Good morning and happy June. This week, we cover illicit finance, appropriations, a hearing on tokenization, and a Presidential veto.
Top Points
Senator Mark Warner's (D-VA) bill to expand Treasury's sanction authority over "foreign digital asset transaction facilitators" is included in the Senate's Intelligence Authorization Act for 2025, which recently passed the Senate Intel Committee with unanimous support.
The House Appropriations Committee advanced a financial services funding bill, which includes provisions to prohibit funding for SAB 121, a U.S. CBDC, and SEC enforcement actions against digital asset firms until there is more regulatory clarity.
A House Financial Services subcommittee held a hearing on tokenizing real world assets where Republicans focused on potential benefits and most Democrats echoed concerns from previous digital asset hearings regarding customer protections and illicit finance risks.
President Biden vetoed a resolution to repeal SAB 121, claiming it would "inappropriately constrain" the SEC's ability to provide accounting guidance.
DeFi Sanctions Bill Included In Intelligence Reauthorization Bill
Background
The Intelligence Authorization Act is an annual bill authorizing funding for intelligence-related programs and activities across various federal agencies, including the CIA, DOD, and Homeland Security.
On May 22, the Senate Intelligence Committee unanimously passed (17-0) the Intelligence Authorization Act for Fiscal Year 2025.
Of note to the crypto community, Section 423 of this bill ("Section 423") would expand Treasury’s authority to sanction foreign persons who control, operate, or make available digital asset protocols. The section draws heavily on language from Senator Mark Warner's (D-VA) Terrorist Financing Prevention Act of 2023.
Summary
Section 423 would direct the President to prohibit transactions between U.S. persons and "foreign digital asset transaction facilitators" that Treasury identifies as having knowingly transacted with a terrorist or sanctioned person. § 423(b)(2).
Bill Text.
"Foreign digital asset transaction facilitator" is defined broadly to include:
"any foreign person or group of foreign persons that, as determined by the Secretary [of Treasury], controls, operates, or makes available a digital asset protocol or similar facility, or otherwise materially assists in the purchase, sale, exchange, custody, or other transaction involving an exchange or transfer of value using digital assets." § 423(a)(3) (emphasis added).
A "digital asset protocol" would include any protocol, smart contract, or other software:
deployed through the use of blockchain or similar technology; and
that provides a mechanism for users to interact and agree to the terms of a trade for digital assets. § 423(a)(4).
Treasury could waive the imposition of sanctions if it:
(a) determines that such a waiver is in the national interests of the U.S., and
(b) notifies and explains to Congress the reasons for the waiver. § 423(b)(5)
In addition, Section 423 would authorize Treasury to prohibit or condition certain "transmittals of funds (as such term may be defined by the Secretary [of Treasury])" to or from a U.S. financial institution or financial agency, if the transfers involve a foreign financial institution, account, or class of transactions that have been designated a primary money laundering concern. § 423(c).
What's Next?
To become law, the bill would still have to clear the full Senate and House (which will have its own Intelligence Authorization bill) before heading to the President.
Notably, intel reauthorization acts have been rolled into the NDAA the last few years. To save precious floor time in an election year, this strategy may very well be invoked again (rather than having each bill come to the floor separately for standalone votes).
Must pass bills like the NDAA and intel reauthorization will likely be subject to heavy negotiation and horse trading between the House and Senate, as Members look to attach legislative priorities to the limited number of bills that are expected to move this year.
As a result, it’s too early to tell what any final bill will look like, but pro-crypto House Republicans, like Republican Whip Tom Emmer and HFSC Chair Patrick McHenry, would likely oppose Section 423’s inclusion in any bill that might become law.
Crypto Policy Riders Included in House Approps Bill
On Wednesday, the House Appropriations Subcommittee on Financial Services and General Government approved its Fiscal Year 2025 spending bill.
Text.
Here are three crypto-related policy riders that are included in the current bill:
First, Section 131 would prohibit funding for Treasury to design, build, develop or establish a U.S. CBDC or stop the circulation or use of cash as legal tender in the U.S.
Second, Section 558 would prohibit funding for the implementation or enforcement of SAB 121.
Third, Section 560 prohibits funding for the SEC to bring enforcement actions related to digital asset transactions unless:
(a) the SEC clarifies which digital assets are securities or
(b) a law is enacted giving the SEC regulatory and enforcement jurisdiction over digital assets.
The prohibition would not apply to enforcement actions related to fraud or market manipulation.
What's Next
The appropriations process is a long and contentious slog. It will be an uphill battle for any partisan policy riders, especially the provisions defunding a CBDC and SEC crypto enforcement efforts, to get signed into law.
House Financial Services Subcommittee Hearing on Tokenization of Real World Assets
On Wednesday, House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing to examine the risks and benefits of tokenizing real world assets.
Key Takeaways
Anti-Crypto Democrats on Financial Services Haven't Changed Their Tune
Despite bipartisan momentum behind FIT 21 and SAB 121 repeal votes, anti-crypto Democrat members on the HFS Digital Asset Subcommittee do not appear to be changing tune on blockchain-related policy. While the hearing was meant to focus on tokenizing traditional assets, Subcommittee Ranking Member Stephen Lynch (D-MA), Brad Sherman (D-CA), and Sean Casten (D-IL) focused on concerns often raised at previous crypto-asset centric hearings. For example, they argued blockchains are ripe for fraud, illicit finance, tax evasion, hacks, and operational risks. Moreover, these Members, along with witness Hillary Allen, argued that issuers may try to use tokenization to circumvent existing securities laws.
Republicans & Wiley Nickel Keyed In On Potential Benefits
Committee Republicans, Democrat Wiley Nickel, and the majority of witnesses, primarily focused on the potential benefits of tokenizing real-world assets.
Potential benefits discussed included:
Increasing transaction efficiency by reducing (if not eliminating) intermediaries
Allowing for faster, cheaper, and programmable payments
Improving transparency by placing key transaction and asset information on a publicly visible ledger
Improving liquidity and expanding access to markets
Empowering community banks and other smaller institutions by allowing them to pool together resources and collaborate via a distributed ledger.
Adjacent Issues
SAB 121
Rep. Wiley Nickel (D-NC) once again urged SEC Chair Gensler to withdraw SAB 121.
Rep. John Rose (R-TN) flagged that SAB 121 may require different accounting treatment for custody of tokenized assets compared to non-tokenized assets – even where the underlying assets are the same.
Witness Lilya Tessler (Sidley Austin) agreed, noting SAB 121’s broad definition of a digital asset would likely sweep in tokenized securities.
Illicit Finance
In response to a question about illicit finance concerns from Rep. Sean Casten (D-IL), Securitize co-founder Carlos Domingo explained that AML controls can be built on permissionless blockchains.
See exchange clip here.
What's Next
Two bills noticed for the hearing would direct federal agencies to further study tokenization and report back to Congress.
More specifically, Rep. William Timmons' (R-SC) Tokenization Report Act of 2024 would direct federal banking regulators to study the potential benefits and risks of tokenizing on blockchain networks. Regulators would also have to provide a summary of the legal permissibility and regulatory requirements for tokenizing assets.
Another draft bill would direct the SEC and CFTC to study whether additional rules or guidance are needed to facilitate the development of tokenized securities and derivatives products. (Note: similar language was included in § 608 of FIT 21).
Biden Vetoed SAB 121 Repeal
Last Friday night, President Biden vetoed the House Resolution to repeal SAB 121.
In the veto message, President Biden downplayed the bipartisan votes in the House and Senate, and focused on concerns with the CRA process and protecting customers.
"By virtue of invoking the Congressional Review Act, this Republican-led resolution would inappropriately constrain the SEC’s ability to set forth appropriate guardrails and address future issues. This reversal of the considered judgment of SEC staff in this way risks undercutting the SEC’s broader authorities regarding accounting practices."
What's Next?
Based on initial floor vote tallies, a veto override is unlikely. But the White House could still urge SEC Chair Gensler to withdraw the rule.
Look Ahead
Wednesday - June 12 - 10AM
House Financial Services hearing on FDIC's toxic workplace culture.
Thursday - June 13- 10AM
House Financial Services hearing on the CFPB's Semi-Annual Report.
Senate Appropriations Subcommittee on Fin Services and General Government: Hearing to examine proposed budget estimates and justifications for FY 2025 for SEC and CFTC.
Quick Hits
SEC
The Fifth Circuit vacated the SEC's private funds rule in its entirety, finding the SEC exceeded its statutory authority.
The American Securities Association is suing the SEC to compel compliance with the Freedom of Information Act.
According to the Complaint, the SEC has failed to produce documents related to the SEC investigations into certain broker-dealers' retention of "off-channel" communications, which lead to billions of dollars in penalties paid as part of settlements.
Privacy
DeFi Education Fund's Amanda Tuminelli and Marisa Coppel pen Op-Ed in CoinDesk on the SEC's Consolidated Audit Trail.
Op-Ed.
"Under the SEC’s CAT-related requirements, regulated entities will be forced to collect a multitude of data points about trades, traders and retail customers, including customer names, addresses and account details. As for digital asset market participants, this information could end up including transaction identifiers and wallet addresses, giving those with access to the database insight into users’ forward- and backward-looking transaction information for all time."
Foreign Affairs
16 Members of Congress - including House Foreign Affairs Chairman, Michael McCaul (R-TX) - urged POTUS to bring home Tigran Gambaryan, a former IRS employee and current Binance executive.
According to the letter, Tigran is a U.S. citizen being unlawfully detained in Nigeria and is facing potentially life-threatening health issues.
Letter.
Trivia
Answer to Previous Q: Edward Dickinson Baker is the only Senator to lose his life in a military engagement while serving in Congress.
This Week's Q: The Constitution vests Congress with the power to control government spending, often referred to as "the Power over the Purse." Which founding father is credited with first using this phrase?
Thank you for reading and please enjoy your weekend.
-GSL
P.S.
For bespoke policy analysis, tracking, & strategy tailored for your project, learn more more about Cap Hill Crypto's advisory services here.
