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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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Chair Gary Gensler Defends SEC on Perceived Gap Between Crypto and Today’s Accounting Rules

SAB 121

The Sarbanes-Oxley Act (known as SOX) and the Center for Audit Quality brought SEC Chair Gary Gensler to a webcast today with interviewer Rob Schmidt of Capitol Account.

Sarbanes-Oxley Act dates back to 2002 when accounting scandals from companies such as Enron and WorldCom were highlighting the critical need for better transparency, governance and reporting by public companies. The transparency afforded by the blockchain would seem to be a SOX dream to a degree with the ability to potentially audit an open and transparent ledger.

After his opening remarks which were devoted to traditional finance markets and the implementation of SOX, Schmidt asked Gensler about crypto and accounting. (The Chair seemed mildly frustrated about getting a crypto question):

(lightly edited for clarity)

Rob Schmidt:

“Speaking of public comment and accounting standards, there’s been a lot of pushback and your Staff Accounting Bulletin 121 on crypto accounting and some people say that it’s basically the SEC is creating a gap and there should be more public input. I wonder if you could speak to some of those criticisms.”

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Chair Rostin Behnam Amps Up CFTC’s Mission in Crypto

This afternoon, Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam participated in a webinar with think tank Brookings Institution titled, “The future of crypto regulation.”

Chair Behnam began with a speech making clear his belief that the CFTC is ready to regulate the cryptocurrency space.

“Regulators must be nimble, and new challenges may require us to dig deeper, take a different look into how our organic statutes promote our growth alongside the markets we regulate. In the absence of new legislative authority, we at the CFTC continue to look at how we can work to protect markets and investors within the bounds of our existing authority. We have (and will forcefully utilize) our fraud and manipulation enforcement authority. But, given the regulatory vacuum, we are also thinking creatively about how else we can use our existing regulatory authority to protect retail commodity markets and investors. Make no mistake: we will use all levers at our disposal, and all relevant authorities to continue rooting out fraud and manipulation.”

Read entire speech here (PDF).

Two main updates included elevating the importance of LabCFTC:

“LabCFTC is evolving in new ways and will take on a new identity as the Office of Technology Innovation (OTI) with an updated operating model.  There is now a real intersection between the financial innovations and our markets that did not exist even a few years ago when former Chairman Giancarlo ambitiously and appropriately established LabCFTC as a means to accelerate CFTC engagement with fintech innovators.  As I testified in February, we are past the incubator stage, and digital assets and decentralized financial technologies have outgrown their sandboxes (…) OTI will also have an opportunity to evolve within its new structure and have flexibility to meet needs both internally at the Commission and externally in the regulatory space and in the markets.”

And the second update appears to align with education and consumer protection:
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Will SEC Chair Face Scrutiny From Democrats

Democrats and the SEC

A Securities and Exchange Commission (SEC) Chair appointed by a Democratic President under pressure from Democrats? It could happen soon. Republicans are already confronting Chair Gary Gensler and his agency.

Given last week’s demands for regulatory clarity amid an insider trading enforcement action brought by the SEC against a former Coinbase employee and others, blockchain-friendly Democrats may need to confront the SEC directly – likely after this fall’s elections.

Even Commodity Futures Trading Commission’s (CFTC) Caroline Pham seemed perplexed by the SEC’s latest action while quoting from James Madison’s Federalist No. 49. Noticeably silent was SEC Commissioner Hester Peirce whose past calls for regulatory clarity versus the use of enforcement are well-known.

The point isn’t that crypto markets should not be regulated. Far from it. But currently, these new, innovative markets are only regulated through enforcement. If Industry knew the rules at the outset, then it would be less likely to run afoul of securities laws. The SEC seems to be saying that regulation begins and ends with the early 20th century’s Howey Test (see PDF from 2019 on SEC website) and that’s all the clarity needed.

Democratic pressure on the SEC and Chair Gensler could build from any number of Senators and Representatives who are busy working on crypto regulation -even the President. The only thing preventing a Democrat-SEC collision is this fall’s elections as well as an extended crypto winter making crypto less interesting to voters and therefore Congress.

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Senator Booker May Co-Sponsor RFIA Bill; Stablecoin Bills are “Meld”-ing

Senators Gillibrand and Lumis

This morning at Bloomberg’s Crypto Summit in New York City, Senator Cynthia Lummis (R, WY) and Senator Kirsten Gillibrand, (D, NY) continued their outreach to the blockchain industry with a 15-minute, recently recorded fireside chat on the Responsible Financial Innovation Act (RFIA) with Bloomberg’s Allyson Versprille. The chat featured familiar talking points as well as a deeper discussion on timelines and attainable milestones for their bill and components of it.

The Highlights

Senator Lummis said specifically that the stablecoin part of the bill could “go through” the Senate Banking Committee on which she sits this year led by Senator Pat Toomey (R, PA).

The total RFIA bill will likely take until and through next year said Senator Lummis. Senator Gillibrand emphasized bi-partisan participation on behalf of Democrats noting Senator Wyden’s (D, OR) participation on tax provisions as well as overall participation by Democrats in the Senate Banking and Agriculture Committees.

Continuing to address RFIA’s momentum, NIST‘s cybersecurity piece could move forward on the Intelligence Committee of which Senator Gillibrand is a member. Gillibrand added that she and Senator Lummis are actively educating Congress on their bill. Senator Lummis emphasized bi-partisan education on Senate Banking as well as keeping Republican leadership informed on timelines. She also said, on the House side, that Maxine Waters (D, CA) and Patrick McHenry (R, NC) are “coalescing” on thoughts related to RFIA.

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