Good morning and happy Friday. This week, the House Financial Services Committee advanced two bills with a crypto nexus, and anti-CBDC efforts ramped up in the Senate.
Top Points
House Financial Services advanced two bipartisan bills of note to the crypto community:
(1) a joint resolution to rescind SAB 121, and
(2) a bill to clarify and expand the Secret Service's authority to investigate cyber crime.
Senator Ted Cruz (R-TX) introduced a bill to prohibit the federal reserve from issuing a U.S. CBDC.
HFS Chairman Patrick McHenry introduced a bill to promote financial innovation by establishing regulatory sandboxes for entrepreneurs to operate under an alternative compliance framework.
Senate Agriculture Chairwoman Debbie Stabenow (D-MI) said she is back to working on crypto legislation and is looking for areas of agreement with the House.
HFS Markup
Overview
On Thursday, the House Financial Services Committee held a markup of five bills covering SAB 121, housing, insurance, and cyber crime. At a markup, committee members debate and amend bills before voting on whether to advance them to the House or Senate floor.
Initially, Thursday's markup noticed 12 bills, but the schedule was cut short due to government funding votes on the House floor.
Votes
Most notable for the crypto community, the committee voted to advance two bipartisan bills:
(1) H.J. Res. 109 - a resolution to repeal Staff Accounting Bulletin 121.
Vote: 31-20.
All Rs voted yes along with Democrats Wiley Nickel (D-NC), Josh Gottheimer (D-NJ), and Ritchie Torres (D-NY).
(2) H.R. 7156 - the Combating Money Laundering in Cyber Crime Act of 2024.
Vote: 49-0.
Next Steps: To become law, the legislation must still pass the full House and Senate and receive President Biden’s signature. This year, it will be difficult for any standalone legislation to get signed into law, as election year politics and government funding fights eat up floor time. Based on the vote tally and Ranking Member Water's statements at the hearing, it looks unlikely enough Democrats will come on board to get the SAB 121 repeal across the finish line. As for the Combating Money Laundering in Cyber Crime Act, the unanimous committee vote gives it a shot at making it through the House, especially if it can get added to must pass legislation or the House suspension calendar (i.e., a fast track process for non-controversial bills).
Bill Summaries
H.J. Res. 109
H.J. Res. 109 would repeal SAB 121.
Text.
Cosponsors: Reps. Mike Flood (R-NE) & Wiley Nickel (D-NC).
Background: Under SAB 121, publicly listed companies - including banks - who provide custody services for digital assets must record those assets as a liability on their balance sheet (unlike traditional assets which are recorded off-balance sheet). This, combined with capital and liquidity requirements imposed under federal banking regulations, has effectively prohibited banks from providing custody services for customers’ digital assets and spot bitcoin ETFs.
On October 31, 2023, the GAO found that SAB 121 constituted a rule under the Congressional Review Act and the SEC failed to submit the rule to Congress as the CRA requires. Accordingly, Congress can nullify the rule by passing a Congressional resolution of disapproval like H.J. Res. 109.
The Combating Money Laundering in Cyber Crime Act of 2024
This bill would expand the Secret Service’s investigative authorities to cover illicit activity involving fraud against financial institutions, unlicensed money transmitters, and structured transactions designed to avoid financial reporting requirements. § 2.
Text.
Cosponsors: Reps. Gregory Meeks(D-NY), Zach Nunn (R-IA), Mike Flood (R-NE), Madeline Dean (D-PA), Donald Davis (D-NC).
While the bill’s text doesn’t contain language specific to digital assets, the committee memorandum describes the bill as strengthening "the authorities of the United States Secret Service by closing a gap in their ability to investigate various crimes related to digital asset transactions and to counter transnational cyber-criminal activity."
At the markup, Rep. Patrick McHenry, Ranking Member Waters, and bill sponsors applauded the bill for clarifying the Secret Service's authority to combat cyber crimes, including those involving digital assets.
Finally, the bill extends two statutory requirements for an additional five years:
(1) a provision directing Treasury to report to Congress on the FinCEN Exchange at least once every two years. § 3 (amending 31 U.S.C. 310(d)(3)(A)).
FinCEN Exchange is a voluntary public-private information sharing partnership among law enforcement agencies, national security agencies, financial institutions, and relevant private sector entities aimed at combatting illicit finance. 31 U.S.C. 310(d).
(2) a provision directing the U.S. Executive Director at the IMF to use the voice and vote of the U.S. to support the IMF in preventing money laundering and terrorist financing. § 4 (amending NDAA 2020 § 7125(b)).
Senate CBDC Anti-Surveillance State Act
On Monday, Senator Ted Cruz (R-TX) introduced the CBDC Anti-Surveillance State Act.
Cosponsors: Bill Hagerty (R-TN), Rick Scott (R-FL), Mike Braun (R-IN), Ted Budd (R-NC), Kevin Cramer (R-ND), Katie Britt (R-AL), Cindy Hyde-Smith (R-MS).
The bill would:
Prohibit the federal reserve from issuing a CBDC or providing services directly to individuals or indirectly through financial institutions. §§ 2-3.
Prohibit Treasury or the Fed from issuing a CBDC without clear Congressional approval. § 5.
Prohibit the Fed from using a CBDC to implement monetary policy. § 4.
Clarify that the prohibitions in the act do not apply to open, private, permissionless, dollar-denominated currencies. § 6.
The bill serves as the Senate companion to GOP House Majority Whip Tom Emmer's (R-MN) CBDC Anti-Surveillance State Act, which is now up to 114 cosponsors (all Republicans).
Notably, Heritage Action announced it will include cosponsorship of the CBDC Anti-Surveillance State Act on its influential scorecard. As a result, expect Republicans cosponsors to continue rolling in on the House and Senate bills.
H.R. 7440 - Financial Services Innovation Act of 2024
On Tuesday, Rep. Patrick McHenry (R-NC) officially introduced the Financial Services Innovation Act of 2024 ("FSIA"). The bill would establish regulatory "sandboxes" whereby entrepreneurs could test innovative financial products and services subject to tailored compliance rules.
More specifically, the FSIA would require federal regulators to create Financial Services Innovation Offices ("FSIO") at the Fed, CFPB, HUD, Treasury, FDIC, NUA, OCC, and SEC.
Companies building innovative financial products or services could submit applications to operate under an "alternative compliance strategy." §§ 6-8.
To get approved, applicants would have to show that, under their alternative compliance strategy, the financial innovation would:
serve the public interest
improve consumer access to a financial product or service
not present systemic financial risk
promote consumer protection. See § 6.
In addition, the bill would:
Require FSIOs to support the development of financial innovation, including by reducing regulatory burdens. § 4(c).
Establish an FSIO Liaison Committee to facilitate cooperation amongst FSIO’s across federal agencies and with state regulators. § 5.
Direct FSOC to submit a report to Congress on the program’s impact and offer recommendations for reducing, consolidating, or eliminating regulatory overlap. § 9.
Note: The bill was one of the 12 bills originally noticed for Thursday's hearing, but didn't make the cut. Rep McHenry indicated he plans to bring up the remaining 7 bills originally noticed at a future markup.
Look Ahead
Wednesday - March 6:
10 AM - House Financial Services Hearing: "The Federal Reserve's Semi-Annual Monetary Policy Report"
Thursday - March 7:
10AM - House Financial Services Hearing: "Politicized Financial Regulation and its Impact on Consumer Credit and Community Development"
9 PM - President Biden's State of the Union Address.
After passing a continuing resolution, Congress now has until:
March 8th to pass: Energy & Water, Interior, Transportation-HUD, Commerce-Justice-Science, MilCon VA, and Agriculture funding bills.
March 22 to pass: Defense, Financial Services & General Government, Homeland Security, Labor-HHS-Education, Legislative Branch, and State-Foreign Ops funding bills.
Quick Hits
Senate
According to Politico's Meredith Lee Hill, Senator Debbie Stabenow (D-MI) - Chairwoman of Senate Ag - is back to considering crypto legislation as farm bill talks stall.
Senator Stabenow is retiring at the end of her term on January 3, 2025. Last Congress, she sponsored the Digital Commodities Consumer Protection Act (DCCPA), along with Senate Ag Ranking Member John Boozman (R-AR) and Senators Cory Booker (D-NJ), John Thune (R-SD), Kirsten Gillibrand (D-NY), Joni Ernst (R-IA), and Ben Ray Lujan (D-NM).
Senate Minority Leader Mitch McConnel to step down from his leadership position.
Leading candidates to replace him: Senator John Cornyn (R-TX), John Thune (R-SD), John Barasso (R-WY).
Wild cards: Sens. Steve Daines (R-MT), Shelley Moore Capito (R-WV), Rick Scott (R-FL), Joni Ernst (R-IA).
Check the Legislative Tracker to see crypto-related bills they support (if any).
SEC
Reps. Mike Flood (R-NE) and Wiley Nickel (D-NC) pen op-ed in Newsweek in support of repealing SAB 121.
Senator JD Vance shares his thoughts on SEC Chair Gensler and digital assets. Says SEC too political; has it backwards by targeting tokens with a utility.
Link to Video.
In SEC v. Kraken, Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas filed amicus briefs in support of neither party, but argue:
"The court should reject categorizing crypto assets as securities absent an investment contract. The SEC’s exercise of this undelegated authority puts state consumers at risk by preempting state statutes better tailored to the specific risks of non-securities products"
See Article by Timmy Shen, the Block.
Amicus briefs filed in support of Kraken:
Law
New legal project - MetaLeX - launches.
According to co-founder Gabe Shapiro, "MetaLeX is devoted to cybernetic law solutions co-developed by devs and lawyers to fuse autonomous software with legal structures."
More background on "BORGs" (Cybernetic Organizations) in this Delphi Labs medium post.
Illicit Finance
Chainalysis publishes 2024 Crypto Crime Report.
Estimates illicit transactions accounted for 0.34% of all on-chain transaction volume.
Thank you for reading and please enjoy your weekend.
Sincerely,
GSL
P.S. You can read this newsletter in its original format here.
