U.S. District Judge Robert Shelby explained he had agreed to grant the SEC’s request because the agency’s lawyer, Michael Welsh, had said the crypto company was actively closing bank accounts—including 33 in the last 48 hours—as part of a bid to move the firm to Abu Dhabi and beyond the reach of U.S. regulators. This turned out to be untrue, however.” Read more. Shelby was nominated by President Barack Obama in 2011.

what you should know: Does this speak to a wider initiative within the SEC and government (i.e. Choke Point)? This anecdote looks like a “lay up” for further exploration by Congress – Senate Banking and House Financial Services, in particular.

alert to Hill staffers: New Congressional letters appear imminent. Can a hearing or investigation on this alleged SEC over-step be far behind given scrutiny around the Federal Deposit Insurance Corporation’s (FDIC) harassment scandal and the Office of the Comptroller of the Currency (OCC) fintech hiring mishap?

blockchain markup

The Energy & Commerce Committee led by Chair Cathy McMorris Rodgers (R, WA) and Ranking Member Frank Pallone (D, NJ) has a full markup hearing scheduled for tomorrow involving at least two bipartisan bills with blockchain technology implications among the 44 bills to be considered.

Read the E&C announcement.

“H.R. ___, Deploying American Blockchains Act” from Reps. Larry Bucshon (R, IN) and Lisa Blunt Rochester (D, DE). The seeds of this bill was discussed at an E&C hearing in September.

• • The stated purpose of the bill is to enable the Secretary of Commerce to “promote the leadership of the United States with respect to the use of blockchain technology.” The bill lists examples of policies and recommendations that could arise such as “the issues of decentralized identity, cyber security, key storage and security systems, artificial intelligence, fraud reduction, regulatory compliance, e-commerce, health care applications, and supply chain resiliency.”

“H.R. 4814, Consumer Safety Technology Act” from Reps. Darren Soto (D, FL), Michael Burgess (R, TX), Lori Trahan (D,  MA), and Brett Guthrie (R, KY).

• • This bill directs the Consumer Product Safety Commission to “establish a pilot program to explore the use of artificial intelligence in support of the mission of the Commission and to direct the Secretary of Commerce and the Federal Trade Commission to study and report on the use of blockchain technology and digital tokens, respectively.”

what you should know: These two pieces of legislation positively broaden the discussion around the use case for blockchain tech beyond just financial services.

Commissioner speaks

In a speech on compliance reforms titled “Beyond Policing for Fraud: Post-Crisis Crypto-Corporate Governance Reforms,” Commissioner Kristin Johnson of the Commodity Futures Trading Commission (CFTC) offers a tapestry of ideas coming out of resolution of the many recent CFTC enforcement cases and, in particular, the Binance settlement.

Johnson writes in part, “… one of the most interesting aspects of the Binance case is its implications for how the Commission can regulate the digital assets market, specifically the compliance obligations that the consent order imposes on Binance.  As part of the resolution, Binance now needs to maintain three independent members of its Board of Directors—and now-former CEO Changpeng Zhao cannot be a member—and it must stand up Compliance and Audit Committees of the Board.” Read it.

the faces of AML legislation

The Block’s Sarah Wynn took the pulse of Congress and industry advocates last week as different forms of digital asset anti-money laundering (AML) legislation try to push through Congress.

Three amendments/bills are identified including the National Defense Authorization Act (NDAA) amendment [S.Amdt.712] which includes a study by U.S. Treasury for creating rule recommendations for Congress on crypto-asset products such as mixers. Sen. Cynthia Lummis (R, WY) tells The Block, “I hear rumors, and that’s all they are, that it may get caught up into some other negotiations and I don’t know whether it’s going to survive…” She said more should be known on the amendment early this week. 

Senator Elizabeth Warren’s (D, MA) “Digital Asset Anti-Money Laundering Act” (S.2669) takes a brief bow in the article, and is, perhaps, the most discussed among all the digital asset AML-related bills. But, its next steps seem less clear in that it’s not in the “amendment” discussion (such at the NDAA) and the industry sees its draconian measures as a non-starter. Could another unforeseen catalyst in the news help this bill? I mean… what else could there possibly be?!

Anti-crypto Democrats and some Senate Republicans have been vocal in their support of S.2669, but the group (such as these co-sponsors or these letter signers) still doesn’t seem to have enough support to push it through the 118th Congress – especially the Republican-controlled House, where digital assets is on the innovation-focused, legislative agenda. Like most digital assets legislation, the 2024 general election looms large.

But, S.2669’s existence also serves the purposes of the “no regulation” digital assets camp (arguably led by Senate Banking Chair Sherrod Brown (D, OH)) by making little room for compromise. Therefore, digital assets is kept outside the regulatory perimeter of the U.S. financial system and slowing growth of the industry in the United States.

In The Block article, Digital Chamber of Commerce policy executive Cody Carbone says that The Financial Technology Protection Act [S.1340, H.R. 2969] is another NDAA possibility. The bicameral bill is another study creates a working group among federal agencies to provide recommendations on crypto-asset illicit financing to Congress.  Carbone says the bill would be a welcome addition to the NDAA, “We’re hopeful and we’ve been advocating for that to get added.” Read more.

outside-funded fellows

Allegations by Tech Congress founder Travis Moore – a former legislative director for retired Rep. Henry Waxman (D, CA) – suggest that certain Capitol Hill staff fellowships have a conflict-of-interest given their roles are paid for by technology companies such as Google and Microsoft. Moore tells Politico, “It is a red flag for us when we have people that apply and they’re like, ‘I only want to work on crypto, I only want to work on AI.’”  Read more.

what you should know: Could this issue be publicly explored by Congress?  Or would opposing partisan interests threaten each other with “If you take down my policy fellow, I’ll take down yours”?

quote of the day

“New York Department of Financial Services (NYDFS) superintendent Adrienne Harris could eventually eclipse SEC chair Gary Gensler as the most influential crypto regulator.” – Axios

tomorrow

What’s going on with new technologies in service to U.S. financial regulators?

Tomorrow’s House Financial Services (HFS) Digital Assets, Financial Technology and Inclusion Subcommittee hearing may reveal the answer.  Titled “Fostering Financial Innovation: How Agencies Can Leverage Technology to Shape the Future of Financial Services,” the committee memorandum  reads, “While the private sector typically leads financial innovation, regulatory agencies play an important role in establishing a regulatory environment that supports and nurtures innovation.” Get the memo for Tuesday’s 10 a.m. ET hearing.

Witnesses include:

• • Valerie Szczepanik, Director of the Strategic Hub for Innovation and Financial Technology (FinHub), SEC
  • Donna Murphy, Acting Deputy Comptroller for the Office of Financial Technology and Deputy Comptroller for Compliance Risk Policy, OCC
  • Mark Mulholland, Deputy Chief Information Officer for Management, FDIC
  • Ann Epstein, Assistant Director of the Office of Competition and Innovation, Consumer Financial Protection Bureau
  • Charles Vice, Director of Financial Technology and Access, National Credit Union Administration
  • Michael Gibson, Director of Division of Supervision and Regulation, Federal Reserve

Download prepared testimony from the HFS hearing page.

number go up

The biggest concern for anti-crypto interests in Washington could be the price of the large cap digital assets which it knows it can’t control.

Currently, the biggest catalyst for driving the price of Bitcoin, Ether and Solana is seen as the approval of the Bitcoin Spot ETF by the Securities and Exchange Commission (SEC). Keep in mind, these larger digital assets tend to move in lock step.

Think of all the news since Bitcoin hit its market bottom (~$16,600 USD last November) of the current cycle…FTX, Binance, enforcement actions, terrorist financing allegations… and yet, today it’s closing in on $40,000 USD if it hasn’t surpassed it already.

How long the SEC can hold off approval of a Bitcoin ETF – say, beyond the 2024 general election – may not even matter in that the market seems to sense the inevitable approval which will lead to easier on-ramps for U.S. investors to participate in crypto – let alone crypto’s global growth.

what you should know: With “number go up,” the digital asset discussion returns to the dinner table putting pressure on lawmakers to meet U.S. retail demand for digital assets and potentially exposing anti-crypto advocates – especially around the general election given current price momentum.

still more tips

FIELD HEARING NOTICE for this Friday, December 8: Subcommittee on Digital Assets, Financial Technology and Inclusion Field Hearing – financialservices.house.gov

Talking With an Ex-FDIC Chair; Crypto Firms Hit D.C.; SEC’s Own Investor Group Criticizes AI Rule – Capitol Account

The SEC Piles On – DeFi Education Fund

How the Winklevii’s Second Act Went Bad – Inside the twins’ crypto exchange, where they abandoned the rules to get bigger than they could handle. – New York Magazine

Opinion: Why crypto was the perfect tool for criminals and kleptocrats – Casey Michel on CNN

‘Tokens’ Book Review: Cash, Card or Ape? – The Wall Street Journal

Quotes of the day

Today’s edition of blockchain tipsheet includes a selection of quotes from Members of Congress at yesterday’s Blockchain Association Policy Summit.

Rep. Ritchie Torres (D, NY) discussed next, possible steps for digital assets legislation: “In my view, the courts cannot provide you with the kind of comprehensive regulatory framework that you would need – only a statute can. But the courts can prompt legislative action. If either the Court of Appeals or the Supreme Court were to uphold the decision in the Ripple case, then that could create a powerful incentive for Congress to step in and to legislate a regulatory framework. But there needs to be a judicial rejection of ‘The Gensler Doctrine’ in order to prompt Congress to act legislatively -that’s my assessment of where the politics lies at the moment.”

Reacting to the Policy Summit’s featured keynote the day before – U.S. Treasury Deputy Secretary Wally Adeyemo (D) -, House Majority Whip Tom Emmer (R, MN) shared his thoughts yesterday on Treasury’s request for power over crypto: “Beware of the self proclaimed savior that rides in on the white horse and tells you, ‘I’m here to protect you.’”

Rep. Jim Himes (D, CT) says digital assets needs a better use case to help with legislative prospects: “Until the industry does a better job really showing that ‘we can take remittance fees down from 8% to two basis points,’ or show us any positive, world-improving application – the industry is not going to have the benefit of the doubt. The reason you need that is because – not so much on our side of the Capitol (House) – but on the other side of the Capitol (Senate), the ‘weather’ is uglier and people just need to start hearing about how this stuff is gonna make people’s lives better.”

And, New York Department of Financial Services (NYDFS) Superintendent Adrienne Harris (D) spoke to crypto’s challenges from the state purview: “… the two areas where the crypto and digital asset space continues to falter the most are around illicit finance and cybersecurity. That’s where we see the compliance apparatus really being its most immature. And we continue to work with companies through supervision, our exams and enforcement to make sure that those areas get up to snuff very quickly.”

more tips:

Republicans’ Leadership Squabbles Delayed U.S. Crypto Bills Until 2024, Key Lawmakers Say – CoinDesk

SEC’s Hester Peirce doesn’t know what her agency is trying to accomplish – Blockworks

NDAA in Senate

The NDAA crypto anti-money laundering (AML) amendment is still kicking in the Senate. Sen. Cynthia Lummis (R, WY) tells Politico, “The fear is that you’ll put together a product, introduce it as a piece of legislation, and start getting attacked by the administration… And with a 50-50 Senate, we can’t afford to have subjects that are really non-partisan begin to take on a ‘skins versus shirts’ tone.” Read more.

At Policy Summit, Sen. Kirsten Gillibrand (D, NY) – in a fireside discussion that included Senator Lummis – expanded on the NDAA amendment’s prospects saying, “I don’t know if it’ll last through conference and whether it’ll be in the final bill, but we’re hopeful it is. And it addresses tumblers, illicit financing and terrorist financing and requires not only a [regulatory] study but also recommendations. [And that represents] common ground for all people interested in crypto.”

Senators on stablecoin bill

Also at Policy Summit, Sens. Gillibrand and Lummis  offered some color on their support for a stablecoin bill which includes states rights along with federal oversight.

The two Senators are unique in that there are few in the Senate who speak publicly about supporting digital assets innovation – let alone the duo have their own digital asset market structure legislation: the Lummis-Gillibrand Responsible Financial Innovation Act (RFIA).

Sen. Gillibrand saw momentum coming from states on stablecoin regulation even without initiatives at the federal level, but remained resolute about a federal solution: “I’m sure the states will try to regulate themselves because that’s what they do. But our decision point is when a state wants to issue a stablecoin, what structure do they have to have around it to make sure they have consumer safety, cybersecurity, safety and soundness? We know we have it in our states (New York and Wyoming). [But,] there may be other states that have never done this before. We want to make sure that if they do set up a DFAs (digital financial assets) type of organization that they do it well because we want to protect consumers – that’s the first concern. Everyone is happy with issuance by banks – both state and federal banks – absolutely happy with that. That’s definitely common ground.”

Gillibrand continued, “The question is other state regulatory agencies and how robust they need to be to have this authority. And I think Cynthia and I have worked in a very positive way towards what that should look like.”

Sen. Lummis adding her thoughts referenced RFIA, “And we – very much – in our bill protected the dual banking system with regard to the issuance of stablecoin. That was a big priority.”

Treasury on crypto – reaction

Industry crypto education organization, Coin Center, came out with a quick take on Treasury’s recent request for more jurisdiction over digital assets. Read the blog post titled: “In an effort to close perceived loopholes, Treasury recommends massive expansion of warrantless surveillance and power to sanction open-source software” by Landon Zinda of CoinCenter.

new co-sponsors

Senator Raphael Warnock (D, GA) signed on a co-sponsor of Senator Elizabeth Warren’s (D, MA) “Digital Asset Anti-Money Laundering Act” [S.2669]. There are now 16 co-sponsors according to Congress.gov.

Rep. Michelle Fischbach (R, MN) signed on as a co-sponsor of Majority Whip Tom Emmer’s (R, MN) “CBDC Anti-Surveillance State Act” [H.R.5403]. There are now 73 co-sponsors according to Congress.gov.

still more tips

Circle denies alleged ties to Justin Sun and Hamas in letter to lawmakers – Blockworks

Singapore Central Banker Sees Private Crypto on Its Way Out – Bloomberg

Binance Begins Again With U.S. Oversight. Will It Survive? – The Wall Street Journal

Is GameFi Dead? 3 in 4 Projects Have Failed – Coingecko

another offshore USD stablecoin

Stablecoin issuer Paxos took another step with its global stablecoin strategy backed by US dollars and cash equivalents. The New York City-based company  said yesterday it had received “In-Principle Approval” (IPA) for US dollar and other currency-backed stablecoins from the United Arab Emirate’s Financial Services Regulatory Authority (FSRA). The next step will be “full approval” – no timetable was given. Walter Hessert, Paxos Head of Strategy, said in a press release, “Our IPAs from the FSRA, on the heels of our IPA from the Monetary Authority of Singapore, solidify our commitment to pursuing international growth through regulated frameworks.”

what you should know: Pressure is building on U.S. Treasury and the Biden Administration – whether they like it or not – to address the growing offshore stablecoin market and bring that business onshore. In spite of the dispute between the White House and lawmakers around parallel (states) versus pre-emptive (federal) rights, this news lurches the U.S. another step closer to stablecoin law.

Treasury – stablecoins

In his opening remarks at Blockchain Association’s Policy Summit, Deputy Secretary of the Treasury Wally Adeyemo summarized three ways Treasury is looking to address digital assets and the challenges which it says exists with illicit financing: better sanctioning tools, illicit finance “authorities” and an updated regulatory approach for the international Financial Action Task Force (FATF). Treasury wants Congress’ help in all this.

Notably, Treasury is seeing a threat with the offshore movement of stablecoins, too, as Adeyemo said,  “We cannot allow dollar-backed stablecoin providers outside the United States to have the privilege of using our currency without the responsibility of putting in place procedures to prevent terrorists from abusing their platform.” Read the remarks.

what you should know: Keep in mind, Paxos is based in New York State – the center of the storm when it come to the states rights versus federal pre-emption debate in stablecoins.

Treasury – fig leaf

After his prepared remarks at the Policy Summit, Deputy Secretary Adeyemo participated in a Q&A with Bain Capital’s TuongVy Le in which Adeyemo’s answers largely echoed the Biden Administration’s views to-date and framed the digital asset space as an area of ongoing malfeasance compared to traditional markets.

For example, Adeyemo said, “We think that people should be able to enjoy their privacy. But that does not mean that terrorists and criminals should also be able to use the guise of privacy as a means to move their money. We’ve been able to find that balance when it comes to traditional financial institutions. I think that’s possible also in the digital asset space.”

Ultimately, Adeyemo’s presence at the Blockchain Association event was the only fig leaf offered to the industry.

NDAA and digital assets

Appearing on CNBC’s Squawk Box yesterday, Rep. French Hill (R, AR), vice chair of House Financial Services (HFS), provided the latest update on digital asset bills in Congress saying, “…there was an effort made in the Senate to add some banking bill topics to the National Defense Authorization bill (NDAA) that didn’t really go anywhere. That was a potential opening for, perhaps, the stablecoin legislation. But, we want to go to the Floor with both the stablecoin bill and the [market structure] framework bill early in 2024. There’ll be both the House Ag Committee and the House Financial Services (HFS) Committee working on it. They’ll be bipartisan and I expect us to be successful early in 2024.” See excerpt of the interview.

what you should know: Did NDAA amendment negotiations fail over digital assets or is this statement a ploy by House Republicans in their negotiations with the Senate over the NDAA? We’ll know soon enough: 2024 is a month away.

was Gruenberg, now Hsu

Members of Congress Plan to Grill OCC Over Fintech Regulator Who Faked His Resume – The Information

Brown miffed

Senator Sherrod Brown (D, OH), Chair of the Senate Banking Committee, added himself to the list of Democratic Senators – like Sen. Chuck Schumer (NY) – who believe that HFS Chair Patrick McHenry is slowing progress on the NDAA.  Brown told Politico’s Eleanor Mueller on Tuesday, “There are many things, apparently, in this bill he’s holding up.” Read more in Politico.

Punchbowl News also made note of the NDAA drama and quoted House Foreign Affairs Committee Chair Michael McCaul (R, TX), who is co-sponsor of the fentanyl package, who said about McHenry, “We came in together. We’re good friends. [McHenry] basically said, ‘If I don’t get my crypto [bill] in here, I’m not going to agree to this fentanyl bill.’” McCaul didn’t seem too concerned and said he’d get his package done with “regular order” if the NDAA didn’t work out. Read that one.

what you should know: Given Wednesday morning’s statement on CNBC by Rep. French Hill, perhaps the banking-related “things” (like the FEND Off Fentanyl amendment) are now dead. Or is it?

mixer nixed

US Seizes Sinbad Crypto Mixer Used By North Korean Lazarus Hackers – Bleeping Computer

DeSantis pro-crypto agenda

The Washington Examiner featured U.S. presidential candidate and Florida governor Ron DeSantis (R) and his pro-crypto agenda in an article yesterday. “Under President Joe Biden, the [Securities and Exchange Commission (SEC)] has gone after crypto companies through several lawsuits,” writes the Examiner which says DeSantis would “reverse course” on a digital assets agenda compared to Biden. DeSantis added, “Biden’s SEC thinks it’s judge, jury, and executioner on crypto while the Fed continues to press ahead on CBDC.” – i.e. a CBDC would have no future in a DeSantis Administration.  Read more.

what you should know: DeSantis sounds like Majority Leader Tom Emmer (R, MN). Does Emmer remain a key Congressional facilitator or is he a Cabinet member in a DeSantis administration?

still more tips

Crypto Firms That Act Like Banks Should Be Regulated Like Them, ECB Official Says – CoinDesk

Philippines’ SEC to block access to world’s largest crypto exchange Binance – Reuters

SoFi Is Exiting Crypto With Banking Regulators Stepping Up Scrutiny – Bloomberg

‘horse trading’ begins

Punchbowl News’ Brenden Pedersen reported on X yesterday that “Rep. Patrick McHenry (R-NC) has threatened to block the bipartisan FEND Off Fentanyl Act’s inclusion from the annual defense package if leading House crypto legislation isn’t included.” Sen. Chuck Schumer (D, NY) “flagged” McHenry’s threat in a lunch with Senate Democrats yesterday, according to Pedersen.

more tips:

“Inside Patrick McHenry’s crypto scramble – The North Carolina Republican has made crypto his top priority as chair of the HFS Committee” – Politico

what you should know: Is it the stablecoin bill? Digital asset market structure bill? Both? “Ask for a lot, get a little” may be McHenry’s negotiation strategy. Pedersen promised updates… The digital assets Anti-Money-Laundering (AML) amendment in the NDAA could enter the mix, too. Read more on X from Politico’s Eleanor Mueller.

horse trading – Treasury

Deputy Treasury Secretary Wally Adeyemo has sent a letter to leaders of the Senate Banking and House Financial Services Committees asking for more power for his agency when it comes to digital assets. Politico’s Sam Sutton reports, “The letter, along with an accompanying term sheet with legislative proposals, marks a significant development in efforts to subject digital asset firms to the same anti-money laundering rules that apply to banks, asset managers and other traditional Wall Street institutions.” Read more.

what you should know: More “horse trading” from Democratic leadership and The White House.

digital assets hearing

Tailor-made for members of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) among others, House Financial Services (HFS) Chair Patrick McHenry (R, NC) announced a new hearing for the Subcommittee on Digital Assets, Financial Technology and Inclusion. Titled, “Fostering Financial Innovation: How Agencies Can Leverage Technology to Shape the Future of Financial Services.” The hearing will take place next Tuesday, December 5, 10:00 a.m. in Rayburn. See the hearing page.

what you should know: Though not directly related to the HFS subcommittee hearing, CFTC Commissioner Caroline Pham‘s recent Global Markets Advisory Committee (GMAC) meeting set a high bar for how agencies can foster innovation. The November 6 meeting included an outline of five (5) work streams currently in motion among the 36 Digital Assets Markets Subcommittee members from across traditional finance and digital asset companies. See a slide (JPG).

NatSec lobby

As part of its effort to highlight the involvement of former U.S. military and government working in the blockchain industry, Blockchain Association said signors of a recent national security letter to lawmakers connected with Members and their staffs on Capitol Hill yesterday.  See them on the Capitol steps on X.  Today is Day 1 of the industry association’s Policy Summit.

more tips:

Crypto could benefit from an influx of Chinese money, Arthur Hayes says – The Block

X marks the spot

“I have in my grubby little paws the latest proposal, dated from today, that Treasury has sent to the Senate Banking committee, and boy, do I have thoughts. (…) Overall grade: F” – Austin Campbell on X

“KUDOS to the Federal Reserve Board for creating exam guidance w/r/t crypto-asset activities. They are the only federal banking regulator to do so. Creation of a mechanism to examine bank’s crypto activities is a prerequisite to allowing any bank to do them.” – Zach Wong on X

no legislation needed

Los Angeles Times business columnist Michael Hitzik says that November has been a “cruel” month for the crypto throngs and deservedly so, he believes.  Beginning with Sam Bankman-Fried’s conviction to Kraken‘s charges to the settlement of the case(s) against Binance, Hitzik sees an industry that is better left alone, or more to the point, left for dead. He wrote, “No new rules are needed, because to cite Ecclesiastes: When it comes to financial crime, as in all things, ‘there is nothing new under the sun.” All Hitzik sees is lobbying dollars at work in Congress and – citing data on CoinGecko – lists HFS Chair McHenry, Rep. Ro Khanna (D, CA), Sens. Chuck Schumer (D, NY), Ron Wyden of Oregon (D, OR) and Kirsten Gillibrand (D, NY) as beneficiaries.

still more tips

Gary Gensler has remade the SEC into a crypto nemesis and climate warrior. Now a backlash is brewing – Fortune (on Yahoo)

Grayscale Consumer and Culture Crypto Sector Summary – Grayscale

Coinbase Stock Is Soaring—What Does That Mean for Crypto? – Decrypt

digital yuan win

Has capitulation to the Digital Yuan as the new digital currency of the Internet begun?  Ledger Insights reports that UK multinational Standard Chartered, which services Asia, Middle East and African markets, said that its bank in China “is amongst the first foreign banks to take part in the digital yuan business pilot. It has started providing digital RMB exchange and redemption services via City Bank Clearing.” Read it. No doubt there will be many such announcements in the days, months, years to come and with the full support of the Chinese government.

Singapore-based Temasek Holdings is believed to have a 17% stake in Standard Chartered.

what you should know: Can you say, “Threat to the global hegemony of the U.S. Dollar”? Hello, national security implications. If lawmakers need encouragement on digital assets legislation (i.e. the stablecoin bill, in particular), this is it. For some, this will renew focus on creating a U.S. Central Bank Digital Currency (CBDC), too.

spin move

With the settlement of U.S. government charges against cryptocurrency platform Binance announced last week (and the SEC’s still pending), Coinbase CEO Brian Armstrong sees light at the end of the tunnel for his industry.  Armstrong told CNBC yesterday,  “The enforcement action against Binance… that’s allowing us to kind of turn the page on that and hopefully close that chapter of history...” Read it. Armstrong was in the U.K. on Monday for the Global Investment Summit, an exclusive event which encourages foreign investment in the United Kingdom. He told CNBC that “he is ‘impressed’ with U.K. Prime Minister Rishi Sunak’s leadership when it comes to digital currencies and that Coinbase was investing more in the U.K. as a result.”

what you should know: Armstrong rattled the unspoken saber of “moving offshore” with his UK comments. If/when his company wins its lawsuit against the SEC, even more pressure – or encouragement, depending on how you look at it – will come Congress’s way with regulatory clarity as the ultimate prize.

regulation “loopholes”

Policy director Justin Slaughter of venture firm Paradigm dishes on prospects for digital assets Congressional action on “The Scoop” podcast with Frank Chaparro of The Block. Other than the stablecoin bill, Slaughter sees any regulation driven by Congress delayed until after the 2024 general election. He also explains that many policymakers believe the problem with new regulation for industries such as digital assets is that it creates “loopholes” for the industry. “I reject that. I think there’s a lot of potential here – even if you’re a regulator – to like change here…,” added Slaughter. “There’s ways in which attacking the questions of crypto leads to wins for the industry, for consumers, for investors and for the regulators as well. And I think that is the mindset I wish was more prevalent.” Listen to the podcast.

terrorist financing and Tron

The Tron blockchain and Tether came under the Reuters microscope yesterday for facilitating the movement of funds by terrorist organizations such as Hamas. Reuters quotes Mriganka Pattnaik, CEO of blockchain analytics firm Merkle Science, “Earlier it was Bitcoin and now our data shows that these terrorist organizations tend to increasingly favor Tron.” Read more. Reuters provides details on past seizures by Israel’s National Bureau for Counter Terror Financing (NBCTF), which was responsible for freezing 143 Tron wallets between July 2021 and October 2023.

more tips:

Counter Terrorist Financing Taskforce – Israel (CTFTI) – FIU Task Force Public Statement – FinCEN.gov

what you should know: It’s not clear where the data in the Reuters report intersects with reports from the Wall Street Journal such as this one on October 27. And, Reuters’ reporting team admits, “Estimates of the sums of money that reach proscribed groups through crypto are unreliable because it is hard to say whether money sent to seized wallets was really destined for those groups.” Nevertheless, for advocates of draconian anti-money laundering legislation for digital assets, the Reuters piece will be another “arrow in the quiver.”

shaking the hill 

Thomas Vartanian, who was as a bank regulator during the Carter and Reagan Administrations, offered a provocatively titled op-ed in The Hill yesterday titled, “When are regulators going to hold crypto accountable?”

Vartanian favors continued enforcement actions in the digital assets space, and doesn’t back away from the need for strong regulation: “We are long past the time for regulatory action. More flowery executive orders from presidents are not going to change a thing. Regulators need to stop quibbling over regulatory turf and Congress needs to look past political donations from the tech and crypto industries and act decisively.”  Read it.

thinking Gensler

Hear Tony Edward’s recent Thinking Crypto podcasts…

• • House Majority Whip Tom Emmer (R, MN) Interview – “Stopping Gary Gensler’s Enforcement Actions Against Crypto” – November 22
  • Rep. Mike Flood (R, NE) Interview – “Holding SEC & Gary Gensler Accountable” – November 21

still more tips

Blast Protocol Faces Criticism From Investor Paradigm – NFT Now

Bitcoin may reach $57K over pending ETF approval: Analyst – Yahoo Finance

New Binance CEO Richard Teng says firm has ‘robust timeline’ for board, financial disclosures – Fortune

Binance’s Zhao Can’t Return to UAE From US for Now, Judge Says – Bloomberg

grumbling about Gruenberg

The tenure of Martin Gruenberg at prudential bank regulator Federal Deposit Insurance Corporation (FDIC) remains on shaky ground as the agency’s embarrassing harassment scandal continues to envelop the Chairman, who is a Democrat. Last Wednesday, Republican members of the House Financial Services demanded he recuse himself from any internal investigation. Is Gruenberg’s resignation imminent? TradFi publication American Banker doesn’t think so – yet.  The Biden Administration reportedly won’t bail on their appointee unless things get worse.

fintech fumble at OCC

The Office of the Comptroller of the Currency (OCC) appointed a much-heralded deputy comptroller and chief financial technology officer, Prashant Kumar Bhardwaj, last April. He was to be the first person at the OCC to specifically police fintech firms and the banks that power them – except his resume was allegedly a fraud. Read more in the Information.

Sometime between June and August, a few months after being hired, Bhardwaj was quietly replaced by an OCC insider.

Will OCC’s Acting Comptroller Michael Hsu, a Democrat, feel some Congressional heat soon?

more tips:

What Happened to the OCC’s Chief Fintech Officer? (Sept. 10) – Fintech Business Weekly

event this week

Blockchain Association is producing its Policy Summit in D.C. this Wednesday and Thursday with a robust, bipartisan agenda containing Members and their staff. See it.

Two notable additions to the speaker list are the ubiquitous Deputy Secretary of the Treasury, Wally Adeyemo (D), and Rep. Sean Casten (D, IL). Both represent, arguably, the opinions of the Biden Administration and have played an active role recently in trying to connect cryptocurrency to the financing of the terrorist organization Hamas.

Read Adeyemo’s remarks in the UK on Oct. 27.

Rep. Casten was a lead signer of Senator Warren’s Oct. 18 letter to the White House on terrorist financing and cryptocurrency. Maybe Casten – usually a well-spoken and pugnacious lawmaker – can answer at this week’s event what happened here (HFS hearing, Nov. 15)?

more tips:

Blockchain Association senior counsel Marisa Tashman Coppel talks legislative landscape on the Thinking Crypto podcast. She notes the importance of the Coinbase-SEC court case going to trial in January. View it on YouTube.

last week – Kraken

Last Monday, US-based cryptocurrency platform Kraken was charged again by the SEC. This time it’s a lawsuit (release) similar to the one levied against U.S. competitor Coinbase where the company is charged with “unlawfully facilitating the buying and selling of crypto asset securities.” Since the SEC views nearly all crypto tokens as securities,  in theory, it would be hard for a digital assets exchange operator NOT to get charged by the regulator. Read more in CoinDesk.

It was just last February that the SEC was “Kraken Down” on the company for its staking services which it has since abandoned for U.S. customers.

more tips:

Kraken continues to fight for its mission and crypto innovation in the United States – Kraken

last week – Binance

Last Tuesday, cryptocurrency platform Binance incurred a $4.3 billion fine and their CEO Changpeng “CZ” Zhao was forced to step down in a settlement related to money laundering charges. Treasury (release), Justice (release) and the Commodity Futures Trading Commission (release) were involved but not the Securities and Exchange Commission (SEC). Is the SEC next to bring the hammer? Read more from Leo Schwartz of Fortune.

Senator Warren tweeted about the Binance charges: “This is part of a larger trend of criminal activity in the crypto industry and sadly predictable.” She vowed to continue to build support for her Digital Asset Anti-Money Laundering bill [S.2669], which would take the cryptography out of crypto. Meanwhile, Better Markets’ CEO Dennis Kelleher channeled his inner “Gen  Z” on X saying, “OMG, this is nuts…the [crypto] book is nothing but pages of predatory, illegal & criminal activity…” And Derek Robertson of Politico wrote, “The deal forces crypto to reckon with its biggest questions: How ‘law-abiding’ can an industry really be when it’s inherently designed to evade surveillance and reporting?” Oof.

more tips:

The Feds Did Not Go Easy on CZ – Slate

still more tips

Bank of Korea, BIS concerned Visa, Mastercard might launch stablecoins – Ledger Insights

Austria’s Raiffeisen Bank to Roll Out Crypto Trading for Retail Customers in January – CoinDesk

Our Updated Guide to OpenAI, Sam Altman, What Happened and What’s Next – The Wall Street Journal

OpenAI drama

With the news breaking late Friday that OpenAI CEO Sam Altman had been fired by his board, the media was scrambling to make sense of it: what it means for artificial intelligence, investing and the players involved.

Coinbase CEO Brian Armstrong, a Silicon Valley veteran, provided his “take” on X: “If this is really some EA (effective altruism), decel, AI safety coup at OpenAI, the board just torched $80B of value, destroyed a shining star of American capitalism, and will be sued to high heaven by investors. Every talented employee at OpenAI should quit and join Sam/Greg’s new thing (if they make one). This time, skip the woke non-profit board, eject the decels/EAs, maintain founder control, avoid nonsensical regulation, and just build. Accelerate progress. You are building something good for the world, don’t let anyone make you feel guilty for it and try to capture it for their own motives.” And that wasn’t all. Read more from Armstrong.

latest:

Sam Altman Not Returning As CEO Of OpenAI – The Wall Street Journal

bitcoin ETF update

The unveiling of multiple Bitcoin spot market ETFs (Exchange-Traded Funds) by the Securities and Exchange Commission (SEC) was not to be last Friday. “As expected” – as some analysts claimed – the SEC wanted more clarifications before the final approval. We shall see. According to Bloomberg ETF analyst Eric Balchunas something called “cash creates” was the cause of the latest delay.  He went into the weeds on X, “Only 2-3 filers had planned cash creates, the rest wanted to do in-kind. So may have to adjust or risk delay. Anyway, this doesn’t change our 90% odds up or down but is good sign the process marching and SEC has a path fwd in the plumbing that they are comfortable with.” Read his tweet thread.

what you should know: This “90%” expectation of approval by January is being reported across the media. Could SEC Chair Gary Gensler still put his finger on the scale and prevent this potential market catalyst from happening in January, too? The WSJ says the deadline can get extended in the new year.

NY state of veto

New York Governor Kathy Hochul (D) vetoed a bill on Friday which would have created “a 16-member task force to study digital currencies and their ancillary systems, including blockchain technology, in the state. In addition to assessing the tax impacts of digital currencies, the task force was designed to review the number of digital currencies being traded and their approximate market share, the energy consumption necessary for coin mining operations, and more.” Read more on Bloomberg (subscription).

And, see Assembly Bill A954.

New York State Assemblyman Clyde Vanel (D), a “pro-crypto” lawmaker, responded on X saying, “I am disappointed that [Governor Hochul] vetoed the #Crypto bill. It is important for NY to work with stakeholders seeking a regulatory regime that strikes the proper balance of protecting consumers & investors, while fostering an environment for economic growth, jobs & innovation.”

what you should know: It was a year ago that Governor Hochul appeared to side with the anti-crypto camp and signed a bill which curbed crypto mining activities in the state. Nevertheless, Hochul also appears to support New York Department of Financial Services (NYDFS) Superintendent Adrienne Harris’ efforts to maintain “parallel” (states’) rights in any Federal stablecoin legislation – something the anti-crypto camp does not want.

opinions flying

The Wall Street Journal’s October 10 article on crypto and the funding of terrorism has led to still more opinions. In an op-ed in The Washington Post on Thursday, a16z head of policy Brian Quintenz, who is a former commissioner with the Commodity Futures Trading Commission, takes issue with a damning opinion written by WaPo’s own editorial board a week earlier on the topic of ending crypto altogether.  Quintenz takes the other side and says, “… good regulation would ensure the future of the internet is not solely controlled by a handful of tech companies, including by creating stronger revenue streams for artists, democratizing finance and giving consumers control over their data.” Read Quintenz’ piece.

more tips:

Opinion: “Treat Hamas like ISIS: Use financial warfare to crush them” – Shlomit Wagman in The Hill

what you should know: Quintenz conclusion fits well with the bipartisan interests of many in Congress who believe that “big tech” needs to be reined in.

still more tips

New congressional letter: “Financial Services Committee Republicans Launch Investigation into Gruenberg Misconduct, Toxic Workplace at FDIC” – House Financial Services Committee

Fidelity Wants to Create an Ether ETF, Joining BlackRock in Doubling Down on Crypto – CoinDesk

Opinion: How to Win the Fight for America – Katherine Boyle, a16z, The Free Press

stablecoin deal

House Financial Services Ranking Member Maxine Waters (D, CA) says her side is ready to move along stablecoin legislation according to Politico. “We continue to be in a relationship on stablecoins (…) We want to get it. We’re working with them — our staffs are still working,” Waters tells Politico’s Jasper Goodman. Her suggestion is that “a deal” is possible by the end of the year.  Read it.

what you should know: Back in March, the Ranking Member was optimistic about stablecoin legislation saying, “I believe the legislation could be passed when we get back to Congress… in [the space of] a few days.” And then in April at the first stablecoin hearing of the 118th Congress, she said the stablecoin bill had “no chance….” Are things really different this time? The pre-emptive (Federal floor, etc.) vs. states right issue is the main point of contention. But even solving this may not mean Dem leadership led by the White House – not Waters – is going to want a stablecoin bill to pass. Since FTX’s implosion, Dems have appeared to believe being “anti-crypto” is a winning position for the 2024 general election.

offshore USD stablecoins

As the United States arguably falls behind in creating a digital assets regulatory framework, more countries are opening up to the issuance of – local – U.S. dollar-backed stablecoins.

In a press release yesterday, Paxos says it’s been approved by the Monetary Authority of Singapore (MAS) to issue a USD stablecoin in MAS’ jurisdiction. The release explains, “All Paxos stablecoins are fully backed 1:1 by the US Dollar and cash equivalents, ensuring that they are stable, safe, and reliable. Similar to its other tokens, Paxos will issue monthly attestations and reserve reports so that all holders know exactly what they own.” Read the release.  And, read more in CoinDesk.

is today the day?

It’s possible that Bitcoin spot market ETFs could be approved today by the Securities Exchange Commission (SEC) – a first.  In a feature article, The New York Times covers the recent momentum in Bitcoin prices in anticipation of the approval: “Some proponents have hailed the possibility of this new investment vehicle, known as a spot Bitcoin E.T.F., as crypto’s ‘salvation.’ In August, Grayscale Investments, a crypto asset manager, scored a legal victory over the S.E.C. that seemed to pave the way for it to offer the Bitcoin product.” Read it.

CFTC on illicit financing

Speaking at the 2023 U.S. Treasury Market Conference yesterday, Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam said, “When the use of digital assets and related enabling technologies for illicit finance purposes threatens national security and may fund acts of war and terrorism, we must continue to aggressively demand that all market entrants implement and comply with know-your-customer (KYC) and anti-money laundering (AML) procedures and Customer Information Programs (CIPs).” Read the speech.

what you should know: The recent Wall Street Journal articles on crypto financing terrorism continue to reverberate.

Bitcoin global

Crypto app Strike announced that it will make available the purchase of Bitcoin using a debit card through its app by virtue of a new partnership with Checkout[.]com.  The app’s new feature will extend across 65 countries.

Strike CEO Jack Mallers explains to Fortune, “Checkout.com is providing a card network gateway, meaning it brokers relationships with the likes of Visa and Mastercard. Checkout.com itself is not doing the fiat-to-Bitcoin conversions, but instead will serve as an alternative payment rail to wire transfers, ACH, and card processing already available in the U.S, opening up the Bitcoin on-ramp to users globally.” Read more.

digital asset donations

In a detailed article on JD Supra, Andie Kramer of ASKramer Law suggests that there are benefits in donating digital assets to charities. She suggests, “Donors might want to specifically identify those digital assets to contribute as the ones they hold with the lowest tax basis and the largest amount of unrecognized appreciation. Such a donor would be able to “mop up” on a tax-free basis the largest amount of unrecognized gain hold in their digital asset positions.” Read this.  It’s lengthy, but full of ideas in case you’d like to donate your favorite crypto or NFT.

trade consolidation

Blockchain trade associations Global Blockchain Business Council (GBBC) and U.S. Blockchain Coalition (USBC), which describes itself as a  “coalition of state-focused blockchain associations,” have merged. The press release explained that USBC will become a “national initiative” of GBBC. Read the release.

still more tips

Biggest Stablecoin Issuer Tether Now Wants to Become a Major Bitcoin Miner – Bloomberg

BlackRock files for spot ethereum ETF to further crypto push – Reuters

Fallen Crypto Star Do Kwon Loses Appeal on Fake-Passport Conviction – The Wall Street Journal

letter – SAB 121

Staff Accounting Bulletin 121 (SAB 121) was the topic of a new letter by pro-digital assets members of Congress sent yesterday to prudential regulators (OCC, Federal Reserve, FDIC and the National Credit Union Administration). See the letter (PDF).  The letter raises the October 31 determination by the Government Accountability Office that SAB 121 was a clear overreach by the securities regulator.

So why mail the prudential regulators? Congress wants them to step up, publicly, and NOT enforce SAB 121 as the supporting press release explains, “The lawmakers are urging the regulators to clarify that SAB 121 is not enforceable considering the Government Accountability Office’s (GAO) finding that it constitutes a ‘rule’ for purposes of the Congressional Review Act (CRA).” Read the release.

The letter’s signers were bicameral and bipartisan and included House Financial Services (HFS) Chair Patrick McHenry (R, NC), Senator Cynthia Lummis (R, WY), Senator Kirsten Gillibrand (D, NY), Rep. French Hill (R, AR), Rep. Ritchie Torres (D, NY), Rep. Mike Flood (R, NE) and Rep. Wylie Nickel (D, NC).

letter – military to Congress

In light of the increased scrutiny brought by AML concerns in Congress, Blockchain Association organized a letter sent to Senate Banking and House Financial Services Committee leaders and signed by members of the digital assets industry. Unique to this letter, signers were alumni of the U.S. military, intelligence and national security entities.

They begin, “We write today as entrepreneurs and investors working in the digital asset space who wish to address head-on the issue of illicit finance.” In an effort to advocate for a better understanding of what it sees as “grossly overstated concerns” about crypto’s funding of terrorism, the group also plans to visit Capitol Hill on November 28.

Read the letter (PDF). And, read the announcement on X.

what you should know: On the calculus of this letter, if there’s one group that Congressional members must publicly pay attention to, it’s Veterans. Moreover, this letter shows the degree of concern the industry has regarding the passage of draconian digital assets legislation. AML legislation is front and center.

letter – illicit financing

In what could be viewed as a response to the letter sent by Senator Elizabeth Warren (D, MA) one month ago, House Republican leaders led by Majority Whip Tom Emmer (R, MN) and HFS Chair Patrick McHenry (R, NC) gathered together its caucus as well as three Democrats – Rep. Ritchie Torres (NY), Rep. Josh Gottheimer (NJ) and Rep Wylie Nickel (NC) – for a new letter to the White House on illicit financing and crypto.

View it here (PDF). And, read the release. The letter coincided with yesterday’s HFS Digital Assets, Financial Technology and Inclusion Subcommittee hearing on illicit financing and digital assets.

Emmer’s letter emphasizes a positive view of blockchain technology and attempts to change the narrative which Senator Warren has driven around shutting down digital assets. It reads in part, “Open, transparent blockchain technology should easily provide an open book of Hamas’s terror financing with digital assets, as compared to traditional, more opaque, methods of financing. We request the White House and the Treasury to utilize the open blockchain ledger to assess the footprint of Hamas’s digital asset fundraising campaign.”

what you should know: As blockchain tipsheet noted on X yesterday, it’s interesting to see Rep. Gottheimer, a Democrat, signing on here. He signed Senator Warren’s letter with critical overtones of digital assets from a couple of weeks ago. Yet, he has been a supporter of digital assets legislation: stablecoins and market structure. He even had his own stablecoin bill in February of last year.

quick tip: Rep. French Hill (R, AR) is not promising House Floor votes on digital assets legislation by the end of the year according to Politico.

another letter

McHenry, Torres Lead Bipartisan Letter Urging Treasury to Revise Proposed Regulations for Digital Asset Tax Reporting Requirements – financialservices.house.gov

QOTD

During yesterday’s Financial Markets Quality Conference at Georgetown’s Psaros Center for Financial Markets and Policy, regulators and lawmakers gathered to discuss finance, innovation and policy.  YouTube video is here.

A couple of “quotes of the day” stood out… (quotes lightly edited below)

QOTD – CFTC Behnam

From Commodity Futures Trading Commission Chair Rostin Behnam, a Democrat, he sympathized with a question from a student considering entrepreneurship in the digital assets space. Though he encouraged the student to embrace risk generally, Behnam was less sanguine about the near-term given legislative prospects. He said, “I would say… regulation will come in this space eventually. It may be on my watch. It might be years down the road, but there certainly is momentum and it’s just a matter… as the congressional process goes, this will take time.”

QOTD – FINRA’s Cook

FINRA, the self-regulatory organization overseeing broker-dealers and operating under the SEC, participated at the Psaros Center as FINRA CEO, Robert Cook, submitted to a fireside chat. Towards the end, he answered a student’s question about FINRA’s digital assets and decentralized finance strategy as it related to investor protections and market integrity.

Cook said, “We do spend a lot of time thinking about the growth of the digital asset markets. And, the nature of our regulatory authority is that we really only have authority over our members. And most trading in crypto assets does not happen in a FINRA member… happens in people who aren’t regulated, but we do have a group of firms who have applied for and received membership to trade in crypto assets. It’s usually very limited private placement type of activities, but these are folks who are saying, ‘OK, these assets are securities. I want to be a broker dealer. I want to comply with the broker dealer rules.’ We’ve got about 26 firms who come in under it in that way.” Read more on X from blockchain tipsheet on X.

illicit finance hearing

It was clear from the start of the HFS Digital Assets Subcommittee hearing that the Republican caucus led by Chair French Hill (R, AR) supported a more nuanced approach to the discussion around illicit financing and digital assets. See the hearing video.

Meanwhile, Democratic leadership was not going to lay off the narrative ignited by the October 10 Wall Street Journal article – that terrorist organization Hamas received over $140 million in funds via crypto. Digital Assets Subcommittee Ranking Member Stephen Lynch (D, MA) said in his opening statement, “It is beyond argument however, that crypto remains the preferred currency of organized crime and various cyber attacks.“

During the Q&A, the most notable 5-minutes may have been Rep. Sean Casten’s (D, IL).  He asked a couple of questions that were meant to show the problematic nature of crypto in terrorism but was firmly disputed by witnesses. See it. Shortly thereafter, the hearing was extended with an additional 2-minute Q&A allotted to Members.

Ranking Member Lynch in his additional Q&A seemed to want to backhandedly clarify Casten’s remarks that off-chain transactions related to crypto were a problem with terror financing and cited a CoinDesk article. The argument seemed like a stretch and Lynch didn’t seem totally comfortable trying to make the case, either.

prudential divergence

Punchbowl News’ Brendan Pedersen was watching yesterday’s House Financial Services hearing (see video) with the prudential regulators and made note on X of a divergence; “Something to flag from House Financial Services Committee this AM: Rep. French Hill (R, AR.) got the OCC’s Michael Hsu to admit some ‘concerns’ about an SEC custody rule that would change bank balance sheet reqs. It’s a rare interagency jab for the Biden administration.” Pedersen reported that Rep. Hill pursued Hsu on the topic who reiterated his position.

what you should know: There are two potential impacts here: the SEC’s proposed changes to a bank custody rule (see Skadden’s related discussion)  and the SEC’s Staff Accounting Bulletin 121 (SAB 121) (see BDO’s related discussion).  These two rulings are inhibiting traditional and/or public companies from holding – providing custody – crypto.  Makes sense about Hill’s pursuit in the hearing -the comment comes on the heels of the Congressional letter on SAB 121 yesterday.

Rejecting BSA

Research director Peter Van Valkenburgh at cryptocurrency research and advocacy non-profit Coin Center makes the case in a new paper that the Bank Secrecy Act (BSA) is unconstitutional as the world of digital assets runs up traditional finance guardrails. In a summary of the report, Van Valkenburgh says the BSA “is either (A) so broad as to criminalize everyday life, (B) so ambiguous as to make uncertain its application to millions of Americans, or (C) spared from being so broad or so ambiguous by the exercise of legislative authority delegated by Congress to the Treasury Department.” Read the brief. And then, read the report (PDF).

more tips:

Bank Secrecy Act (BSA) – OCC.gov

still more tips

Fentanyl sales are slowing down following US crackdown, says TRM Labs – The Block

JP Morgan’s Onyx Taps Avalanche for Tokenized Funds, AVAX Jumps 14% – Decrypt

Europe scrutinizes small crypto transactions to cut off funding for Hamas – DL News

Digital collectibles platform NHL Breakaway launches – NHL

Coinbase, Crypto Startups Cut VC Investing as Downturn Lingers – Bloomberg

CBDCs Good for Payments, Even With Competition: IMF – CoinDesk

regulatory breakthrough

In an interview on CNBC’s Squawk Box, CEO Cathie Wood of investment management firm Ark Invest said she think it’s possible for Bitcoin to reach $500,000 by 2025 or 2026. She saw a spot Bitcoin ETF as a key catalyst. She explained, “I think this regulatory breakthrough (the ETF) is very important to bring institutions online, effectively. I think BlackRock and Coinbase’s partnership is going to be very important. The other thing that is going to be very important – way back in 2018, Cambridge Associates, which advises institutions, said, ‘You may not like it. But, you better have a point-of-view because this is a new asset class, it’s a source of diversification..’ and we would add,  it’s a hedge – if you are talking about Bitcoin, in particular – against both inflation and deflation…” See a bit more of the interview on X.

more tips:

“it’s been a ten year dress rehearsal. we’re ready for the main event.” – Michael Sonnenshein, CEO, Grayscale on X

what you should know: We may know as soon as this week on Bitcoin spot market ETF approval by the Securities and Exchange Commission. More likely is approval by January.

use case – collectibles

Disney is getting into the digital collectibles space with a new NFT platform supported by Dapper Labs called Disney Pinnacles. NFT Now describes it as “a digital pin collecting and trading platform that will feature characters from an entire century of Disney magic alongside fan-favorite icons from Pixar and the expansive universe of Star Wars heroes and villains – all uniquely styled as tradable digital pins.” Read more. Built on the Flow blockchain similar to NBA’s Top Shot – which is also managed by Dapper Labs – the platform is set to launch “later this year.” In the meantime, there’s a waitlist.

today

House Financial Services (HFS) Digital Assets, Financial Technology and Inclusion Subcommittee will hold a hearing at 2 pm ET today titled, “Crypto Crime in Context: Breaking Down the Illicit Activity in Digital Assets.” See the hearing page and live video.

The five witnesses are:

• • Bill Hughes, Senior Counsel, ConsenSys
  • Jane Khodarkovsky, Partner at Arktouros
  • Jonathan Levin, Co-Founder & Chief Strategy Officer, Chainalysis
  • Gregory Lisa, Chief Legal Officer, DELV (f/k/a Element Finance, Inc.) and Senior Counsel, Hogan Lovells
  • Alison Jimenez, President, Dynamic Securities Analytics, Inc.

Hughes, who worked at the Department of Justice earlier in his career, is emphatic in his prepared testimony regarding the impact of centralized exchanges and financial crimes related to crypto. He writes on behalf of Consensys, “From our perspective, the single most important initiative in a fight against digital asset money laundering would be to regulate these entities under a common legal framework worldwide.”

No doubt the recent Wall Street Journal articles (1, 2) on Hamas and terrorist financing via crypto will be brought up by both sides of the aisle as various “flavors” of anti-money laundering legislation lurks in both Houses.

what you should know: There’s also a prudential regulator hearing at 9:30 a.m. ET today under the auspices of House Financial Services. See it. The FDIC workforce culture scandal will likely be the topic as it was at yesterday’s Senate Banking hearing with the same witnesses.

enforcement results

Yesterday, the SEC announced its enforcement results for the fiscal year ending September 30, 2023.  Crypto was a “highlight” for the agency as the press release outlined, “Fiscal year 2023 was another highly productive and impactful year for the SEC’s enforcement efforts relating to crypto asset securities. In fiscal year 2023, the Division recommended enforcement actions addressing a range of alleged misconduct in the crypto asset securities space, including billion-dollar crypto fraud schemes, unregistered crypto asset offerings, platforms, and intermediaries, and illegal celebrity touting.” Read more.

still more tips

Standard Chartered to use FundsDLT for blockchain-based transfer agency – Ledger Insights

Opinion: The IRS and the Rising Cost of Crypto Tax Compliance – David Kemmerer, CEO of CoinLedger, on CoinDesk

After six quarters of falling venture interest, crypto investors see recent price gains as positive signal – TechCrunch

digital assets tax

Yesterday’s IRS public hearing titled, “Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions,” on its proposed digital asset tax rules lasted two hours and featured 12 witnesses who each offered 10-minute presentations on their views.

The hearing was lead by counsel from the IRS and attorneys with Treasury’s Office of Tax Policy.

11 of the 12 participating witnesses were decidedly critical of the proposed digital asset rules.

The complete hearing transcript is here.

Shehan Chandrasekera, head of tax strategy at CoinTracker, was among the witnesses and distilled his views on the proposed rules on X, “If implemented as proposed, the broker regulations will likely generate a significant amount of incomplete and inaccurate data for all stakeholders in the chain. That includes brokers, the IRS, and taxpayers. And, we are very concerned about this. We have recommendations to solve this issue and enhance traditional information reporting. Read Cointracker’s comment letter.

Marisa Tashman Coppel, senior counsel at Blockchain Association, prefaced her testimony on X saying, “The Proposal exceeds Treasury’s statutory authority, is overbroad and vague, and violates the APA and the Constitution – including the 1st, 4th, and 5th Amendments.” Read her tweet thread. Also, read Blockchain Association’s 39-page comment here (PDF).

One unique area impacted by the rules are collectibles known as non-fungible tokens (NFTs).  NFT marketplace OpenSea participated in the hearing and represented not only its own interests but that of artists and collectors. On the teleconference, OpenSea general counsel Gina Moon discussed the IRS’ digital assets tax proposal and how it doesn’t work with her company’s platform. “Collectibles are not representations of value though it may have value,” she began. Read her company’s 16-page comment here. In addition to addressing the proposed rules, there’s a condensed discussion of the NFT market and how it works.

more tips:

“The IRS Should Heed This Warning – Devs are not brokers” – Bill Hughes, counsel at Consensys, on CoinDesk

what you should know: Unlike Congressional hearings, this one felt devoid of politics in spite of the fact Treasury is run by Secretary Janet Yellen, an appointee of the Biden Administration. The IRS’ tone was one of learning and appreciation for testimony. At least yesterday it was.

Senate Banking hearing

Senate Banking Chair Sherrod Brown (D, OH) has asked the prudential regulators to appear for an oversight hearing today at 10 a.m. ET in his Committee’s chambers.

The landing page with live video is here.

Witnesses include:

Michael Barr, Vice Chair For Supervision, Federal Reserve
Martin Gruenberg, Chair, Federal Deposit Insurance Corporation
Todd Harper, Chair, National Credit Union Administration
Michael Hsu, Acting Comptroller, Office of the Comptroller of the Currency

what you should know: Of note, Ranking Member Senator Tim Scott (R, SC) abandoned his Presidential campaign over the weekend. The “addition by subtraction” could mean more engagement in the Committee’s business from the Republican leader.

Senate Banking – FDIC

FDIC Chair Gruenberg devotes part of his Senate Banking Committee prepared testimony on crypto and makes clear that his agency has taken steps with banks and non-banks to mitigate the financial instability his agency believes is inherent with crypto. But, perhaps in anticipation of a question from Senator Bill Hagerty (R, TN), Gruenberg concludes by making a veiled reference to Choke Point 2.0 accusations stating: “The agencies continue to emphasize that banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.” Read the testimony (begin page 22).

Also, stablecoins may be a point of discussion with the FDIC Chair. In the past, Gruenberg has been supportive of payment stablecoins and suggested at a Brookings event last October that a payment stablecoin, and distributed ledger technology, “may” have a pivotal role in the payment system.

Finally, Gruenberg will undoubtedly be questioned about the toxic work environment for women at his agency, which was revealed over the weekend by The Wall Street Journal.

Senate Banking – OCC

In his prepared testimony for the Senate Banking Committee, the OCC’s Hsu reiterated comments made at DC Fintechweek that tokenization – and not crypto – has caught his eye. He writes, “In the digital asset space, attention is shifting from crypto to the tokenization of real-world assets and liabilities. In contrast to crypto, tokenization is driven by solving real-world settlement problems and can be developed in a safe, sound, and fair manner. Next February, the OCC will host a public symposium on tokenization to take stock of developments, help enable strong foundations, and promote public discussion.”

gov luvs tokens

Right on cue yesterday, Office of the Comptroller of the Currency (OCC) acting comptroller Michael Hsu announced – by video on X – his agency’s conference next February 8 on the tokenization of real-world assets. The symposium promises to “include moderated panel discussions to explore the legal foundations for digital asset tokens, tokenization use cases, and risk management and control considerations. There will also be a panel discussion of academic papers on tokenization.”

what you should know:  A prudential regulator using “digital asset” in a positive light seems like a meaningful step forward. Read the release.  Registration is here.

pre-emptive v. parallel

Rep. Jim Himes (D, CT), who voted for passage of the stablecoin bill out of the House Financial Services Committee’s markup in July, tells Punchbowl News that he thinks empowering state’s isn’t going to work in order to make stablecoin law. He says, “The House bill — for it to pass, I think would probably need to go further, especially with respect to the Federal Reserve’s ability to step in when a state regulator has dropped the ball.” Read more on the stablecoin debate.

what you should know: Ironically, its the Democratic New York State members of Congress (Sen. Kirsten Gillibrand, Rep. Ritchie Torres, Rep. Gregory Meeks – maybe even Sen. Chuck Schumer?) who are unlikely to back off the need for “parallel” powers in stablecoin legislation. The New York Department of Financial Services (NYDFS) has too much at stake… i.e. maintaining New York City as the financial capital of the world.

unstablecoin lobby

Democratic lobbyist Better Markets and its CEO Dennis Kelleher were active on X yesterday promoting its views in a new article in Bloomberg. Kelleher writes on X, “Truth in advertising: will everyone please refer to this product accurately? They are ‘unstablecoins,’ as [Better Markets] spells out here.” Read it.

digital assets omnibus

On X yesterday, Ron Hammond, policy executive at Blockchain Association, published a detailed update on DC digital assets machinations amidst the current government funding drama. One element of his thread was devoted to the hoped-for use of say, the NDAA, as a way for Congress to “horse trade” its way into the adoption of new digital assets legislation.

Hammond writes, “The funding battle in Congress could alter the strategy for including crypto bills (both bad and good) in large legislative vehicles. Some thought a year-end omnibus bill would be a path forward or the defense funding bill. If those aren’t options there aren’t too many after…. Why do large legislative vehicles matter? Because the closer the 2024 election comes, the closer Congress shifts to messaging instead of policy. Finding floor time is also hard so tucking various bills with bipartisan support in these big bills saves time for other efforts.” Read the whole thread.

what you should know: Stablecoin law in 2025, anyone? 2026?

you’re hired

Former digital assets policy executive Zach Wong announced that he’s moving to the business side and has joined Uniswap Labs where he’ll work in a strategy and operations capacity for the company’s COO Mary-Catherine Lader.

Wong said on X in part, “My goal this summer was simple: I wanted to find a job where I could work hard, on important problems, with a team of people I greatly respected. I think I’ve found that, and I couldn’t be more excited.” Read more.

the lobby that was

Binance and its U.S. subsidiary, Binance.US, have severed all lobbying ties to DC.  “FS Vector and Fierce Government Relations, both stopped lobbying for the firm at the end of September,” reports Politico. Read a bit more.

what you should know: What a difference a year makes. It was a year ago that Binance was sponsoring a December 1, 2022, Politico event called “2022 Crypto Summit.” And then FTX happened – which resulted in the cancellation of the event.

still more tips

Memorandum for Wednesday’s hearing: “Subcommittee on Digital Assets, Financial Technology, and Inclusion Hearing: ‘Crypto Crime in Context: Breaking Down Illicit Activity in Digital Assets’” (PDF) – House.gov

Rebuild or retreat? Crypto faces tough choices after FTX – The Financial Times

Crypto news site The Block shakes off SBF ties with Foresight Ventures deal – Cointelegraph

FTX Marks a Year in Bankruptcy. What We’ve Learned From Crypto Restructurings. – The Wall Street Journal

Crypto Crashed and Everyone’s In Jail. Investors Think It’s Coming Back Anyway. – Motherboard by VICE

new WSJ story

The Wall Street Journal reporting team added another chapter to crypto’s responsibility in terrorist financing. In a follow up to its October 10 story which had caused the publication to issue a correction, yesterday the paper revealed new sources including Israeli blockchain analytics firm BitOK and Israel’s National Bureau for Counter-Terror Financing (NBCTF).  The two organizations affirmed the $93 million in crypto used to finance terrorism in the WSJ’s original story and added still more: “Digital wallets identified by the NBCTF in two of these orders as being connected to the exchanges had received $41 million in crypto, according to research by Tel Aviv-based analytics and software firm BitOK.” Read more.

new WSJ story – reaction

Riot Platforms’ policy executive Sam Lyman, who wrote last week’s Forbes rebuttal of the WSJ findings, said on X of the new WSJ piece, “Another day, another hit piece on crypto. A reminder that these numbers more likely reflect the total volume of crypto that flowed between entities with links to Hamas—not the actual amount of money raised by the organization. Stripped of this context, you get Senators sending panicked letters to the White House with erroneous claims that Hamas had raised ‘over $130 million in crypto.’”

Fortune reporter Leo Schwartz noted a new wrinkle in yesterday’s WSJ article saying on X, “Important distinction – according to WSJ reporting, Hamas crypto usage has shifted from Bitcoin to Tether on Tron.”

what you should know: Make sure to read it. Gotta say – it’s hard to follow and it will be interesting to see if there is more access to the data used for the piece. Also, there is an anonymous quote from an “ex-NBCTF Official”: “It’s a drop in the ocean” regarding the known vs. unknown use of crypto in terrorist financing. This conflicts with the on-the-record testimony of former Chair of Israel’s AML authority Dr. Shlomit Wagman at the October 27 Senate Banking hearing who indicated crypto’s impact was limited in the financing of terrorism and urged more sanctions. But, she did not discount that crypto should be monitored.

midwestern op-ed

Editorial boards of major newspapers are steadily planting their flags on digital asset regulation (WSJ, WaPo). On Friday, the Chicago Tribune’s editorial board expressed its POV in an opinion titled, “SBF made crypto suffer. Now the industry must turn the page.”

The midwestern paper smells a rat in the criticism of crypto.

The Board writes, “We remember when East Coast critics in the 1980s were saying much the same about the financial futures entrepreneurs along LaSalle Street and Wacker Drive who were turning Chicago’s exchanges into world beaters. SBF’s brand of fraud wasn’t peculiar to cryptocurrencies, but rather was the same shameful, garden-variety fraud that could occur (and has occurred) just about anywhere in the world of finance.”

“We’re typically reluctant to call for more government regulation, but not in this case,” continues the Trib, which concludes, “Once the dust clears from the [Sam Bankman-Fried] legal saga, and the other cases now underway, we urge the industry, its regulators and Congress to find common ground for the stronger, better-fitting rules that crypto needs to fulfill its potential.” Read the editorial.

what you should know: This is a “blue state” city and state’s paper challenging national Democratic leadership’s current anti-crypto position. Not nothing.

use case – KYC service

Coinbase launched Coinbase Verifications, built on Coinbase’s layer-2 Base, which it says provides identity verification on the chain protocol level and will increase security and transparency. If you need to add Know-Your-Customer (KYC) capabilities in Web3, this is the service -that’s the pitch. Blockworks Casey Wagner delves into the use case further: “The service is expected to help particularly with Sybil attacks, which is when hackers use a single node to create many fake identities.” Read more.

what you should know: Privacy and identity remain a crucible for government technology policy. In a future of deep fakes, for example, being able to separate the fake from the real seems ideal for the immutable blockchain.

today’s hearing

Today’s the day for the Internal Revenue Services (IRS) hearing on their proposed digital assets tax framework. The teleconference begins at 10 a.m. ET. Agenda is here.

The much-discussed (over 123,000 public comments) proposal has been unanimously maligned by pro-crypto voices who see the regulations creating an untenable overreach by the agency and crippling reporting requirements on crypto software developers for wallets, decentralized finance (DeFi) and more.

Today’s IRS hearing will include the presence of counsel with the IRS, attorneys with Treasury’s Office of Tax Policy and at least 12 scheduled witnesses including Coinbase, crypto tax provider Cointracker, Blockchain Association and National Taxpayers Union Foundation (NTPU).

In its published comment, the NTPU sees harm for both the industry and taxpayers with the proposed regulation. On the latter, the NTPU says, “The Proposed Regulations place a burdensome taxation scheme on taxpayers. The proposed regulation for when digital assets are exchanged for other digital assets is not practical in the volatile, unregulated cryptocurrency market. Additionally, the Proposed Regulations categorize cryptocurrency as a security when it may also function as cash. Finally, the proposed fair market value evaluation standard for services provided raises legal issues and increases the risk of litigation.”

what you should know: Where this IRS proposal collides with Congress remains to be seen. The efforts of Senate Finance Chair Ron Wyden (D, OR) and Ranking Member Mike Crapo (R, ID), whose own digital asset tax comment period ended in September, appear to be the most likely source of a Congressional response, if not legislation.

article rebuttal

Senator Cynthia Lummis (R, WY) came out in support of Riot Platforms’ policy executive Sam Lyman’s article in Forbes on misinformation about digital assets resulting from the October 10 Wall Street Journal article on crypto and terrorist financing. The Senator retweeted the article on X and wrote on Friday (before the new Sunday WSJ piece): “Crypto accounts for < 1% of all illicit finance activity and would be even less if we created a regulatory structure to allow the crypto industry to operate in America instead of unregulated foreign markets. Crypto is not the problem, bad actors that exist in every industry are.” See the tweet.

implementation, not (more) regulation

The European Union’s much-heralded Markets in Crypto-Asset Regulation is being given a critical eye by some EU officials.

The message is: enough regulation, “let the industry breathe.” 

According to crypto publication DL News, Ondřej Kovařík, a lawmaker who was helped create the EU’s Markets in Crypto-Assets regulation in European Parliament. “We should really, instead of proposing more and more new legislation, take our time and focus on proper implementation.” Read more in DL News.

choosing sides

Russia recently issued a small fine against Coinbase, according to Crypto Times, for a “data localization breach.”

But, Coinbase’s Chief Legal Officer Paul Grewal was unapologetic about the news on X, “Not exactly a hard call. We will not localize our customer data in Russia. Rozkomnadzor is a sanctioned actor and their demands won’t change our stance. Protecting your information and keeping it secure has and will always be a key priority for Coinbase.” Read it.

what you should know: Centralized crypto marketplaces are, and will, have to choose sides – as in their market of choice –  in order to grow a successful business alongside local governments.

still more tips

The CFTC’s union files grievance against Republican Commissioner Caroline Pham; Pham’s office sees retaliation – Capitol Account

Justin Sun-Owned Exchange Poloniex Hacked for At Least $126 Million – Decrypt

Public Comment Re: Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker‐​Dealers and Investment Advisers – Cato Institute

JPMorgan just added ‘holy grail’ to its $1 billion per day crypto network – The Street

Key Witness at Sam Bankman-Fried Trial to Launch New Crypto Exchange – The Wall Street Journal

bicameral CBDC legislation

On Wednesday, Sen. Rick Scott (R, FL) has thrown his “CBDC legislation” hat into the ring with the “Chinese CBDC Prohibition Act” which “prohibit the use of the Chinese Central Bank Digital Currency, also known as the Digital Yuan, by U.S. licensed money service businesses.” See the release. Rep. Blaine Luetkemeyer (R, MO), Chairman of the House Financial Services Subcommittee on National Security, Illicit Finance, and International Financial Institutions, had originally introduced the legislation in the House back in February.

Also co-sponsoring up for the bill in the Senate were Ted Cruz (R, TX) and Marsha Blackburn (R, TN). Cruz said in a statement, “The Chinese Communist Party intends to use a central bank digital currency to spy on Americans’ private financial transactions. We must eliminate the CCP’s underhanded attempts to gain access to American financial data, that threaten their privacy and undermines our national security. This bill prevents the CCP from monitoring American transactions and financial data.”

what you should know: There are many flavors of Anti-CBDC bills from Republicans in Congress, but what makes this unique is, this bill specifically targets the Chinese central bank’s CBDC.  Moreover, there are national security implications as the stature of the U.S. Dollar, the world’s reserve currency, may increasingly be threatened by China’s Digital Yuan.

legislation crossroads

In an Op-Ed in Forbes, former congressional staffer Sam Lyman, who is now a public policy executive at Bitcoin infrastructure provider Riot Platforms, takes issue with what he sees as misinformation being spread in Congress about digital assets. He takes issue with Senator Elizabeth Warren (D, MA) who “saw a crisis and capitalized on it” for her own Digital Asset Anti-Money Laundering Act by using data about crypto’s use in terrorist financing that Lyman notes has been debunked. He writes, “Will misinformation form the foundation of crypto policymaking? Or will lawmakers heed the facts, even when they defy their previously held viewpoints?”  Lyman believes we’re at a crossroads. Read more.

what you should know: There’s more momentum than ever for legislation such as Sen. Warren’s. Will it be enough to pass both Houses of Congress is the question? The Republican majority in the House would appear to indicate it’s not. But with the general election looming in 2024, a Democratic sweep in Congress could grease the wheels for the Senator in the next Congress.

self-regulation

Blockchain industry group Proof of Stake Alliance (PoSA) announced its “Industry Principles for Staking.” With proof of stake (PoS) blockchains growing to include 19 of the top 20 smart contract platforms and a market cap of over $250 billion USD as of September 2023 according to a PoSA press release, the group hopes that the new principles will solidify the industry’s interest in both consumer protections and innnovation. See the principles (PDF).

Polygon legal and policy executive Rebecca Rettig said about the principles, “We hear over & over from policymakers that the industry should put forward proposals for best practices & how to regulate.  [PoSA] has done just that today w the Staking Industry Principles … to promote consumer protection, market integrity & responsible innovation.” Read on X.

what you should know: Self-regulation may be scoffed at by digital asset critics but it’s not without precedent in traditional finance realms. Associations such as FINRA (securities related)and the National Futures Association (commodities) are self-regulatory bodies, for example.

use case – gamer income

Decrypt reports that a blockchain games development company called LootRush will let gamers rent out their non-fungible tokens (NFTs) to earn passive income for game items like cards and land. The company claims to already have 100 of its 1,000-game library enabled with the NFT renting capabilities.  Read more. The CEO calls his company the “AirBnB” of gaming NFTs.

more tips:

What is an NFT? – OpenSea

still more tips

BlackRock appears to take first steps toward an ether ETF – CNBC

Polygon Village launches $90 million fund for ecosystem development – The Block

Opinion by Moody’s Head of DeFi Rajeev Bamra: “Can Stablecoins Get Past Their Instability?” – CoinDesk

approps amendments

As negotiations continue on the Hill regarding appropriations, at least two digital asset-related amendments were introduced by Republicans in the House of Representatives yesterday. Reigning in the SEC and CBDCs was the focus.

Majority Whip Tom Emmer (R, MN) said, “[Gary Gensler] is as ineffective as he is incompetent. Fortunately, my nonpartisan appropriations amendment to reign in SEC enforcement abuses against the digital asset industry passed the House today with no opposition. Congress will hold unelected bureaucrats accountable.” Incidents involving Coinbase and Grayscale and the agency’s SAB 121 bulletin are all identified as examples of SEC overreach. See Emmer’s 5-minute statement on the House floor on X.

Rep. Warren Davidson (R, OH) took the opportunity to target CBDCs, a House Republican bugaboo, as an approps amendment.  He said, “Central Bank Digital Currencies (CBDCs) should never be designed, developed, or established. It’s like building the Death Star and saying you won’t turn it on. Today I offered an amendment to stop the creation of [CBDCs]…” On X, see Rep. Davidson’s speech on the House floor.

Emmer’s (here) and Davidson’s (here) amendments were adopted by voice vote in the House.

more tips:

You Can’t Regulate What You Don’t Understand (2.0) – Alex Grieve, Paradigm

cop on the beat

Showing Congress that it’s the “cop on the beat,” the Commodity Futures Trading Commission (CFTC) tallied up its fiscal year 2023 enforcement actions ending September 30, 2023 in a press release yesterday. It’s lead category was “digital assets” in which the regulator “brought 47 actions involving conduct related to digital asset commodities, representing more than 49% of all actions filed during that period.” Overall (digital assets plus everything else), the CFTC said it had “over $4.3 billion in penalties, restitution and disgorgement” in the fiscal year. Read the release.

CFTC Chair Rostin Behnam has long advocated that his agency is the appropriate “cop on the beat” for digital assets cash markets since pre-FTX-implosion and the consideration of the Digital Commodities Consumer Protection Act (DCCPA) in the last Congress.

“Cop on the beat” history tip: “CFTC and Energy Markets:  ‘The Cop on the Beat – Protecting Consumers’” (2007) – CFTC.gov

quick tip: “CFTC Chair Behnam admits his agency is behind other countries on crypto: ‘…it’s unfortunate but we’re a bit behind and we’re talking about the UK… Europe, Asia, the Middle East as well. And I think that becomes a competitive disadvantage…’”- @blockchaintipsheet at #DCFintechWeek

tokenization tsunami

The growing wave of tokenization added more momentum yesterday as one of the world’s largest banks – HSBC – said that it would offer institutions custody services for tokenized securities next year.  Ripple will be helping facilitate the new offering after acquiring Metaco and its custody product line in May.

HSBC’s John O’Neill, who is the bank’s Global Head of Digital Assets Strategy, said in a statement: “I’m excited by the forthcoming launch of our new custody service for digital assets, which will complement HSBC Orion, our platform for issuing digital assets, as well as our recent launch of tokenised physical gold.” Read the release (PDF). And, read a summary on Bloomberg.

quick tip: House Financial Services Chair Patrick McHenry (R, NC) thinks something can be done in regards to crypto legislation in the next couple months – likely though the National Defense Authorization Act (NDAA). McHenry knows the Senate wants AML provisions and tells Politico, “Just a focus on anti-money laundering is not enough…. We have to have a broader view of this, though that’s an important component of it.” Read Politico.

tax comments

The Monday, November 13 deadline for comments on the new digital assets tax proposal by U.S. Treasury and the Internal Revenue Service is fast approaching and the decision to move back the original deadline two weeks in order to accommodate demand appears to have been a good idea.  All told, over 119,000 public comments were received as of yesterday.

Blockchain industry advocates such as DeFi Education Fund are publicizing their comments with the Fund’s Miller Whitehouse-Levine and Amanda Tuminelli issuing a 35-page tome rejecting the definition of “broker” used in the 84-page proposal.

The team conclude in part, “In light of the concerns raised in this report and the sheer number of comment letters already submitted raising myriad issues, the Treasury and the IRS should delay the effective date of any broker reporting obligations that would apply to digital asset middlemen.” Read the comment letter (PDF).

Meanwhile on X, Bill Hughes, who is counsel for software technology company Consensys, bemoaned a specific cohort of commentary: “I’m sorry to be a bummer but 120,000 comments submitted to Treasury where a non trivial percentage is either bloviating about HEX or doesn’t realize the Treasury is not the SEC has me feeling like this sometimes.” See “this.”

quick tip: “[Galaxy Digital CEO Mike Novogratz]  says in wake of FTX, crypto needs experienced finance execs. [Uniswap] COO Mary Catherine Lader responds: ‘I don’t think the response to FTX should be that we replaced one form of social proof -endorsing someone who looks like a young innovator- with another form of [social proof] … endorsing someone who looks like a financial services executive. The history of finance is full of dozens of old men who have led people down the wrong path.’” – @blockchaintipsheet at #DCFintechWeek

hear ye, hear ya

House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion and scheduled a hearing entitled: “Crypto Crime in Context: Breaking Down the Illicit Activity in Digital Assets.” It will take place next Wednesday, November 15, 2:00 p.m. ET.  See the landing page.

stablecoins – central bankers

The Swiss-based central banker organization known as the Bank for International Settlements (a.k.a. BIS) is not a fan of stablecoins. Surprised?  In a paper titled, “Will the real stablecoin please stand up?“, BIS economist Anneke Kosse finds volatility and where there’s volatility there is considerable circumspection. “…we conclude that the stablecoins in circulation today do not meet the key criteria for being a safe store of value and a trustworthy means of payment in the real economy,” she writes. Bring on the central bank digital currency (CBDC). Read a short statement from BIS . And then, download the 29-page paper.

stablecoins – EU reserves

Yesterday, the European Union’s consultations (i.e. proposals) on stablecoins tried to clarify the reserves required for the digital asset financial product. Ledger Insights distills the proposals that will impact the roll-out of the EU’s Markets in Crypto-Assets Regulation (known as MiCAR in this article). One snippet: “Smaller stablecoins must hold at least 30% of their reserves at commercial banks. In contrast, significant stablecoins must keep 60% or more at banks. Both of these requirements are already specified by MiCAR. A significant stablecoin is one with at least €5 billion in reserves or more than ten million users.” Read more on Ledger Insights. And, read the EU press release.

more tips:

“Good news for fintechs and non-bank payment firms from Brussels: The EU institutions have reached a provisional deal on instant payments during yesterday’s trilogue negotiation…” – Patrick Hansen, Circle, on X yesterday

still more tips

U.S. SEC Said to Open Talks with Grayscale on Spot Bitcoin ETF Push – CoinDesk

Opinion: “Sam Bankman-Fried and the People Who Gave Up Their Money for Nothing” – Molly White in The New York Times

Congress Must Aid Fight Against Illicit Use of Crypto, Treasury Official Says (Nov. 7) – WSJ

House Financial Services Committee: “HEARING NOTICE: Oversight of Prudential Regulators” on November 15 – financialservices.house.gov

Stablecoin Behemoth Circle Mulls 2024 IPO: Report – Decrypt

Fed on CBDCs, stablecoins

The Fed still sees a priority with stablecoin regulation, not so much on Central Bank Digital Currencies (CBDCs) according to The Federal Reserve’s Vice Chair for Supervision Michael Barr at yesterday’s DC Fintech Week event. Paraphrasing Barr, Fortune’s Leo Schwartz tweeted on X, “…the central bank has not yet made a decision on CBDCs, but wouldn’t move forward with a retail version without authorization from Congress and the White House.” Read more  on Fortune.

what you should know: The Fed has yet to publicly suggest that a CBDC is imminent. As Barr stated, Congress would need to authorize a CBDC, too.

Rep. Nickel

Rep. Wiley Nickel (D, NC), a member of the House Financial Services (HFS) Committee, represented Congress at DC FinTech Week yesterday and spoke across a range of digital asset topics. On the stablecoin bill, he remains optimistic with only one issue remaining between the opposing sides, i.e. “state right-ers and having a strong federal floor” for stablecoins. Nickel said that the views were not very far apart and all that remained was the “sausage making process” for the bill to eventually become law.

what you should know: Nickel was among five Democrats on HFS who vote for [H.R.4766] Clarity for Payment Stablecoins Act during the markup in July.

Thread: “Take a look at some of the amendments to the FSGG approps bill for [crypto]” – Digital Chamber’s Cody Carbone on X

OCC loves tokenization

Appearing at DC Fintech Week, Acting Comptroller of the Currency, Michael Hsu, brought his unwaveringly skeptical view on crypto, but saw opportunity with tokenization.

Hsu explained, “Tokenization – what is tokenization about? Tokenization is focused on solving an actual problem. And that problem is settlement. This is boring back office stuff, but it’s super important. Every time you buy a security, every time you transfer money, there’s a bunch of actions that happen in the background with regards to settling that transaction. And it seems invisible, but to those in the know, it involves a bunch of different players with a bunch of different handoffs, there’s risks, there’s frictions, there’s fees. Tokenization holds the promise to collapse that and to simplify it if it’s done right.

“So when I talk to folks, there’s increasing interest in tokenization because it solves a problem and less and less interest on crypto. And crypto is just – there’s so many problems with it. It’s hard to comply with BSA and other laws. Whereas tokenization, if done right, that holds a lot of promise.”

Hsu also announced that the Office of the Comptroller of the Currency (OCC)  will be hosting a conference in February on tokenization.

what you should know:  Hsu said at last year’s DC FinTech Week a month prior to FTX’s implosion: “One of the largest centralized crypto exchanges in the U.S., submitted a presentation to the Financial Stability Oversight Council (FSOC) in response to outreach on the digital assets Executive Order. The arguments in the presentation caught my attention because they presumed that integrating crypto and TradFi would enhance finance stability. I could not disagree more.” The damage FTX wrought in D.C. is vast.

.“… We live in a fully digital electronic age, not just in trading. We already, by the way, have digital money. It’s called bank deposits.” SEC Chair Gary Gensler (in person) at SIFMA’s Annual Meeting

Keep Your Coins

The Chamber of Digital Commerce’s Taylor Barr announced on X yesterday that Senator Ted Budd (R, NC) has introduced in the Senate the “Keep Your Coins” Act [H.R. 4841] previously introduced in the House by Rep. Warren Davidson (R, OH). The bill passed out of a HFS Committees markup along party lines in late July.

Barr described the bill’s aim: “Specifically, it prohibits Federal agencies from restricting the use of convertible virtual currency by a person to purchase goods or services for the person’s own use.”(Senator Budd’s X account re-tweeted the announcement.)  The two Congressmen were on the HFS Committee before Budd joined the Senate this year.

what you should know: So far, Democrats have not voiced support for the bill in the House with Rep. Sean Casten (D, IL) calling the bill “a real problem” at an HFS illicit financing hearing two weeks ago.

defense lobby

Coinbase has added for well-known names to its Coinbase Global Advisory Council: former U.S. Defense Secretary Mark Esper, former Rep. Stephanie Murphy (D, FL), former Bush Administration counterterrorism advisor Frances Townsend, and consultant David Urban, who was the former Chief of Staff to Sen. Arlen Specter (R, PA). In addition to Coinbase’s own battle with the Securities Exchange Commission (SEC), with the recent discussions in DC around crypto’s involvement in illicit financing and the terrorist attacks in Israel, the move likely looks to address the increased pressure on the Company – and the blockchain industry – regarding perceived threats from virtual currency to the U.S. and its global interests.  Read Coinbase blog post.

what you should know: Regarding the announcement, Coinbase CEO Brian Armstrong added on X, “Crypto has an important role to play in national security.”

CFPB wallet crackdown

The Consumer Financial Protection Board run by Director Rohit Chopra proposed new guidelines for “big tech” as well as digital wallets and payment apps yesterday as the Biden Administration and Democratic leadership continues to attempt to rein in technology. Generally speaking, non-bank companies will need to comply to the level of bank compliance regarding payments. Comments are due January 8, 2024. Read the press release.

Read the proposal: “Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications” – consumerfinance.gov

House Financial Services Committee Chair Patrick McHenry (R, NC) spoke strongly against the action saying in a release, “The action announced by Director Chopra today is a step in the wrong direction. Consistent with the Bureau’s track record, this proposed rule will only entrench the status quo by impeding the adoption and development of innovative products and services.” Read more.

what you should know: Blockchain payments solutions such as crypto wallets are not mentioned by name but would appear to get bucketed into the broad application of the rule.

still more tips

a16z writes first check out of UK to crypto startup Pimlico – Techcrunch

NY Top Financial Regulator on Banking System, AI (Video) – Bloomberg

Custodia Bank launches Bitcoin custody platform – Cointelegraph

digital assets taxonomy

Yesterday’s meeting of the Commodity Futures Trading Commission’s (CFTC) Global Markets Advisory Committee (GMAC) led by Commissioner Caroline Pham revealed the current work of its new Digital Assets Market Subcommittee (DAMS).

Caroline Butler, who is the CEO of Digital Assets at BNY Mellon and heads up the subcommittee with Franklin Templeton SVP Sandy Kaul, explained at the meeting about five (5) work streams currently in motion among the 36 subcommittee members who represent traditional finance and digital asset companies. The works streams include: nomenclature and creating a taxonomy; pre-trade and post-trade requirements across digital assets; governance and risk control frameworks; NFTs and utility tokens; and, digital asset infrastructure. See a slide breaking it all down (JPEG).

what you should know: Considering its ambitious goals, DAMS’ work would appear to be a resource that Congress, CFTC and industry will covet. Meeting video is here.

AML provisions

With the stablecoin and digital asset market structure bills still waiting to reach the House Floor, Blockchain Association’s policy executive Ron Hammond provided his point-of-view on Congress and digital assets legislation momentum yesterday. Hammond said, “At this stage for any of the bills to move forward this Congress, there is a strong push for inclusion of [Anti-Money Laundering (AML)] provisions. It was something that came up multiple times when [House Financial Services (HFS) Committee] voted on the stablecoins and market structure but the Hamas narrative has escalated this.” Read the whole thread.

what you should know: The AML legislative smorgasbord includes the Digital Asset AML Act from Senator Elizabeth Warren (D, MA) and Senator Roger Marshall (R, KS), Senator Jack Reed’s (D, RI) CANSEE Act and the National Defense Authorization Act (NDAA) amendment from Warren, Marshall, Senator Cynthia Lummis (R, WY) and Senator Kirsten Gillibrand (D, NY).

quick tip: A FinTech conference at Georgetown next week includes CFTC’s Rostin Behnam, Christy Goldsmith Romero and Summer Mersinger; Reps. Steven Lynch (D, MA), French Hill (R, AR) and Bryan Steil (R, WI); and SEC Commissioner Hester Peirce. See agenda.

stablecoins UK

With crypto asset regulation approved as of last week – now to the rollout – and with the rollout comes more discovery of the exact regulations. The Financial Conduct Authority’s (FCA) new discussion paper for stablecoin issuers was published yesterday as the UK government takes a phased approach to its crypto-asset strategy beginning with  fiat-backed
stablecoins. See the proposed stablecoin approach (PDF). The discussion period ends February 24, 2024.

This wasn’t the only guidance in the UK as the Bank of England also supplied its guidelines with a focus on the central banks and insuring stability with the same deadline as the FCA’s effort. See it.

Ledger Insights breaks down the difference between the two releases and comments that the Bank of England “doesn’t want banks to get involved in stablecoins or e-money using their primary banking brand. The only way in which banks should use DLT [distributed ledger technology] for money is for tokenized deposits. Like the United States, the banking regulator also wants to be kept informed about planned digital money innovations.” Read  more.

more tips:

What is the difference between DLT and DeFi? – Investopedia

use case – entertainment

An opinion piece in the Los Angeles Business Journal, entertainment industry participants make their case for how blockchain can “save” entertainment. In addition to the incremental revenue opportunity represented by NFTs or digital collectibles, “curbing piracy, addressing fraud, creating new funding methods, tracking royalties and securing an equitable and sustainable future” are all mentioned.  The centerpiece of the article is the Decentralized Pictures Foundation co-owned by Frances Ford Coppola’s son, Roman. Read more.

today

Today’s House Financial Services Subcommittee on Financial Institutions and Monetary Policy hearing titled, “The Tangled Web of Global Governance: How the Biden Administration is Ceding Authority Over American Financial Regulation” will begin at 10:00 a.m. ET. Live video and hearing info here.

Witnesses include:

• • Thomas Hoenig, Distinguished Senior Fellow, Mercatus Center, George Mason University
  • Christina Parajon Skinner, Assistant Professor of Legal Studies & Business Ethics, Wharton School, University of Pennsylvania
  • Bryan Bashur, Director of Financial Policy, Americans for Tax Reform
  • Renita Marcellin, Advocacy and Legislative Director, Americans for Financial Reform

what you should know: Digital assets might pop-up in this hearing. George Mason’s Hoenig wrote an op-ed in American Banker in 2021 which read in part, “Cryptocurrencies are faith-based – they have no intrinsic value. There is no sovereign authority backing them. They are the ‘pet rock’ of currency, worth only what someone can get you to believe they are worth.”

Moody stablecoins

Financial ratings agency Moody’s put an electric shock – or two – into the hearts of stablecoin users with a self-published article yesterday titled, “Large fiat-backed stablecoins depegged 600+ times in 2023”.  Simultaneously, the company launched a “new digital asset monitor to track risk.” How conveeeenient.

what you should know: Zero Knowledge Consulting’s Austin Campbell tweeted on X, “Moody’s out with some spectacular disinformation on stablecoins by apparently including tiny exchanges and venues with zero liquidity in their definition of de-peg.”

SEC crypto recruiting

The Office of Inspector General at the Securities and Exchange Commission (SEC) reported last week said that there is significant difficulty hiring for the Commission due to the crypto asset rules. From page 16: “Officials also reported that many qualified candidates hold crypto assets, which the Office of the Ethics Counsel has determined would prohibit them from working on particular matters affecting or involving crypto assets. This prohibition, according to SEC officials, has been detrimental to recruiting, as candidates are often unwilling to divest their crypto assets to work for the SEC.” Read the report (PDF).

what you should know: Imagine if job candidates weren’t allowed to hold U.S. dollars? Read Fortune, too.

still more tips

Largest investor inflows into crypto products since 2021 bull market high – Blockworks

Opinion: Sizing the Massive Spot Bitcoin ETF Opportunity – GSR’s Brian Rudick and Matt Kunke on CoinDesk

Hong Kong Mulls Allowing Spot Crypto ETFs in Pursuit of Asia Hub – Bloomberg

WSJ editorial board

Inspired by the conclusion of the trial of former FTX co-founder and CEO Sam Bankman-Fried, the Wall Street Journal editorial board unleashed an Op-Ed late Friday suggesting new digital assets regulation isn’t needed from Congress when it comes to fraud. The board accuses Securities and Exchange Commission (SEC) Chair Gary Gensler of overlooking FTX and says, “Note to Chairman Gary Gensler: The [SEC] doesn’t need to regulate crypto markets to police malfeasance.” Read the whole magilla.

what you should know: Chair Gensler and his SEC agenda has been known for its overreach among critics. Here, it’s underreach. The right-leaning publication’s editorial board has been a consistent critic of Chair Gensler, a Democrat.

quick tip – Plenty of public speaking this week in DC with FinTech Week and SIFMA‘s Annual Meeting among highlights.

Dem lobbyist weighs in

Also in the wake of Bankman-Fried’s conviction on Thursday, Better Markets Dennis Kelleher (a member of Biden 2020 transition team along with SEC Chair Gary Gensler) tells the Associated Press, “There is no need for any special interest crypto legislation which would only legitimize an industry that is used by speculators, financial predators, and criminals.” Read more. The article argues that Congress has not been eager to regulate crypto.

what you should know: A more accurate description could be that Democratic leadership (including Kelleher and Better Markets) along with the The White House do not have interest in digital assets regulation that brings it within the umbrella of the U.S. financial system.

decentralization Q&A

Cap Hill Crypto’s George Leonardo, a former Hill staffer and attorney, reaches out to policy executive Rashan Colbert, a former staffer for Sen. Cory Booker (D, NJ), and asks Colbert to walk through – step by step – his new firm dYdX, how it works and how U.S. policymakers should address decentralization. Colbert says in part, “Decentralization comes with a particular set of benefits and trade-offs that should be adequately considered when interacting with decentralized networks, or when crafting policies that will govern them.” Read the informative Q&A.

what you should know:  Regarding the GAO announcement on Staff Accounting Bulletin (SAB 121), also read Leonardo’s breakdown last week in the newsletter. He writes, “…if a court were to agree with GAO’s finding that SAB 121 is a ‘rule’ under the APA, it could set aside SAB 121 because the SEC did not follow the APA’s notice and comment procedural requirements when issuing the bulletin.” Cap Hill Crypto’s newsletter sign up is here.

quick tip – “Sam Bankman-Fried Verdict Reflects Crypto’s Broken Dreams”: a bleak look – WSJ

postponed (hearing)

A classified hearing for this coming Wednesday was quickly pulled by the House Financial Services Committee on Friday. “POSTPONED: A Review of Our Sanctions Regime and Efforts to Combat Terrorist Financing.” No reason was provided in the press release.

Meanwhile, pro-crypto advocates in the House remain busy. Chair Patrick McHenry (R, NC) spoke out in favor of bipartisan funding support for Israel. And HFS Committee member and House Majority Whip Tom Emmer (R, MN) said on X on Saturday, “House Republicans are reviving the appropriations process for the first time in more than a decade, with 7 out of 12 bills passed so far.”

what you should know: A potential government shutdown looms mid-month, and a new Speaker of the House is navigating a way forward. Where digital assets legislation (stablecoins, market structure) fits remains to be seen. Perhaps, it’s postponed?

quick tip – “Opinion: A Tale of 2 SEC Commissioners”: Gary Gensler and Hester Peirce – Rodrigo Seira, Paradigm, on CoinDesk

CFTC meeting

Beginning at 9 a.m. ET today, Commissioner Caroline Pham of the Commodity Futures Trading Commission (CFTC) is convening another session of her Global Markets Advisory Committee (GMAC), which helps connect industry to the Commission on matters such as markets, competition and regulation.

what you should know: TradFi representing… GMAC’s Digital Asset Markets Subcommittee members Caroline Butler, Global Head of Digital Assets, BNY Mellon and Sandy Kaul, SVP, Franklin Templeton will provide an update on their subcommittee’s work at 11:42 a.m. See agenda.

quick tip: Treasury Designates Virtual Currency Money Launderer for Russian Elites and Cybercriminals – Treasury.gov

article analytics

Inspired by crypto venture investor Nic Carter‘s “bounty” offers, a new Medium post from “@0xham3d_eth on X” has been published, “Tracking of Suspected Addresses in Elliptic & BitOK claims” and takes issue with the analytics of used in the October 10 WSJ article on terrorist financing and crypto. Read it.

what you should know: Like many things related to digital assets (and politics!), there is a sense that whatever the reality of the data of the Oct. 10 article is, and depending what side you’re already on, “you’re going to believe whatever you’re going to want to believe.”

still more tips

Solana’s Breakpoint 2023: Veep or House of Cards? How Washington Makes Decisions (video) – YouTube

“I think [crypto] is the biggest financial mania of modern times.” – Zeke Faux of Bloomberg News on the Masters in Business podcast

OpenSea Slashes NFT Marketplace Staff by 50% – Decrypt

Barry Silbert’s Digital Currency Group Hires Former Trump Impeachment Counsel – Bloomberg

SBF is guilty

Here’s a selection of media outlets who covered the trial of FTX CEO Sam Bankman-Fried and the guilty verdict on all 7 counts last night:

what you should know: There is still a second trial expected in March 2024 which will cover the campaign finance laws that Bankman-Fried violated.

yesterday’s HFS hearing

Yesterday’s 2-hour House Financial Services (HFS) Capital Markets Subcommittee Hearing on the SEC’s agenda for capital markets went as expected.  The Republican majority, owners of the Committee’s agenda, led by subcommittee Chair Rep. Ann Wagner (R, MO), expressed deep skepticism about the SEC’s machinations in the markets. And the Democratic caucus provided support *mostly* for the SEC.

See the recorded video and hearing documents here.

Rep. Wagner noted the SEC had not responded within the requested 30 days to a Congressional letter in September on the SEC’s predictive data analytics rule proposal. Previously, HFS Chair Patrick McHenry (R, NC) threatened to subpoena SEC Chair Gary Gensler at a September SEC Oversight hearing for Gensler’s and his agency’s lack of meaningful response to Congressional requests. Is Wagner’s letter and the resulting echo another mark in favor of the threatened subpoena?

Rep. Brad Sherman (D, CA), the subcommittee’s Ranking Member, spoke next and didn’t hesitate to commence with criticism of digital assets and laud the SEC for its jurisdiction over it saying, “Some $130 million of cryptocurrency has gone to Hamas and Palestinian Islamic Jihad and the SEC is the one agency here in Washington that is most effective in clamping down on crypto which is designed to be a perfect means for *hidden money* –  hence the term *cryptocurrrency*  – getting to the worst actors in the world.” Sherman’s comment appeared to use data from an October 10 WSJ article that has since been corrected by the reporters.

HFS hearing – Q&A

Rep. Sherman brought up a proposed “safeguarding” rule – the SEC’s controversial custodial rule which would inhibit digital assets. Sherman said it was a good rule for crypto (intangible assets), but questionable when it comes to tangible assets. SIFMA CEO and witness Ken Bentsen quickly answered that the rule was an overreach by the Commission and “inconsistent with how prudential regulators govern custodians.”

Rep. Wiley Nickel (D, CA) brought up SAB 121 – another custody quagmire for digital assets and the recent GAO decision against the SEC’s bulletin. Nickel was not a fan of SAB 121 and neither was SIFMA CEO Bentsen in that it has forced traditional banking firms to abandon plans (e.g. BNY Mellon) to provide custody of digital assets.

Noting the 61 rules issued by the SEC in the current Administration, Rep. French Hill (R, AR) strongly criticized SEC Chair Gary Gensler during his five minutes of witness questioning and noted how the SEC is now losing in the Federal courts (Grayscale, Ripple among others). Hill then had the Wall Street Journal editorial published yesterday – “Gary Gensler loses again” – entered into the Congressional record.

more tips:

Read, “Gary Gensler and the SEC Lose Again” by The Wall Street Journal’s Editorial Board.

what you should know: In spite of some Dem support, whether you’re a Democrat or Republican, the SEC is a bipartisan magnet for griping.

battleground Ohio

Senate Banking Chair Sherrod Brown (D, OH) is colliding with digital asset supporters’ efforts amidst the Senator’s re-election campaign. But, Brown appears unfazed and tells Politico’s Zach Warmbrodt: “I don’t care if they do… They only serve to discredit themselves. These corporate interests are going to attack me for standing up to their illicit financing of terrorism and fentanyl? I mean, bring ’em on if that’s what they’re going to do.” He never changes.

Brown’s 2024 Republican adversaries are all running even with him according to recent polls.  Read more on the state of play in Ohio.

more tips:

How Ohio became a key player in the fight over cryptocurrency regulations (Sept. 20) – Columbus Dispatch

what you should know: The “Stand With Crypto” lobbying effort, created by Coinbase, continues to target Ohio. Yesterday, the org held a “Digital Town Hall” with Rep. Greg Landsman (D, OH), a member of the Problem Solvers caucus. Landsman asked questions and mostly listened to participants’ answers during the event. At best, he is undecided on digital assets legislation and in “learn” mode.

Rep. Casten

Rep. Sean Casten (D, IL) is taking a leadership role among anti-crypto House Democrats on digital assets policy. One of his first solo moves was his prominent “page 1” signature on the Sen. Elizabeth Warren (D, MA) letter to the White House last month in regards to crypto and terrorist financing coming just after the October 10 Wall Street article.

This past Monday, Casten penned an op-ed in The Hill titled,”Stopping future crypto-financed terrorism.” Read it. Among other points, Rep. Casten believes all the recent House Financial Services Committee legislation on digital assets such as the stablecoin and digital asset market structure bills need to be “rescinded.”

Casten also claims the industry is getting in the way writing, “It’s also time for the crypto industry to put safety first. Since 2020, the industry has spent more than $45 million on its lobbying efforts, with nearly $6.6 million of that being spent in the second quarter of this year alone. Those efforts led directly to the bills introduced above. Given the damage to their own reputation, they need to call to rescind those bills and replace them with ones that provide no differential regulation between alternative money transfer systems.”

what you should know: Rep. Casten appears to be the perfect warrior for anti-crypto Democrats. At last week’s HFS Subcommittee on Digital Assets, Financial Technology and Inclusion hearing on FinTech, he said “As long as we have mixers and anonymous wallets, blockchain is just a really bad accounting system.” Rep. Casten doesn’t seem to like the technology. But, at the inaugural Digital Assets Subcommittee hearing in March, Rep. Casten audibly worried about sounding like a “luddite” and said, “blockchain is a fascinating technology.”

stablecoin subpoena

Payments provider PayPal announced yesterday that it received a subpoena about its stablecoin plans from the SEC. The Company’s stablecoin – known by the ticker PYUSD – had received scrutiny from anti-crypto Democrats who were embroiled in negotiations over the House Financial Services Committee stablecoin bill.

On August 10, HFS Ranking Member Maxine Waters (D, CA) said at an HFS hearing, “I am deeply concerned that PayPal has chosen to launch its own stablecoin while there is still no Federal framework for regulation, oversight, and enforcement of these assets…” Read more. And poof… a subpoena.

PayPal’s public filing from yesterday reads, “On November 1, 2023, we received a subpoena from the U.S. SEC Division of Enforcement relating to PayPal USD stablecoin. The subpoena requests the production of documents. We are cooperating with the SEC in connection with this request.”

what you should know: Anti-crypto Dems want “pre-emptive” Federal oversight of stablecoins, pro-crypto forces want “parallel” State and Federal oversight. This subpoena would appear to be an extension of that battle and echoes criticism of the SEC and its efforts to rein in the alleged abuses or autonomy its Democratic majority sees in the private sector. The subpoena was also well-timed to yesterday’s HFS hearing, run by the Republican majority, on the SEC agenda.

sanctions tightrope

According to the Congressional record, Rep. French Hill was on the House floor on Wednesday and spoke in support of “H.R. 340, the Hamas International Financing Prevention Act.” The bill, re-introduced by Rep. Brian Brian (R, FL) and co-sponsored by Rep. Josh Gottheimer (D, NJ), (originally in January), emphasizes the importance of sanctions in combatting terrorist financing. See more on Rep. Mast’s website. It passed by a vote of 363-46.

Meanwhile, digital assets have been inextricably tied to Hamas and terrorist financing by the recent WSJ article and Republicans (House Republicans, in particular) have been careful not back away from it. Yet, Republicans emphasize sanctions as the optimal answer.

On the other hand, Democratic leadership (in the Senate, in particular) appears to back sanctions as well as sees the need to crack down on digital assets.

Rep. Hill said Wednesday, “In addition to my work on the Foreign Affairs Committee, I serve on the House Financial Services Committee. Over the years that I have been in Congress, I have been on the Task Force to Investigate Terrorism Financing and the Subcommittee on Terrorism and Illicit Finance. Today, once again, we come to this House floor to tackle a new form of illicit finance. It was shocking to a lot of people in America to read in The Wall Street Journal that Hamas is now using digital assets in order to raise funds and move money around. Just as we tackle illicit charitable use, illicit cash use, illicit bank use, this committee is dedicated to tackling this new form of escaping our anti-money laundering Bank Secrecy Act laws in order to fund terror. I expect all of my colleagues to be together, working together to pass this bill and, in fact, standing up against this new form of terror finance by using digital assets.”

hear ye, hear ye

This could be fun. The HFS Committee led by Chair McHenry announced a full Committee Hearing titled, “Member Day.” Taking place on November 9 beginning at 9 a.m. ET, “Members of Congress, Delegates, and the Resident Commissioner will have the opportunity to testify before the Committee.” Read a bit more.

Also, another hearing on the Internal Revenue Service (IRS) proposed rulemaking for digital assets has moved to November 13 (was November 7). The IRS said yesterday, “Given the large amount of interest in the issue, the IRS wanted to give as much advance public notice of the change in advance of the Federal Register notice. In addition, the hearing will be conducted telephonically, rather than at the IRS headquarters building in Washington. The Federal Register will have additional details on how the public can listen to the hearing.” Read more.

earnings

Coinbase beats Q3 estimates, USDC interest income rebounds to $172 million – The Block

Block shares surge after earnings beat and strong Square, Cash App growth – CNBC

still more tips

Commissioner Pham Announces Agenda for the Upcoming Global Markets Advisory Committee Meeting on November 6 – CFTC.gov

Guidance for crypto firms to help them comply with marketing rules – FCA.org.uk

Hong Kong to stoke tokenisation of real-world assets and stablecoins to build web3 hub – DL News

Sam Bankman-Fried Lambasted by Prosecutor Right Before Jurors Begin Deciding His Fate: SBF Thought ‘He Could Fool the World’ – CoinDesk

enforcement action

The Securities and Exchange Commission (SEC) has filed another enforcement action against a cryptocurrency company – this time it’s Safemoon and accused it of “perpetrating a massive fraudulent scheme through the unregistered sale of the crypto asset security, SafeMoon” and adding that the executive team “withdrew crypto assets worth more than $200 million.”   See the SEC’s press release.

SEC Crypto Assets and Cyber Unit Enforcement Chief David Hirsch projects skepticism about DeFi, in general, in the announcement, too: “Decentralized finance claims to deliver transparency and predictable outcomes, but unregistered offerings lack the disclosures and accountability that the law demands, and they attract scammers…”

In a Department of Justice press release, the DoJ announced the arrest of the CEO and CTO of SafeMoon, and said it’s still seeking Safemoon’s creator Kyle Nagy.  U.S. Attorney Breon Peace said about the fraud, “…the defendants deliberately misled investors and diverted millions of dollars to fuel their greedy scheme and enrich themselves by purchasing a custom Porsche sports car, other luxury vehicles and real estate.” Read more in CoinDesk.

what you should know: The Safemoon X account, with 1.2 million followers, gives no indication of the lawsuit. But, many commenting on the company’s Halloween tweet – it’s final tweet? – apparently did see it coming.

AML legislation momentum

Yesterday, momentum may be slowed, for now, for Anti-Money Laundering (AML) legislation on digital assets in the Senate as other priorities take over. Politico reports, “After a hearing last week ‘on crypto’s involvement, we’re looking at that — [and] we’re looking at potentially more sanctions on non-state actors, and we’re looking at Iran and Russia,’ [Senate Banking Chair Sherrod Brown (D, OH)] said when asked about legislative developments. He said he didn’t yet know when the next hearing on the topic would be.” Read it.

what you should know: The dichotomy present between Senate Banking Democrats such as Brown and Senator Elizabeth Warren (D, MA) at last week’s hearing on terrorist financing was noticeable. The Democratic Senators questions and statements suggested they wanted to hear that crypto was an important driver in terrorist financing – whereas the witnesses, stressed crypto’s small role and the importance of strong sanctions. Meanwhile, hearing comments by Sen. Warren on non-custodial wallets have become a meme on X this week (1, 2).

crypto whistleblowers

According to the latest, annual whistleblower report from the Commodity Futures Trading Commission (CFTC), crypto is delivering more whistleblowers than any other areas in the CFTC’s remit. According to a statement by Commissioner Christy Goldsmith Romero (D), “The majority of the tips received this year involved crypto—an area that continues to have pervasive fraud and other illegality. (…) With the rise of crypto, more retail customers have come under the CFTC’s jurisdiction, making even more critical the efforts of the CFTC’s Whistleblower Program and the Office of Customer Education and Outreach.” Read the Commissioner’s statement.

The report provides specifics: “The volume of tips relating to both crypto/digital asset schemes and romance scams continued to be high. These schemes generally start with a text from a ‘wrong number’ or through social media contacts and result in the victim losing large sums of money to his/her romantic interest.” See the CFTC’s annual whistleblower report (PDF).

And, read a summary on The Block.

what you should know: The implications of the prolific use of whistleblowers by the regulator should send shivers down the collective spine of fraudsters as they work with partners, co-founders, etc. who are also looking to make a quick buck.

Oregon and UCC

In an op-ed in the Portland Business Journal, lawyers Danny Newman and Michael Fletcher at law firm Tonkin Torp explain that Oregon has yet to adopt Uniform Commercial Code (UCC) provisions for  crypto assets transaction and the uncertainty may hurt the state especially when it comes to bankruptcy cases but there are larger implications.  Newman and Fletcher argue, “To promote business development and innovation with crypto assets, Oregon should join these other states and adopt the model UCC provisions for digital assets. (…) The Oregon legislature should take up consideration of the model UCC crypto provisions to bring certainty to this emerging area of commercial activity.” Read more.

what you should know: States think about innovation, too!- not just reigning in digital assets. Learn more on the UCC changes and its impact from law firm Orrick and a piece written in October ’22 here.

PayPal offshore

A global strategy in digital assets continues to expand for payments firm PayPal as the company successfully registered (see “PayPal UK Limited“) this week in the United Kingdom as a crypto service provider. Decrypt reports, “PayPal’s registration comes a few months after the firm temporarily paused crypto purchases for British customers, citing “new regulatory requirements.” Read more.

what you should know: Global companies such as PayPal are going to create crypto businesses where jurisdictions with well-defined regulations exist.

SEC pushback continues

It may not have been digital assets, but after Tuesday’s GAO announcement sharply critical of the Securities and Exchange Commission’s (SEC) SAB 121 maneuvers with digital assets, a new Congressional letter on Tuesday reinforced the increasing pressure on the SEC’s Democratic majority led by its Chair Gary Gensler.

Participants in the letter are from across the partisan divide: from Reps. Wylie Nickel (D, NC) and Sean Casten (D, IL) to Reps. Brian Steil (R, WI) and Byron Donalds (R, FL). The lawmakers’ concern was rulemaking – specifically “Prohibition Against Conflicts of Interest in Certain Securitizations” (see fact sheet) which the lawmakers said was hard on “working families [who] are already enduring both a credit crunch and a housing crisis, and this proposed rule may make it even harder for our constituents to make ends meet.”

See the letter.

what you should know: Rep. Casten and Rep. Donalds on the same letter – write it down!

today’s hearing

Today’s House Financial Services Capital Markets Subcommittee Hearing titled, “Examining the SEC’s Agenda: Unintended Consequences for U.S. Capital Markets and Investors,” will commence at 10 a.m. ET in the Rayburn House Office Building. See live video, memo and hearing page here. Rep. Ann Wagner (R, MO) is Chair.

Witness and former SEC Director Dalia Blass doesn’t hold back in criticism of the SEC in her prepared testimony (PDF): “…I am concerned with the breadth, pace, and scope of the SEC’s current rulemaking agenda. Many of these significant rulemakings are not being conducted in response to a legislative mandate from Congress, nor has the Commission demonstrated any market failure or regulatory failure in support of their breadth and scope.”

Witness list (click name for testimony where available):

• • S.P. Kothari, Professor, MIT Sloan School of Management
  • Dalia Blass, Partner, Sullivan & Cromwell
  • Tom Quaadman, EVP, U.S. Chamber of Commerce
  • Ken Bentsen, President and CEO, SIFMA
  • Amy Borrus, Executive Director, Council of Institutional Investors

what you should know: And, as we pointed out last week before the hearing was postponed due to House Speaker drama, Blass’s presence along with Securities Industry and Financial Markets Association (SIFMA) CEO Ken Bentsen is notable. Blass collided with SIFMA when she was at the SEC and when the idea of a Bitcoin ETF was starting to take shape in the industry. The SEC wanted the industry to slow down. See Blass’s letter to SIFMA in 2018.

thinking Coinbase wins

On the Thinking Crypto podcast this week, host Tony Edwards asks Digital Chamber of Commerce executive Cody Carbone a relevant “what if” question given the SEC’s recent losses (1, 2) in the court and elsewhere. What if Coinbase wins against SEC?

Carbone said, “If Coinbase is going to be successful with their motion to dismiss and they’re going to move on from the SEC’s enforcement action, you’re going to get a lot of questions in DC. We already saw them after the Ripple case where there were House Democrats who were sitting on the sidelines for the last few years saying, ‘All right, Gary Gensler, you say that you’re going to regulate the entire industry. You say you have authority. We will believe you until the courts tell us you don’t have that authority.’ … When that XRP case happened was the first time that I saw members of Congress reach out to us saying, ‘We have questions. What’s going on here?’ If Coinbase is granted a motion to dismiss and it is another – and I would say massive loss for the SEC – those questions are only going to intensify.”

Hear the podcast.

what you should know: U.S. District Judge Katherine Failla, who presides over the Coinbase case, is the same Judge who dismissed the lawsuit against the Uniswap protocol and its executives.

still more tips

HSBC Takes Stab at Using Blockchain to Modernize London’s Antiquated Gold Market – Bloomberg

How does the New York Department of Financial Services (NYDFS) regulate stablecoins? – Bluechip on X

US traders can now trade regulated leveraged crypto futures through Coinbase Financial Markets – Coinbase

Tether Q3 Attestation Reveals Highest Percentage of Cash & Cash Equivalent Reserves, Over $330M Reduction in Secured Loans and Maintains $72.6B exposure in US T-Bills – Tether

Binance to Shut Down Ruble Payment Partnership – The Wall Street Journal

Treasury threatens crypto

This coming Friday, a speech to be delivered by U.S. Deputy Treasury Secretary Wally Adeyemo at foreign-policy think tank Royal United Services Institute in London will warn “cryptocurrency firms against allowing their platforms to be used to finance terrorist organizations, as scrutiny mounts of how Hamas may have used digital currency to fund its attack on Israel,” reports The Washington Post.

The Post publishes an excerpt from Adeyemo’s Friday speech: “There are those in the digital asset space who wish to innovate without regard to consequences instead of doing so responsibly, including protecting against illicit financing. (…) Let me be clear: We will use every tool available to go after any person or platform that is facilitating the movement of resources for terrorists.” The theme speaks to an October 19 rulemaking proposal by Treasury’s FinCEN around mixers which has implications for decentralized finance (DeFi).  Read more.

what you should know: The fact the speech was shared by the Administration several days ahead of time with WaPo is telling. The speech feels like a new level as the speech increases the pressure on the digital assets industry while also showing clear support for legislative efforts in Congress which seek tough or draconian efforts to shut down cryptocurrency, in particular, in the United States. Adeyemo spoke to CNN last week with a similar tone about crypto and illicit financing.

It’s not about one report

Chair Sherrod Brown (D, OH) and Sen. Elizabeth Warren (D, MA) of the Senate Banking Committee are not impressed with the digital assets industry’s efforts to dispute the connection between crypto and illicit financing portrayed by an October 10 article in The Wall Street Journal.

Punchbowl News Brendan Pedersen provides an overview of the latest and quotes Sen. Warren who says, “It’s not about one report… It’s about the whole structure of crypto that attracts some of the worst people around the world to move value around in a way that they cannot do through the ordinary banking system.” Fellow Banking Committee member Senator Cynthia Lummis (R, WY) chimes in and expresses concern about the damage done by the WSJ article. Read more.

Warren’s “Digital Asset Anti-Money Laundering Act [S.2669]” and recent Congressional letter has received strong support from Democrats in both Houses as well as some Senate Republicans including Sen. Roger Marshall (R, KS).

what you should know: Perhaps Sen. Lummis wasn’t satisfied by the characterization of her comments in Punchbowl News because later in the day on X, she unleashed a thread on inaccuracies related to crypto’s share of terrorist financing. She concluded emphatically, “Make no mistake, crypto assets are NOT the problem. Bad actors, who exist in every sector, are. The future for crypto assets in America is brighter than ever.”

GAO on SAB 121

A controversial April 2022 accounting bulletin issued by the Securities and Exchange Commission’s (SEC) Chief Accountant, Paul Munter, and known as Staff Acccounting Bulletin (SAB 121) was called out yesterday by the Government Accountability Office, who said, in so many words, the SEC overstepped its bounds with the rule.

The GAO writes, “The Bulletin provides interpretive guidance regarding how covered entities should account for and disclose their custodial obligations to safeguard cryptoassets held for their platform users. SEC did not submit a report pursuant to the Congressional Review Act (CRA) to Congress or the Comptroller General on the Bulletin.” And the SEC should have. Read the announcement.

And then, read the GAO’s 10-page report on the findings.

In an interview in July 2022, SEC Chair Gary Gensler expressed not an inkling of concern about SAB 121’s creation, “And this is the same process that we’ve gone into before and and gives issuers – public company issuers – advice, and in this case, we had a number of companies coming to us saying, ‘How do you think this should be accounted for?’”

what you should know: This loss by the SEC couples with the increasing number of court cases that the securities regulator has lost such as Ripple, Grayscale, and even a Uniswap case, where it may not have  been the complainant, but it arguably had a horse in the race.

GAO on SAB 121 – reaction

Senator Cynthia Lummis (she was busy yesterday!) and Rep. Patrick McHenry (R, NC), Chair of House Financial Services, responded to the news in the late afternoon yesterday with a press release. Sen. Lummis said in part, “Ensuring well-regulated financial institutions are able to provide safe custody for Americans’ hard-earned financial assets is my top priority. [SAB 121] sets an incredibly dangerous precedent. I plan to use the Congressional Review Act to block this rule in the coming weeks.” McHenry concluded his statement by saying, “SAB 121 was drafted with zero input from prudential regulators and the public, and now Congress must step in to block this harmful rule.”

Read the full press release.

Also yesterday, House Financial Services Committee member Mike Flood (R, NE) linked to the GAO decision on X and said, “The GAO has spoken. Staff Accounting Bulletin 121 is a rule, not mere guidance as the [SEC] claims. Rest assured, Congress will act to rein in Chair[Gary Gensler]’s overreach on this issue.” Read it.

Flood questioned Chair Gensler on SAB 121 in a September HFS SEC oversight hearing and has his own bill targeting the bulletin.

In a Congressional letter last May, HFS Chair McHenry asked House Appropriations committee Chairwoman Kay Granger (R, TX) and Ranking Member Rosa DeLauro (D, CT) to “prohibit funding for Staff Accounting Bulletin 121” in that it “precludes banking organizations from serving clients seeking digital asset safeguarding services…” McHenry continued at the time, “Moreover, such policy decisions made by staff circumvent the notice and comment requirements set forth in the Administrative Procedure Act and should not be funded.” Read the May 2023 letter (see page 4).

what you should know: In Congress, the House Financial Services’ digital assets market structure bill sponsored by House Agriculture Committee Chair Glenn “GT” Thompson (R, PA) and co-sponsored by HFS Digital Assets Subcommittee Chair French Hill (R, AR), among others, takes aim at SAB 121. Rep. Flood’s bill is a standalone option introduced later.  The GAO may have beaten them all to it.

52, 40, 16, 13

Better Markets, a lobbying firm run by Dennis Kelleher and closely aligned with Democratic policy perspectives in financial markets (Kelleher and SEC Chair Gensler were members of the Biden transition team in 2020), continues to take aim at Coinbase’s “52 million” cryptocurrency user number in the United States.   Yesterday, a tweet from Better Markets referred to the Coinbase number as “rigged” and “bogus” though it doesn’t suggest what the actual number is.

In a speech last week and reported by Politico on Monday,  Internal Revenue Service Director Julie Foerster suggested 40 million crypto buyers and sellers as the agency received feedback on its new crypto reporting proposal.

Digging deeper last week, accounting publication Tax Notes shared Foerster’s discussion of the details of the proposed new digital assets reporting:  “IRS and Treasury estimate that between 13 million and 16 million taxpayers will account for the deluge of the new Forms 1099-DA.”

Also from Tax Notes:  “The IRS plans to soon release a draft Form 1099-DA to be used by brokers to report transactions after the form’s instructions are completed, according to Foerster.” Read more (sign up required).

what you should know: 50 million, 40 million, 16 million, 13 million… the real question is: how many of those crypto users are single issue voters who will vote for or against a candidate – President – in 2024?  In a polarized voting environment, where a small slice of undecided voters in the middle could decide the election, the impact could be significant.

hear ye, hear ye

Coming November 7, House Financial Services has called together a hearing for Financial Institutions and Monetary Policy Subcommittee called “The Tangled Web of Global Governance: How the Biden Administration is Ceding Authority Over American Financial Regulation.” Rep. Andy Barr (R, KY) is the Chair – and was also McHenry’s chosen replacement at last week’s Capitol Account event where Barr spoke about digital assets legislation.

No agenda information is available on the hearing’s web page – yet. But, digital assets could be a part of this given the topic.

a lobbying update

The grassroots “Stand With Crypto”  lobbying organization – with help from Coinbase – is getting some traction. Stand With Crypto executive Nick Carr tells CoinDesk’s Jesse Hamilton that 80,000 people have donated over $2 million to date.  The group also claims at least 16,000 calls to lawmaker offices.

Hamilton concludes, “Though Stand With Crypto is meant to gather crypto enthusiasts at all levels, the biggest digital asset companies could benefit if the group starts making progress with lawmakers.” Read more.

what you should know: That’s a lotta calls. If you’re curious, read how Amazon Web Services says it’s helped Congress deal with high call volume.

Chair Gensler tweet

A tweet from SEC Chair Gary Gensler‘s X account yesterday (Halloween):

“If Satoshi Nakamoto went as Satoshi Nakamoto for Halloween, would we be able to tell?”

“Happy 15th anniversary to Satoshi’s famous white paper that started crypto.”

“Any crypto companies that are tricking investors should start treating them to compliance with the securities laws.”

more tips:

Satoshi Nakamoto – Wikipedia

tokenized deposits vs. stablecoins

The upcoming Singapore Fintech Festival from November 15-17 is bringing together world financial leaders for a discussion on the latest and greatest in financial technology including blockchain. See agenda.

Dante Disparte, Chief Strategy Officer and Head of Policy for Circle, issuer of the USDC stablecoin, promoted on X yesterday his upcoming appearance along with executives of JP Morgan, UBS and BNY Mellon in a panel called, “Digital Currency Showdown: Stablecoins Vs Tokenised Deposits.”

The panel’s description teases, “… the key question looms: Which contender can maximise payment utility while minimising associated risks? Tokenised deposits enjoy stronger trust from established systems, but can they guard against new capabilities like programmability and interoperability? Fiat-backed stablecoins could offer more inclusive reach but are still playing catch-up on the regulatory race – can it hit critical mass in time to realise its full potential?” Read more.

more tips:

The Digital Pound Foundation in the UK breaks down the differentiation in a self-published bulletin in September with a Central Bank Digital Currency (CBDC) a part of the mix.

what you should know: In the United States, Congressional Republicans are adamantly against CBDCs with Majority Whip Tom Emmer’s (R, MN) CBDC Anti-Surveillance State Act [H.R. 1122] emblematic of the pushback.  A House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion hearing  in September on CBDCs showed division including some reticence against Democrats, too. Read that one.

still more tips

Biden AI plan is one step in avoiding crypto trap – Reuters

Grayscale’s Ethereum ETF just entered a 240-day review process. Its Bitcoin cousin is expected in January – Fortune

Crypto mogul looks to seize control of company that publishes Sports Illustrated – NY Post

tax comments skyrocket

The digital assets industry is keeping up the drumbeat on a request for comments by Treasury and the Internal Revenue Service regarding a tax rules for digital assets proposal. The deadline is November 13. A hearing is scheduled next week on November 7 with another, potentially, the next day according to the Federal Register. Some are already touting their appearance.

IRS’s director of digital assets Julie Foerster said just last week that the agency is expecting 8 billion “information returns” related to crypto. That’s 200 returns for each of the 40 million crypto buyers and sellers in the United States, she said. Read more.

Blockchain Association Senior Counsel Marisa Tashman Coppel tweeted on X yesterday: “Over 25,000 comments have been received by the IRS regarding their broker rulemaking proposal. Over 12,000 posted to the docket on regulations.gov. Clearly a sign something is wrong with the proposal.” See the comments.

what you should know: Another reason for so many potential forms is that ANY crypto transaction would need to be reported according to the proposed rule. There still is no di minimis exemption, for example. You buy an NFT or a cup of coffee with Bitcoin, your service provider needs to report it, potentially.

NY state on stablecoins

New York Department of Financial Services Superintendent Adrienne Harris (D) reiterated yesterday that she supports “parallel” stablecoin regulation rather than “pre-emptive” Federal regulation.

In an interview with Bloomberg, Superintendent Harris said about “pre-emptive” regulation: “I think it’s dangerous. I understand that the desire to have one set of rules and avoid what some people think will be the race to the bottom. But you see in New York, where we have the most rigorous set of rules and regulations around the world -there’s no bigger crypto team than what we built at DFS. There are no more rigorous regulations anywhere in the world than what we’ve had on the books and I think it’s important to preserve that.” See the interview.

what you should know: This is the krux of the disagreement. A bipartisan group of Congressional members led by House Financial Services (HFS) Chair Patrick McHenry (R, NC) wish to preserve state’s rights to oversee stablecoins.  Democratic leadership led by HFS Ranking Member Maxine Waters (D, CA) and the White House, want Federal authorities to have final “say” on stablecoin oversight.

4 countries tokenize

Four countries announced a new cooperative program in tokenization yesterday.

According to the release, “The Monetary Authority of Singapore (MAS) today announced that it is partnering the Financial Services Agency of Japan (FSA), the Swiss Financial Market Supervisory Authority (FINMA) and the United Kingdom’s Financial Conduct Authority (FCA) to advance digital asset pilots in fixed income, foreign exchange and asset management products.” Read it. The countries call the new program: Project Guardian, a “policymaker group.”

And look at all the participating companies in the project: Apollo Global
Management, BNY Mellon, UBS, Citi, Deutsche Banc and Franklin Templeton to name a few. See the list.

more tips:

The digitization of real-world assets into tokens on blockchain – IBM

what you should know: Imagine the Securities and Exchange Commission (SEC) being a part of these groups? …maybe someday?  Members of today’s global financial  system are certainly talking a good “game” around real-world assets (RWA) and tokenization.

UK crypto rules

The latest version of proposed crypto regulation in the United Kingdom was published yesterday.  Get the 94-page (PDF). According to the The Block, “described how firms undertaking crypto asset activities will now have to be authorized by the UK’s Financial Conduct Authority. The authorization will include a stipulation for crypto exchanges to create detailed requirements for admission standards and mandate disclosures when listing new assets.” Read the summary.

what you should know: Nothing like this exists in the United States. But, you knew that.

American leadership and the EO

Look familiar? Yesterday, President Joseph Biden signed a new Executive Order (EO) for Artificial Intelligence (AI) which  “establishes new standards for AI safety and security, protects Americans’ privacy, advances equity and civil rights, stands up for consumers and workers, promotes innovation and competition, advances American leadership around the world, and more.” See the AI EO Fact Sheet.

The AI EO Fact Sheet begins with the negative effects of AI – and protection against it – with innovation, progress and American leadership secondary. Also, see AI.gov.

Last year, the Fact Sheet for the digital assets EO began with the benefits and leadership, “The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk…” See the digital assets EO Fact Sheet from March 2022.

what you should know: Are these two new technologies exactly comparable? Not exactly. But they’re potentially transformative effects are. So, what’s happened in between the two EO’s that has led to a change in tone coming from the White House? Two things: the implosion of FTX (and the 2022 election donations), which damaged relationships across Congress and regulatory agencies; and then, the resulting politicization of digital assets.

Also of note: AI makes the government want to protect privacy. Blockchain makes the government want to increase transparency with expanded anti-money laundering (AML) laws.

use case – wildcat mining

Chris Alfano and his Texas-based 360 Mining company are featured in a Wall Street Journal article about “wildcatting” for Bitcoin.

The entrepreneur built a mining system using natural gas wells and then looked for investors. “Alfano’s pitch to these prospective clients: They can earn $10 or more from burning a thousand cubic feet of gas to mine the cryptocurrency instead of selling it for $1.50 or less. ‘This is wildcatting on the bitcoin side,’ he shouts over the generators’ roar.” Natural gas is the volatile commodity and Bitcoin is the (volatile) hedge. Read more.

more tips:

Wildcatter – Wikipedia

what you should know: Crypto mining, mainly Bitcoin, is increasingly big business and impactful in DC. So much so that industry organization Digital Chamber of Commerce launched an affiliated specialized in mining: The Digital Power Network. See it. Wyoming, Florida and Texas mining efforts, to name a few, all have support in Congress from the likes of Senator Cynthia Lummis (R, WY), Rep. Byron Donalds (R, FL) and Senator Ted Cruz (TX). See this, this and this.

happy halloween

The image below is non-fungible token (NFT) artwork called “Nightmare Gothic” and created by Lucréce, who describes himself as “a Norwegian-born Vietnamese artist living and working in the US.” See Lucréce on X.

what you should know: This artwork is CC0 which means the artwork uses a Creative Commons license that “enables creators to give up their copyright and put their works into the worldwide public domain. CC0 enables reusers to distribute, remix, adapt, and build upon the material in any medium or format, with no conditions.” Full disclosure: I own an NFT of this artwork.

still more tips

DeFi is facing a ‘full frontal assault’ from regulators – Blockworks

Is Crypto Financing Terrorism? (Oct. 28) – The New York Times

article correction

It wasn’t a retraction of the story run on October 10 connecting crypto to terrorist financing in the Wall Street Journal, but there was confirmation by the reporting team that interpretation of the data was incorrect.

A new correction posted Friday begins: “Palestinian Islamic Jihad and Hezbollah may have exchanged up to $12 million in crypto since 2021, according to crypto-research firm Elliptic. An earlier version of this article incorrectly said PIJ had sent more than $12 million in crypto to Hezbollah since 2021, citing Elliptic’s research.”

Scroll to the bottom of the article for the “Corrections and Amplifications” section.

article correction – reaction

Crypto venture capitalist Nic Carter observed the change in a tweet thread on X, “…while it’s great that WSJ acknowledged they’d made mistakes, the correction is still very weak.” Coinbase’s Chief Legal Officer Paul Grewal weighed in on X, “[The WSJ’s] lede still maintains that the funding supported Hamas attacks hinged on ‘One answer: cryptocurrency.’ There’s no evidence of that, and WSJ knows it.” Read that thread.

Given the fire the article started in Congress as shown by elements of terrorist financing hearings in the House and Senate last week, the stakes remain high regarding the actual data.

Meanwhile, the “crypto and terrorist financing” narrative has continued to propagate in the media. In an interview on CNN with Deputy Treasury Secretary Wally Adeyemo last week, the lower-third graphic for the interview reads, “U.S. Warns Crypto Firms Against Financing Hamas, Terror Groups.” See it.

more tips:

“Put simply, it now seems the initial reporting was exaggerated as the Wall Street Journal issued a correction today to address some of the issues…” – tweet thread from Cato Institute’s Nick Anthony on X 

what you should know:  Last week’s Senate Banking hearing did not seem like the “slam dunk” Senate Banking Democrats were looking for in regards to support for their digital asset AML legislation. The digital asset AML legislative “race” right now is between Senator Elizabeth Warren’s  (D, MA)  Digital Asset Anti-Money Laundering Act and the digital assets NDAA amendment being driven by Senators Cynthia Lummis (R, WY) and Kirsten Gillibrand (D, NY) as a lighter bill that begins to explore beefed up regulation. Senator Jack Reed’s (D, RI) CANSEE Act feels like a distant third, currently.

scorched earth

In an “overdue dissent” published on Friday, Republican Securities and Exchange Commission (SEC) Commissioner Hester Peirce was finally able to vent about what she saw as the troubling outcome to the LBRY token enforcement action by the SEC. LBRY announced that it was shutting down its business due to the decision.

In her note, Peirce accused her own Commission of an unnecessary “scorched earth” approach. Peirce concludes, “What could I do to help prevent another group of people with a big idea for changing the world from going through what LBRY has over the past several years?” I have not come up with an answer to that question; however, I urge people who have suggestions about how the Commission can right its course on crypto and innovation more broadly, to send them my way.” Read it.

more tips:

LBRY ends operations, cites feud with SEC and mounting debt – Blockworks

what you should know: The three Democratic commissioners led by SEC Chair Gary Gensler continue to carry out a strategy focused on dismantling or disrupting digital asset businesses in the United States while the two Republican commissioners (Peirce and Mark Uyeda) watch with no power to overturn the majority.

DeFi and Europe

Jonathan Galea of European crypto consultants BCAS published a review of recent European Securities and Markets Authority guidance (PDF) on decentralized finance (DeFi) and how it will work in the EU’s new crypto framework, MiCA. In linking to his company’s blog post, Galea writes on X, “The industry has to pull its pants up and work on instilling the true meaning of ‘DeFi’ in projects, without eating the very cake it is having.”

See the post titled, “The meaning of fully decentralised under MiCA.”  (h/t @BillHughesDC)

what you should know:  It’s still early days for DeFi and proponents are worried it all turn into CeFi (centralized finance) if they’re not careful about educating appropriate authorities about the development of DeFI products

conduct claims

According to Capitol Account, there is unhappiness with Commissioner Caroline Pham (R) among members of the Commodity Futures Trading Commission union due to a recent incident.  Sources tell the DC financial publication that “Pham dressed down an enforcement lawyer at a closed-door meeting last week. Witnesses called the episode a ‘diatribe,’ and it prompted the labor union president to send out an email complaining about ‘unprofessional conduct.’” No word on the exact subject matter of the disagreement due to the meeting’s “closed-door” nature. Both Chair Rostin Behnam (D) and Commissioner Christy Goldsmith Romero (D) reportedly tried to diffuse the situation.  Read more.

what you should know: Commissioner Pham has been a consistent and strong supporter of a regulatory framework for digital assets.

offline CBDCs

On Thursday, as part of its ongoing research, the Bank for International Settlements (BIS) published a guide for offline payments with central bank digital currencies (CBDCs). See it.

When you think of an offline CBDC, think cash as the BIS explains in its guide, “The drivers for offline payments with CBDC vary by jurisdiction. Some common motivations are supporting inclusion, offering cash-like features such as enhanced privacy, and increasing payments.”

The BIS project is research-in-progress and Google has popped up among the vendor participants. Ledger Insights explains, “By piggybacking on top of Google Pay’s large user base, central banks reduce the friction of consumer adoption. Additionally, because offline CBDC solutions are new, most offerings are not battle tested. If Google integrates with a CBDC, a big chunk of the technology is already proven, making it a low risk option.” Read more.

what you should know: Other than government, big tech is the only entity that can reach everyone – hence, a potential solution for facilitating a CBDC. CBDCs already have been rejected by Republicans. The “big tech” angle could add bipartisan fuel to the anti-CBDC fire.

still more tips:

Kraken Warns Users: Your Bitcoin Trading Data Is Headed to the IRS – Decrypt

2nd comment letter in response to SEC’s proposed safeguarding (custody) rules (PDF) – Blockchain Association

Crypto Memes Kick Back Into High Gear After Bitcoin ETF Frenzy – Bloomberg

The Hunt for Crypto’s Most Famous Fugitive. ‘Everyone Is Looking for Me.’ – The Wall Street Journal

Inside the Vaping, Gambling, and Jeering Wildness of the SBF Overflow Rooms – New York Magazine

“An interview with CZ, crypto’s last man standing” (podcast) – The Economist

senate banking hearing

With 13 mentions of “crypto” in his opening statement, Senate Banking Chair Sherrod Brown (D, OH) made sure everyone knew where yesterday’s hearing on illicit financing was going. Titled “Combating the Networks of Illicit Finance and Terrorism,” some Democratic Senators took pains to paint crypto with a broad brush (smearing U.S. digital asset companies in the process) only to have witnesses largely push back on the suggested scope of the AML challenge with crypto. See the hearing page and video.

Brown said, “Too often, crypto platforms don’t use the same commonsense protections that help keep illicit money out of the traditional banking system—safeguards like knowing their customers, or suspicious transaction reporting. Some crypto services and tokens even help users keep their transactions anonymous.” Read his statement. But, if you’re a U.S. based company, you already must comply with existing AML laws.

Overall, the pro- (Republican) and anti-crypto (Dems) positions were along partisan lines.

Some Senators did not bother with crypto in their Q&A – such as Sen. Katie Britt (R, AL) – who maintained focus on how on broader solutions for preventing the atrocities in Israel earlier in the month.

Senator Jack Reid (D, RI) promoted his CANSEE Act [S.2355] during the hearing and asked the star witness of the day – former Chair of Israeli’s AML authority Dr. Shlomit Wagman – about decentralized finance (DeFi) and its role in terrorist financing. She steered the answer away from potential threats from DeFi saying that toolboxes existed for tracing and emphasized the transparency of the blockchain. She then re-shared a well-know anecdote about Hamas stopping the use of Bitcoin due to its traceability.

Senator Mark Warner (D, VA) shared during his Q&A allotment that what he’s learned in Intelligence briefings might help everyone understand the danger in crypto. He also issued a full-throated rejection of DeFi saying, “I do not accept the premise that there is no father or mother of a DeFi system. Someone is making money off of that.”

Senator Elizabeth Warren (D, MA) was deferential to witnesses but tried to make the most of her Q&A time and build a case for the Digital Asset Money Laundering Act [S.2669] which her and Senator Roger Marshall (R, KS) are driving in the Senate. Warren tried to steer questions in support of the legislation but heard from witness Matthew Levitt (his testimony) who said crypto estimates are “inflated.” Israel’s Wagman told the Senator: “Crypto is a problem but not the major problem,” and advocated for sanctions and “creating environments for compliance.”

Some Republican Senators also participated in the Q&A with Senator Bill Hagerty (R, TN) noting that the WSJ article on crypto – which originally ignited new scrutiny on crypto in Congress – is now being disputed. Furthermore, to anyone that would listen in the hearing room, Hagerty said that “scalpel not a sledgehammer” was necessary regarding crypto legislation and he made clear that the U.S. should not push digital assets offshore.

Sen. Cynthia Lummis (R, WY) raised her bipartisan National Defense Authorization Act [S.712] digital assets AML amendment as well the new letter (see below) she sent to the Department of Justice with Rep. French Hill (R, AR). Witnesses noted during Lummis’ Q&A that “crypto assets are easier to trace than cash.”

(Read this update on the NDAA amendment from Politico on Wednesday.)

At one point during the hearing, Dr. Wagman tapped her real world experience in the Israeli government and spoke eloquently about today’s reality in illicit finance: “Let’s not lose sight and focus from the big picture. Crypto is currently a very small part of the puzzle, the major funding channels are, were, and remain state funding. Iran and others, those are the major players. Most of the funds are still being transferred by the traditional channels that we all know from the past: banks, money transmitters, payment system, Hawala, money exchange, trade-based terrorism financing, charity, cash, shell companies, and crypto.”

more tips:

“The topic of illicit finance is a wildly complex one, especially when layered atop decades of history and recent weeks of violence…” – Rashan Colbert, former staffer to Sen. Booker (D, NJ), on X

what you should know: If there was one thing witnesses stressed was the importance of sanctions in addressing the illicit finance problem – sanctioning humans, sanctioning their bank accounts and their crypto wallets. The time for shutting down through government intervention had long since passed. Also of note: bipartisanship on digital assets policy in the Senate only exists behind the curtain currently.

letter to AG

In the ongoing chess match on Capitol Hill regarding illicit financing and anti-money laundering (AML) legislation for cryptocurrency, Sen. Cynthia Lummis (R, WY) and Rep. French Hill (R, AR) partnered on a bicameral letter sent yesterday to U.S. Attorney General Merrick Garland. See it (PDF).

Given recent news about Hamas receiving financing via crypto in the past two years, they ask the AG to “reach a charging decision on Binance that reflects their level of culpability and expeditiously and conclude your investigations into the ongoing illicit activities involving Tether.” They add, “Crypto assets and distributed ledger technology have the potential to drive responsible innovation in U.S. financial markets, therefore we must be careful not to paint all crypto asset intermediaries as suspect when a small handful of bad actors use them for nefarious purposes.”

what you should know: Appearances are important. In competition with the bipartisan Warren-Marshall AML bill, and at a sensitive moment in time, Lummis and Hill want to promote legislation which will provide digital assets room for growth in the United States and look pro-active about addressing AML in crypto, too.  Legislation includes the Lummis-Gillibrand Responsible Financial Innovation Act in the Senate and the stablecoin and digital asset market structure bills from the House Financial Services Committee.

data source controversy

CoinDesk’s Jesse Hamilton covers the evolving controversy around the veracity of the data – and conclusions drawn – in the Wall Street Journal articles on terrorists use of crypto financing.  “After Hamas’ deadly attacks in Israel, media reports linked the terrorist group with tens of millions in crypto donations, but that data was misinterpreted and hugely exaggerated, according to the blockchain analytical firm that was cited,” reports Hamilton. Elliptic was the company which is now trying to walk back observations using its data. See Elliptic’s blog post from Wednesday. One of the WSJ’s illicit finance reporter tweeted what seems like a defense of the use of the data on Wednesday.

what you should know: The current narrative isn’t going to be turned around unless, maybe, the WSJ were to retract the story – that seems unlikely.

hear ye, hear ye

It’s back.

HEARING NOTICE: Subcommittees on Capital Markets and Housing & Insurance – House.gov

use case – bank coin

Bloomberg reports that JPMorgan Chase’s a stablecoin-of-sorts known as “JPM Coin” is now handling $1 billion worth of transactions daily as the bank continues to grow the product. Global Head of Payments Takis Georgakopoulos says, “JPM Coin gets transacted on a daily basis mostly in US dollars, but we again intend to continue to expand that.”

In this use case, stablecoins are being used to move funds since settlement using the blockchain is faster than traditional finance methods with more intermediaries. JPM Coin is internal to JP Morgan, but it’s global client base requires efficient transfers around the world within its own banking system. They may be among the first, but all global banks will do something like this someday. Efficiency means more profit.

what you should know: Settlement, baby! Cutting out the middleman is the blockchain’s killer app/feature.

still more tips

UK passes bill aimed to help law enforcement seize crypto – Blockworks

What is tokenization? – McKinsey

Here’s How FTX Executives Secretly Spent $8 Billion in Customer Money – The Wall Street Journal

digital assets hearing

For Republicans – with the (successful) election of Rep. Mike Johnson (R, LA) as House Speaker looming later in the day – yesterday’s House Financial Services (HFS) Digital Assets, Financial Technology and Inclusion Subcommittee hearing was perhaps both a distraction and a welcome respite from the politicking and drama of the past three weeks.

Titled, “Modernizing Financial Services Through Innovation and Competition” (agenda and witnesses), Chair French Hill (R, AR) noted the Subcommittee’s accomplishments on digital assets legislation in his opening statement and explained that the day’s hearing would explore the broader FinTech topic.

Ranking Member Steven Lynch (D, MA) opened by skewering his Republican counterparts about whether the hearing’s timing was appropriate considering the acute need for a House Speaker.

Moving to the day’s subject matter of financial technology, Lynch echoed themes heard from Democratic Party leadership in previous hearings on digital assets: “I believe technology does have the potential to lower costs and improve accessibility for those left out of the traditional financial services service sector. However, while remaining interested in, and really believing in, the potential of FinTech and and ‘Buy Now Pay Later’ products, I want to say that some of these are simply repackaged versions of traditional finance -but packaged in a way to evade laws and regulations under the claims of innovation.”

See the video. The hearing’s duration was 1 hour and 45 minutes.

more tips:

Rep. Hill Statement on Rep. Mike Johnson (R, LA) Elected To Speaker Of The House – hill.house.gov

what you should know: Republicans wanted it to appear that it was “business as usual” in the House Financial Services Digital Assets Subcommittee hearing room. Yet, the House Speaker drama remained a heavy, gauze curtain on the proceedings and HFS Democrats didn’t let the majority forget it. With the new House Speaker finally decided today, Republicans will need to come hard out of the gates in the days to come to try and save face with the electorate by effectively legislating and moving forward impactful law. In turn, Democrats will likely have significant “asks” that they wouldn’t have had a chance to make a month ago. For example, in digital assets, a re-negotiation of the stablecoin bill could be on the table, which Chair McHenry seemed to originally declined during the bill’s July markup. That bill’s success (makes it to law) likely turns on the states rights versus Federal oversight of stablecoins. The Dem conundrum: Democratic leadership in D.C. supports the latter, even though Democratic states such as New York support states rights.

illicit financing hearing

House Financial Services’ Subcommittee on National Security, Illicit Finance, and International Financial Institutions and its Chair, Rep. Blaine Luetkemeyer, (R, MO) dug into crypto’s hottest topic lately – terrorist financing – with a hearing titled: “How America and Its Allies Can Stop Hamas, Hezbollah, and Iran from Evading Sanctions and Financing Terror.”  See agenda and witnesses.

Chair Luetkemeyer and Ranking Member Joyce Beatty (D, OH) set the stage in their opening remarks and made clear that the recent terrorist attack in Israel were repugnant and had given additional focus to the work of the subcommittee – though there was little mention of crypto, initially. Read Luetkemeyer’s opening statement.

Adam Zarazinski, CEO of blockchain analytics firm Inca Digital and a current Major in the U.S. Air Force Reserve, was the sole digital assets-related witness, and provided in his prepared testimony (see it) a useful discussion of how crypto terrorist financing works into addition historical examples.  On the WSJ article that had recently circulated on crypto financing of terrorist organization Hamas, Zarazinski claimed that crypto is only 6% of the estimated financial activity of terrorist organizations though he didn’t mean to minimize its impact. His testimony concluded in part, “The problem is not primarily on shore in the United States. The problem is the list of companies I provided above – these organizations are completely outside of our jurisdiction. These companies will exist outside of our reach and whatever solution we opt for must acknowledge this fact. Eradicating crypto is simply not possible, and likely has not been possible for at least a decade, if not more.” In brief, Zarazinski sees technology as the solution. Read more.

Washington Institute’s Matthew Levitt also appeared as a witness and said that he would defer his commments on crypto given Mr. Zarazinski’s testimony. But, he did say more comments on the history of terrorist financing using crypto were in his testimony.

what you should know: Inca Digital, Chainalysis, TRM Labs, Elliptic… blockchain analytics and “forensics” companies are having a moment and leading the industry side of the discussion for blockchain technology.

illicit financing hearing – Q&A

Given the reaction from Rep. Leutekemeyer, the most surprising observation of the day may have been an assertion by Gabriel Noronha (see testimony) of The Jewish Institute for National Security of America.

Noronha was a former staffer for Senators John McCain (R, AR) and Jim Inhofe (R, OK) and was removed by the Trump Administration from his work at the State Department after tweets critical about the January 6 Capitol riot.

At the hearing, Noronha said that terrorist cells in the United States were plotting assassinations and were being funded via cryptocurrency. He mentioned former National Security Advisor John Bolton having a “bounty” of $300,000.

HFS Ranking Member Maxine Waters (D, CA) brought her gravitas to the Subcommittee hearing with her 5-minute Q&A allotment. She wanted to discuss how cryptocurrency could be used to facilitate terrorist financing and wondered if there was a crypto connection between Iran and Hamas. Both Levitt and Zarazinski said  Iran wasn’t funding Hamas using crypto. Rather, crypto was used in fundraising campaigns.

Rep. Zach Nunn (R, IA) in his 5-minutes drove home the importance of new digital assets regulation that keeps crypto in the U.S. but will also combat terrorist financing.

Rep. Nunn: The more that we push it out of the United States, the more illicit actors will use cryptocurrency in nefarious ways. Is that correct?

Mr. Zarazinski: Yes, Sir.

Rep. Nunn: This is why we need to address it in this Committee, to bring it back home and regulate it.

what you should know: Though Ranking Member Waters dutifully spoke to Democratic leadership themes regarding crypto and terrorist financing, one wonders how supportive she truly is. The fact that Rep. Sean Casten (IL) was the featured House Member in last week’s letter by Senator Warren and 100 other Democrats – and the fact Waters signature was nowhere to be found – may be indicative of her ambivalence. And/or, a generational “changing of the guard” could be afoot within House Democratic leadership.

illicit financing hearing – 3 Dems

Members of the National Security, Illicit Finance, and International Financial Institutions Subcommittee include three Democrats who voted “for” the recent digital assets market structure bill approved in a July HFS markup: Reps. Wiley Nickel (NC), Brittany Pettersen (CO), Josh Gottheimer (NJ). (Nickel and Gottheimer also voted for the stablecoin bill during the Committee’s markup of the legislation.) Each took their turn during the hearing’s Q&A.

In her questioning, Rep. Pettersen’s primary concern was Iran’s involvement in terrorism and also the strategy of sanctions – their potential over-use – and the consequences for the United States and its economy.

Rep. Gottheimer, noting the senseless death of American and Israelis in the terror attacks in Israel, asked witness Michael Levitt his view on the proper policy positioning in the Middle East for the United States. Gottheimer emphasized the importance of crushing Hamas. He also inquired about the panel’s thoughts on the adequacy of sanctions.

Later, Rep. Nickel explored the challenge of tracing funds “in the era of digital currencies and decentralized finance,” the significance of the threat and what tools or legislation should be considered to counteract terror groups active in crypto. Inca Digital’s Zarazinski demurred on legislation specifics but was unequivocal on the needed outcome, “What we need to do is we need to bring crypto markets back onshore. It is literally a zero sum game. The more liquidity that is offshore that is outside of US jurisdiction. That that’s a bad thing.”

what you should know: Not one of the three Members who reside on the Subcommittee and had provided their support to the digital asset market structure bill in July gave any inkling that they’ve changed their minds on digital assets in spite of recent events. Gottheimer was the only one of the three that signed last week’s letter on crypto and terrorist financing from Senator Warren.

illicit financing hearing – Rep. Casten

Rep. Sean Casten (D, IL) began his Q&A by immediately invoking the letter in which he was prominently featured and sent last week by “Senator Warren, Senator Marshall and I” – as well as 99 other Congressional Democrats and one other Republican – which asked the White House and U.S. Treasury about how cryptocurrency was involved with the recent terror attacks in Israel. The unspoken theme of the letter was bringing urgency to Senator Warren’s Digital Asset AML bill.

Bringing up crypto mixers and their facilitation of money laundering, Casten emphasized, “As long as we have mixers and anonymous wallets, blockchain is just a really bad accounting system.”

Casten then seemed to announce that he’ll be introducing Senator Warren’s bill in the House, “We need to strengthen the BSA. We will be introducing a bill that Senator Warren has already introduced on the Senate side to do that over here. I’m hoping we will get some bipartisan support this time because I think this is a bipartisan issue. Our goal is not to cripple the people of Iran. It is to cripple Hamas and if they’re getting funding from any source then let’s go through and get all of that.”

Turning to his Committee colleagues on both sides of the aisle, Casten said, “I would also just put a request into this committee that…  we’ve had long conversations about the cryptographic industry and lots of bills and it is a tragedy that it took October 7 to have this conversation. But, I would truly hope that we can revisit some of the bills that we have passed on a partisan basis out of this committee –that among other things, provided a safe harbor for the crypto industries that it doesn’t have to comply with AML Rules. That was a bill led by Mr. Emmer. Mr. Davidson’s bill to prohibit regulation of all self–hosted wallets. This is a real problem. And either we either we agree that we don’t want to launder money, or we don’t …”

See the hearing on YouTube.

what you should know: What Rep. Casten revealed during his five minutes is that Senator Warren has apparently chosen Casten to drive the Digital Asset Money Laundering bill in the House. Given Republican control of House Financial Services, it seems like a daunting challenge for the bill to make the HFS agenda in the 118th Congress especially given Casten’s remarks about Majority Whip Tom Emmer (R, MN) and Rep. Warren Davidson (R, OH). What would be interesting to see is which Republicans, if any, might agree to co-sponsor the bill just as Senator Warren was able to bring aboard Republican Senator Roger Marshall, initially. On that note – nobody knows what a House floor vote looks like for any digital assets bill. Yet.

today’s hearing

Today’s 10 a.m. hearing titled, “Combating the Networks of Illicit Finance and Terrorism,” at the Dirksen House Office Building promises to bring digital assets to the discussion. See agenda and witnesses -including the live (and recorded) video.

Among those added to the witness list is Dr. Shlomit Wagman, who is the former Chair of Israel’s Money Laundering and Terror Financing Prohibition Authority. Dr. Wagman apparently has been asked specifically about terrorist financing using crypto. She writes, “My goal in today’s testimony is to review the funding channels used by illicit and terror organizations and – as per your request – focus specifically on the use of cryptocurrencies, which most likely funded (both directly and indirectly) Hamas’s activities.” Later in her prepared testimony,  Dr. Wagman observes: “In April 2023, following a further series of Israeli asset freezing orders and seizure of many accounts, Hamas announced to its supporters that it would stop receiving fundraising via the crypto currency Bitcoin, citing an increase in ‘hostile’ activity against donors and that ‘this comes out of concern about the safety of donors and to spare them any harm’.  Such a statement demonstrates that the FATF approach of signaling to the market of ‘blacklisted’ crypto, was proven to be efficient.” Read more.

what you should know: Chair Sherrod Brown (D, OH) may be deciding whether it’s time to support Senator Elizabeth Warren’s Digital Asset Money Laundering Act and bring it to the Senate Banking Commitee stage.

Rep. Barr raises NDAA

So far, a bipartisan group of Senators (Sens. Lummis (WY), Warren (MA), Gillibrand (NY) and Marshall (KS)) have attached an Anti-Money Laundering (AML) amendment to the NDAA. At a Capitol Account event yesterday in Washington, D.C., HFS Committee member Rep. Andy Barr (R, KY) spoke up for his side of the bicameral equation, “We do need some regulatory clarity in this space, and I think the National Defense Authorization Act could be a vehicle for Chairman McHenry and [digital assets subcommittee] Chairman [French] Hill to move their products.” Read a bit more.  Later, Punchbowl’s Brendan Pedersen reported on X Rep. Hill’s response to Barr’s comments, “Remains to be seen.”

what you should know: Stablecoins and digital asset market structure bills, right this way? It remains to be seen, indeed, but with observations such as the those from the Federal Reserve’s stability report last week (see it) which talked about instability introduced by the stablecoin market (e.g. pages 8, 10 and 45), there may be more willingness to get a stablecoin law done by Democratic leadership. Treasury and Secretary Janet Yellen appear to realize that it’s time to address “stables.” Sec. Yellen said as much at an Oversight hearing in June, “…and there are gaps in regulations. I would point out specifically stablecoins. And I do believe that we need a comprehensive federal prudential framework and would be pleased to work with you, with Congress, to see if we can develop such a framework.”

still more tips

Terrorists raised $130m in crypto since 2021; sought more via social media after attack – The Times of Israel

Binance is behind the Hong Kong crypto exchange HKVAEX, which is seeking a license in the city – South China Morning Post

“Thank you [Rep. Darren Soto (D, FL)], Co-Chair of the Congressional Blockchain Caucus, for a productive meeting with [Digital Power US] members.” – Perianne Boring, Chamber of Digital Commerce, on X

The tragically millennial vocabulary of the Sam Bankman-Fried trial – The Verge

state of stablecoins

At yesterday’s State of Crypto event produced by CoinDesk in Washington, D.C., an appearance by Senators Cynthia Lummis (R, WY) and Kirsten Gillibrand (D, NY) provided optimism on digital assets legislation. Rather than identifying their own “Responsible Financial Innovation Act” [S.2281] as the low-hanging fruit, they said stablecoin law might be possible very soon. Sen. Gillibrand said, “I think there’s a huge potential for a bipartisan stablecoin bill in both the House and Senate. (…) This is a measurable, doable goal for both chambers to have.” Read more.

more tips:

Opinion: The U.S. Risks Its Position as a Stablecoin Leader – Jason Somensatto, Chainalysis, on CoinDesk

what you should know: Perhaps, a stablecoin bill gets added to a must-pass? This seems like the only hope with the expected stasis of 2024 legislative action caused by the 2024 general election.

Emmer

After the House Republican conference voted privately to nominate Majority Whip Tom Emmer (R, MN) to the Speaker role yesterday, crypto advocates rallied given Emmer’s strong support for digital assets and his desire to keep innovation, its companies and its jobs in the United States.

But a nomination is one thing. A successful election in a House with a slim and rancorous Republican majority is another as witnessed by the previous House Speaker, Rep. Kevin McCarthy (R, CA). Then, in yesterday afternoon, former Republican President Donald Trump’s comments added more controversy.

And just like that, Emmer was out as Speaker. So much for the pledge.

more tips:

Tom Emmer drops out of the Speaker’s race – The Hill

what you should know: For Republicans to sacrifice one of the party’s leaders, again, speaks to what appears to be the inevitable success Democrats will have in the 2024 general election. Blockchain industry execs will be praying Emmer doesn’t quit.

Tax rule deadline

The deadline for comment on the U.S. Treasury and the Internal Revenue Service’s (IRS) broker rule has been extended two weeks to November 13. BUT, the public hearings on the rule are still happening on November 7 and 8.  See more in the notice in the Federal Register (PDF).

When the latest proposed rules were published in late August, the blockchain industry was largely aghast at some of their draconian details which had been held over from a problematic section introduced by Congress in the Jobs Act of 2021.

Blockchain Association CEO Kristin Smith explained on X, “For instance, the proposal includes software developers who might have worked on a front-end interface to a DeFi protocol, and bc they did so, the IRS may consider them ‘in a position to know’ about future activity on that protocol…These developers would then have to furnish 1099s and abide by other reporting requirements. This is untenable + would force those persons to stop work or move to more welcoming jurisdictions. As it stands, if this updated definition is adopted by the IRS, it would result in a decimation of the digital assets industry in the U.S.” Read the thread.

what you should know: The decentralized finance battle continues as a centralized government senses a loss of control -a threat. Who didn’t expect this to happen? And it will continue as the United States led by Congress figures out how to embrace decentralization while maintaining the supremacy of the U.S. and the Dollar in the global economy. Perhaps, the bipartisan  “Keep Innovation In America Act” [H.R. 1414] introduced in March with 14 co-sponsors including HFS Chair Patrick McHenry (R, NC) and Majority Whip Rep. Tom Emmer, which address a reporting fix with the IRS, could be in play soon.

Rep. Horsford on regulation

Rep. Steven Horsford (D, NV) appeared at a Punchbowl News event in Washington D.C. yesterday and spoke on a range of business topics including regulation – though not specifically digital assets. Horsford, who is a member of the House Financial Services (HFS) Committte, was among six Democrats that voted “for” the digital assets market structure which passed out of Committee in late July.

According to Punchbowl on X,  Horsford shared his opinion on Securities and Exchange Commission (SEC) Chair Gary Gensler, also a Democrat, saying, “…he has a lot of respect for the former MIT professor, but: ‘I think it’s important that in this moment that we’re in, we’re not adopting regulations based on what was happening 10-20 years ago.’” This echoes a theme from fellow HFS Committee member Ritchie Torres (D, NY) who believes there is a generational divide in the Democratic Party when it comes to regulation such as digital assets.

what you should know: How the Democratic digital assets regulation generation breaks out…. Horsford is 50, Torres is 35. And the other four Democrats who voted “for” H.R. 4763 in July were: Rep. Wiley Nickel (D, NC), who is 47; Rep. Josh Gottheimer (D, NJ) is 48; Rep. Brittany Pettersen (D, CO) is 41, and Rep. Jim Himes, (D, CT) is 57.

So, if you’re 58 or older and a Democrat… well, you know.

White House crypto policy

Politico confirmed that Senator Elizabeth Warren’s (D, MA) Chief of Staff Jon Donenberg is moving to the White House and its National Economic Council next month: “He’s expected to take over the portfolio of departing Warren alum Bharat Ramamurti, including competition, junk fees, financial regulations, tech policy and student debt relief.” Also, read coverage in The Hill.

It was just last week that Mainnet CEO Ryan Selkis had shared on X a rumor about Donenberg’s new role. Selkis believed it will continue the White House’s hawkish view on crypto policy. Others believed it could signal a softening.

what you should know: Senator Warren maintains her sphere of influence in the White House by letting her trusted Chief of Staff leave. Executive branch digital assets policy will remain circumspect of anything digital assets-related unless there is a new administration.

about the Web3 voter

Coinbase continues advocacy marketing campaigns across the Web that details for Congress and anyone else who will listen, how many U.S. citizens really do love their crypto. See AmericaLovesCrypto.org.

A data point from a Morning Consult survey targeting the thoughts of voters during the  November 2022 elections in New Hampshire, Nevada, Ohio, and Pennsylvania reveals: “55% of voters are less likely to vote for candidates who oppose policies that enable web3 (defined as a decentralized, open internet where people have more control over their data).”

what you should know: The survey was taken in September of last year.  Where voters stand today could be an issue given FTX’s implosion in November and the rippling side effects at the time such as Gemini Earn, which is now caught up in the New York AG’s fraud lawsuit. On the other hand,  arguably, “number go up” solves everything.

innovation safe harbor

Today’s House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion provided a complete agenda for the meeting  prior to today’s 10 a.m. start time. The House Speaker drama will hopefully not get in the way.

Memo is here. See the live (and recorded) video is here.

This hearing appears to be mostly about financial technology rather than digital assets, in particular.

Legislation

• • H.R. ___, the “Financial Services Innovation Act of 2023”
  • H.R. ___, the “Earned Wage Access Consumer Protection Act”
  • H.R. ___, the “Examining Consumer Choice in Digital Payments Act”
  • H.R. ___, the “Fostering the Use of Technology to Uphold Regulatory Effectiveness in Supervision Act”

Witnesses

• • Jodie Kelley, CEO, Electronic Transactions Association
  • Ram Palaniappan, CEO, EarnIn
  • Jimmie Lenz, Director, Advanced Research & Financial Services, Duke University
  • Parris Sanz, Head of Policy and Government Relations, WebBank
  • Mitria Spotser, Director of Federal Policy, Center for Responsible Lending

what you should know: The “Financial Services Innovation Act of 2023” which is appended to the meeting could help digital asset companies looking for an exempt “safe harbor” with regulators as the Committee’s memo explains, “The bill allows persons intending to offer a financial innovation to petition specified financial regulatory agencies regarding existing areas of regulation. A petitioner may request a modification or waiver of an agency regulation. The bill sets forth requirements regarding the petition process, a safe harbor for petitioners from enforcement, and enforceable compliance agreements. The bill also establishes Financial Services Innovation Offices at these agencies to assist petitioners.” SEC Commissioner Peirce long-ago recommended a sandbox for digital assets including her 2021 “Token Safe Harbor Proposal 2.0.”

HFS postponement

A Housing and Insurance Subcommittee hearing was cancelled by the House Financial Services (HFS) Committee yesterday afternoon leaving three of the original six hearings for the week including one for tomorrow’s Digital Assets Subcommittee.

what you should know: In spite of HFS Republicans best efforts to carry on as usual, reality appears to have set in as House Speaker business needed to be prioritized. Will voters notice?

still more tips

Grayscale Investments Unveils Grayscale Crypto Sectors and Launches New Partnership with FTSE Russell to Introduce Crypto Sector Index Series – press release

McHenry, Huizenga, Luetkemeyer Demand Treasury Produce Records on Status of Sanctions Against Iran – House.gov

FTC Commissioner Alvaro Bedoya, a digital privacy expert, on plan to hire child psychologists to help regulate social media firms – The Record

Fred Ehrsam At Crypto Venture Firm Paradigm Stepping Down as Managing Partner – The Information

NDAA and Senate Banking

The bipartisan National Defense Authorization Act (NDAA) amendment [S.712] brokered between Senators Kirsten Gillibrand (D, NY) and Cynthia Lummis and Senators Elizabeth Warren (D, MA) and Roger Marshall (R, KS) re-appeared yesterday in a press release from team Lummis-Gillibrand. The two “urge” for the inclusion of the Senate-passed amendment in the annual defense budget bill “following reports that Hamas has used unregulated crypto asset exchanges to fund their war in Israel and to pass comprehensive legislation to create a well-regulated and safe crypto asset market in the United States.”

Read the release.  The amendment was announced back in July.

Also yesterday, a spokesperson for Senator Lummis clarified about the process for the current amendment saying, “The Senate and House will have a conference committee where the Senate and House versions are considered for the final bill, so Sens. Lummis and Gillibrand are working to ensure this provision is included in the final version.”

what you should know: The announcement may be an attempt to try and head off the momentum that the drastically more restrictive “Digital Asset Money Laundering Act” [S.2669] introduced by Sens. Warren and Marshall has in light of recent news media reports linking crypto to terrorist funding.  We’ll likely hear more on both legislative efforts when Warren and Lummis have their 5-minutes to question witnesses at Senate Banking’s “Combating the Networks of Illicit Finance and Terrorism” hearing on Thursday.

postponed hearing – Bitcoin ETF

The hearing that almost was. Former head of investment management for the Securities and Exchange Commission (SEC), Dalia Blass, was scheduled to join four others as witnesses for today’s House Financial Services Capital Markets Subcommittee hearing titled, “Examining the SEC’s Agenda: Unintended Consequences for U.S. Capital Markets and Investors.” Rep. Ann Wagner (R, MO) is Chair.

Mid-afternoon yesterday, the House Financial Services (HFS) GOP account on X announced the hearing was “postponed until further notice.” Read the official announcement. No doubt the hearing was a victim of the House Speaker drama with the House Republican conference scheduled to privately meet about a new candidate  today. (The Financial Institutions and Monetary Subcommittee Hearing also was postponed. Four HFS hearings remain this week.)

Blass’s presence along with Securities Industry and Financial Markets Association (SIFMA) CEO Ken Bentsen would have been notable – hopefully this hearing returns. Blass collided with SIFMA when she was at the SEC when the idea of a Bitcoin ETF was starting to take shape in the industry. The SEC wanted the industry to slow down. See Blass’s letter to SIFMA in 2018.

The Committee memo (see it – including witnesses) for today’s postponed hearing teed up Republican concerns, “This hearing will delve into Chair Gensler’s approach to rulemaking, which has sparked significant concerns.” Digital assets would likely have been among the topics for discussion.

what you should know: The Bitcoin ETF process has experienced friction with the SEC during both Republican and Democratic presidential administrations. Blass’s insights on the role that the Chair plays in decision making across the Commission could be revealing.

BItcon ETF – SEC’s Peirce

In an interview on CNBC’s Squawk Box, Republican SEC Commissioner Hester Peirce waded into the “Will the SEC approve a Bitcoin ETF” discussion. As usual, Peirce wouldn’t prognosticate, but she did share her own opinion: “I can’t say whether or not the Commission is ready to approve a Bitcoin Exchange-Traded Product. I’ve been thinking we should approve one for the last five years. So, the logic for why we haven’t has always mystified me. The court case (i.e. Grayscale), obviously, is an important factor in the landscape. But, I can’t guess my colleagues approach to this topic.” See the interview.

what you should know: What if Peirce were in charge of the SEC in a Commission with a Republican majority? A Republican president could provide the answer.

Emmer’s quest

House Majority Whip Tom Emmer (R, MN) is pulling out all the stops in an effort to secure the House Speaker role (private Republican conference election today, hopefully). Politico reported that the Whip had “a Trump problem.” Read it. Meanwhile, Emmer was fighting back against the characterization.

what you should know: Having Emmer as the House Speaker is a future that the blockchain industry would relish given his advocacy to date. Nevertheless, having the Whip stay in his current role isn’t bad either. Maybe it’s better? The Speaker role in the Republican caucus looks like a no-win situation.

Coinbase v. SEC today

CoinDesk’s Jesse Hamilton provides an overview on the current state of court proceedings between the SEC and cryptocurrency platform Coinbase. According to Hamilton, the SEC has a deadline of today for rebutting Coinbase’s request to have its enforcement action dismissed. Crypto lawyer Jason Gottlieb says about the case, “This is an extremely important case for, not just the cryptocurrency industry, but for the future of digital assets in America.” Read it.

what you should know: Coinbase suddenly getting its cased dismissed by the court would be a stunning win for the company, an equally stunning loss for the SEC and a catalyst for the industry bigger than any Bitcoin spot market ETF approval by the agency.

State of Crypto

CoinDesk has its State of Crypto event today in Washington, D.C. Given the Speaker drama, oof, rough timing considering the participants. We wish them well. See agenda.

UK emissions inspection

With the launch of aggressive new rules restricting the marketing for crypto companies, a “cottage” industry has emerged which facilitates compliance with the new regulations. The Financial Times says that only three companies “are able to sign off the marketing materials of potentially hundreds of crypto groups, from social media posts to business websites. (…) London-based Archax, one of the three permitted to perform sign-offs, has OKX and Coinbase, two of the world’s biggest crypto exchanges, as customers.” Read more.

what you should know: This is the digital assets’ version of an emissions inspection. Could the States or Federal Government see a new revenue stream?

still more tips

Letter to the Editor: Blockchain Helps the Good Guys Track the Bad Guys, WSJ

Digital Yuan Used for First Time to Settle International Crude Oil Transaction: Report – Unchained

Amicus brief in case relating to IRS John Doe summons on exchanges – Coin Center

Worldcoin to pay orb operators in WLD rather than USDC – The Block

Hong Kong updates crypto rules for retail investors blocking foreign spot ETFs – Ledger Insights

WSJ money laundering data

Blockchain industry participants are continuing their pushback on the data from Elliptic that was used two weeks ago in the original Wall Street Journal article and the follow-up on October 13 about terrorist financing and crypto. Some even want a retraction by the WSJ regarding its conclusions.

Yesterday, Coinbase Chief Legal Officer Paul Grewal said in response to discussion of the disputed data in a tweet on X, “Yes- wrong is wrong. This reported misinformation furthers agendas that demean real human tragedy and genuine and effective efforts to thwart those who are responsible.” And, crypto venture capitalist Nic Carter claimed on X yesterday that, “The [journalists] are aware of their abominable mistake and failed reporting and refused to retract. (Reached via email).”

At the center of the current “retraction” discussion seems to be blockchain analytics firm Chainalysis (the U.S. government is a large client) blog post last Wednesday which provided a deep dive on specific wallet addresses and suggested an incorrect reading of the data used by the WSJ such as: “Of the roughly $82 million in cryptocurrency received by this address, about $450,000 worth of funds were transferred from the known terror-affiliated wallet.” Read the whole thing.

Nevertheless, on Friday, the Wall Street Journal expanded and summarized its coverage of crypto and terrorist financing and, in the process, re-affirmed the use of Elliptic’s data in an article, “Why Hamas Uses Crypto to Raise Money.” Read it.

what you should know: There’s a lotta future business at stake for blockchain analytics firms – specifically, future business with the U.S. government. Among several narratives here is Chainalysis taking on Elliptic, which provided the original data to the WSJ.

WSJ opinion fight

Senators Elizabeth Warren (D, MA) and Roger Marshall (R, KS) have since used the WSJ’s findings to build support for their “The Digital Asset Anti-Money Laundering Act” [S.2669]  which included a WSJ op-ed  last Wednesday. Since that time, at least two “Letters to the Editor” have been published in response:

• • On Thursday: “Crypto and Hamas: Why Elizabeth Warren Is Wrong” by George Mason University professor J.W. Verret who took issue with the Senators’ position and that “their legislative agenda is misguided.” Read it.

• • On Friday: “Questioning Two Senators on Crypto Terrorism” by Yaya Fanusie, Director of anti-money laundering and cyber risk at Crypto Council for Innovation, offered three points of contention with the Senators beginning with “…crypto exchanges in the U.S. are already regulated and have been since 2013.” Read that one.

what you should know: … and what no one wants to talk about may be the enormous-cost-with-little-to-show-for-it of AML and KYC (Know Your Customer) requirements. This article from July makes a compelling argument using a variety of data: “How KYC and AML are destroying the world.” (h/t @BillHughesDC)

House Speaker race

Punchbowl News reporter Brendan Pedersen noted the benefits to the blockchain industry in the latest iteration of the House Speaker vote as House Majority Whip Tom Emmer (R, MN) is now a candidate. Pedersen said on X,
“Emmer is crypto’s #1 advocate in Congress by a huge margin. His speakership would be a titanic win for the industry, which could definitely use a win these days.”

But as of late yesterday, Emmer is not alone. Punchbowl reported that 8 other Republican candidates will submit themselves to election in a private Republican conference tomorrow.  In addition to Emmer there are: Republican Conference Vice Chair Rep. Mike Johnson (LA), Republican Study Committee Chair Rep. Kevin Hern (OK), Reps. Byron Donalds (FL), Austin Scott (GA), Jack Bergman (MI), Pete Sessions (TX), Gary Palmer (AL) and Dan Meuser (PA).

what you should know: Flood waters rising! Freshman Congressman Mike Flood (R, NE) has found a potentially important role in the speaker race by getting speaker nominees to sign a pledge that basically says whoever wins the race happening in the Republican’s private conference, will support that winner in a House floor vote. Will be interesting to see if Flood is rewarded with, say, his “Uniform Treatment of Custodial Assets Act” which would gut the SEC’s despised Staff Accounting Bulletin 121 getting into a markup in House Financial Services (HFS) and heading to the House floor for a vote. His Prometheum questioning in June remains among the highlights of this year’s HFS hearings.

Senate – new Banking hearing

Senate Banking Chair Sherrod Brown (D, OH) has scheduled new hearing titled, “Combating the Networks of Illicit Finance and Terrorism” for this Thursday. So far two people have been added to the witness list:  Matthew Levitt of  The Washington Institute whose Hamas funding figures have been widely quoted (like here in Bloomberg) and Danielle Pletka, Senior Fellow at American Enterprise Institute.

what you should know: this will be the hearing Senator Warren to make a strong play for her Digital Asset AML legislation. Will Chair Brown support a pathway forward?

proof of reserves (PoR)

Senators Thom Tilis (R, NC) and John Hickenlooper (D, CO) have thrown their hats in the crypto legislation ring with “Proving Reserves of Others Funds (PROOF) Act” which they describe in a press release as “bipartisan legislation that would establish strong safeguards against instances of unethical co-mingling of customer funds while also requiring digital assets institutions to submit to a monthly proof of reserves (PoR) inspection by a neutral third-party auditing firm.” The Senators say that the bill looks to circumvent the possibility that a crypto company such as FTX could ever exist within the U.S. financial system’s regulatory perimeter.  Read the release.

Back in February at Senate Banking “Crypto Crash” hearing on the FTX implosion, Tillis first publicly proposed his interest in “proof of reserves” in a question to Duke professor Lee Reiners who said PoR wasn’t a replacement for audits. Read a quick summary of Tillis Q&A in February.

But, Galaxy researcher Alex Thorn rebuts the audit criticism saying in Friday’ release, “Proof of Reserves (PoR) is an industry best practice that combines the cryptographic nature of digital assets with strong traditional audit standards to achieve greater industry transparency than is possible in traditional finance.”

Read a short summary on the legislation from Tillis office. And, read the section by section.

more tips:

Nic Carter provides a long form argument for PoR in July in Fortune.

what you should know: In less than a year, Nic Carter (who *called* Choke Point 2.0) has moved from what the left may have viewed as a “crazy libertarian” to a trusted resource for bipartisan Congressional legislation by the Senate.

on House Floor votes

Politico talks to HFS Digital Assets, Financial Technology and Inclusion Subcommittee Chair French Hill (R, AR) and explores whether crypto legislation such as the digital asset market structure or stablecoin bills can make it to the House floor before the end of the year.

Rep. Hill sounds like he isn’t so sure and tells Politico on Friday, “Part of the biggest challenge for us to move our digital assets bills … is floor time… As we push off these decisions about appropriations and the important farm bill, we’re cutting into coordinating floor time between now and the holiday.” Read a bit more.

what you should know: Republicans have a lot of work to do coming out of this Speaker mess. And they know it. Success in 2024 for Republicans hangs in the balance.

stablecoin bill, right this way

Late Friday, the Federal Reserve Board released its current assessment of stability in the U.S. financial system – better known as the Financial Stability Report. Along with money  market funds and some mutual funds, the Fed said “structural vulnerabilities persisted” with stablecoins.

On page 41 of the assessment, there was additional explanation: “While not widely used as a cash-management vehicle by institutional and retail investors or for transactions for real economic activity, stablecoins are important for digital asset investors. They remain structurally vulnerable to runs and lack a comprehensive prudential regulatory framework. Moreover, stablecoins could scale quickly, particularly if the stablecoin is supported by access to an existing customer base.” Read it (PDF).

what you should know: Sounds like an invitation for Congress to expedite the House’s stablecoin bill  H.R. 4766, the “Clarity for Payment Stablecoins Act of 2023,” which was passed out of the House Financial Services Committee in July.

brief comments

Response To NYDFS Coin Listing Policy Framework  – Chamber of Digital Commerce

Public Comment on IOSCO’s Consultation Report on Policy Recommendations for Decentralized Finance (DeFi) – CCI

DeFi Education Fund Amicus Brief In Harper v. IRS appeal – DeFi Education Fund

what you should know: If Congress isn’t going to handle digital assets, the courts will … eventually.

still more tips

Talking Bank Oversight; ‘Open’ Banking; Gensler Speaks; Bitcoin ETFs Coming Soon? – Capitol Account

Hong Kong securities regulator updates crypto policies, citing market developments – Cointelegraph

Crypto Shareholder Requirements Set Out by EU Banking Regulators – CoinDesk

Crypto Needs to Fend Off Stigma Caused by FTX. Meaningful Regulation Could Help – Inc