Letters on the Edge of Regulation

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,

July 26, 2022
From: Senator Pat Toomey (R, PA)
To: Chair Gary Gensler, Securities & Exchange Commission
Subject: Regulation-by-Enforcement

Senator Pat Toomey, who is Ranking Member of the Senate Banking Committee, sent a letter to SEC Chair Gary Gensler taking issue with his agency’s apparent regulation of crypto companies through the use of enforcement actions. Toomey begins, “I write to express my concern about the SEC’s uncompromising refusal to give regulatory clarity to the cryptocurrency community and consumers. Instead, the SEC has pursued a capricious and ineffective approach to consumer protection known as regulation-by-enforcement that is chilling financial innovation and contributing to significant financial losses for unsuspecting American consumers.”

Sen. Toomey requested that all answers be delivered by August 9, 2022.  To date, there has been no public response by SEC Chair Gensler. Toomey concluded in his letter, “I hope when you urge crypto firms to ‘come in and talk to us,’ you will have the SEC provide clear and useful feedback. The public, both crypto enthusiasts and skeptics alike, would benefit, too. A regulation-by-enforcement approach simply fails to provide the regulatory clarity that is needed.”

A press release from Sen. Toomey’s office followed on July 28.

July 15, 2022
From: Senator Elizabeth Warren (D, MA) and 5 Democrats
To: US Department of Energy and EPA
Subject: Cryptomining

Senator Elizabeth Warren (D, MA) sent a letter to the Secretary of Energy and the administrator of the U.S. Environmental Protection Agency (APT) – both of whom were appointed by President Joseph Biden. Also around the same time, the House’s Committee on Energy and Commerce sent a letter requesting energy consumption information from four crypto miners according to CoinDesk.

Warren’s letter – which came on the heels of a June 15 House Republican letter decrying the SEC’s new climate risk reporting requirements – revealed results from Warren’s own investigation into cryptocurrency mining operations in the United States and raised questions about their impact on the environment. She wrote, “Our investigation suggests that the overall U.S. cryptomining industry is likely to be problematic for energy and emissions. But little is known about the full scope of cryptomining activity.” She and her co-signers wanted the agencies to look into mining more deeply and report back only one month later – by August 15, 2022. To date, there is no word if the briefing transpired.

Signed by Warren and five Democratic members of Congress, the letter did not include Senator Warren’s Democratic colleague Kirsten Gillibrand (D, NY) who co-sponsored the Responsible Financial Innovation Act on June 8 with Senator Cynthia Lummis (R, WY). Gillibrand has been tangentially involved with the controversy around crypto mining operations in her home state of New York.

Senator Warren is a member of the Senate Committee on Banking, Housing, & Urban Affairs and the Senate Committee on Finance.

March 16, 2022
From: The Blockchain Eight
To: Chair Gary Gensler, Securities & Exchange Commission
Subject: Burdensome Reporting Requirements

In a letter to SEC Chair Gary Gensler, Rep. Emmer along with a bipartisan group of 7 congressmen – soon-to-be-known in crypto circles as “The Blockchain Eight” – questioned the Securities and Exchange Commission’s (SEC) “burdensome” reporting requirements as it relates to private crypto companies.

According to the letter, Congress wanted to know “how and why the SEC is soliciting information from private firms related to cryptocurrency and blockchain.” Beyond a request for more transparency on the process, the gyst of the 13 questions sent to Chair Gensler suggested that the SEC may be overstepping its bounds of authority.

Also, read the press release from Emmer’s office.

The letter concluded, “Your response will help provide us with a better understanding of the SEC’s authority to secure the information and transparency it feels it requires while also ensuring these types of requests are not overburdensome, unnecessary, and do not stifle innovation.”

Rep. Emmer requested that all answers be delivered by April 29, 2022.  To date, there has been no public response by the SEC’s Gensler to the questions. A day after publication of the letter, Congressmen Ritchie Torres (D, NY), a progressive Democrat and member of The Blockchain Eight, penned an op-ed for the NY Daily News titled, “A liberal case for cryptocurrency.” Torres wrote, “No one knows for sure how the crypto revolution will unfold. But we should all be rooting for its success because decentralizing both finance and the internet would offer a long-overdue counterweight to the very concentrated power and wealth that has increasingly put the American dream out of reach.”

On August 19, Chair Gensler published an op-ed in The Wall Street Journal titled, “The SEC Treats Crypto Like the Rest of the Capital Markets.” He wrote, “I encourage platforms offering crypto lending to come in and talk to SEC staff. Getting these platforms into compliance with the securities laws will benefit investors and the crypto market.” Effectively, Gensler appeared to be saying that the Howey Test will work for crypto markets just as it has for all other markets since the Test’s creation in the 1930s.

January 27, 2022
From: Rep. Patrick McHenry
To: U.S. Secretary of the Treausry, Janet Yellen
Subject: Fixing Reporting Requirements in the Jobs Act

In the lead up to passage of the Infrastructure and Jobs Act in August 2021, all crypto eyes were on an egregious designation of what constitutes a “broker.”  The bill had identified crypto mining operations and wallet providers, for example, as brokers and requiring them to potentially issue 1099s to… no one’s really sure.  The crypto industry rallied, and an amendment was on the table, but because of some procedural issues that only Congress understands, the bill passed with the “broker” definition in tact. Still, most in Congress as well as the Treasury Department understood that this provision would need to be fixed ASAP.

At the beginning of this year, House Financial Services Committee Ranking Member Rep. Patrick McHenry (R, NC) nudged Treasury Secretary Janet Yellen in a letter stating, “To help constrain a potentially expansive reading of the ‘broker’ definition, we would point you to the definition of ‘broker’ proposed in H.R. 6006 (Keep Innovation in America Act). This definition clearly avoids placing unworkable customer reporting obligations on persons who do not, in actuality, have customers (e.g. miners, stakers, protocol nodes, payment channel nodes, developers of protocol or decentralized application software, or similar non-custodial entities).” And, read the Financial Services press release from House Republicans.

On August 3, the Senate released its tightly defined version of the reporting fix with bipartisan support from Senators Portman, Warner, Lummis and Sinema who are co-sponsoring.

Given the overall support in Congress, this reporting clarification would seem to have the inside track on getting passed in 2022 in comparison to everything else crypto-related that is bubbling in the House and Senate.