Category: Policy

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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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Blockchain’s New DC Powerbroker: The Digital Assets Subcommittee

Digital Assets Subcommittee

With Rep. Patrick McHenry (R, NC) finally in his House Financial Services Committee Chair last week, the congressman whipped up a selection of subcommittees that will carry his party’s financial services agenda in the 118th Congress.

Among them, a committee devoted to digital assets: The Subcommittee on Digital Assets, Financial Technology and Inclusion led by Rep. French Hill (R, AR), a former banker.

Still to be populated with House Financial Services members from both sides of the aisle, there will be no other committee like it in Congress: digital assets and fintech-focused, all the time.

Bipartisan support for crypto legislation has been a key element of driving digital assets discussion in DC to-date (RFIA, DCCPA, DCEA and stablecoins) even if bills have yet to cross the finish line into law. With a wide spectrum of political viewpoints unifying over a common cause AND attempting to navigate a divided government, this committee would seem to be at the tip of the bipartisan crypto spear.

Topping the agenda for the new subcommittee will be working with (if not helping dictate along with Chair McHenry’s guidance) what the SEC, CFTC, the Fed and any other applicable regulator should do about digital assets and thereby define their jurisdictions.

This will be a years-long, legislative journey as technology and products evolve. But it has to start – or continue – somewhere.

The agenda

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Battle of the Bipartisan: Warren-Marshall Bill Challenges Hill’s Crypto Support

Warren-Marshall

Who says Washington is hopelessly divided along partisan lines?

Yesterday, Senators Elizabeth Warren (D, MA) and Roger Marshall (R, KS) co-sponsored a new bill requiring US Treasury’s FinCEN – Financial Crimes Enforcement Network – to further interwine the requirements of Anti-Money Laundering (AML) and Know-Your-Customer (KYC) rules within digital assets.

See a copy of the Bill.

Titled “Digital Asset Anti-Money Laundering Act of 2022,” the legislation appears, in part, to build on actions taken by the U.S. Treasury with mixing service Tornado Cash back in August.

Industry advocate CoinCenter responded unequivocally to the bill’s introduction:

“[The bill] is the most direct attack on the personal freedom and privacy of cryptocurrency users and developers we’ve yet seen. It would force anyone who helps maintain public blockchain infrastructure, either through software development or validating transactions on the network, to register as a Financial Institution (FI).”

The bill would also likely inhibit the growth of the crypto sector due to additional costs associated with cumbersome financial institution compliance requirements.

Bipartisan

Senators Warren and Marshall’s partnership took a page from Capitol Hill’s bipartisan crypto supporters by reaching across the aisle in hopes of driving passage. RFIA, DCCPA, DCEA and many other crypto bills have bipartisan support including the stablecoin bill which is being developed in the House Financial Services Committee.

Marshall’s break is notable in that Republican libertarian views have appeared to mesh well with crypto which promotes self-custody and autonomy even as Republicans support the development of new regulatory guardrails.

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Congress and Industry Attempt Reset After FTX Debacle

FTX and Congress

FTX CEO Sam Bankman-Fried would appear to not have any friends left in Washington, D.C. after his company’s implosion earlier this week.

Members of Congress and industry trade organizations are trying to build a protective wall around legislation still in its embryonic stages – such as the Digital Commodity Consumer Protection Act (DCCPA) – while distancing themselves from any perceived influence Bankman-Fried had on the process.

Meanwhile, Bankman-Fried’s global company has had its assets frozen by authorities in the Bahamas where FTX global operations are based. And, it appears that FTX’s US operations are also under pressure with perhaps only enough money for another week of payroll for employees according to Bloomberg. Customers are being asked to remove their assets from the US-based exchange with assurances around the exchange’s liquidity in the interim. (Update: Bankman-Fried has resigned and his company has declared bankruptcy. Read more.)

And last but not least, the SEC and CFTC are rumored to be starting investigations. Could it get any uglier?

Senate speaks

Back in Congress, leaders from the Senate Agricultural Committee expressed urgency and made clear that their still-in-committee DCCPA is alive and well despite FTX’s fall from grace.

Chairwoman and Senator Debbie Stabenow (D, MI) tweeted: “The recent collapse of a major cryptocurrency exchange reinforces the urgent need for greater federal oversight of this industry. Consumers continue to be harmed by the lack of transparency and accountability in this market. It is time for Congress to act.”

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FDIC’s Gruenberg Sees Crypto and Private Stablecoins As Risk To Banking System

FDIC

Today at a Brookings event in Washington, D.C., Federal Deposit Insurance Corporation (FDIC) Acting Chairman Martin Gruenberg discussed his government purview and how crypto assets are and should be addressed by banks. Video of the event is here.

Though recognizing blockchain’s innovative qualities, he largely saw huge risk to the banking system from crypto and suggested there is broader FDIC guidance forthcoming.

As he began, Gruenberg noted that innovation is a double-edged sword saying that financial products such as credit default swaps were seen as innovative, but helped cause the Great Financial Crisis in 2008-9. The accessibility and convenience of crypto was attractive to consumers and banks, but Gruenberg believed it was difficult for the banks to move quickly given the dynamic nature of the new assets as tech, business model and use cases are subject to change in short order.

Don’t mix the message

For background, in late July, the FDIC released guidance on how banks should deal with the crypto ecosystem. The over-arching concern from the FDIC was the consumer believing they are insured when they are not.  According to the FDIC, non-banks were offering uninsured crypto asset products and insured bank deposit products but that doesn’t mean for the consumer using these products that their crypto product or asset is insured.

See:

In his speech, Acting Chairman Gruenberg claimed that consumers are often finding they have no one to turn to with distributed ledger technology. If something goes wrong, transactions were difficult to track on the blockchain – a contradiction of pro-crypto advocates who claim it is trackable, sometimes too trackable and presents privacy challenges.

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Crypto Meets ‘Global vs. National Regulation’ With Financial System Stability At Stake

IIF AMM 2022

Stability.

At the height of the Great Financial Crisis of 2008 and 2009, all anybody wanted was stability within the banking system.  Enter 2010’s Dodd-Frank legislation, a “Wall Street reform and consumer protection act,” which sought to put the banking system on a solid foundation and calm domestic and global nerves.

Accordingly, stability was a consistent thread among on-stage discussions last week at The Institute of International Finance (IIF) Annual Meeting which brought together banking titans across industry and government in Washington, D.C. Market structure dynamics, Net Zero initiatives and digital assets mixed with macro issues such as war, inflation and a post-COVID society.

And again… every topic could draw a line to the desire for stability. Yet, that didn’t stop companies within the high volatility, digital asset universe from taking its seat at the IIF table.

In the form of sponsorship for the event – and among a list of TradFi sponsor companies – FTX and Circle were there sending chief executives Sam Bankman-Fried and Jeremy Allaire, respectively, for onstage interviews that engaged a much larger financial community which will one day envelop, embrace or crush all or part of the crypto ecosystem.

BNY Mellon – America’s oldest bank – is already “embracing” as it announced crypto custody services last week after receiving approval from New York State’s financial regulator. Michael Demissie, Global Head of Digital Assets and Advanced Solutions at BNY Mellon said at the conference, “Digital assets is a much broader sector. I think crypto is really just the tip of the spear.” Beyond Bitcoin, Ether and other cryptos, he said settlement and tokenized assets enabled by blockchain technology are in its infancy, but on the way.

The IIF meeting’s exhaustive agenda (PDF) showed that crypto is clearly on the mainstream banking system’s radar but still early in its TradFi implementation. The heavily regulated banking sector’s reluctance ranges from a belief by some that crypto is a speculative “Ponzi” scheme to hesitation tied to a lack of regulation – money transmitter licenses for exchanges and the like, notwithstanding.

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Fed Needs To Maintain Oversight on Crypto -And Stablecoins Which Align With US Dollar

Michael Barr, Federal Reserve

The Federal Reserve added its fingerprints to DC Fintech Week as the recently appointed Michael Barr, Vice Chair for Supervision of the Board of Governors at the Federal Reserve, presented a policy address titled “Managing the Promise and Risk of Financial Innovation.”

Get the transcript of Barr’s speech on the Fed’s website.

Barr began by recognizing the broad umbrella of fintech – without mentioning crypto – saying that financial innovation can positively grow the financial system, serve consumers more efficiently and better address underserved communities.

Unsurprisingly, he believed the fintech roadmap ahead included regulation:

“I would note with some humility that striking the right balance between creating an enabling environment that supports innovation and managing related risks to businesses, households, and the stability of the financial system is no easy task. When regulations are too prescriptive or regulators too cautious, they run the risk of stifling innovation and locking in the market power of dominant participants in ways that can raise costs and limit access. When regulation is lax or behind the curve, it can facilitate risk-taking and a race to the bottom that puts consumers, businesses, and the economy in danger and discredits new products and services with consumers and investors.”

Barr then re-iterated crypto themes of fraud, manipulation and money laundering and made clear that oversight was necessary both inside and outside banks.

Outlining the oversight committee, he said that the Federal Reserve Board of Governors was working with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) “to ensure that crypto-asset-related activities banks may become involved in are well regulated and supervised, to protect both customers and the financial system.”

He emphasized that the oversight regime didn’t mean to “discourage banks from providing access to banking products and services to businesses associated with crypto-assets.” Perhaps this will increasingly assuage concerns coming from institutional investors who have moved slowly with digital asset investment due to a lack of approved government guardrails for the new crypto ecosystem.

So regulation needed; and oversight already happening.

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European Parliament Sees Crypto Tax Evasion And Blockchain For Solution

European Parliament

Last week’s European Parliament debate on a tax reporting resolution (PDF) brought into focus the depths of concern regarding tax evasion by cryptocurrency holders in the European Union.  Even though there was hopeful discussion that blockchain technology could be a potential solution for standardized tax reporting on digital assets across the continent, the consensus view appeared to hold that crypto holders aren’t paying their fair share.

A press release (read it) offered this sub-headline, “Members of the European Parliament adopted a resolution on October 4 calling for a better use of blockchain to fight tax evasion and for member states to coordinate more on the taxing of crypto assets.”

In spite of a vote that included 566 votes “for,” 7 “against” and 47 abstentions, the resolution’s debate during a plenary session of Parliament included a number of Members who voiced starkly different points-of-view in spite of their support.

Glass half-empty

It certainly sounds great: a European tax system on the blockchain. But who/what exactly is going to implement this? It is not clear from the resolution.

What is clear is that Europe believes tax evasion is happening and the rule of law needs to get ahead of it.

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