Letters on the Edge of Regulation

Letters from Congress

When it comes to disagreements over crypto and its regulation, DC policymakers have consistently chosen the humble “letter” as an impactful device.

Often signaling a disagreement of some sort between the sender and the receiver, a Congressional letter is like publishing a press release, but with more personalization and a purposeful lack of discretion.

With 4 months still remaining in the calendar year, 2022 has gotten off to a prodigious start among DC letter writers with crypto on their minds. Here is a sample of what we’ve seen thus far in reverse chronological order:

August 23, 2022
From: Rep. Tom Emmer (R, MN)
To: US Treasury
Subject: DeFi application Tornado Cash

Rep. Tom Emmer wrote in an open letter to the U.S. Treasury Department and Secretary Janet Yellen, an appointee of Democratic President Joseph Biden and member of his Cabinet, requesting clarifications about the sanctioning of mixing service Tornado Cash on August 8. A “senior official” summarized Treasury’s case in a quote for The Wall Street Journal: “Mixers are basically an automated money-laundering service.”

Effectively, The Office of Foreign Assets Control (“OFAC”) under the auspices of Treasury had for the first time ever sanctioned code rather than a person or entity. Emmer’s letter identified 7 questions for which he wanted answers including guidance on how OFAC determines that a wallet address might be sanctioned. The congressman’s pithy conclusion offered that the decentralized Tornado Cash mixer may have been used for illicit services, “Nonetheless, technology is neutral and privacy is normal.”

The four-page letter signed by Rep. Emmer was released in a tweet. The Congressman is co-Chair of the Congressional Blockchain Caucus, a U.S. House Financial Services committee member and Ranking Member of its Task Force on Financial Technology,

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From 600 to 200 to 50, The De Minimis Exemption For Crypto Dwindles, Gains Support

diminimis exemption

Purchasing a cup of coffee using Bitcoin triggers a capital gain whether crypto coffee drinkers care to admit it or not – and, that tiny transaction must be reported to the Internal Revenue Service (IRS). But recently, Senator Pat Toomey (R, PA), who is Ranking Member of the Senate Banking Committee, and Senator Kyrsten Sinema (D, AZ) sought to make things more equitable and efficient for consumers making small payments with cryptocurrency.

Known as the “Virtual Currency Tax Fairness Act” and rolled out on July 26, the law would create “a sensible de minimis exemption for gains of less than $50 on personal transactions and for personal transactions under $50 [sic],” according to a press release.  The new law, if it passes, would update the tax code from 1986.

Sen. Sinema added the Arizona perspective in the release, “We’re protecting Arizonans from surprise taxes on everyday digital payments, so as use of digital currencies increases, Arizonans can keep more of their own money in their pockets and continue to thrive.” She is a member of the Senate’s Financial Innovation Caucus which promotes the use of blockchain tech and innovative technologies and includes Senator Cynthia Lummis (R, WY) whose RFIA bill looks to guide blockchain regulation in the US.

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Senator Booker May Co-Sponsor RFIA Bill; Stablecoin Bills are “Meld”-ing

Senators Gillibrand and Lumis

This morning at Bloomberg’s Crypto Summit in New York City, Senator Cynthia Lummis (R, WY) and Senator Kirsten Gillibrand, (D, NY) continued their outreach to the blockchain industry with a 15-minute, recently recorded fireside chat on the Responsible Financial Innovation Act (RFIA) with Bloomberg’s Allyson Versprille. The chat featured familiar talking points as well as a deeper discussion on timelines and attainable milestones for their bill and components of it.

The Highlights

Senator Lummis said specifically that the stablecoin part of the bill could “go through” the Senate Banking Committee on which she sits this year led by Senator Pat Toomey (R, PA).

The total RFIA bill will likely take until and through next year said Senator Lummis. Senator Gillibrand emphasized bi-partisan participation on behalf of Democrats noting Senator Wyden’s (D, OR) participation on tax provisions as well as overall participation by Democrats in the Senate Banking and Agriculture Committees.

Continuing to address RFIA’s momentum, NIST‘s cybersecurity piece could move forward on the Intelligence Committee of which Senator Gillibrand is a member. Gillibrand added that she and Senator Lummis are actively educating Congress on their bill. Senator Lummis emphasized bi-partisan education on Senate Banking as well as keeping Republican leadership informed on timelines. She also said, on the House side, that Maxine Waters (D, CA) and Patrick McHenry (R, NC) are “coalescing” on thoughts related to RFIA.

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Can Senator Toomey Get Stablecoin Legislation Passed Before He Leaves?

Senator Patrick Toomey

There’s an opening for the passage of stablecoin legislation this year.

No, really.

Even though crypto critiques rage and bankruptcies blare while crypto prices swirl around the drain, this is the moment for Senator Patrick Toomey (R, PA) to deliver a first-of-its-kind law on stablecoins before he leaves office in January.

Complicating matters, narratives have changed in the past several months:

    • Pre-“crypto winter” narrative: “Legislation is coming to help support innovation and grow the blockchain industry.”
    • “Crypto winter” narrative: “Legislation needs to save us from the contagion that blockchain technology could ignite in the financial system.”

Yet, with either narrative, there’s an acute need for stablecoin legislation.

And so the table is set for Senator Toomey, who could steward narrowly-defined legislation in an expedited process that builds on his Stablecoin TRUST Act. In fact, the Senator said 2022 passage was possible only a month ago when speaking at the Consensus conference in Austin:
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Senators Lummis and Gillibrand Introduce Responsible Financial Innovation Act (RFIA)

Responsible Financial Innovation Act

Like the finest porterhouse steak at Peter Luger’s, Senator Cynthia Lummis (R, WY) and Senator Kirsten Gillibrand (D, NY) formally delivered to the U.S. Senate yesterday their new, meaty, digital assets legislation titled, “Responsible Financial Innovation Act (RFIA).”

Is this steak a history in the making? The blockchain community appeared ravenous and ready to inhale it.

The scope of the bill is sweeping and mostly favors Commodity Futures Trading Commission (CFTC) jurisdiction versus the Securities and Exchange Commission (SEC) and therefore applies a commodities classification for many digital assets.

Blockchain Association’s Jake Chervinsky noted in a tweet yesterday that the CFTC leadership role in crypto in the new bill syncs with the House’s Digital Commodity Exchange Act (DCEA) efforts driven by the House Ag Committee and its Ranking Member Glenn Thompson (R, PA). Bi-partisan, bicameral ‘kumbaya’ reigns as Chervinsky pointed out. Similarly, Senator Gillibrand is on the Senate’s Ag Committee, Senator Lummis is on Banking.

From the medium post by Senators Lummis and Gillibrand: “Digital assets that meet the definition of a commodity, such as bitcoin or ether, which comprise more than half of digital asset market capitalization, will be regulated by the CFTC.” This has been never more clearly defined by the a U.S. government entity. But, if you have a security token, fear not, you’ll be in the SEC’s purview.

Overall, this bill sweeps into its pages many of the bills from both sides of Congress – such as the aforementioned DCEA – that have already been introduced including those around stablecoins and crypto tax guidance to name a few.

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Will Senator Gillibrand Tell Governor Hochul to Veto Bitcoin Mining Bill This Week?

Gillibrand and Hochul

This is a big week for Governor Kathy Hochul and Senator Kirsten Gillibrand of New York as their proof-of-political-relationship will likely be tested by a proof-of-work (PoW) Bitcoin mining ban for crypto companies using fossil fuels in New York State.

For Governor Hochul, the ongoing Bitcoin mining battle in New York has been brought to her desk for signature as the state senate delivered an early Friday morning rebuke to crypto miners in the Empire state with approval of a 2-year moratorium (see the bill).

Will she sign or won’t she?  There is no indication yet. NY’s State Assembly approved the bill on April 26.

Meanwhile, this Tuesday June 7, Senator Gillibrand (D, NY) is expected to join with her Republican co-sponsor, Senator Cynthia Lummis (R, WY), on the most eagerly anticipated bill to ever be introduced in Congress on digital assets and their regulation.

New York Governor Kathy Hochul’s signature or veto must occur within 10 days (as of Friday morning, 6/3) according to legislative rules so that makes “zero hour” Monday, 6/13, at the latest. It seems hard to imagine Governor Hochul stealing Gillibrand’s thunder by signing or vetoing anything until after June 7.

In fact, a discussion is likely happening right now between Senator Gillibrand and Governor Hochul on timing – here’s a sample of their previous coordination and alignment in the past two years:
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House Gives CFTC Responsibility with Digital Commodity Exchange Act

Congressman Thompson

To be a commodity, or a security, that is the question.

Another crypto-related bill was introduced in Congress last week with the Digital Commodity Exchange Act of 2022 (DCEA), which built on the DCEA of 2021.

Four members of the Congressional Blockchain Caucus are leading the crypto-as-a-commodity charge beginning with Representative Glenn “GT” Thompson (R, PA), who is the Ranking Member of the House Agriculture Committee, along with co-sponsors Rep. Ro Khanna (D, CA), Rep. Darren Soto (D, FL) and Rep. Tom Emmer (R, MN).

H.R. Bill 7614, which was referred to the House Ag Committee, aims to assign responsibility for crypto exchanges with the Commodity Futures Trading Commission (CFTC) rather than the Securities and Exchange Commission where exchanges tradable assets would therefore be associated with securities.

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More Stablecoin Legislation: Senator Toomey Proposes The Stablecoin Trust Act

Senator Toomey

In the second bill associated with stablecoins in a week from Republicans, Senator Pat Toomey (R., PA), Ranking Member on the Senate Banking Committee,  announced a draft (PDF) of his new legislation today titled, “Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022,” or more succinctly, “The Stablecoin Trust Act of 2022.”

Sen. Toomey, who sits on the U.S. Senate Banking Committee, explained the what the new legislation does in a press release:

Authorizes three different options to issue payment stablecoins:

    1. Establishes a new federal license designed specifically for stablecoin issuers;
    2. Preserves the state-registered money transmitter status for most existing stablecoin issuers; and
    3. Clarifies that insured depository institutions are permitted to issue stablecoins.

Protects consumers by subjecting all payment stablecoin issuers—regardless of whether they are a state money transmitter or receiving a new federal license—to standardized requirements, including:

      1. Disclosures regarding the reserve assets backing the stablecoin;
      2. Clear redemption policies; and
      3. Subjecting them to routine audits by registered public accounting firms.

Provides much-needed clarity that, at a minimum, stablecoins that do not offer interest are not securities.

Provides a clear regulatory framework for payment stablecoins and rejects the Securities and Exchange Commission’s approach of regulating through enforcement actions.

Applies privacy protections to transactions involving stablecoins and other virtual currencies.

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