February 3, 2023

Good morning, and happy February. This week, we look at Senate Banking Ranking Member Tim Scott's priorities, the Digital Asset Subcommittee's roster, a follow up letter to Silvergate, and the White House's roadmap to mitigate crypto risks.

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This week's newsletter is presented by Cap Hill Crypto's Legislative Tracker—use the tracker to read high-level summaries of every crypto related bill and stay on top of recent bill developments from committee votes to new cosponsors.

118th Congress - Crypto Legislative Tracker

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Top Points

• Senate Banking Ranking Member Tim Scott (R-SC) lays out priorities for 118th Congress—includes developing a "bipartisan regulatory framework" for digital assets.
• House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion finalizes roster - see summary chart below for full list and a crypto sentiment rating for each.
• Senators Elizabeth Warren (D-MA), Roger Marshall (R-KS), and John Kennedy (R-LA) send follow up letter to Silvergate bank asking for more information regarding the bank's risk management processes and the extent to which it may have transferred FTX customer funds to Alameda.
  • Senators describe bank's initial response as "evasive and incomplete."
• White House publishes "Roadmap to Mitigate Cryptocurrencies' Risks," highlights priorities for Administration and Congress.

Senator Tim Scott Includes "Developing a Framework for Digital Assets" in Outline of His Priorities for 118th Congress

On Thursday, Ranking Member Tim Scott (R-SC) laid out seven priorities for the Senate Committee on Banking, Housing, and Urban Affairs. See full memo here.

According to the memo, Senator Scott will work "to ensure that the U.S. financial services system best helps American families find success and financial stability." It also notes Senator Scott is a "longtime advocate for increasing financial inclusion and advancing opportunity, especially for underserved and underrepresented communities."

Here's the full section on digital asset regulations:

In an accompanying press release, found here, the Ranking Member said the Committee will "work to facilitate a bipartisan regulatory framework that accounts for both the rapid growth in the use of cryptocurrencies and the concerns raised by high-profile failures."

The other six priorities included in the memo are:

• Reducing Barriers and Promoting Access to Credit
• Increasing Access to Capital Formation and Fostering Innovation
• Enabling Financial Success
• Regulatory Oversight Protecting U.S. National and Economic Security
• Responsibly Advancing Housing Opportunity

So What?

This is pretty high-level language but the focus on protecting consumers and financial stability generally may bode well for finding common ground with Chairman Sherrod Brown (D-OH). While the Chairman is generally skeptical of crypto, last November he wrote a letter to Secretary Yellen about the need to work together on crypto legislation and fill regulatory gaps to address consumer and financial stability risks posed by crypto.

House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion Roster Finalized

Here's a look at the Subcommittee's members and their "crypto sentiment" per Coinbase's in-app crypto advocacy feature.

Senators Send Follow Up Letter to Silvergate Bank

On Monday, January 30, U.S. Senators Elizabeth Warren (D-MA), Roger Marshall (R-KS), and John Kennedy (R-LA) sent a follow up letter to Silvergate bank ("Silvergate"), finding the crypto-focused bank's response to their initial letter "evasive and incomplete."

See "the Letter" here.

Background

On December 5, 2022, the same three Senators asked Silvergate to respond to a series of questions about the bank's alleged failure to monitor and report suspicious transactions. In particular, the letter focused on the bank's alleged role in transferring FTX customer funds to Alameda (FTX's sister company/hedge-fund). See "Initial Letter" here.

On December 19, 2022, Silvergate's CEO, Alan J. Lane, replied to the Senators, but declined to provide specific answers to questions regarding the bank's anti-money laundering and bank secrecy act compliance measures, claiming federal law prohibits disclosure of "confidential supervisory information." See "Silvergate Letter" here.

For those looking to take a deeper dive, the Silvergate letter cites 12 C.F.R. § 261.4 (Prohibition against disclosure) and 31 C.F.R. §1020.32(e)(1)(i) (Confidentiality of [Suspicious Action Reports]) as the basis for not responding in full.

The Letter

The Senators said they are "disappointed by" the "evasive and incomplete response to our December 5, 2022 letter," describing Silvergate's basis for refusing to provide full answers "not an acceptable rationale." Letter at 1, 2.

In addition, the Letter raises concern with Silvergate borrowing $4.3 billion from the Federal Home Loan Bank of San Francisco. According to the Letter, this could put U.S. taxpayers on the hook, should Silvergate fail. See Letter at 1-2.

Moreover, Silvergate's responses affirmed that Alameda opened an account with Silvergate in 2018 and that Silvergate "conducted significant due diligence on FTX and related entities...both during the onboarding process and through ongoing monitoring." Letter at 2. Thus, the Senators say, these insights show "Silvergate had risk management and due diligence processes in place – but that they did, in fact, fail miserably." Id.

The Ask

In light of the concerns outlined above, the Senators ask Silvergate to answer more questions about the extent to which Silvergate may have transferred FTX customer funds to Alameda and the bank's compliance and risk management processes, by February 13, 2023. Letter at 3-4.

The Senators also reiterated their request for complete answers to their Initial Letter. Letter at 4-5.

White House Issues "Roadmap to Mitigate Cryptocurrencies' Risks"

On Friday, January 27, the White House published a roadmap highlighting (1) risks posed by crypto, (2) how the administration is mitigating those risks, and (3) what it would like to see from Congress.

Full text.

(1) What risks is the Administration focused on?

• cryptocurrency platforms and promoters often:
  • mislead consumers,
  • have conflicts of interest,
  • fail to make adequate disclosures,
  • or commit outright fraud
• poor cybersecurity (citing North Korean hacker groups targeting crypto)

(2) What is the Administration doing to mitigate risks?

• Ramping up enforcement efforts
• Issuing guidance (citing joint statement recently issued by banking regulators regarding banks engaging in crypto-asset related activities)
• Pushing out public-awareness programs to warn the public of risks outlined above

(3) What would the Administration like to see Congress do?

• expand regulators’ powers to prevent misuses of customers’ assets
• mitigate conflicts of interest
• strengthen transparency and disclosure requirements for cryptocurrency companies so that investors can make more informed decisions about financial and environmental risks
• strengthen penalties for violating illicit-finance rules and subject cryptocurrency intermediaries to bans against tipping off criminals
• fund greater law-enforcement capacity building, including with international partners
• limit cryptocurrencies’ risks to the financial system by following the steps outlined by the Financial Stability Oversight Council​
• But Don't: "greenlight mainstream institutions, like pension funds, to dive headlong into cryptocurrency markets"

Look Ahead

Congressional Hearings

• Wednesday, February 8th, 10AM - House Financial Services Subcommittee on Monetary Policy and Trade - "Revamping and Revitalizing Banking in the 21st Century"

Other

• Monday, February 6th - Technically, the President's Budget is due on the first Monday of February, but this deadline is not enforced. According to Punchbowl News, the White House will release their budget proposal on March 9.
  • See more on Congressional Budget Process Timeline here.
• Monday, February 6th, at 9:30AM - Hearing on U.S. Trustee's Motion re: Appointing an Independent Examiner in FTX bankruptcy case. Senators Hickenlooper, Tillis, Warren and Lummis had previously sent a letter to the bankruptcy judge in support of the Trustee's motion, though the judge labeled it as an "inappropriate ex-parte communication." More background in 1.13.22 newsletter.

Worth the Read

• Senator Durbin gives floor speech warning of risks of crypto.
  • See pgs. 56-57 of Congressional Record here.
    • "This area has been called the 'new money,' 'digital cash,' and some have called it 'the way of the future.' I have another name for it: reckless, predatory, foolish, and dangerous. I am referring, of course, to cryptocurrency, the latest scam to rip off millions of hard-working Americans to the tune of billions of dollars."
• ​Judge Dismisses Class Action Lawsuit Against Coinbase; Suit Had Claimed Coinbase Violated Federal Securities Laws By Facilitating Sale of Unregistered Securities.
• ​Federal Reserve Board denies application by Custodia Bank, Inc. to 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. The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices. The Board also found that Custodia's risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks."
  • More context from Banking Exchange here.
• ​Virtual Birkin Bags on Trial in Hermès Case Testing IP Rights (Erin Mulvaney; WSJ).
• ​U.S. Federal Government Blockchain Projects Continue Post-FTX Collapse (American Blockchain Initiative) (Providing examples of federal agencies exploring blockchain uses).
• Why America Should Ban Crypto (Charlie Munger; WSJ Op-Ed).
  • "What should the U.S. do after a ban of cryptocurrencies is in place? Well, one more action might make sense: Thank the Chinese communist leader for his splendid example of uncommon sense." - Charle Munger.
• ​Damus, another decentralized social networking app, arrives to take on Twitter (Sarah Perez; Tech Crunch).

Trivia

Last Week's A: The two Congressmen to serve as Chief Justice of the Supreme Court were:

• Fred Vinson (D-KY) - Chief Justice from 1946-53
• John Marshall (Federalist - VA) Chief Justice from 1801-1835

This Week's Q: In May 2007, this former Fed Chairman who went on to win a Nobel Prize in economics proclaimed: “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited."

Thank you for reading, and please enjoy your weekend.

Sincerely,

GSL

Catch me on Damus 🤙

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