The ‘crypto’ crowd is celebrating after U.S. digital asset legislation made unprecedented advances, but their cork-popping memes may prove a little premature.
On Thursday, July 27, the U.S. House of Representatives Financial Services Committee advanced two bills that could now be sent to the House floor for a full vote: HR4766, the Clarity for Payment Stablecoins Act of 2023, and HR4841, the Keep Your Coins Act of 2023.
The latter is a relatively simple affair that allows consumers to use self-hosted wallets to custody their digital assets and to use said assets for their own legal purposes, “such as to purchase real or virtual goods and services for the user’s own use.”
This self-evident language reportedly responds to last November’s collapse of the FTX exchange and the ensuing loss of billions of dollars worth of tokens the exchange held on behalf of U.S. citizens.
HR4766 is the latest in a series of attempts to muscle a stablecoin bill through the Committee. HR4766 passed largely along partisan lines, with Committee chair and bill author Rep. Patrick McHenry (R-NC) using his opening statement to express disappointment that his bill lacked support from most Democratic committee members as well as President Joe Biden. McHenry’s opening remarks acidly claimed that it was “the White House’s unwillingness to compromise that has once again brought negotiations to a halt.”
While McHenry exempted the Dems’ ranking member Rep. Maxine Waters (D-CA) from this criticism, she nonetheless called his bill “deeply problematic and bad for America.” Among Waters’ criticisms is the bill allowing state regulators to unilaterally expand the list of suitable stablecoin reserve assets based on what they deem “appropriate.” As Waters points out, “strong reserves are what ensure a stablecoin remains stable.”
The delegation of authority to state-level ‘payment stablecoin regulators’ didn’t sit well with Waters, who noted the bill lacked support from the Federal Reserve or the Treasury Department. The bill would give the Fed the ability to intervene in as yet undefined ‘exigent circumstances’ but only after giving state regulators 48 hours’ notice, a relative eternity in the fast-paced digital asset sector.
Democrats also took issue with the possibility that the bill could allow private corporations to issue their own tokens, conjuring up not only ugly memories of Mark Zuckerberg’s ill-fated Diem digital asset but also the wildcat banking era and company scrip.
Law professor Hilary Allen, who testified at previous Congressional hearings on digital assets, issued a scathing tweet thread last week on what she called the “very flawed stablecoin bill” being marked up on Thursday. The thread deserves reading in full, but we’ll highlight a few low-lights.
The bill states that stablecoins are neither securities nor commodities, effectively exempting them from oversight by either the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). As Allen notes, nobody uses stablecoins for payments, only for on- and off-ramps to speculate on exchanges, so maybe investor protections are a good thing.
Structurally speaking, Allen views stablecoins as money market mutual funds—others think so too—which generally invest in ‘safe’ assets but can still suffer ‘bank runs’ during times of financial upheaval. Allen expressed concern about efforts to bring stablecoins into the traditional financial system in case the taxpayer is asked to bail out customers burned by the collapse of this or that stablecoin.
That’s not such a far-fetched scenario, as demonstrated by the recent depegging of Circle’s USDC stablecoin. Circle kept $3.3 billion of its reserves at Silicon Valley Bank (SVB), and when SVB imploded in March, Circle halted USDC redemptions, and the coin briefly sunk as low as 88¢. Circle was only rescued after the feds agreed to raise their account guarantees over the FDIC-maximum $100,000 level.
So it wasn’t much of a surprise when Circle boss Jeremy Allaire tweeted his enthusiastic support of McHenry’s bill advancing. USDC’s current $26.5 billion market cap is less than half of what it was this time last year, and $17.4 billion has been redeemed in just the last five months. HR4766 might as well have been titled the ‘Saving Circle’s Bacon Act.’
Thursday’s hearing followed a somewhat less contentious markup session at the House Agricultural Committee, which advanced the Financial Innovation Technology for the 21st Century Act. Among other things, the bill aims to define what’s a security and what’s a commodity and, in the process, settle the regulatory oversight turf war between the SEC and CFTC. The Committee, under whose purview the CFTC falls, has a definite favorite in this race.
The Act was advanced out of McHenry’s Committee the day before, and Waters was equally unimpressed with this bill, calling it a “wish list” crafted by digital asset firms that were being rushed through without adequate debate. McHenry unwittingly agreed by claiming an imperfect bill was better than the status quo.
Defense against the dark (‘crypto’) arts
Over in the Senate, Thursday brought approval of the 2024 National Defense Authorization Act (NDAA) with a last-minute amendment addressing so-called privacy coins and coin-mixer services. The amendment was a bipartisan effort involving pro-crypto senators Cynthia Lummis (R-WY) and Kristen Gillibrand (D-NY), and anti-crypto counterparts Sen. Elizabeth Warren (D-MA) and Roger Marshall (R-KS).
The amendment gives the Treasury Department two years from the passage of the bill to work with financial institutions to craft appropriate reporting obligations and anti-money laundering programs regarding digital assets.
The Treasury will have only one year to provide a briefing to Congress on ‘combating anonymous crypto asset transactions,’ including “categories of anonymity-enhancing technologies or services used in connection with crypto assets, such as mixers and tumblers.”
The plan will use this briefing to craft specific legislation focusing on “illicit finance, including crypto asset transaction volumes associated with sanctioned entities and entities.” In other words, kick the can down the road for a year or two, and we’ll do the heavy lifting at some future date.
U.S. authorities’ interest in mixers has taken on new significance since Russia invaded Ukraine, and all sorts of economic sanctions were placed on Russian entities and individuals. The fact that mixers like Tornado Cash are increasingly popular with North Korea’s state-sponsored digital currency-focused hackers doesn’t help.
The success of the amendment apparently prompted Warren to make good on her February threat to reintroduce the Digital Asset Anti-Money Laundering Act she co-authored with Marshall last year. Bloomberg reported that the revived bill received bipartisan support from Senators Joe Manchin (D-WV) and Lindsey Graham (R-SC), along with the Bank Policy Institute, a banking advocacy group, and the National Consumer Law Center.
A healthy dose of perspective
The Senate’s defense bill is expected to face significant amending once it arrives in the House, where the GOP holds a wafer-thin majority, meaning there isn’t much wiggle room if the GOP has any conscientious defectors.
By the same token, assuming the House committee bills pass floor votes, they have to travel to the Democratic-controlled Senate for further debate before any vote takes place. In other words, none of this legislation is guaranteed a tomorrow.
As someone who covered the gaming industry for over a decade, I vividly recall the rapturous rejoicing that followed the same House Financial Services Committee approving an online poker bill in the summer of 2010. (Ironically, the Committee was then chaired by Barney Frank, who served on the board of New York’s crypto-friendly Signature Bank before it was shut down this year.)
That online poker bill represented a first for pro-online gambling legislation at the federal level, but it died when Congress adjourned that year for the mid-term elections without taking any further action. In fact, it wasn’t until December 2013 that the federal government indicated that the states could proceed with online poker, casino, and lottery regimes within their respective borders.
Crucially, that abrupt shift didn’t involve herding cats in Congress; it was a unilateral declaration by the Department of Justice that simply left the matter up to the states. To date, there is STILL no federal online poker legislation on the books. Maybe meditate on that sobering reality while federal politicians are off enjoying their summer break.
Watch: SEC Commissioner Hester Peirce on BSV Association’s Blockchain Policy Matters
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