New CFPB Rule Impacting Digital Assets Gets Congressional Letter; Treasury, Crypto And Illicit Finance

letter – digital wallet rule

In a letter to the Consumer Financial Protection Bureau (CFPB) and Director Rohit Chopra (D), Republican House Financial Services (HFS) lawmakers urged the agency to reopen the comment period for the proposed rule (see it):  “Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications.” Comments closed on January 8 and would impact digital wallets for crypto among other non-bank areas.

Read the letter.

HFS Chair Patrick McHenry (R, NC), Rep. French Hill (R, AR), Chair of the Digital Assets, Financial Technology and Inclusion Subcommittee and Rep. Mike Flood (R, NE) signed on to the letter and said the rule would have “unknown effects on the digital asset ecosystem” among other reasons.

Given recent run-ins with the CFPB, it’s not surprising that HFS Republicans believe the CFPB and Biden-appointee Chopra are making a clear overreach. But, the industry has made it clear that the proposed rule is not gonna work.

Among many comments previously delivered in response to the rule, Paradigm government relations executive Alexander Grieve wrote on his company’s blog that problems with the new rule include:

    1. Overreach by the CFPB where it has no jurisdicton;
    2. “Broadly worded to capture crypto wallet software service providers that do not custody cryptoassets”;
    3. “The CFPB failed to adequately perform a fulsome cost-benefit analysis of the proposed rule.”

what you should know: As the HFS Republicans’ letter identifies, this is another attempt by the Biden Administration to reign in crypto -and “Big Tech” for that matter. This is reminiscent of what’s happening with the Financial Stability Oversight Council (FSOC) and its ability to “designate” a crypto company a stability threat to the financial system of the Untied States and thereby put the company under a restrictive compliance regime. HFS’ Digital Assets Subcommittee with Chair Hill presiding had a hearing about it earlier this month. Finally, the Securities and Exchange Commission and its Democratic majority’s “regulation by enforcement” approach could be seen as still another digital assets strategic effort.  Operation Choke Point-a-go-go!

Treasury designating with crypto

The U.S. Treasury announced new sanctions against sources of terrorist financing by ISIS as the Office of Foreign Assets Control (OFAC) “designated” two cybersecurity experts and an ISIS financial intermediary involved in transferring funds for terror purposes.

In the announcement, The Biden Administration (and Democratic leadership) appear to be making a special point on crypto through Brian Nelson, the Under Secretary of the Treasury for Terrorism and Financial Intelligence -unmistakeable was the same phrasing as a previous release about terrorist organization Hamas.

Mr. Nelson in yesterday’s Treasury release:

“Today’s actions disrupt ISIS’s ability to move funds, including through the use of cryptocurrency, and leverage its online presence to recruit and promote its terrorist ideology…” Read it.

Mr. Nelson in January 22’s Treasury release:

“Hamas has sought to leverage a variety of financial transfer mechanisms, including the exploitation of cryptocurrency, to channel funds to support the group’s terrorist activities…” Read it.

It is not clear in either release what part of the terrorism financing was crypto.

what you should know: The release speaks to Capitol Hill’s hottest crypto narrative led by Senator Elizabeth Warren’s (D, MA) Digital Asset Money Laundering Act [S.2669] as well as other terrorist-financing-in-crypto legislation circulating in both the Senate (CANSEE Act and the Terrorism Financing Prevention Act) and House (e.g. new additions to the House Financial Services digital asset market structure bill with more bills, potentially, on the way).

another Peirce dissent

“My thoughts on the SEC’s unusual practice of telling defendants who settle with us that they can’t ever say anything bad about the settlement…” – SEC Commissioner Hester Peirce on X

SEC admits fault (kinda)

Fox Business’ Eleanor Terrett reports that the Securities and Exchange Commission lawyers, who drewthe ire of a Federal judge in an SEC case brought against crypto company DebtBox, have decided to have their complaint dismissed. Terrett writes on X, “The SEC is choosing dismissal rather than face possible sanctions from the judge for misleading the court in order to secure a restraining order and asset freeze against Debt Box.”

more tips:

U.S. Judge Warns SEC Over ‘False and Misleading’ Request in Crypto Case (Dec. 1) – CoinDesk

Binance isn’t dead

Cryptocurrency platform Binance is still thriving in spite of criminal charges by the U.S. government which were settled in November and an ongoing complaint brought by the SEC. But, the interactions with government appear to be leading to structural change for the company according to the Financial Times.

Traders report that Binance’s liquidity remains unmatched and they’re relieved that new custody options are now available through Swiss banks Sygnum Bank and Flow Bank. “I’d much rather park my money with a Swiss bank than Binance,” says one trader. To date, the only option was to use a Binance-designated custody option called Ceffu.

Binance may be looking to avoid the appearance of the commingling of assets under the company’s umbrella of partnerships. Read more in the FT.

more tips

Binance Labs Invests in Puffer to Support the Next Generation of Decentralized Liquid Restaking – Binance

institutional adoption chart

Bitwise researcher Juan Leon asks readers on X, “How many institutions does it take to turn on the mainstream crypto lightbulb?”

The lightbulb is on.. or almost on?  See Leon’s chart for TradFi adoption of crypto products and services.

Europe blocking non-EU firms

With the much-ballyhooed MiCA (Markets in Crypto-Assets) regulatory framework gradually taking effect in Europe, one part of the regulation may be particularly onerous to U.S. firms, let alone in the rest of the non-EU world.

Specifically, The European Securities and Markets Authority (ESMA – the SEC, but in the EU) highlighted on Monday a new “consultation” on a provision of crypto-asset services or activities by a third-country firm “which is strictly limited under MiCA to cases where such service is initiated at the own exclusive initiative of a client (the so called ‘reverse solicitation’ exemption).” See ESMA’s consultation.

Consensys counsel Bill Hughes said of the consultation on X, “ESMA’s proposed rule on reverse solicitations from non-EU crypto service providers is incredibly broad and restrictive. It will also be ignored by most firms around the world and scantly enforced by EU member states, especially to begin with.”

still more tips

Germany: Police seize bitcoins worth $2.1 billion from alleged piracy ring active in 2013 – Deutsche Welle

Opinion: You’ve got a friend in me: How amicus briefs are helping the crypto industry win over the courts – Amanda Tuminelli, DeFi Education Fund, in Fortune

PayPal begins more layoffs – TechCrunch

Bitcoin-based DEX Portal raises $34 million in seed funding from Coinbase Ventures and others – The Block