Politics Mixes Heavily With Tokenization Hearing; Sen. Warner’s Illicit Finance Bill

Senator Warner – illicit finance

Senator Mark Warner (D, VA) has inserted his Terrorist Financing Prevention Act [S.3441] into a must-pass: The “Intelligence Authorization Act for Fiscal Year 2025” [S.4443].

From the bill:

“… Sanctions With Respect To Foreign Financial Institutions And Foreign Digital Asset Transaction Facilitators That Engage In Certain Transactions.” –

“(1) MANDATORY IDENTIFICATION.—Not later than 60 days after the date of enactment of this Act, and periodically thereafter, the Secretary shall identify and submit to the President a report identifying any foreign financial institution or foreign digital asset transaction facilitator that has knowingly…” See the text.

Senator Warner chairs the Senate Intelligence Committee.

DeFi Education Fund CEO Miller Whitehouse-Levine tweeted last night about the addition, “Massive expansion of sanctions designation authorities (and mandatory imposition?) including ‘foreign digital asset transaction facilitators’ put into [Sen.Mark Warner’s] intel bill, which passed out of committee unanimously yesterday. Very concerning.”

what you should know: Senator Warner has previously partnered with Sens. Jack Reed (D, RI), Mitt Romney (R, UT) and Mike Rounds (R, SD) on the CANSEE or “Crypto-Asset National Security Enhancement and Enforcement Act” [S.2355] which has given industry pause in its treatment decentralized finance among other issues.

Senators Ron Wyden (D, OR) and Kirsten Gillibrand (D, NY) are also members of the Senate Intelligence Committee and are presumably aware of Sen. Warner’s legislative maneuvers. Wyden and Gillibrand have been openly supportive of digital asset interests.

tokenization hearing – 2 things

Two things were clear from yesterday’s hearing on tokenization from House Financial Services (HFS) Subcommittee on Digital Assets, Financial Technology and Inclusion led by Chair French Hill (R, AR)

See video and hearing info.

First, real-world asset (RWA) tokenization is an exciting and potentially huge financial frontier enabled by distributed ledger technology and Congress will need to weigh in.

Representing financial system infrastructure provider Depository Trust and Clearing Corporation, Nadine Chakar was among several witnesses who spoke eloquently to its potential.

Second, HFS Democratic leadership was more interested in smearing the recently passed Financial Innovation and Technology for the 21st Century Act (FIT 21), the SAB 121 resolution, the Republican stance on CBDCs and efforts to bring digital assets underneath the regulatory umbrella of the U.S. financial system than tokenization. All of this was in the name of consumer protections and fighting fraud – from Dem leadership’s persective.

With American University Professor Hilary Allen’s help as a witness, Dem leaders threw the still-pending stablecoin legislation into the same bucket, too.

more tips:

    • Securitize CEO calls for clearer digital asset regulation in House Financial Services hearing – The Block

what you should know: If HFS Dem leadership is a proxy for the White House – which it has seemed to be since the beginning of the 118th Congress – then the White House has not changed its tune in spite of hints of a “fig leaf” extended to pro-digital assets supporters in the recent SAB 121 resolution veto memo on May 31 and a guidance memo prior to the FIT 21 vote on May 22.

tokenization – remarks

In his opening remarks, Digital Assets Subcommittee Chair French Hill (R, AR) briefly noted the passage of SAB 121 and FIT 21 but quickly turned to the day’s topic at hand – tokenization.

Chair Hill said that tokenization “can leverage the efficiency and transparency of blockchains to help modernize U.S. markets. Some components of our capital markets suffer from inflated costs, stranded liquidity, siloed markets, and high barriers to entry. Unsurprisingly, some of these limitations are also present in the banking system as well, where it can take can time to transfer funds and reconcile ledgers between two different financial institutions.” Read more of his remarks.

Note the separate “capital markets” vs. “banking system” use cases.

Meanwhile, and he has done many times before, Subcommittee Ranking Member Stephen Lynch (D, MA) dutifully toed the anti-crypto party line familiar to Democratic leadership in his opening statement and during the Q&A. He was not alone as other members of the Democratic caucus continued to echo concerns such as Rep. Brad Sherman (D, CA), who ignored tokenization and asked Professor Allen about the implications of FIT 21.

Allen replied to Sherman about FIT 21’s effects if it became law, “If you were a securities issuer, and you had the option of opting out of securities laws, you’re going to consider it. And so, what you can do is ‘slap a blockchain‘ on a product – even if it’s not a particularly useful piece of technology as you said, it can be quite useful in enabling you to get around a lot of the regulations…” See the exchange on X.

tokenization – Vice Chair Davidson

Both during and after the hearing, Subcommittee Vice Chair Warren Davidson (D, OH) took issue with some of his colleagues across the aisle. On X, post-hearing, Vice Chair Davidson said, “Tokenization will transform our economy. Unfortunately, senior Democrats want to block the entire space from having the legal certainty markets need to flourish. I’m encouraged because outside of Congress this is a nonpartisan issue, and in Congress it’s increasingly bipartisan.”

tokenization – Rep. Nickel

Subcommittee member Rep. Wiley Nickel (D, NC) remained as steadfast as ever regarding his supportive views regarding digital assets. At the beginning of his 5-minute, Q&A allotment, Rep. Nickel made a personal appeal to the SEC Chair: “It’s unfortunately Gary Gensler who is holding back tokenization technology with SAB 121. I’d like to use this moment briefly to call on Gary Gensler to withdraw SAB 121… He’s putting President Biden in a very difficult position… We have a tremendous Executive Order and continuous statements from the Administration wanting to work with Congress on this issue in a bipartisan manner…” Hear the complete statement.

what you should know: The difference between Rep. Nickel and HFS Dem leadership is stark. Rep. Nickel hasn’t given up on President Biden’s support of a “pro-digital assets” point-of-view.

tokenization – two bills

The two “study” bills which were appended to yesterday’s hearing will likely be a part of an upcoming markup. Each the CFTC and SEC to embark on studies.

The first unnamed bill tells the agencies to “conduct a study to assess whether additional guidance or rules are necessary to facilitate the development of tokenized securities and derivatives products, and for other purposes…”

The second study bill, titled “Tokenization Report Act of 2024” [H.R. 8464], asks the prudential regulators to look at tokenization, too. The bill is sponsored by Rep. William Timmons (R, SC) and co-sponsored by Rep. Ritchie Torres (D, NY).

what you should know: The tokenization topic is “early days” in Congress compared to the more crypto-centric remit of bills such as FIT 21. But, it speaks to the sprawling scope of blockchain technology applications across the financial industry and the U.S. economy as it “cuts out the middleman.”

Bitcoin ETFs

Another Wave of Bitcoin ETF Adoption Is Coming: Franklin Templeton CEO – Decrypt

cue Chair Gensler

Right on cue as yesterday’s HFS Digital Assets Subcommittee hearing on tokenization was getting underway, SEC Chair Gary Gensler appeared on CNBC’s Squawk on the Street.  Due to a different group of questioners led by investor Jim Cramer, Chair Gensler spoke to a range of topics beyond digital assets.

Nevertheless, the Chair addressed the first leg of approval of the Ether Exchange-Traded Products (ETP) saying that the next/final S-1 step of the process “will take some time.”

Alexander Grieve of venture firm Paradigm also commented on Chair Gensler’s change of phrasing during the interview: “Note the pivot from ‘all tokens are securities’ to ‘tokens lack proper disclosure.'”  See what Grieve means (video).

more tips

    • SEC’s Gensler Shrugs About New Crypto ETFs Strolling Through His Agency’s Gates – CoinDesk

what you should know: To Grieve’s point, by virtue of the first leg of the Ether ETP approval already completed, Chair Gensler appears to know that the crypto token Ether is no longer a security – a point he has held out on during his tenure as SEC chair.

iPhone moment – smart wallets

Coinbase announced its new smart wallet product yesterday as the company hopes this will be the equivalent of web3’s “iPhone moment.”

Unchained summarizes, “Smart wallets enable people without crypto wallets to get one quickly and jump into using an application.”  If you have tried a crypto wallet in the past, you know that the first steps can be complicated. By subsidizing the transactions, the hope is that consumers can move more quickly and easily on-chain. Read more from Unchained.

Yesterday’s Coinbase blog post explains:

“With smart wallets, new users will be able to mint an NFT, trade on decentralized exchanges, or diversify their investment with DeFi apps in just a few clicks. Users can enjoy a fluid and intuitive experience without sacrificing self-custody or their security.”

FDIC hearing

The Full Committee of House Financial Services will gather for a hearing next Wednesday, June 12, titled, “Oversight of the FDIC’s Failed Leadership and Toxic Workplace Culture” led by Chair Patrick McHenry (R, NC)See the hearing page.

The title suggests that Federal Deposit Insurance Corporation (FDIC) Chair Martin Gruenberg will be the subject of the hearing whether in person or in absentia. During recent Fed/OCC/FDIC oversight hearings held by HFS and Senate Banking, both sides of the aisle – for example, read this May 20 statement from Senate Banking Chair Sherrod Brown (D, OH) – were calling for separate hearings related to the FDIC’s sexual harassment scandal and Chair Gruenberg’s leadership during that time.

what you should know: For digital asset supporters, the specter of Choke Point 2.0 looms as Chair Gruenberg continues to lead the prudential regulator. Gruenberg has already said he will leave once a successor is found. But, critics remain skeptical that he’s actually leaving.

still more tips

Crypto & Pre-Enforcement Challenges: Another Tool in the Arsenal – DeFi Education Fund

US political change could expose crypto to $20T industry: Bitwise – Cointelegraph

How Crypto SuperPACs Will Change Crypto Policy – Forbes

Crypto industry’s lobbying drive will pay off in US elections, Ripple president says – Reuters

Stand With Crypto has just reached 1 million advocates – Fox Business’ Eleanor Terrett on X