Category: Policy

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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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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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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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House Agriculture Committee Takes On “The Future of Digital Asset Regulation” (VIDEO)

Vincent McGonagle, CFTC

Today, the House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit looked at “The Future of Digital Asset Regulation.” Video stream below.

Previously, the committee members Rep. Glenn “GT” Thompson (R, PA and Ranking Member) and Rep. Ro Khanna (D, CA) as well as Rep. Tom Emmer (R, MN) and Rep. Darren Soto (D, FL) have co-sponsored the Digital Commodity Exchange Act of 2022 (DCEA), which provides the Commodity Futures Trading Commission (CFTC) with oversight of key aspects of the digital assets world.

Four witnesses representing a regulator, an academic from the legal world and two blockchain industry executives have submitted prepared testimony for today as follows:

    • Vincent McGonagle, Director of the Division of Market Oversight, Commodity Futures Trading Commission (CFTC) – [See PDF]
    • Christopher Brummer, Georgetown University Law Center – [PDF]
    • Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis – [PDF]
    • Charles Hoskinson, CEO, Input Output Global, Singapore – [PDF]

View the hearing:

Live blog featuring Q&A with The Committee

Ranking members Thompson and Rep. Michelle Fischbach (R, MN) offer opening statements including the need for clearly defined core principles and regulation. Even though the blockchain industry is nascent and its unknown where it will lead,, Rep. Thompson says “that should excite us not intimidate us.” He’s all in on the innovation potential of blockchain and its potential benefits to the United States.

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