Coinbase Rulemaking Denied By SEC; GAO Delivers NatSec Report On Digital Assets

SEC denies Coinbase

To no one’s surprise, a rulemaking petition filed by Coinbase was denied by the Securities and Exchange Commission (SEC) on Friday as its Democratic majority prevailed in a 3-2 decision led by Chair Gary Gensler. The rulemaking would have presumably created a path for rules for digital assets and companies operating in the sector.

In a statement, SEC Chair Gary Gensler explained his support for the denial with three reasons: “First, existing laws and regulations apply to the crypto securities markets. Second, the SEC addresses the crypto securities markets through rulemaking as well. Third, it is important to maintain Commission discretion in setting its own rulemaking priorities.”

more tips:

U.S. SEC Denies Coinbase’s Push for Crypto Regulations as ‘Unwarranted’ – CoinDesk

what you should know: This decision was not a surprise. The SEC was the judge, after all. And given Chair Gensler’s past decisions and statements on crypto, he will continue to shoot down anything that gives digital assets hooks into his agency unless the courts intercede (see Grayscale) -or Congress finally, and successfully, enters the picture.

SEC denies Coinbase – reaction

Willkie Farr counsel Justin Browder noted on X a “slight retreat” in Gensler’s statement whereas crypto assets used to be assumed as securities, now crypto assets are securities when “offered and sold as a security.”

Hester Peirce and Mark Uyeda, the Republican minority on the SEC’s commission, expressed resignation that the SEC was unwilling to engage in the rulemaking with Coinbase but held out a fig leaf to industry by saying in a statement, “While we are disappointed that the Commission is not hosting these important conversations, we will have an open ear for conversations that others host and the ideas that emerge from those conversations.”

Late Friday afternoon, Coinbase Chief Legal Officer Paul Grewal announced that in response to the denial, his company had filed suit due to the SEC’s decision  saying on X, “Promise made, promise kept: we are now on file with Third Circuit to challenge the SEC’s arbitrary and capricious denial of our petition for crypto rulemaking. We again appreciate the Court’s consideration.”

more tips:

Statement Regarding Denial of Petition for Rulemaking – Commissioners Hester Peirce and Mark Uyeda on

what you should know: Another day, another 3-2 party line vote among the commissioners. The SEC is where digital assets’ partisan reputation burns the brightest in Washington. As the 2024 general election approaches, will the SEC’s partisan positioning hurt or help either party’s presidential candidate? Chair Gensler’s about-face on digital assets – from his MIT teaching days to becoming one of today’s staunchest crypto critics as SEC Chair – suggest full-steam ahead for Democratic leadership and what it sees as an “anti-crypto army” capable of giving them a win in November.

GAO strikes again

Last week, the Government Accountability Office (GAO) quietly published a new report, “Economic Sanctions: Agency Efforts Help Mitigate Some of the Risks Posed by Digital Assets (PDF).”  It’s a timely report considering digital asset anti-money laundering and terrorist financing legislation currently swirling in Congress. Also, the stated purpose of the report also appears relevant as the GAO explains, “GAO was asked to review matters relating to the national security implications of certain types of digital assets.” Read the release.

The main findings are written even-handedly – unsurprising given the relative neutrality of the GAO. A summary reads: “Digital assets like Bitcoin and other virtual currencies pose risks to implementing and enforcing U.S. sanctions, but several factors partially mitigate these risks (see table). A key feature of digital assets is that they enable users to rapidly transfer value across countries’ borders. Yet many digital assets are recorded on a public ledger, which may enable U.S. agencies and analytics firms to trace transactions and potentially identify illicit actors. However, digital asset owners also may use the anonymizing features of some digital assets or other techniques that obscure their identities in an attempt to evade sanctions.” (h/t @BillHughesDC)

what you should know: Like the GAO report on November 1 which found the SEC’s Staff Accounting Bulletin 121 on crypto custody an overreach by the SEC, this report arguably pulls the politics out of the digital assets discussion in Washington.

picture worth thousand stablecoins

The New York Department of Financial Services (NYDFS) Superintendent Adrienne Harris met last week with the House Minority Leader Hakeem Jefferies (D, NY) as the NYDFS X account revealed a photo of the two said only that the meeting was “to discuss recent financial regulatory developments.” See the pic.

what you should know: New York State is the center of the storm when it comes to Federal stablecoin legislation. The Biden Administration and Democratic leadership have been fighting for pre-emptive rights which gives the Federal Reserval final say on issuance of any stablecoin. New York State and its relatively, well-developed digital assets regulatory infrastructure are arguing for “parallel rights” which will prevent the Fed from telling the State what to do. New York Democrats Reps. Ritchie Torres and Gregory Meeks both voted in favor of the stablecoin bill that came out of July’s House Financial Services markup and preserved states’ rights. A rumored House floor vote on the stablecoin bill in 2024 would reveal whether fellow New Yorker Jeffries is a states’ rights camper, too.

central bankers & stablecoins

The Bank of International Settlements (BIS) – a.k.a. the bank for central banks – and its Basel Committee on Banking Supervision issued a proposal for comment last week on standards for banks and their exposures to digital assets. See “Cryptoasset standard amendments (PDF).”

As a BIS statement explains,  part of the new amendments includes stablecoins: “The proposed changes flesh out the criteria on the composition of the reserve assets that back stablecoins and puts in place a due diligence requirement to ensure that banks have an adequate understanding of their stabilisation mechanisms.” Read more.

Comments are due by March 28, 2024. Zach Wong, formerly of stablecoin issuer Circle and now of Uniswap Labs, offered his own comment X saying, “the proposals indicate Basel-level recognition of the innovation of cryptoassets as well as the widespread, international market demand by banks to be able to use them when appropriate. US bank regulators should take note and ensure we don’t abdicate our leadership role in guiding prudential standards.”

more tips:

Basel Committee consults on targeted adjustments to tighten its standard on banks’ exposures to cryptoassets – BIS

what you should know: This is more recognition by the BIS (fyi, the U.S. has 2 seats within its 63 jurisdiction membership) of the ever-increasing momentum for digital assets across the world and, in particular, in countries and regions like the European Union. The EU has a cryptoasset framework and may see an opening for the Euro as the U.S. Dollar’s hegemony weakens while any new regulation is thwarted in the States.

critic touts crypto

NYU professor Nouriel Roubini drops an opinion piece in The Financial Times as the notorious crypto critic has…. wait for it… a new crypto startup to tout.

Roubini writes, “…Despite my longstanding skepticism over such crypto developments, the need for a more secure store of value backed by stable assets that can also be a means of payment is legitimate in a world in which inflation is likely to be higher even in advanced economies, let alone in unstable emerging market economies where poorer households don’t have access to a stable currency.” He sees blockchain technology and something called a “flatcoin” as the solution. Read more

Paradigm policy executive Justin Slaughter notes Roubini’s change of heart and commented on X, “Nouriel Roubini, who criticized crypto/blockchain in testimony before the Senate in 2018 is now working on a crypto project. He also notes the numerous uses for crypto, from speed and transparency to financial inclusion. Senate Banking – you should invite him to testify again!”

more tips:
Opinion: Nouriel Roubini’s crypto secretly wishes it was bitcoin (Nov. 10) – Blockworks

what you should know: A Q1 Senate Banking hearing featuring the still-cloaked Lummis-Gillibrand stablecoin bill might be a fun way to loop in Roubini. It certainly would be good for the press. Just a thought for you, Senate Bank’ers.

still more tips

In Cambodia’s ‘underground’ crypto economy, Tether becomes coin of choice for Chinese-linked activities – South China Morning Post

A Comprehensive Guide to the Deductibility of Digital Asset Losses – Andie Kramer of ASKramer Law on National Law Review

Stablecoins and Tax Rules – Cap Hill Crypto

The Terrorism Financing Prevention Act; The Deploying American Blockchains Act – DeFi Education Fund