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