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Scott Announces Digital Assets Framework for Banking; Durbin Inveighs On Crypto

Senate Banking

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Scott on digital assets framework

New Senate Banking Ranking Member, Tim Scott (R, SC), announced that the Committee will be developing a framework for digital assets. From the press release: “The Committee will work to facilitate a bipartisan regulatory framework that accounts for both the rapid growth in the use of cryptocurrencies and the concerns raised by high-profile failures.” Read all of Scott’s priorities. However, this will be no easy task for Senator Scott as he bumps up against the agenda of Banking Chair Sherrod Brown (D, OH), who has expressed deep skepticism about cryptocurrencies – including at the December Senate Banking hearing on FTX where the Chair raised the issue of whether “regulatory clarity” was even needed.

Durbin inveighs against crypto

From the Congressional Record on Wednesday comes an entry (see it) from Sen. Dick Durbin (D, IL) who wanted to talk crypto on the Senate floor. Back in December, Durbin was critical of digital assets in the December Senate Agriculture hearing on FTX with CFTC Chair Rostin Behnam.

He did not hold back this time either with an 1,800+ word speech: “Let me tell you about crypto’s terrible, horrible, no-good, very bad year–2022. Let’s start with the most popular cryptocurrency, Bitcoin. In 2022, the currency cratered, losing more than 60 percent of its value in 1 year. To put it in perspective, if you bought one Bitcoin at the start of 2022 and held on to it today, you would be down $25,000. Think of all the Americans who could have held on to that cash for family needs or to cover a downpayment on their first home. Their money is gone…” Matt Damon, Larry David, and LeBron James are implicated as well by the Senator. Read the full speech.

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Digital Asset Democrats Designated; McHenry Critical Of SEC Chair Gensler

House Financial Services starts

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digital asset Democrats

Yesterday afternoon, just prior to the “Organizational meeting” for the U.S. House Financial Services Committee, Ranking Member Maxine Waters (D, CA) announced selections for Democratic subcommittee posts. The Majority Republicans announced their appointments last week.

For the new “Subcommittee on Digital Assets, Financial Technology and Inclusion,” the eight Democratic members will be:

    • Rep. Stephen F. Lynch (MA), Ranking Member
    • Rep. Bill Foster (IL)
    • Rep. Josh Gottheimer (NJ)
    • Rep. Ritchie Torres (NY)
    • Rep. Brad Sherman (CA)
    • Rep. Al Green (TX)
    • Rep. Sean Casten (IL)
    • Rep. Wiley Nickel (NC)

breaking down the Dems

Ranking Member Rep. Lynch brings his previous Congressional FinTech experience which includes his work as Chairman of the Task Force on Financial Technology  – originally established by Maxine Waters – in the 117th Congress.

Lynch, Foster, Gottheimer and Torres were members of the Congressional Blockchain Caucus in the last Congress with Foster assuming a caucus co-chair role. Rep. Gottheimer introduced the “Stablecoin Innovation and Protection Act” early last year – one of many stablecoin bills put forward in the last Congress.

Rep. Brad Sherman has been a notable critic of cryptocurrencies and Congressional blockchain buzz and will undoubtedly provide a sharp point-of-view in opposition to crypto proponents of the Committee regardless of party.

Rep. Al Green was Chairman of the Financial Services Subcommittee on Oversight and Investigations in the previous Congress and held a hearing in 2021 on “Crypto Frenzy” which looked skeptically at cryptocurrencies. He also asked during the questioning of current FTX John Ray at an HFS hearing in December if the implosion of crypto exchange FTX was “all one big mistake” and due to “sincere ignorance” on former FTX CEO Mr. Sam Bankman-Fried’s part. Mr. Ray answered dutifully, “Ultimately, others will judge him by actions.”

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Senators Pressure Bank On FTX; Digital Assets Subcommittee Prioritizing Stablecoins

Congress questions Silvergate Capital

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senators pressure crypto bank

Senators Elizabeth Warrren (D, MA), John Kennedy (R, LA) and Roger Marshall (R, KS) announced in a press release yesterday that they still aren’t happy with bank holding company and fiat/crypto rails provider Silvergate Capital Corporation after the company was sent a December letter filled with the Senators’ questions about the company’s involvement with crypto exchange FTX.

From the Senators’ release: “The bank’s response (see it) was largely evasive and refused to provide much of the requested information on the grounds that it was ‘confidential supervisory information.'” The Senators also sent another letter on Monday to Silvergate CEO Alan Lane saying, “Your response confirms the extent of this failure – but then neglects to provide key information needed by Congress to understand why and how these failures occurred.”

As outlined in a December press release, the bipartisan group of Senators original inquiry was fueled by “concerns about Silvergate’s failure to apply extensive review processes to FTX and Alameda, and the possible role the bank may have played in the loss of billions of dollars of customer funds.” Or put another way: how did a U.S. bank go about vetting a Bahamian crypto exchange?

innovation + stablecoin bill

Rep. French Hill (R, AR) said on Fox Business yesterday morning that the opportunity he sees for any blockchain-related legislation in the new Congress starts with nurturing innovation. The new Chair of the Digital Assets, Financial Technology and Inclusion Subcommittee said, “Stepping away from cryptocurrency or even a digital dollar, think about the innovation around fintech and blockchain in the future -we want that done here in the United States… we need a solid regulatory framework.”

A stablecoin bill appears to be a top priority as Rep. Hill said, “Last year, we had some work with both the Treasury and House Democrats moving towards a stablecoin bill. This would tell investors and consumers what’s the value -what backs the stablecoin. How do you know what the value is? How frequently is it valued? When are their financial statements published? How is it overseen for both consumer and investor safety as well as to be able to be used in the commercial marketplace? We just don’t have that.” But maybe soon. Hear more from the Fox Business interview [begins 2:20].

In an interview with Bloomberg TV yesterday afternoon, Rep. Hill shared additional nuggets on his agenda, “I think we need to look with our colleagues both in the Senate and House Agriculture Committees and make sure that we can develop a ‘brightline’ test of what should be traded in an Ag or commodity type environment versus something that’s a security and under the regulation of the SEC.” See the full Bloomberg interview [6:15 in length].

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House Financial Services Starts Wednesday; Regulating Twitter Payments Including Crypto

House Financial Services

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McHenry and Waters return

Rep. Patrick McHenry (R, NC) has scheduled the first meeting of the House Financial Services (HFS) Committee under his leadership as Chair.  Taking place on Wednesday (2/1) beginning at 1 p.m., the session will be focused on 118th Congress organizational housekeeping. Live webcast will be here. Agenda items include appointing Democratic HFS committee members to subcommittees by Ranking Member Rep. Maxine Waters (D, CA) including the “Digital Assets, Financial Technology and Inclusion” – a new HFS committee. Majority members have already been appointed by the Chair.

The jurisdiction of the Subcommittee on Digital Assets, Financial Technology and Inclusion, chaired by Rep. French Hill (R, AR), is broad according to the rules resolution and begins with “digital assets, including but not limited to cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs)”. Read all the proposed Digital Assets Subcommittee rules (PDF) – even artificial intelligence (AI) takes a bow.

not FDIC insured

Back in October, then Acting-Chair Martin Gruenberg of the Federal Deposit Insurance Corporation (FDIC) openly expressed concern at a Brookings event about crypto companies: “…false and misleading statements, either direct or implied, by crypto–asset entities concerning the availability of federal deposit insurance for a given crypto–asset product, violate the law.” Fast forward to yesterday when Axios reported cryptocurrency exchange Gemini is alleged to have told some customers that it’s Earn product was FDIC-insured when it was not.  Axios’ Emily Peck and Matt Phillips note, “Some 340,000 Earn customers now have had almost $1 billion worth of assets frozen on the platform. It’s unclear if they’ll ever get it back.” Read more. The article notes that the language used by Gemini may not be illegal.

Emmer on legislative possibilities

House GOP Whip Rep. Tom Emmer (R, MN) discusses his priorities as it relates to digital assets in the 118th Congress on “The Scoop” podcast hosted by The Block’s Frank Chaparro. Emmer offers an array of opinions including his belief that “crypto will actually insure the status of the U.S. Dollar if we do this right.” But, he admits that among the naysayers, the defense hawks on the Republican side are a challenge to his vision.  On digital asset legislative possibilities, Rep. Emmer tempers expectations, “There will be a series of clarifying bills on the laws that we’re talking about: there will be data privacy stuff that we’ll work on related to this; there will be clarifying language so you can categorize digital assets, so you know who the regulator is, the jurisdiction that you’re underneath –  -trying to give people more clarity – I think those are realistic. But people out there should not expect that there’s going to be this explosion of new legislation that is suddenly going to solve all these problems.” Hear the podcast (48 minutes).
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White House Anti-Crypto Stance Threatens Bipartisan Coalition; US CBDC In The Mix

White House goes anti-crypto

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White House throws 3-pitch crypto strikeout

STRIKE 1 – On Friday, with a tip of the cap to President Biden’s digital assets Executive Order last March, the White House released, “The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks.” The emphasis of the report is entirely on “risks.” Also – note the use of “cryptocurrencies’ risks” rather than “digital assets risks” in the title. Is the White House cutting to the chase on what it thinks about the broader context of digital assets and blockchain technology? Co-author and White House National Economic Council Director Brian Deese warned Congress later in the day, “We’re ready to work w/ Congress to address regulatory gaps, but it would be a grave mistake to reverse course and deepen ties btw crypto and the financial system.”

STRIKE 2 – At the same time, the Federal Reserve Board (FRB) announced that it was not letting digital assets bank and Wyoming-based Custodia Bank become a member of the Federal Reserve System. “The firm’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks…” – no crypto allowed in the U.S. banking system in other words. Expressing “surprise and disappoointment,” Custodia Bank’s founder and CEO Caitlin Long said Custodia’s master account application at the Federal Reserve Board of Kansas City is still pending. Perhaps -but it’s also mired in the courts. This is the front lines of TradFi vs DeFi.

STRIKE 3 – Finally, at the same time as its Custodia bank announcement, The FRB issued a 14-page policy statement warning banks about their involvement in crypto on the grounds of “safety and soundness.” According to a separate press release, “The Board has not identified any authority permitting national banks to hold most crypto-assets, including bitcoin and ether, as principal in any amount, and there is no federal statute or rule expressly permitting state banks to hold crypto-assets as principal. Therefore, the Board would presumptively prohibit state member banks from engaging in such activity under section 9(13) of the Act.” In a four-page memo to its Board of Governors, The Fed boils the policy down including the intent to rein in state banks interested in crypto… like those in Wyoming?

will pro-crypto Dems desert?

With a Democratic White House appearing to fight against efforts to advance digital assets legislation, where does Friday’s “3-pitch strikeout” leave pro-crypto Democrats especially as the next Presidential election approaches in 2024? Some Democratic political strategists around the President may believe crypto and digital assets as something to use against Republicans in ’24.

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Rep. French Hill Discusses Digital Assets Subcommittee Agenda

Rep. French Hill

This morning, Rep. French Hill, who is Chair of the new Subcommittee on Digital Assets, Financial Technology and Inclusion under the House Financial Services Committee, appeared on CNBC in an interview with anchor Joe Kernen.

Highlights include his interest in nurturing bipartisan support for blockchain legislation as well as coming privacy and stablecoin bills. And he also suggested that his new subcommittee will be working with the Agriculture committees in the House and Senate on upcoming bills but did not specify which. See the interview here.

Transcript below:

JOE KERNEN: [On crypto] – people go into both corners depending on which side of the aisle they’re on. Congressman, what what does that come from? Why do you need convincing of one side or the other if you want to do this? The Democrats aren’t going to want to do it. I know I can see it coming.

REP. FRENCH HILL: Joe, good morning. It’s good to be with you.

I think there’s an opportunity for bipartisan work here on creating a regulatory framework around digital assets. I think for two reasons. One, you’re right. There are some Democrats that think anything associated with blockchain, or cryptocurrency is just money laundering in a way to have bad behavior.

On the other hand, there’s some Republicans that think the future is decentralized finance and that digital assets are critical.

I think we bring them together because blockchain is an important innovation area. We want that technology to be done here in the United States. We want a regulatory framework that is transparent for developers, investors, and potential consumers as people try to prove a use case.

And finally, we want to make sure that people have a full transparency of that. And so I think that will bring Democrats and Republicans together for both law enforcement reasons, if that’s what their top issue is, or for innovation and financial technology reasons.

JOE KERNEN: Congressman, do you think we need to follow the money? Do we need to see who who gets disintermediated [and] whether they have big offices on K Street and don’t want this to happen? I won’t mention any names, but obviously there’s a lot of industries that that probably are loath to think of a future with decentralized finance.

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Commissioner Hester Peirce Amps Up Critique Of SEC Agenda

Hester Peirce of the SEC

It’s been a long two years at the Securities and Exchange Commission (SEC) for Commissioner Hester Peirce.

She’s had to deal with an SEC Chair whose agenda she has openly disagreed with and a 117th Congress dominated by Democrats who were mostly loathe to reproach the Chair, a Biden-appointee. On top of all that, Peirce is entering her 5th year on the Commission – the longest tenure of any current member.

Time to get busy? Last Friday she did.

With the dawn of a new Congress and a Republican majority in the House, Peirce took the gloves off by delivering a 5,400-word keynote address at a Duke University crypto conference while simultaneously publishing an op-ed co-written with former Senator and Senate Banking Committee member Phil Gramm (R, TX) in the Wall Street Journal (read it).

On traditional banking

The piece in the WSJ is two-pronged and focuses on the traditional banking and investing world. The overall theme supports a commonly-held belief whether you’re in the banking or digital assets industry: the SEC agenda set by its Chair Gary Gensler is clearly overreaching. And overreach has mingled with overbroad climate concerns by the Commission argues Peirce/Gramm: “The SEC proposes to turn a disclosure rule into a how-to guide for companies seeking to reduce their carbon footprints.” The SEC has gone from regulator to management consultant, say the writers.

Peirce and Senator Gramm make the same case about new SEC rules coming for mutual funds: “Rather than simply work to enhance existing disclosures, the SEC has decided to remake the markets by forcing retail orders into auctions of its own design.” They conclude, “The SEC proposes to expand the role of government and reduce the economic freedom that has been the source of American economic exceptionalism.”

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