February 9, 2024

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Good morning and happy Friday. This week, Treasury Secretary Janet Yellen testified before House and Senate oversight committees, and Rep. Maxine Waters said a stablecoin deal is "very, very, close."

Top Points

• House Financial Services Committee Members discussed FSOC's call for Congress to address regulatory gaps for stablecoins and "crypto-assets that are not securities."
• HFSC Chair McHenry and House Ag Chair Thompson led a letter to Sec. Yellen seeking further clarity on when FSOC thinks crypto assets are securities.
• The Senate Banking Committee's FSOC hearing included a couple of crypto-related illicit finance questions, but by-and-large, lawmakers focused on shaping the narrative around whether "Bidenomics" has been a success or failure.
• HFSC Ranking Member Maxine Waters told Politico a stablecoin agreement is "very, very close."

HFSC FSOC Hearing

FSOC Background

Dodd-Frank created the Financial Stability Oversight Council ("FSOC") to serve as a comprehensive interagency body dedicated to identifying and mitigating potential risks to U.S. financial stability. It's primarily composed of federal financial regulators, including the Treasury Secretary (who chairs the council) and heads of the Federal Reserve, SEC, CFTC, and FDIC.

The Hearing

Overview

In general, Republicans tended to discuss inflation and concerns with proposed rules to increase capital requirements for banks. Democrats often touted "Bidenomics," noting the strong job market, rising GDP, and slowing inflation.

Crypto Highlights

Chair McHenry and other crypto-proponents keyed in on FSOC’s previous statements – reiterated in Sec. Yellen’s testimony – that Congress needs to address regulatory gaps for stablecoins and crypto assets that are not securities.

• Of course, this rhetoric leaves open the major questions of which crypto assets FSOC believes are securities and when (i.e., when initially offered as part of investment contract or even in secondary market sales down the line?).
• In tandem with the hearing, Chair McHenry, House Ag Chair Glenn Thompson (R-PA), Rep. French Hill (R-AR), and Rep. Dusty Johnson (R-SD) sent a letter to Treasury asking Sec. Yellen to elaborate further on FSOC's position here. (See section below).

Chair McHenry, Rep. Hill, and Rep. Will Timmons (R-SC) highlighted the Committee’s work on FIT 21 and stablecoins to address the very regulatory gap FSOC identified.

• Sec. Yellen generally avoided commenting on specific legislation and was careful to avoid undermining SEC Chair Gensler’s position that most crypto assets are securities.
• But she consistently recognized that regulatory gaps do exist and that consumers would be better off if Congress closed those gaps.

On stablecoin legislation, Sec. Yellen reaffirmed her support for imposing a strong federal floor for issuers, empowering a federal regulator to bar issuers, and addressing risks related to wallets.

Rep. Ritchie Torres (D-NY) questioned why the President’s Working Group's report on stablecoins (from 2021) had suggested regulating stablecoin issuers like banks - when stablecoin issuers do NOT lend or hold fractional reserves like banks.

• Sec. Yellen conceded that different regulations may be necessary to address stablecoin-specific risks, but regulations are needed to address risks similar to bank-runs.

Rep. Warren Davidson (R-OH) questioned why digital assets are even a priority for FSOC given the industry’s relative size compared to traditional finance.

• He also flagged potential risks rising from crypto firms operating offshore, contrasting the transparency of stablecoin issuers subject to New York state law (who are required to certify reserves) with the opaqueness of offshore firms (who are not necessarily required to certify reserves).

Here are some other crypto-related issues discussed:

Digital Identity: Rep. Bill Foster (D- IL) flagged the importance of combatting AI-related financial fraud and deep fakes by improving access to secure digital identity.

• Sec. Yellen seemed interested in working with the Congressman to address this issue. Last Congress, Rep. Foster spearheaded legislation to establish a government-wide approach to improving digital identity: the Improving Digital Identity Act.
• The Senate Homeland Security and Governmental Affairs Committee advanced similar legislation last year.
• Sponsored by Senators Kyrsten Sinema (I-AZ) and Cynthia Lummis (R-WY), the bill would include a report on how to develop secure digital identity, including recommendations for leveraging distributed ledger technology.

FSOC Nonbank Designation Authority: While not a crypto-specific issue, Rep. McHenry and Rep. Hill voiced concerns that FSOC may circumvent Congress’s authority to effect policy in the financial innovation space by relying on its designation authority under Dodd-Frank.

• As background, FSOC may "designate" nonbank financial firms they believe could pose systemic risk. In turn, designated firms become subject to Federal Reserve oversight and regulation.
• Rep. Hill questioned whether the Fed has sufficient expertise and knowledge to deal with nonbank companies in various industries, like asset managers and cloud providers. He also fears federal regulators may see this power as an opportunity to advance their political agendas - not a last-resort policy tool.
• In response to a question from Chair McHenry, Sec. Yellen said FSOC staff has not yet recommended any nonbank firms for designation.
• (More background on this issue, recent FSOC guidance on nonbank designation, and the HFS Digital Asset Subcommittee's recent hearing on this here.)

Peer-to-Peer Payments: Rep. Hill also asked Sec. Yellen whether she believed peer-to-peer payment systems (like Venmo and Zelle) pose financial stability risks.

• Sec. Yellen said she didn’t think P2P payments was something FSOC has previously highlighted.

Taxes: Rep. Brad Sherman (D-CA) briefly remarked that Treasury is behind on enforcing new crypto tax rules under the IIJA.

Letter to FSOC

On Tuesday, HFSC Chair Patrick McHenry, House Ag Committee Chairman Glenn Thompson (R-PA), Rep. French Hill (R-AR), and Rep. Dusty Johnson (R-SD), sent a letter to Treasury Secretary Yellen asking her to clarify FSOC's position on oversight of the non-security crypto spot market.

Throughout the letter, the Congressmen flag examples of regulators identifying regulatory gaps and the overall lack of clarity in the crypto spot market. They also describes how FIT 21 aims to add clarity, close identified gaps, and protect consumers.

In closing, it asks Treasury Secretary Yellen a series of questions aimed at better understanding how FSOC is working with the SEC and CFTC to oversee the non-security digital asset spot market.

For example, the Congressmen asks Sec. Yellen to clarify:

• FSOC's previous assertion that securities laws apply to all "crypto-asset issuers" and secondary transactions with the "crypto-asset," given: (1) the SEC's recent claims that digital assets themselves are not securities, and (2) Judge Torres's decision in SEC v. Ripple finding digital assets themselves are not securities;
• how Howey's "backwards looking" investment contract analysis provides adequate customer protections, in the absence of comprehensive legislation;
• whether FSOC believes Bitcoin and Ether are not securities; and
• whether FSOC believes expanding the CFTC's jurisdiction to encompass non-security digital assets is appropriate.

The Congressmen request a response by February 20th.

Senate FSOC Hearing

Overview

Like the House FSOC hearing, Democrats generally focused on promoting President Biden's economic track record, while Republicans painted a different picture, focusing on elevated prices.

Crypto Highlights

As usual, the crypto highlights in the Senate hearing focused on combatting illicit finance.

Chairman Sherrod Brown (D-OH) asked if Treasury's tools to combat illicit finance needed an update given the rise of new technologies, including digital assets.

• Sec. Yellen said Treasury has identified holes in its authority and composed a list of suggestions to close them (likely referencing proposals submitted by Deputy Treasury Secretary Wally Adeyemo in December 2023).
• Sen. Brown said he'll continue working with Sec. Yellen on this issue, noting many of Treasury's suggestions require Congressional action.
• As further background, Sen. Brown is reportedly considering various illicit finance proposals and is expected to unveil his own illicit-finance bill in the coming weeks, likely drawing on prior proposals.

Senator Mark Warner (D-VA) asked Sec. Yellen if she supported his legislation to expand Treasury's power to sanction foreign parties - including those who operate, control, or make available digital asset protocols - if they knowingly facilitate transactions with terrorists or sanctioned persons.

• Sec. Yellen said she supported the general aims of the bill as it would give Treasury the authority to deal with significant threats.
• Senators Jack Reed (D-RI), Mitt Romney (R-UT), and Mike Rounds (R-SD) are cosponsors of Sen. Warner's bill.
• More on the Terrorism Financing Prevention Act here.

Senator Elizabeth Warren (D-MA) didn't mention DAAMLA or crypto. Instead, she focused her time on the benefits of increasing capital requirements for banks.

Senator Jack Reed (D-RI) - the lead sponsor of the CANSEE Act - asked Secretary Yellen about threats from investment advisors being exempt from certain AML/CFT requirements, citing a recent Treasury report. He didn't mention crypto.

Look Ahead

• ​Senate is in recess; House is in session.

House Financial Services Committee Hearings

• Wednesday - Feb 14 - 10AM - Full Committee
  • ​Oversight of the Financial Crimes Enforcement Network (FinCEN) and the Office of Terrorism and Financial Intelligence (TFI)​
• Thursday - Feb 15 - 2PM - Digital Assets, FinTech & Inclusion Subcommittee
  • ​Crypto Crime in Context Part II: Examining Approaches to Combat Illicit Finance​

Public Comment - Bitcoin Mining Survey

• The period to submit public comments on the EIA's planned Bitcoin mining survey begins today (2.9) and runs for 60 days.
  • You can submit comments here.

Quick Hits

Stablecoins

• Rep. Maxine Waters (D-CA) - the top Democrat on House Financial Services - says a stablecoin deal is "very, very close."

SEC

• Senator JD Vance (R-OH) led a letter to the SEC expressing concerns with the agency's "misleading representations" in its case against Digital Licensing Inc. (aka the DEBT Box case).
  • ​Letter.
    • "Regardless of whether Commission staff deliberately misrepresented evidence or unknowingly presented false information, this case suggests other enforcement cases brought by the Commission may be deserving of scrutiny. It is difficult to maintain confidence that other cases are not predicated upon dubious evidence, obfuscations, or outright misrepresentations. " Letter at 1.
  • Signees: Senator Thom Tillis (R-NC), Bill Hagerty (R-TN), Cynthia Lummis (R-WY), Katie Britt (R-AL).
• SEC adopts final "dealer" rule in a 3-2 vote. Commissioners Hester Peirce and Mark Uyeda were the two no votes.
  • ​Press Release w/ Rule Details & Fact Sheet.
  • Commissioner Peirce Statement & Commissioner Mark Uyeda Statement.
  • Here's a tweet thread breaking down key implications for crypto from CCI's Ji Kim:

Use Cases

• Coinbase and the Block teamed up for a report on the "State of Crypto."
  • ​The State of Crypto: Fairer, Cheaper, Faster Everyday Finance - in partnership with Coinbase.

Treasury

• Treasury Publishes 2024 National Risk Assessments for Money Laundering, Terrorist Financing, and Proliferation Financing.
  • ​2024 National Money Laundering Risk Assessment.
  • ​2024 National Terrorist Financing Risk Assessment.
  • ​2024 National Proliferation Financing Risk Assessment.

Energy & Commerce

• House Energy & Commerce Chairwoman Cathy McMorris Rodgers will not seek re-election.

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Thank you for reading, and hope you enjoy your weekend.

Sincerely,

GSL

Farcaster 🎣: @CapHillCrypto.

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*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.*