This week, we cover crypto highlights from four hearings, a veto-override attempt, appropriations amendments, and much more from another action-packed week on Capitol Hill.
The Senate Agriculture Committee's hearing on digital commodities largely focused on protecting retail customers.
Senator Stabenow plans to share new bill text this week, but Senator Boozman is not yet ready to sign on, citing concerns by industry stakeholders.
House efforts to override President Biden's veto of a SAB 121 repeal resolution fell short (228-184; a 2/3 vote was needed), but Members may try to include a repeal in a must-pass bill later this Congress, and the SEC may be granting exemptions to certain banks.
At a House hearing on international finance, lawmakers questioned Sec. Yellen on market structure, DeFi, custody, and illicit finance.
Amendments to a House appropriations bill that would boost funding for Treasury to combat illicit finance and study tokenization of real world assets are pending in the House Rules Committee.
At a Senate nominations hearing, Senator Hagerty criticized SEC Commissioner Crenshaw's “hostility” towards the crypto industry, and Senator Lummis encouraged FDIC Chair nominee Christy Romero to ensure crypto firms have fair access to banks.
The GOP party platform for 2024 supports defending the rights to mine Bitcoin and self-custody, and opposes a CBDC.
On Wednesday, the Senate Ag Committee held an oversight hearing on the digital commodities market with CFTC Chair Rostin Behnam.
Key Takeaways:
Senator Stabenow plans to share text of a bill to regulate the digital commodity spot market with Members this week, but Ranking Member Boozman isn’t ready to support it, citing concerns from industry stakeholders who would be covered by the bill.
Senate Republicans and Democrats are interested in granting the CFTC primary jurisdiction over the digital commodity spot market, but it’s unclear whether they will reach consensus on details like determining which crypto assets are digital commodities – and whether they can reconcile their framework with the House.
Issue discussion remained mostly high-level, with Senators voicing support for general principles like closing regulatory gaps, protecting customers, combatting illicit finance, and ensuring adequate funding for the CFTC.
Bipartisan legislation would likely focus on centralized entities, leaving DeFi for another day.
Here's a closer look at recurring issues throughout the hearing.
Protecting Retail
Protecting retail investors was the dominant theme of the hearing. To this end, Chair Behnam, Chairwoman Stabenow, and several other Senators argued there is an urgent need to address the existing regulatory gap in the non-security crypto spot market.
On this point, several Senators pressed Behnam on whether the CFTC has the necessary resources and experience to protect retail customers if granted authority to oversee the crypto spot market.
Chair Behnam said he was confident the CFTC was up to the task, pointing to the CFTC’s experience protecting retail customers in gold, silver, and forex markets, the agency's enforcement track record in crypto to date, and the success of the CFTC's Office of Customer Education and Outreach.
Chair Behnam also made clear the agency would need additional funding.
CFTC v. SEC Jurisdiction
Discussion of where to draw the line between non-security and security tokens remained high-level, but Senators appeared to lean towards ensuring the CFTC, rather than the SEC, had jurisdiction over the majority of crypto assets.
For example, Chairwoman Debbie Stabenow (D-MI) noted in her opening remarks that Bitcoin, Ether, and other non-security tokens “account for the vast majority of the crypto market.”
Ranking Member John Boozman (R-AR) expressed concern with any framework that would allow the SEC to make the initial determination about whether a digital asset is a security, before the CFTC could then sue the SEC if it disagreed.
Senator Boozman and Chair Behnam both appeared supportive of applying a framework similar to the CFTC's self-certification process for DCMs listing certain futures contracts to the crypto spot market. Behnam described this process as efficient, “well-worn,” and a potential model for Congress to consider when crafting legislation for digital assets.
See exchange here (starting at 1:50:42).
Interestingly, Senator Roger Marshall (R-KS) – who is a lead cosponsor of DAAMLA – suggested simply giving the CFTC authority over every crypto asset. Chair Behnam, chuckling, responded that he’d be happy with that.
Illicit Finance
Senator Ben Ray Luján (D-NM) expressed frustration with current AML/KYC laws (not just in crypto), characterizing them as weak and ineffective.
Senator Roger Marshall (R-KS) asked why criminals prefer crypto. Chair Behnam offered two potential reasons: (1) crypto is borderless, and (2) there is a regulatory vacuum (though he qualified this statement by noting U.S. intermediaries are still subject to AML/CFT rules enforced by FinCEN and state authorities).
Senator Tuberville – National Security & Tax
Senator Tommy Tuberville (R-AL) flagged two unique issues. First, he encouraged CFTC Chair Behnam to support his bill to prohibit the CFTC from registering digital intermediaries that are based in adversarial nations like China, North Korea, and Iran (see the Prohibiting Foreign Adversary Interference in Cryptocurrency Markets Act).
Second, he made clear he believes digital assets received from mining should be taxed when sold, not when received.
DeFi
Senators Boozman and Amy Klobuchar (D-MN) brought up the unique challenges of regulating DeFi in their questioning.
Senator Boozman asked if Congress should be focusing on regulations for centralized entities given the lack of understanding and expertise on the issue, noting Congress has yet to hold one hearing on DeFi. Chair Behnam conceded DeFi raises unique policy and legal issues, while agreeing that Congress's focus should be on centralized actors - at least for now.
What's Next?
Keeping eyes out for bill text to become public.
The House voted on a measure to override President Biden's veto of a SAB 121 repeal resolution.
The measure went down 229-184, failing to get the necessary 2/3 votes required to advance.
Here's the breakdown of the floor vote:
But note: Rep. Drew Ferguson (R-GA) mistakenly voted no on the floor and is seeking an official vote change.
For the most part, this vote tracked the initial vote on the repeal resolution itself. Here's a quick look at who flipped:
What's Next?
Despite failing to reach the 2/3 threshold, there is still a bipartisan majority in support of rescinding SAB 121. So Members may still try to tack on a targeted repeal measure, like the Uniform Treatment of Custodial Assets Act, to a must-pass bill later this year.
SEC Chair Gensler could also withdraw the rule at any point. According to a Bloomberg tax article published yesterday, the SEC may already be granting exemptions to certain banks on a one-off basis.
On Tuesday, the House Financial Services Committee held a hearing on the state of the international financial system, primarily focusing on inflation, housing, and Russian sanctions.
Here are the crypto highlights:
Market Structure
Sec. Yellen told Rep. French Hill (R-AR) that she’s happy to continue working with Congress on market structure legislation, but she has not been “quarterbacking” SEC and CFTC disagreements over crypto in her role as FSOC Chair.
DeFi
Rep. Mike Flood (R-NE) asked Sec. Yellen how she thought about regulating DeFi protocols given their unique characteristics compared to centralized platforms.
Sec. Yellen didn’t appear to have given it much thought, directing Rep. Flood's attention to the SEC and other banking regulators instead.
Custody
Rep. Flood and Rep. Wiley Nickel (D-NC) once again raised concerns that SAB 121 concentrates risk in the hands of a small group of eligible custodians by precluding banks from offering custody services to customers.
Illicit Finance
In response to claims by Rep. Brad Sherman (D-CA) that the Russian Central Bank is urging Russians to use crypto to evade western sanctions, Sec. Yellen said Treasury is very attentive to the sanctions issue, but at this point, the use of crypto is not substantial.
Big Picture
House and Senate are in recess; they return week of July 22.
Republican Committee National Convention: Monday July 15 - Thursday July 18.
Appropriations
The House may consider its Financial Services & General Government Appropriations bill before the August recess.
Crypto amendments to that bill pending in Rules Committee:
Amdt. 121: Would add $3 million in funding for Treasury to combat illicit finance through improved blockchain analytics tools and trainings for crypto investigations (Rep. Gottheimer (D-NJ)).
Amdts. 199, 200, 204: Would direct prudential regulators to study and report to Congress on the tokenization of real world assets (Rep. Timmons (R-SC)).
Underlying bill also contains provisions to defund CBDC efforts at Treasury, SAB 121, and certain SEC enforcement actions against crypto firms.
Senate Banking Nominations Hearing
Senator Bill Hagerty (R-TN) pressed SEC Commissioner Caroline Crenshaw on her dissent from the SEC's approval of spot Bitcoin ETPs.
Crenshaw cited concerns with fraud in the underlying market as the basis for her dissent.
Senator Hagerty said he's “deeply disturbed” with the SEC and Crenshaw's hostility towards the crypto industry, adding: “This is a critical industry in terms of innovation and technology in our country, and I hate to see it being pushed overseas.”
Senator Cynthia Lummis (R-WY) pressed FDIC Nominee Christy Goldsmith Romero on whether she thinks banks should be able to hold crypto companies' assets and provide them services.
Romero said yes, adding she doesn't think it's the FDIC's role to tell banks what industries or companies they should serve.
House & Senate Hearings With Fed Vice Chair Powell
Senators and Representatives focused on inflation, housing, and Basel III, but crypto came up when Fed Chair Powell told Rep. Wiley Nickel (D-NC) he will continue working with Congress on stablecoin legislation.
The Republican National Committee's Rules Committee approved its 2024 platform.
Under a section focused on “championing innovation,” the Platform states:
“We will defend the right to mine Bitcoin, and ensure every American has the right to self-custody of their Digital Assets, and transact free from Government Surveillance and Control.”
The platform also opposes a CBDC and vows to “end Democrats’ unlawful and unAmerican Crypto crackdown[.]”
On the Friday before the Fourth of July, the IRS finalized portions of its digital asset broker tax reporting rules that apply to crypto intermediaries who take possession of customers' crypto assets (centralized exchanges, hosted wallet providers, crypto kiosks, and certain payment processors).
The IRS largely punted on final rules for non-custodial crypto actors and DeFi, saying it needs more time to consider such rules.
Rule.
SEC v. Binance
In SEC v. Binance, the court allowed claims relating to securities registration violations to proceed, finding the SEC plausibly alleged Binance's BNB sales, staking-as-a service, and lending programs were offered and sold as investment contract securities on its platforms.
But the Court dismissed claims that secondary sales of BNB by third-parties were securities.
The Court also dismissed the claim that BUSD was a security.
Helpful & thorough summary of courts reasoning from Fenwick here.
SEC v. Coinbase
Citing the secondary sales holding in Binance above, Coinbase filed a letter with the court in its case urging Judge Failla to certify appeal of her March ruling.
According to the letter, the Binance decision - only “compounds the confusion for the industry and its customers,” thus “underscore[ing] the urgent need for appellate review.”
Paxos
SEC drops investigation into Paxos's issuance of BUSD (Leo Schwartz; Fortune).
Stacks
SEC drops three-year investigation into Stacks Protocol (Michael Ebiekutan, FX Street).
Uniswap
Uniswap is urging the SEC not to adopt proposed amendments to the definition of exchange that would sweep up DeFi protocols.
The letter argues the SEC's proposed interpretation “cannot be squared with the text of Section 3(a)(1) of the Exchange Act." And the Loper Bright decision holding that agencies can no longer rely on Chevron deference heightens the importance of “the disconnect between the statutory language and the proposed amendments."
Letter.
A White House adviser, Rep. Rho Khanna (D-CA), and Senator Kirsten Gillibrand (D-NY) met with a small group of industry leaders at the Willard Hotel to talk crypto policy and hear their concerns.
The Energy Information Administration is restarting the process of drafting a new bitcoin mining survey.
Last Week's A: Standing next to Thomas Jefferson are fellow members of the committee tasked with writing the Declaration of Independence: John Adams, Roger Sherman, Robert Livingston and Benjamin Franklin.
This Week's Q:
Which U.S. city has hosted the most major national party conventions?
Thank you for reading and enjoy your weekend.
-GSL
P.S. You can read this newsletter in its original form here.
