Defiant or Defensive, SEC Chair Gensler Unleashes PR Blitz On Crypto

SEC Chair Gary Gensler at NYC Summit

Spinning out of the Labor Day holiday, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler unleashed a public relations blitz about cryptocurrency and its regulation.

His position mostly reinforced what the Chair has said before: crypto companies should “come in” and connect with the SEC to ensure regulatory compliance, the Howey Test is the unquestionable arbiter of all things securities-related and Bitcoin is a commodity.

Putting his many appearances together such as SEC Speaks 2022, The Wall Street Journal and CoinDesk, Chair Gensler appears either increasingly defiant or defensive in relation to the crypto hordes depending on your point-of-view.

The least publicized of his media appearances on Wednesday was his 10-minute taped interview (see the video) with former Commerce Secretary Penny Pritzker for NYC Summit. Ms. Pritzker’s firm Inspired Capital co-hosted the New York City entrepreneurial ecosystem event along with Primary Capital.

Gensler’s role as head of the CFTC (2009-2014) overlapped six months with Pritzker’s Commerce Secretary role (2013-2017) during the Obama administration.

Interview highlights

Among the questions, Ms. Pritzker inquired about “Bitcoin or other cryptocurrencies” and how the Chair saw them evolving from a regulatory standpoint. Chair Gensler avoided mentioning any cryptocurrency by name other than Bitcoin:

(lightly edited for clarity)

“This is a bit of innovation that came along, whomever Satoshi Nakamoto, whoever she was, or he, this innovation. And the investing public got interested – certainly by five, six years ago – got pretty interested. I think that it’s similar to what I said earlier. I think the investing public benefits from disclosures, understanding what a group of entrepreneurs might be doing, and, frankly, that most of the tokens and there’s five or 10,000 tokens to buy most of the tokens have a group of entrepreneurs and the public is trying to invest in those projects and get a better future. Well, those are the attributes of a security. And those are things that the SEC does well. I’ve said come in, talk to us, help get the the intermediaries registered, the crypto exchanges, the crypto lending platforms, the crypto broker dealers, registered we can use exemptive authority to to where we can to tailor this but also the disclosures around the tokens.”

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Rep. Krishnamoorthi Makes Case for ‘Seat at the Table’ of Crypto Legislation

Rep. Raja Krishnamoorthi (D, IL), who represents Illinois’ 8th Congressional District – a large part of the northwest suburbs of Chicago, asked on August 30 that key financial regulators and digital asset exchanges turn around by Monday, September 12, what they are doing to prevent fraud in the crypto markets.

Another letter from Congress, another deadline unfulfilled?

What it means

Federal agencies may need to prioritize their responses given the expected delivery of reports pertaining to the President’s Executive Order on blockchain technology and cryptocurrency this coming week. For executives at the exchanges, it could be an opportunity to connect with a pro-blockchain industry congressman. Krishnamoorthi is a member of the bipartisan Congressional Blockchain Caucus.

Also, with fall elections ahead and a potential for House committee chairmanships flipping from Democrat to Republican, this may be an effort by Krishnamoorthi to use his perch as Chair of the Subcommittee on Economic and Consumer Policy while he’s got it.

Last but not least, the timing of the release – the week before Labor Day Weekend – helped amplify coverage during a notoriously slow news week and perhaps reinforced the congressman’s goal of having a “seat at the table” in future distributed ledger technology regulation discussions.

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Letters on the Edge of Regulation

Letters from Congress

When it comes to disagreements over crypto and its regulation, DC policymakers have consistently chosen the humble “letter” as an impactful device.

Often signaling a disagreement of some sort between the sender and the receiver, a Congressional letter is like publishing a press release, but with more personalization and a purposeful lack of discretion.

With 4 months still remaining in the calendar year, 2022 has gotten off to a prodigious start among DC letter writers with crypto on their minds. Here is a sample of what we’ve seen thus far in reverse chronological order:

August 23, 2022
From: Rep. Tom Emmer (R, MN)
To: US Treasury
Subject: DeFi application Tornado Cash

Rep. Tom Emmer wrote in an open letter to the U.S. Treasury Department and Secretary Janet Yellen, an appointee of Democratic President Joseph Biden and member of his Cabinet, requesting clarifications about the sanctioning of mixing service Tornado Cash on August 8. A “senior official” summarized Treasury’s case in a quote for The Wall Street Journal: “Mixers are basically an automated money-laundering service.”

Effectively, The Office of Foreign Assets Control (“OFAC”) under the auspices of Treasury had for the first time ever sanctioned code rather than a person or entity. Emmer’s letter identified 7 questions for which he wanted answers including guidance on how OFAC determines that a wallet address might be sanctioned. The congressman’s pithy conclusion offered that the decentralized Tornado Cash mixer may have been used for illicit services, “Nonetheless, technology is neutral and privacy is normal.”

The four-page letter signed by Rep. Emmer was released in a tweet. The Congressman is co-Chair of the Congressional Blockchain Caucus, a U.S. House Financial Services committee member and Ranking Member of its Task Force on Financial Technology,

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Congress Sees Opportunity for Crypto To Close The Wealth Gap

crypto and inclusion

What could the emergence of cryptocurrency and blockchain technology provide to underserved communities?

Increasing access to financial services.

Achieving “The American Dream.”

Closing the wealth gap.

These were the hopeful themes from the Commodity Futures Trading Commission (CFTC) recent roundtable on “Digital Assets and Financial Inclusion.” CFTC Commissioner Kristin Johnson led a wide-ranging discussion that included key Democratic staffers from the offices of Senator Debbie Stabenow (D, MI), Senator Cory Booker (D, NJ) and Rep. David Scott (D, GA), each of whom is involved in current blockchain legislation.

The 1-hour, 10-minute video of the event became publicly available late last week on YouTube along with a statement by Commissioner Johnson.

The roundtable itself was produced the Commission’s Office of Minority and Women Inclusion (OMWI),  a requirement of Dodd-Frank legislation signed into law by President Obama after the 2008 financial crisis which crushed many investors including those in minority communities. Beginning in 2010, OMWI offices were established across federal agencies including the US Treasury, SEC and CFTC in order to promote voices which may now be critical to the evolution of blockchain technology and cryptocurrency in the U.S. economy and government.

protecting the consumer

In most crypto regulatory discussions, consumer protections are a paramount concern and the roundtable was no different.

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House Staffers Talk Crypto Regulation at DeFiCon

deficon

At last week’s DeFiCon in Brooklyn, New York, the most important blockchain issues currently pulsing in Washington were on full display as three congressional staffers who advise congressmen on the House Financial Services Committee talked digital assets.

Participants included:

    • Francesco Casella, Senior Policy Advisor for Rep. Ted Budd (R, NC)
    • Sruthi Prabhu, Senior Policy Advisor for Rep. Trey Hollingsworth (R, IN)
    • Lizzie Fallon, Financial Services Policy Advisor for Rep. Tom Emmer (R, MN)

Joining the troika was Ron Hammond who may have pulled from his Rolodex to bring the experienced panel together. He served as a staffer for Rep. Warren Davidson (R, OH), who co-sponsored with Rep. Darren Soto (D, FL) such crypto legislation as the Token Taxonomy Act and Digital Taxonomy Act in 2018 and 2019. Mr. Hammond is currently Director of Government Relations at the Blockchain Association.

Dan Spuller, Head of Industry Relations at the Blockchain Association, guided the discussion.

Knowing the details of key crypto issues and legislation is the day-to-day job for a growing force of congressional staffers and there is no shortage of topics as the hour-long panel proved.

Quotes lightly edited for clarity.

Fixing the infrastructure bill

With an overly broad definition of what a broker is and egregious reporting requirements pushed on to decentralized finance, wallet providers, miners and others by last year’s Infrastructure Investment and Jobs Act, panelists agreed that changes are imminent as heralded by the recent digital assets reporting bill co-sponsored by Senators Portman (R, OH), Warner (D, VA), Sinema (D, AZ), Lummis (R, WY) and Toomey (R, PA)…

Francesco Casella (staffer for Rep. Budd – R, NC):
[Last year’s infrastructure bill debacle] was really when he saw the crypto industry come into its own in terms of getting its own voice and finding its power. Many of us can probably attest to the influx of calls, messages and emails that we were getting on this issue. And it’s funny to think that in this massive infrastructure package, crypto became the number one topic of discussion that no one thought of because of this one provision.

I know our office was leading a fight on trying to push for adoption and have one of the original amendments to fix that language. Unfortunately, it went for naught because of some unrelated issues that killed it…”

Congressional Blockchain Caucus expansion

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From 600 to 200 to 50, The De Minimis Exemption For Crypto Dwindles, Gains Support

diminimis exemption

Purchasing a cup of coffee using Bitcoin triggers a capital gain whether crypto coffee drinkers care to admit it or not – and, that tiny transaction must be reported to the Internal Revenue Service (IRS). But recently, Senator Pat Toomey (R, PA), who is Ranking Member of the Senate Banking Committee, and Senator Kyrsten Sinema (D, AZ) sought to make things more equitable and efficient for consumers making small payments with cryptocurrency.

Known as the “Virtual Currency Tax Fairness Act” and rolled out on July 26, the law would create “a sensible de minimis exemption for gains of less than $50 on personal transactions and for personal transactions under $50 [sic],” according to a press release.  The new law, if it passes, would update the tax code from 1986.

Sen. Sinema added the Arizona perspective in the release, “We’re protecting Arizonans from surprise taxes on everyday digital payments, so as use of digital currencies increases, Arizonans can keep more of their own money in their pockets and continue to thrive.” She is a member of the Senate’s Financial Innovation Caucus which promotes the use of blockchain tech and innovative technologies and includes Senator Cynthia Lummis (R, WY) whose RFIA bill looks to guide blockchain regulation in the US.

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No KYC, No AML, No Service: Mixing Services Run Afoul Of US Treasury

tornado cash

The raison d’être of mixing services or tumblers have always been perplexing to law abiding citizens throughout the world. Their most well-known purpose is to undo one of the blockchain’s most important properties: transparency.

By taking stolen blockchain assets such as Ether or Bitcoin that may have been drained from unsuspecting users’ wallets, thieves can use a mixing service to turn cryptocurrency into essentially new, almost untraceable Ether or Bitcoin that may be used without fear of being tracked. Or put another way, KYC AML connections to the original assets have been erased.

Today, the US Treasury announced it has placed the most well-known mixer, Tornado Cash, as well as 44 associated crypto wallet addresses on a financial sanctions list known as OFAC’s SDN (Specially Designated Nationals) list. The Office of Foreign Assets Control (“OFAC”) is part of the US Treasury and “administers and enforces economic and trade sanctions based on US foreign policy and national security goals…”

This is the second mixing service to be sanctioned after Blender.io in May and is responsible for funneling funds from seven major hacks according to the Department. From the US Treasury’s press release:
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Digital Commodities Consumer Protection Act Could Pass Next Year

DCCPA

Whether “Digital Commodities Consumer Protection Act of 2022” (DCCPA)  gets passed in 2023 and begins a sea change – or stems a flood – of distributed ledger technology within the U.S. financial system remains to be seen.

But on Wednesday, Senator Debbie Stabenow (D, MI) and Senator John Boozman (R, AR) appear to be aggressive about being first to get legislation passed in the crypto arena. By introducing the streamlined DCCPA, the lionshare of cryptocurrency oversight as measured by crypto market capitalization – Bitcoin and Ethereum – is given to the Commodity Futures Trading Commission (CFTC). This fulfills the previously-stated wishes of CFTC Chair Rostin Behnam, who issued a statement strongly supporting the bill on Wednesday and is a former Stabenow staffer.

Senator Boozman, who is Ranking Member of the Senate Ag Committee, was unequivocal in a call with reporters this week saying,“This is not a marker bill. (…) This is something we want to get done.” Boozman and Stabenow, Senate Ag’s Chair, first intimated such a bill would be on its way from their Committee back in early June.

Co-sponsors of DCCPA are Senators Cory Booker (D, NJ) and John Thune (R, SD). Senator Booker has been previously mentioned by fellow Ag Committee member Senator Kirsten Gillibrand (D, NY) as a possible co-sponsor of the Responsible Financial Innovation Act.

Get the details on DCCPA:
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