Tillis And Hickenlooper Introduce Proof Of Reserves Bill; Crypto Wallet Data For Terrorist Financing Gets Pushback

WSJ money laundering data

Blockchain industry participants are continuing their pushback on the data from Elliptic that was used two weeks ago in the original Wall Street Journal article and the follow-up on October 13 about terrorist financing and crypto. Some even want a retraction by the WSJ regarding its conclusions.

Yesterday, Coinbase Chief Legal Officer Paul Grewal said in response to discussion of the disputed data in a tweet on X, “Yes- wrong is wrong. This reported misinformation furthers agendas that demean real human tragedy and genuine and effective efforts to thwart those who are responsible.” And, crypto venture capitalist Nic Carter claimed on X yesterday that, “The [journalists] are aware of their abominable mistake and failed reporting and refused to retract. (Reached via email).”

At the center of the current “retraction” discussion seems to be blockchain analytics firm Chainalysis (the U.S. government is a large client) blog post last Wednesday which provided a deep dive on specific wallet addresses and suggested an incorrect reading of the data used by the WSJ such as: “Of the roughly $82 million in cryptocurrency received by this address, about $450,000 worth of funds were transferred from the known terror-affiliated wallet.” Read the whole thing.

Nevertheless, on Friday, the Wall Street Journal expanded and summarized its coverage of crypto and terrorist financing and, in the process, re-affirmed the use of Elliptic’s data in an article, “Why Hamas Uses Crypto to Raise Money.” Read it.

what you should know: There’s a lotta future business at stake for blockchain analytics firms – specifically, future business with the U.S. government. Among several narratives here is Chainalysis taking on Elliptic, which provided the original data to the WSJ.

WSJ opinion fight

Senators Elizabeth Warren (D, MA) and Roger Marshall (R, KS) have since used the WSJ’s findings to build support for their “The Digital Asset Anti-Money Laundering Act” [S.2669]  which included a WSJ op-ed  last Wednesday. Since that time, at least two “Letters to the Editor” have been published in response:

    • On Thursday: “Crypto and Hamas: Why Elizabeth Warren Is Wrong” by George Mason University professor J.W. Verret who took issue with the Senators’ position and that “their legislative agenda is misguided.” Read it.
    • On Friday: “Questioning Two Senators on Crypto Terrorism” by Yaya Fanusie, Director of anti-money laundering and cyber risk at Crypto Council for Innovation, offered three points of contention with the Senators beginning with “…crypto exchanges in the U.S. are already regulated and have been since 2013.” Read that one.

what you should know: … and what no one wants to talk about may be the enormous-cost-with-little-to-show-for-it of AML and KYC (Know Your Customer) requirements. This article from July makes a compelling argument using a variety of data: “How KYC and AML are destroying the world.” (h/t @BillHughesDC)

House Speaker race

Punchbowl News reporter Brendan Pedersen noted the benefits to the blockchain industry in the latest iteration of the House Speaker vote as House Majority Whip Tom Emmer (R, MN) is now a candidate. Pedersen said on X,
“Emmer is crypto’s #1 advocate in Congress by a huge margin. His speakership would be a titanic win for the industry, which could definitely use a win these days.”

But as of late yesterday, Emmer is not alone. Punchbowl reported that 8 other Republican candidates will submit themselves to election in a private Republican conference tomorrow.  In addition to Emmer there are: Republican Conference Vice Chair Rep. Mike Johnson (LA), Republican Study Committee Chair Rep. Kevin Hern (OK), Reps. Byron Donalds (FL), Austin Scott (GA), Jack Bergman (MI), Pete Sessions (TX), Gary Palmer (AL) and Dan Meuser (PA).

what you should know: Flood waters rising! Freshman Congressman Mike Flood (R, NE) has found a potentially important role in the speaker race by getting speaker nominees to sign a pledge that basically says whoever wins the race happening in the Republican’s private conference, will support that winner in a House floor vote. Will be interesting to see if Flood is rewarded with, say, his “Uniform Treatment of Custodial Assets Act” which would gut the SEC’s despised Staff Accounting Bulletin 121 getting into a markup in House Financial Services (HFS) and heading to the House floor for a vote. His Prometheum questioning in June remains among the highlights of this year’s HFS hearings.

Senate – new Banking hearing

Senate Banking Chair Sherrod Brown (D, OH) has scheduled new hearing titled, “Combating the Networks of Illicit Finance and Terrorism” for this Thursday. So far two people have been added to the witness list:  Matthew Levitt of  The Washington Institute whose Hamas funding figures have been widely quoted (like here in Bloomberg) and Danielle Pletka, Senior Fellow at American Enterprise Institute.

what you should know: this will be the hearing Senator Warren to make a strong play for her Digital Asset AML legislation. Will Chair Brown support a pathway forward?

proof of reserves (PoR)

Senators Thom Tilis (R, NC) and John Hickenlooper (D, CO) have thrown their hats in the crypto legislation ring with “Proving Reserves of Others Funds (PROOF) Actwhich they describe in a press release as “bipartisan legislation that would establish strong safeguards against instances of unethical co-mingling of customer funds while also requiring digital assets institutions to submit to a monthly proof of reserves (PoR) inspection by a neutral third-party auditing firm.” The Senators say that the bill looks to circumvent the possibility that a crypto company such as FTX could ever exist within the U.S. financial system’s regulatory perimeter.  Read the release.

Back in February at Senate Banking “Crypto Crash” hearing on the FTX implosion, Tillis first publicly proposed his interest in “proof of reserves” in a question to Duke professor Lee Reiners who said PoR wasn’t a replacement for audits. Read a quick summary of Tillis Q&A in February.

But, Galaxy researcher Alex Thorn rebuts the audit criticism saying in Friday’ release, “Proof of Reserves (PoR) is an industry best practice that combines the cryptographic nature of digital assets with strong traditional audit standards to achieve greater industry transparency than is possible in traditional finance.”

Read a short summary on the legislation from Tillis office. And, read the section by section.

more tips:

Nic Carter provides a long form argument for PoR in July in Fortune.

what you should know: In less than a year, Nic Carter (who *called* Choke Point 2.0) has moved from what the left may have viewed as a “crazy libertarian” to a trusted resource for bipartisan Congressional legislation by the Senate.

on House Floor votes

Politico talks to HFS Digital Assets, Financial Technology and Inclusion Subcommittee Chair French Hill (R, AR) and explores whether crypto legislation such as the digital asset market structure or stablecoin bills can make it to the House floor before the end of the year.

Rep. Hill sounds like he isn’t so sure and tells Politico on Friday, “Part of the biggest challenge for us to move our digital assets bills … is floor time… As we push off these decisions about appropriations and the important farm bill, we’re cutting into coordinating floor time between now and the holiday.” Read a bit more.

what you should know: Republicans have a lot of work to do coming out of this Speaker mess. And they know it. Success in 2024 for Republicans hangs in the balance.

stablecoin bill, right this way

Late Friday, the Federal Reserve Board released its current assessment of stability in the U.S. financial system – better known as the Financial Stability Report. Along with money  market funds and some mutual funds, the Fed said “structural vulnerabilities persisted” with stablecoins.

On page 41 of the assessment, there was additional explanation: “While not widely used as a cash-management vehicle by institutional and retail investors or for transactions for real economic activity, stablecoins are important for digital asset investors. They remain structurally vulnerable to runs and lack a comprehensive prudential regulatory framework. Moreover, stablecoins could scale quickly, particularly if the stablecoin is supported by access to an existing customer base.” Read it (PDF).

what you should know: Sounds like an invitation for Congress to expedite the House’s stablecoin bill  H.R. 4766, the “Clarity for Payment Stablecoins Act of 2023,” which was passed out of the House Financial Services Committee in July.

brief comments

Response To NYDFS Coin Listing Policy Framework  – Chamber of Digital Commerce

Public Comment on IOSCO’s Consultation Report on Policy Recommendations for Decentralized Finance (DeFi) – CCI

DeFi Education Fund Amicus Brief In Harper v. IRS appeal – DeFi Education Fund

what you should know: If Congress isn’t going to handle digital assets, the courts will … eventually.

still more tips

Talking Bank Oversight; ‘Open’ Banking; Gensler Speaks; Bitcoin ETFs Coming Soon? – Capitol Account

Hong Kong securities regulator updates crypto policies, citing market developments – Cointelegraph

Crypto Shareholder Requirements Set Out by EU Banking Regulators – CoinDesk

Crypto Needs to Fend Off Stigma Caused by FTX. Meaningful Regulation Could Help – Inc