stablecoin and money laundering
Last week, anonymous sources tell Bloomberg that U.S./U.K. authorities are investigating $20 billion in crypto transfers of the Tether stablecoin through Russian crypto exchange Garantex. Bloomberg says, “The transfers have taken place since Garantex was sanctioned by the US and UK on suspicion of enabling financial crimes and illicit transactions in Russia.” Read more.
Last October, the Wall Street Journal reported that Garantex – in spite of sanctions issued in 2022 – had a booming business which included potential involvement in the funding of terrorism and, in particular, Hamas. Read that one from October 13.
more tips:
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- Treasury Sanctions Russia-Based Hydra, World’s Largest Darknet Market, and Ransomware-Enabling Virtual Currency Exchange Garantex (April 2022) – U.S. Treasury
what you should know: Is this latest news more fuel to the fire of anti-money laundering bills such as Senator Elizabeth Warren’s (D, MA) Digital Asset Anti-Money Laundering (DAAMLA) bill or Senator Jack Reed’s (D, RI) CANSEE Act? Or maybe Rep. Sean Casten (D, IL) will finally be able to find a Republican partner for the House version of DAAMLA?
Fed master account – lawsuit
On Friday, Crypto bank Custodia lost its lawsuit in the District court of Wyoming over its request to receive a master account (define) from the U.S. Federal Reserve which would give it access to the pulsing veins of the U.S. financial system.
Download Judge Scott Skavdahl’s judgment on CourtListener.com.
According to The Block’s Sarah Wynn, the judge said, “The real dispute at the heart of this case is whether [Federal Reserve Bank of Kansas City] must grant a master account to Custodia because it was legally eligible or whether FRBKC possessed the discretion to deny Custodia’s master account application despite its eligibility.” And the judge ruled the Fed does have the discretion. Read a summary on The Block.
Custodia will likely continue driving its claim in the courts given it seeks a core bank function – and legitimacy – which the master account access would provide: it would allow the bank to lend.
Reacting to a report by Fox Business’ Eleanor Terrett on a conflict with court findings of the Fed’s previous motion-to-dismiss hearing for Custodia’s lawsuit, crypto investor and fund manager Anthony Scaramucci claimed on X, “The decision makes no sense based on similar precedent and judge’s earlier ruling on case. Clearly a hostile attack on crypto by entrenched special interests represented by [Sen. Elizabeth Warren (D, MA)].”
Fed master account – Congress reacts
On X, Senator Cynthia Lummis (R, WY) reacted strongly to the dismissal of the Custodia lawsuit on Friday: “The Fed’s inaction in issuing master accounts is unacceptable, and I am disappointed in today’s court ruling that goes against clear laws enacted by Congress. Wyoming SPDIs have the right to access master accounts. It is past time the Fed follows the laws passed by Congress.”
more tips:
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- State, Lummis and Blockchain Association file briefs supporting Custodia (February, 2024) – Wyoming Business Report
CBDC – prioritizing legislation
Last Thursday, Politico’s Jasper Goodman reported that unnamed House conservatives are looking for a vote on Majority Whip Tom Emmer’s (R, MN) anti-Central Bank Digital Currency (CBDC) bill [H.R.5403] which passed out of a House Financial Services (HFS) markup last September. Not only that, conservatives want a vote for the bill at the same time as the stablecoin and digital asset market structure bills. As Goodman intimates, that’s probably not gonna work for pro-crypto Democrats who are already butting heads with the anti-crypto White House and Democratic leadership. Read more.
what you should know: HFS Chair Patrick McHenry’s (R, NC) best laid plans for digital assets keep getting more muddled beginning with Speaker Kevin McCarthy (R, CA), a technology forward legislator and ally of McHenry, getting replaced by Speaker Mike Johnson (R, LA) last year. Republicans may decide that they’re going to prioritize the CBDC vote as it becomes a growing element of the Presidential election agenda. Meanwhile, McHenry had stated at a Punchbowl News event on March 19 regarding the stablecoin bill that he was looking for a must-pass piece of legislation to get that bill done: “I think we’re at an inflection point where we can land this ‘plane’ this year.. this year. But we [need] the broader context of Congress to get us that opening _ a legislative vehicle…”
CBDC – advocating exploration
In an op-ed in Project Syndicate last week, Circle Chief Strategy Officer Dante Disparte walks a political tightrope advocating for digital assets legislation while suggesting that a CBDC should be explored by the United States.
Disparte writes, “….Congress must empower federal regulatory agencies to set rules for the market. This involves exploring central bank digital currencies, despite opposition from politicians like former US President Donald Trump, the Republican Party’s presumptive nominee in November’s presidential election.” Read it.
more tips:
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- The Case Against Central Bank Digital Currencies (2022) – Dante Disparte in International Economy
what you should know: Lotta nuance here. Disparte’s company, Circle, issues the USDC stablecoin and, obviously, a stablecoin law for which he also advocates would be hugely beneficial to his company. Republicans have taken the lead in Congress on the stablecoin bill, but they also support anti-CBDC bills. Disparte appears to argue that it’s in the United States best interest within the global financial system to set CBDC rules just like it is for stablecoins. The bottom line may be that the end goal of the stablecoin and CBDC are inherently intertwined – it’s either a government issued stablecoin (CBDC) or it’s a private solution such as Circle’s USDC that functions similarly. Put another way… they’re kinda the same thing?
Prometheum custody didn’t launch
Well, what happened? Did Prometheum or the SEC blink?
There was no launch of a custody product for an Ether (ETH) security last week as first announced by the co-CEO Aaron Kaplan in February. CFTC Chair Rostin Behnam had worried aloud at an early March House Ag oversight hearing that this “securities” designation would throw off his agencies derivatives oversight for ETH.
And then Republicans on the House Agriculture and Financial Services Committees sent a letter early last week to the SEC essentially warning Chair Gary Gensler about the implications of Prometheum’s new Ether security token designation.
On Friday in Cap Hill Crypto, George Leonardo breaks down the Republican letter and notes the key clarifications members want from the SEC by April 9: “1) Does the SEC now think ETH is a security? If so, how and when did it reach that determination? 2) How did Prometheum determine it can custody ETH without running afoul of the SEC’s SPBD rules?” Read Leonardo’s Analysis.
what you should know: More fireworks to come! .. a House SEC oversight hearing with Chair Gensler awaits.
Coinbase MTD – more reaction
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- “Having now read the Coinbase ruling, here are my top four takeaways: 1) Decentralization – The ruling is consistent with the guidance the SEC provided in 2018 and 2019 about decentralization, so to the extent token issuers have been following that guidance…” – Miles Jennings, general counsel, a16z crypto
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- “The recent order in SEC vs Coinbase illustrates the importance of non-custodial wallets. The Judge found the SEC’s claims over the Coinbase Wallet “insufficient to establish ‘brokerage activities.’ Here’s what wallet creators/platforms should know…” – Jacob Robinson, host, Law of Code podcast
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CFTC commish on enforcement, SEC
Commodity Futures Trading Commission (CFTC) Commissioner Caroline Pham took some issue with the enforcement action announced against KuCoin last week. She wrote in a brief statement, “I commend the Division of Enforcement’s vigilance in protecting our markets. However, I note that the complaint appears to assert that fund shares held by investors—namely, securities—can themselves constitute leveraged trading pursuant to section 2(c)(2)(D) of the Commodity Exchange Act. This interpretation fails to distinguish between an investment in a fund, which would typically be a security under the jurisdiction of the SEC, and the trading activities of a fund, alleged here to be under the CFTC’s jurisdiction. The CFTC’s approach may infringe upon the SEC’s authority and undermine decades of robust investor protection laws by conflating a financial instrument with a financial activity, disrupting the foundations of securities markets. Owning shares is not the same thing as trading derivatives.” Read more.
Blockworks Casey Wagner covers the news and notes that the CFTC complaint filed last Tuesday, which precipitated Pham’s response, had classified “KuCoin’s ‘leveraged tokens,’ which represent ‘shares’ in funds controlled by the exchange, according to KuCoin, as digital asset commodity derivatives.” Read more from Blockworks.
Trump regulators
Last Thursday’s “The Vault” newsletter from Punchbowl News postulated on what a Republican Trump Administration might mean in the world of financial regulators: “For commission-led regulators, folks are looking down the dais: Current SEC Commissioner Hester Peirce (R) and Federal Deposit Insurance Corp. Vice Chair Travis Hill (R) are considered strong contenders to lead those agencies if the White House flips.” Read more in The Vault (subscription).
still more tips
Arkansas cryptocurrency mining law to face possible changes in 2025 regarding foreign ownership (Mar. 28) – KARK, an NBC affiliate
Crypto investors are bracing for a busy quarter with the Bitcoin halving, ether ETF updates and potential rate cuts – CNBC
Fallen crypto mogul Sam Bankman-Fried sentenced to 25 years in prison (Mar. 28) – AP
Paradigm’s funding takes Farcaster’s dev to unicorn status – Cointelegraph
DeFi Group Sues to Halt `Regulation by Enforcement’ – Capitol Account