At the time, Cruz’s press release noted today’s recurring concerns about the potential for innovation moving overseas: “Let’s not be the number one economic developer for the Communist Party of China by sending cryptocurrencies overseas.”
Cruz’s 2023 version, which has been referred to Senate Finance, is known in Senate records as S.695 (see it) or “A bill to repeal the provisions of the Infrastructure Investment and Jobs Act that impose new information reporting requirements with respect to digital asset transfers.” No co-sponsors are currently listed. The bill is here (PDF).
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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.
With the collapse of cryptocurrency exchange FTX not even a month old, the first FTX hearing commenced on Capitol Hill with the Senate Agriculture Committee questioning Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam yesterday in Washington D.C.
Overall, the hearing seemed to be a theater of positioning by Senate Ag intended to address…
Urgency – Senate Ag and the CFTC appeared to believe the Digital Commodity Consumer Protection Act (DCCPA) has more urgency than ever in light of the FTX collapse.
Overcoming the conflict of interest – Senate Ag and the CFTC endeavored to distance themselves from FTX and its founder Sam Bankman-Fried (SBF). The unspoken message is that FTX did not influence the creation of the DCCPA. On that note – and grasping for transparency, for example – CFTC Chair Behnam’s calendar in the past year was under the microscope which included 10 FTX meetings largely related to its subsidiary LedgerX and its DCO application – not DCCPA.
Refinement– Chair Rostin Behnam and Committee members urged that learnings from FTX’s implosion be incorporated into the new bill. In some ways, the refinement appears to be finding a way to bring companies like FTX onshore, which would have required the company to adhere to regulations that would have prevented the implosion in the first place.
Pause – In spite of the urgency, the need for refinement requires pause. DCCPA won’t be heading for a vote on the Committee or Senate floor until next year at the earliest. Chair Behnam advocated as much.
On its face, D.C. appears to be in soul-searching mode as it gropes for answers on how the FTX collapse occurred even though the company was based in the Bahamas. The krux of the concern, though, stems from the humiliation endured by unsuspecting lawmakers who had been courted and cajoled by FTX founder and CEO Sam Bankman-Fried.
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.
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.
Two weeks ago, The Financial Accounting Standards Board (FASB) agreed to take up a new review of accounting and disclosure standards for digital assets. The blockchain industry hailed it as a needed addition to FASB’s “technical agenda” and an indication of further acceptance of what the standards board calls “plain vanilla” cryptocurrencies – Bitcoin and Ether.
At last week’s Permissionless conference, Miles Fuller, a former IRS employee and current Head of Government Solutions for TaxBit, echoed industry frustration with today’s reporting standards saying in a discussion with Chamber of Digital Commerce’s Perianne Boring, “You need your balance sheet to be a full reflection of reality.”
As late as October 0f 2020, the not-for-profit accounting standards board, which guides all publicly traded companies such as digital asset holders Tesla and MicroStrategy, said that if the value of Bitcoin goes down, for example, a company must record the decrease in assets on its balance sheet on an annual basis. But if it goes up, the same companies only get to record a gain if the assets are sold.
TaxBit’s Fuller expanded the reporting pain point to the IRS and its intersection with decentralized finance (DeFi) noting how – as a former insider at the IRS – the agency was close to providing guidance to consumers on tax compliance with digital assets, but then Congress got in the way. Fuller added, “Sometimes I hear people put the onus on the IRS, but it’s Congress – the IRS is just trying to administer it.”
From the start of the fireside chat at last week’s Permissionless conference, red-pilled One River Asset Management founder and CIO Eric Peters delighted the decentralized finance throngs with one good story after another.
Anecdotes ranging from his firm’s $600 million of Bitcoin and Ethereum purchases via Coinbase in 2020 to cold-calling outgoing SEC Chair Jay Clayton the day after he left the commission in order to bring him aboard as a key advisor did not disappoint.
But, perhaps most revelatory was the closing anecdote raised by moderator Brett Tejpaul of Coinbase around his and Peters involvement in Project Hamilton – a Central Bank Digital Currency (CBDC) research project with huge implications for the U.S. dollar, the world’s reserve currency and arguably the most important source of American power worldwide.
Project Hamilton, named after Alexander Hamilton and Margaret Hamilton, may have special focus around a CBDC for the United States financial system, but Tejpaul said there was a “group” of people who are trying to convince the Treasury to go in a new direction using privatized stablecoins rather than a CBDC.
Fiscal Year 2023 is in focus today for U.S. Securities and Exchange Commission Chair Gary Gensler who is presenting his group’s budget for next year to the House Committee on Appropriations chaired by Rep. Rosa DeLauro (D, CT).
The live hearing began at 10:30 am ET on Wednesday, May 18. Chair Gensler will also be answering questions with U.S. Federal Trade Commission chair Lina Khan, who will discuss her commission’s budget for the next fiscal year.
On Capitol Hill this Wednesday, Securities and Exchange Commission (SEC) Chair Gary Gensler will appear before the House Appropriations Committee to review the SEC’s 2023 budget proposal as it looks to continue to fulfill its mission to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
In late March, the SEC submitted its budget “justification” to Congress (PDF) as a precursor to the meeting and revealed several areas in which it expects to continue to engage crypto markets in 2023.
Following up on the SEC’s recent announcement of doubling positions related to crypto enforcement this year, the 2023 budget justification outlines a request for 125 additional positions in the Department of Enforcement (ENF) to help enforce regulations across financial assets – including crypto:
“ENF requests 125 additional positions to enhance the division’s ability to timely pursue the wide variety of misconduct within the SEC’s remit. They will also strengthen ENF’s capabilities to investigate new and emerging issues, including crypto-asset markets, cyber-related risks, and the environmental, social, and governance space. Finally, it is expected that the number of litigated cases will continue to rise as ENF increasingly holds wrongdoers accountable for their misconduct with more meaningful and, in some instances, escalating sanctions. ENF requires additional resources to ensure that it has an adequate number of attorneys to staff the increasing number of litigated cases.”
The ENF only accounts for an increase of 63 full-time employees in the justification’s line item – from 1302 in 2022 to 1365 in 2023 .