Good morning and happy May. This week, we cover a new crypto-friendly tax bill, Members of Congress criticizing the SEC and DOJ, and four Congressional letters, including two from Senator Warren.
Top Points
Reps. Drew Ferguson (R-GA) and Wiley Nickel (D-NC) introduced a bill to clarify that digital asset rewards from staking or mining are not taxable until the assets are sold or disposed.
House Majority Whip Tom Emmer (R-MN) and House Financial Services Chair Patrick McHenry (R-NC) criticized SEC Chair Gensler for misleading Congress, following allegations suggesting the SEC considered ETH a security prior to an oversight hearing at which Chair Gensler refused to clarify ETH's regulatory status.
Senator Cynthia Lummis (R-WY) voiced staunch opposition to the DOJ's "hyper-aggressive argument that non-custodial software can constitute a money transmission service," while vowing to "do everything I can to fight for your rights to hold your own keys and run your own node."
Senator Elizabeth Warren (D-MA) sent two letters: (1) one to DOJ and DHS regarding crypto use in the illegal trade of child sexual abuse material and (2) one to the Department of Defense, Treasury, and the White House on Iranian crypto mining and sanctions evasion.
Stablecoin negotiations continue, but it appears unlikely a deal will be struck in time to hitch a ride on an FAA reauthorization bill expected to move next week.
Providing Tax Clarity for Digital Assets Act
On Tuesday, Reps. Drew Ferguson (R-GA) and Wiley Nickel (D-NC) introduced the Providing Tax Clarity for Digital Assets Act.
The bill would clarify that digital asset rewards received from validating blockchain transactions (e.g., from staking or mining) are not treated as taxable income upon receipt. § 1. Instead, they would be taxed at the time the digital assets are sold or disposed. Id.
The bill would apply to digital asset rewards received directly, or indirectly through a service provider. Id.
Background
On July 31, 2023, the IRS published Revenue Ruling 2023-14. This guidance provided that taxpayers using the "cash method of accounting" should include the value of rewards received from staking or mining in their gross income in the taxable year in which the taxpayer gains "dominion and control" over the assets.
The Providing Tax Clarity for Digital Assets Act would effectively overrule this guidance by clarifying that taxpayers only have to pay taxes on rewards when they are sold or disposed, not when received.
Congressmen Respond to Consensys Suit Allegations
Last Thursday, Consensys filed a lawsuit against the SEC in federal court, seeking a court ruling that Ether ("ETH") and transactions in ETH are not securities, and that MetaMask is not operating as an unregistered securities broker.
Based on allegations in the now unredacted complaint, HFSC Chair Patrick McHenry (R-NC) and Majority Whip Tom Emmer (R-MN) are saying Chair Gensler misled Congress at a Congressional hearing last April where Gensler refused to clarify ETH's regulatory status, despite the Commission having internally approved an investigation premised on ETH being a security.
Here’s the relevant timeline outlined in the Consensys complaint:
March 28, 2023 - The SEC’s Division of Enforcement Director Gurbir Grewal approved a "Formal Order" authorizing an investigation in the matter of "Ethereum 2.0." Complaint at 22.
The Formal Order authorized SEC staff "to investigate and subpoena individuals and entities involved in the buying or selling of ETH." Id.
More on the significance of a "Formal Order" in SEC Enforcement Manual at 17- 19; See also Leo Schwartz's article in Fortune this week.
April 13, 2023 - The SEC Commission approved the Formal Order. Id.
According to the Complaint, the Formal Order was predicated "on the SEC's information showing possible offers and sales, since at least 2018, of 'certain securities, including, but not limited to ETH.'" Id. at 22 (emphasis added).
April 18, 2023 - SEC Chair Gensler testifies before House Financial Services Committee ("HFSC"), but evades answering whether ETH is a security or not when pressed by Chair McHenry.
Watch Chair McHenry and Chair Gensler's exchange on ETH here.
Congressional Response
In short, HFSC Chair Patrick McHenry and Whip Tom Emmer are not happy. Here are their statements accusing the SEC Chair of misleading Congress and of "regulatory dishonesty:"
Chair McHenry:
“Just months after a federal judge sanctioned SEC enforcement lawyers for lying to the court, new evidence shows Chair Gensler himself misled Congress. In testimony to the Financial Services Committee last April, Chair Gensler refused to answer questions regarding the SEC’s classification of Ether. New court filings show this was an intentional attempt to misrepresent the Commission’s position…” (Emphasis added).
See Full Statement.
Majority Whip Tom Emmer:
This regulatory dishonesty is reprehensible – it’s tainting our great capital markets, harming investors, and threatening U.S. global leadership.
foxbusiness.com
New court filings show SEC, Chair Gensler believed ethereum was a security for at least a year
Consensys filed a lawsuit against the Securities and Exchange Commission claiming the agency is attempting an unlawful power grab by seeking to classify ethereum as a security.
787
So What?
Expect pro-crypto Members of Congress to cite this as one more reason why Congress should enact market structure legislation to provide regulatory clarity, rather than defer to the SEC's regulation by enforcement approach. It also adds fuel to the fire for pro-crypto Members, particularly Republicans, who have already taken issue with Chair Gensler's lack of forthrightness with Congress and industry regarding digital asset policy.
For example, last April, HFSC Republicans sent a letter to SEC Chair Gensler stating: "Without clear rules of the road, your push for firms to 'come in and register' is a willful misrepresentation of the SEC’s non-existent registration process." And last September, Chair McHenry threatened to subpoena the SEC, citing the agency's lack of transparency with Congress after the SEC failed to substantively respond to Chair McHenry's requests for documents regarding the timing of SBF's arrest.
Look Ahead
On the Hill
Tuesday, May 7 - 10AM - HFS Capital Markets Subcommittee Hearing:
Note: CRA resolution to overturn SEC Dealer Rule is noticed for hearing (along with 9 other bills). See Hearing Memo here.
Off the Hill
Tuesday, May 14 - DC DAO hosts ETH DC.
Wednesday, May 15 - The Digital Chamber hosts a DC Blockchain Summit.
Quick Hits
Self-Custody & Developers
Senator Cynthia Lummis (R-WY) voiced deep concern with the Department of Justice's ("DOJ") recent arguments that non-custodial software can constitute a money transmitter business.
The statement comes in response to arguments raised in the DOJ's opposition to Roman Storm's (a Tornado Cash developer) motion to dismiss and the DOJ's indictment of Samourai Wallet developers.
Senator Lummis also posted this on Thursday:
In a new blog post, Coin Center analyzes how DOJ's recently proffered interpretation of what constitutes a money transmitter departs from FinCEN guidance dating back to 2013, and the shift's potential impact.
Stablecoin Legislation Watch
Stablecoin bill unlikely to be added to FAA reauthorization (FAA expires on May 10).
"A flash of hope that an FAA bill could carry U.S. stablecoin rules across the finish line has been momentarily dashed as congressional leaders were said to ward off amendments."
Illicit Finance
Last Thursday, Senators Elizabeth Warren (D-MA) and Bill Cassidy (R-LA) sent a letter to DOJ and DHS seeking additional information regarding the use of crypto in connection with child sexual abuse material.
Letter.
This Thursday, Senators Elizabeth Warren (D-MA) and Angus King (I-ME) sent a letter to the Department of Defense, Treasury, and the White House, raising concerns with Iran earning money from crypto mining, and seeking additional information on Iran's use of crypto to evade sanctions and finance terrorism.
Letter.
See also Sen. Warren exchange raising similar concerns at a Senate Armed Services Committee hearing yesterday.
According to Politico, Assistant Attorney General Carlos Felipe Uriarte sent a letter to House Judiciary Chair Jim Jordan (R-OH) and Ranking Member Jerry Nadler (D-NY), urging lawmakers to increase penalties for violations of the Bank Secrecy Act's anti-money laundering provisions.
Article by Declan Harty in Politico Pro: "Justice Department pushes for more firepower in crypto crackdown."
Binance
Binance founder Changpeng Zhao sentenced to four months in prison; prosecutors had sought 3 years.
Bitcoin
Reps. Mike Flood (R-NE) and Wiley Nickel (D-NC) sent a letter to SEC Chair Gary Gensler urging him to approve options on spot Bitcoin ETPs or explain why the SEC would treat options for Bitcoin futures ETPs (which are currently trading) differently than options for spot Bitcoin ETPs.
Crypto Law Resource
Justin Wales, Head of Legal for the Americas at Crypto.com, published the "Crypto Legal Handbook - A Guide to the Laws of crypto, Web3, and the Decentralized World."
Thank you for reading and enjoy your weekend.
-GSL
P.S.
For bespoke policy research, tracking, and analysis tailored for your project, learn more about Cap Hill Crypto Advisory Services.
*All information contained in this newsletter is for informational purposes only and should not be considered legal or financial advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. The author may own cryptocurrencies discussed herein.*
