Partisan Divide On Display In Senate Banking Crypto Crash Hearing

Crypto Crash

This morning’s 90-minute Senate Banking hearing, “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets,” offered a snapshot of the partisan divide existing on the committee as it relates to crypto. See the hearing’s video.

    • Democrats focused on fraud, illicit financing and consumer protections with some exceptions.
    • Republicans focused on innovation with consumer protections and blamed the Securities Exchange Commission (SEC) and its Chair, Gary Gensler, for part of crypto’s problems.
    • SBF: The damage done to digital asset legislation prospects by former FTX CEO Sam Bankman Fried cannot be overstated.

Senate Banking Chair Senator Sherrod Brown (D, OH), who controls the agenda on the Committee on behalf of the Democratic majority, expressed skepticism about the efficacy of cryptocurrency from the start which helped set the tone for the day.

The three witnesses present for the hearing were from academia:

    • Mr. Lee Reiners, Duke Financial Economics Center (testimony)
    • Professor Linda Jeng, Georgetown Institute of International Economic Law (testimony)
    • Professor Yesha Yadav, Vanderbilt University Law School (testimony)

Within the prepared testimony, Mr. Reiners, a critic of the crypto industry, suggests that bipartisan stablecoin legislation should be possible.

Mr. Yadav argues for an SRO (self-regulatory organization) “Opting into an SRO model gives industry a chance to take advantage of this crisis, to engage in reform, mature, and to innovate…”

Ms. Jeng, who is also Chief Regulatory Officer & General Counsel at industry trade organization Crypto Council for Innovation, has previously served in financial regulation roles in the U.S. government including Treasury. She showed her industry tilt by concluding her testimony with a request for Committee members on creating effective legislation, “… moving the dial, whether it be on consumer and investor protection, or financial inclusion, requires understanding the technology, its limitations, and opportunities – and having a builder’s mentality.” In other words, legislation should not be about consumer protections exclusively.

the hearing – Chair and Ranking Member

Chair and Senator Brown started off the hearing with listing all the lowlights for crypto in the past year mentioning “high fees, outright theft” associated with crypto in addition to the multiple implosions including FTX – making note of the Senate’s December hearing on FTX.

Everything… everything about crypto was bad in the Senator’s estimation, “When it comes to crypto, it doesn’t favor the brave, it favors wealthy insiders. (…) It was an industry created to skirt the rules.” He advocated for legislation and reminded that “access to financial markets is a privilege and not a right.” See the press release for Brown’s opening statement.

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Senate Banking’s Crypto Hearing Today; Stablecoin Stopped

Stablecoins

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stablecoin stopped #1

Paxos, a cryptocurrency and stablecoin infrastructure platform, announced it will “end its relationship with Binance for the branded stablecoin BUSD” and thereby stop offering BUSD.  See yesterday’s Paxos statement.

stablecoin stopped #2

Effectively, BUSD is getting shut down at the request of state regulator New York Department of Financial Services (NYDFS) – see the NYDFS statement. A spokesperson for NYDFS told Reuters, “Paxos ‘violated its obligation to conduct tailored, periodic risk assessments and due diligence refreshes of Binance and Paxos-issued BUSD customers to prevent bad actors from using the platform.'” More on CoinDesk.

stablecoin stopped #3

The Securities and Exchange Commission will reportedly sue Paxos shortly, the first “enforcement action against a major stablecoin issuer,” according to The Wall Street Journal. And, more crackdowns are expected says The WSJ in a follow-up last night.

SEC’s Gensler on stablecoins

Last September, SEC Chair Gensler said stablecoins may need to be registered as securities: “Stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits, and raise important policy issues.” See that speech.
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Dueling Letters: Republicans Want SEC; Democrats Want SBF

Letters from House Financial Services

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letter #1: investigating SEC

Republicans apparently never forgot that last December former FTX CEO Sam Bankman Fried (SBF) was arrested the day before he was scheduled to appear in front of the House Financial Services (HFS) Committee.

On Friday, Republicans, who represent the new majority of HFS sent a letter (see it) requesting a record of all Securities and Exchange Commission (SEC) communications about FTX founder Sam Bankman Fried (SBF) from November 2, 2022 to last Thursday, February 9, 2023.

Chair Rep. Patrick McHenry (R, NC) and Rep. Bill Huizenga (R, MI), who is Chair of the House Oversight Subcommittee on HFS signed the letter and gave the SEC and its Chair, Gary Gensler, two weeks to deliver. They write, “The timing of the charges and his arrest raise serious questions about the SEC’s process and cooperation with the Department of Justice.” Unspoken is that Republicans believe that some sort of partisan malfeasance may have been perpetrated to willfully undermine the ability for the Committee to talk to SBF. Gensler is a Democrat appointed by the Biden Administration in 2021.

In Friday’s tweet containing the screenshots of the letter, Rep. Huizenga explained, “Since [Gary Gensler] won’t abide by his own polices to ‘come in and talk’, the House GOP will hold him accountable.” Republicans have kept their request strictly to SBF rather than a broader focus of SEC communications about FTX.

In addition to Gensler, the SEC’s head of enforcement, Gurbir Grewal, is also singled out in the letter. Given the Feb. 24 delivery requirement for the SEC by the Committee, an update from the Committee on next steps such as a hearing would likely come the week of Feb. 27. 

letter #2: investigating SBF

On Friday evening, House Financial Services Ranking Member Maxine Waters (D, CA) delivered in a letter the Democratic response to McHenry/Huizenga and requested that the Committee pursue SBF rather than the SEC:  “I believe that the Committee’s efforts would be best spent obtaining a complete understanding of the improper activities that took place at FTX, why they occurred, and who was responsible for those actions, so the Committee can assess whether additional statutory or regulatory reforms are necessary to prevent such events in the future.”

Back in early December, and prior to SBF’s arrest, then-Chair Waters and SBF communicated openly on Twitter about Bankman-Fried’s possible appearance in front of the Committee on December 13.

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New Democrats On House Agriculture; Kraken May Signal End Of Bipartisanship

House Agriculture Democrats

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agriculture committee democrats

Ranking Member David Scott (D, GA) announced the 23 new Democratic House Agriculture Committee members yesterday. The list included 10 holdovers from the previous Committee when Dems were in the majority. It’s hard to predict how the committee’s new faces will divide and conquer when it comes to digital assets. But, given the Biden Administration’s actions lately and yesterday’s Kraken news (below), digital asset interest may be difficult to pursue -especially for junior Democrats. In general, bipartisan Congressional power has lurched both pro- and anti-crypto in the past year.

On the House Ag Committee in the 118th Congress, and among the higher profile Democratic names in digital asset legislation, Rep. Darren Soto (FL) joins and Rep. Ro Khanna (CA) is no longer assigned. See the complete list. Democratic subcommittee assignments – especially on the newly re-named “Subcommittee on Commodity Markets, Digital Assets, and Rural Development” – could be illuminating on Democratic direction on digital asset legislation when announced. To date, only the Ranking Member, Rep. Yadira Caraveo (CO) has been revealed. Her position on digital assets is unknown.

Notably, Rep. Andrea Salinas (OR) joins the committee after beating a May ’22 primary challenger backed by Sam Bankman-Fried. And, committee newcomer Rep. Jill Tokuda (HI) beat a Republican in the General Election who was supported by Web3 Forward -a PAC associated with FTX executives and investors.

Rep. Jasmine Crockett (TX) and Jonathan Jackson (IL) join the Committee and were both supported by Web3 Forward.

In the last Congress, this House committee was responsible for the [H.R. 7614] Digital Commodity Exchange Act (DCEA) introduced by Chair Glenn “GT” Thompson with bipartisan co-sponsorship. The Committee also oversees the Commodity Futures Trading Commission.

Kraken down

Stressing the importance of investor protections, The Securities and Exchange Commission (SEC) announced a settlement with crypto exchange Kraken and its entities on Thursday which included a fine of $30 million and agreeing to shutdown its “staking-as-a-service program.” Read the SEC release.

Proper disclosures associated with the offering and the fact it was not registered as a security is cited. For example, on needed disclosures according to the SEC release: “When investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms, with very little protection.” 

SEC Chair Gary Gensler said in a tweet (with a video): “Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries must provide the proper disclosures & safeguards required by our laws.”

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Choke Point Drumbeat Echoed By Senator Hagerty; Coinbase Staking Rumors

Senator Bill Hagerty

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choke point drumbeat

Perhaps building on the theme of a Nic Carter tweet on Monday that suggested a “Choke Point” type of operation “targeting the crypto space in the US”, Senator Bill Hagerty (R, TN) offered up his own tweet yesterday saying, “Regulators singling out business activities should alarm all Americans. It doesn’t matter if it’s crypto assets, firearms, or any other lawful business, using banking regulators to advance political agendas should not be tolerated.” Is he talking about a new Choke Point for crypto? Hagerty then linked to an early January Blockworks article about U.S. banks dabbling in crypto under the watchful gaze of U.S. government regulators.

Last year, Hagerty, who is considered to be pro-crypto, introduced one of many stablecoin bills in Congress along with Rep. Trey Hollingsworth (R, IN) called the “Stablecoin Transparency Act‘ -an attempt to provide clarity on how the US Dollar stablecoins can be created, used and managed. Any clear regulation saying how cryptocurrency, even stablecoins, can be used in connection to the U.S. dollar would be significant.

Alexander Grieve of D.C. government relations Tiger Hill firm tweeted, “Operation Chokepoint (using bank policy to deny banking services to sectors for political reasons) has been an issue in the past. Recent bank regulatory statements and actions seem to confirm it’s happening again – this time with crypto.”

This is a developing story.

Coinbase staking

Coinbase CEO Brian Armstrong tweeted last night, “We’re hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers. I hope that’s not the case as I believe it would be a terrible path for the U.S. if that was allowed to happen.” He then links out to a Paradigm document on why Ethereum staking does not make ETH a security – see it here.

In the final tweet on his thread, Armstrong makes a plea, “Hopefully we can work together to publish clear rules for the industry, and come up with sensible solutions that protect consumers while preserving innovation and national security interests in the U.S.”

The crypto industry in the United States seems increasingly on edge. Is some big announcement coming?

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SEC Seizing Broad Regulatory Jurisdiction; Democrats Urge Mining Disclosures

SEC Coinbase

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broad regulatory jurisdiction

“The Securities Exchange Commission (SEC) is trying to seize broad regulatory jurisdiction over a massive new industry via an enforcement action against a 32-year old former Coinbase employee and his kid brother.” And so begins law firm Jones Day’s argument – which was submitted Monday to the courts – on why the SEC’s securities fraud case against Coinbase Manager Ishan Wahi should be dismissed.  Read the argument which includes comparison’s to the Howey Test beginning on page 17 of the request for dismissal (PDF)

Meanwhile, a guilty plea has been agreed to by the same Coinbase employee this week according to Reuters (subscription).  What’s going on here?

First, how the alleged scheme worked: before at least 9 different tokens were listed on Coinbase’s exchange, the Coinbase executive, Ishan Wahi, informed his brother about the imminent listing. His brother, Nikhil, would then buy the tokens on exchanges where they were already available. Once the coins were listed on Coinbase – which is an exchange with enormous liquidity relative to any other marketplaces – the token price invariably went up across the token’s entire market including Coinbase’s. And then Mr. Wahi’s brother would sell and profit.

The double-edged sword here is that there were two sets of charges: wire fraud and securities fraud driven by the Securities Exchange Commission (SEC).  There’s more to come on this legal battle as the SEC has until early April to respond to the request for dismissal.

Similar to Grayscale’s Bitcoin ETF case against the SEC coming March 7, the courts are increasingly being tasked with regulation. In this case: are these 9 digital asset tokens securities?

Mining

A new letter sent by 8 Democratic members of Congress led by Senator Elizabeth Warren (MA) expresses concern about the impact of mining cryptocurrency: “The urgency of the climate crisis, combined with the rapid growth of cryptomining in the U.S., dictates a comprehensive mandatory disclosure and data collection regime.” See the letter.

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Brokered Deposits Bedevil; DC Goes On The Road

Brokered deposits

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hot money

On Monday, American Banker continued its look into the troubles for fiat/crypto rails provider Silvergate Capital Corporation and something called “brokered deposits,” a.k.a. “hot money.” Dennis McFadden of Better Markets, a DC-based organization with interests in financial markets, offers his opinion to AB’s Claire Williams: “Like water seeping into the cracks of a foundation, crypto companies have been relentless in attempting to penetrate the core of the banking business for years and this appears to be one of the cracks.” Read more (subscription). And visit the FDIC to read more on brokered deposits.

McFadden’s LinkedIn profile says that he was part of the Biden-Harris Transition Federal Reserve, Banking and Securities Agency Review Team in addition to past senior staff roles with three Democratic Senators.

Also, in early January, he penned an op-ed for the Financial Times which offered support for the work of the SEC in 2022 while simultaneously delivering a scathing indictment of the CFTC due to the FTX implosion. Read it.

need banking partner

Cryptocurrency exchange Binance is suspending US Dollar bank transfers beginning February 8 according to notices sent to customers and reported by The Wall Street Journal.  A spokesperson says the suspension was expected to last a “couple weeks” until a new banking partner could be established. No other reason was given as to why they lost their current unnamed partner. Last month, The Washington Post reported that Binance was “part of a long-running investigation into potential violations of money-laundering rules.” The U.S. attorney’s office for the Western District of Washington in Seattle is involved. Read more.
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Bank Lobby Wants Crypto Isolated; FTX Debtors Want FTX Money Back

TradFi Lobbying

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TradFi’s crypto island vision

Traditional finance organization Independent Community Bankers of America (ICBA), which says its membership represents 99% of all banks in the U.S., is lobbying Congress  to “take a closer look at regulatory agencies’ ‘inadequate’ oversight of crypto and to resist efforts to let nonbank stablecoin issuers access the Fed’s payment rails,” reports Politico’s Zach Warmbrodt.

Indeed, the ICBA wants crypto explicitly separated from the banking system. The threat is apparently so acute that cryptocurrency goals lead the 2023 agenda list: “ICBA urges Congress to exercise robust oversight of the federal financial agencies. In particular, community bankers are concerned about agencies overstepping their statutory authority in rulemaking; the use of informal communications, including press statements and social media, to convey expectations and effectively make rules outside of the notice and comment requirements of the Administrative Procedure Act; and inadequate oversight of non-bank financial firms, including financial technology and cryptocurrency firms which pose significant risk to the broader financial system.” See the ICBA agenda.

Brown calls for crypto hearing

Senate Banking Chair Sherrod Brown (D, OH) has set a hearing titled “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets” for February 14. See Senate Banking’s February hearing schedule. The title for the hearing informs Brown’s pointed misgivings rather than potential for unlocking innovation in cryptocurrencies. Though he sent a letter in November to Treasury Secretary Yellen, Chair Brown offhandedly suggested at December’s “FTX implosion” hearing whether crypto should be regulated at all – perhaps suggesting that keeping it unregulated is to keep it outside of the U.S. financial system -another tactic of anti-crypto forces.

Keep an eye on: will Ranking Member Tim Scott (R, SC) attempt a partial roll out of his digital assets agenda at the hearing?
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