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Digital Payments, Biden's Budget, & ETPs

Weekly Crypto Policy Brief: 3.8-3.15

Good morning. This week, we review a House hearing on digital payments, crypto-related tax proposals in President Biden's budget, and a letter from two Senators opposed to crypto ETFs.

For those looking to test their bracketology skills against fellow crypto policy enthusiasts, join the second annual Cap Hill Crypto bracket pool! Password: SATOSHI.

Top Points

  • A House Financial Services subcommittee examined the CFPB's proposed digital payments rule at a hearing this week.

    • Republicans opposed the rule as unclear and anti-innovation, while Democrat leadership argued it would protect consumers and increase regulatory parity between banks and non-banks operating in the payments space.

  • President Biden's budget proposes taxing energy used for crypto mining, applying wash sales rules to crypto assets, and other crypto-related updates to the tax code.

  • Senators Jack Reed (D-RI) and Laphonza Butler (D-CA) urged the SEC to:

    • (1) carefully scrutinize and examine brokers and advisers recommending spot Bitcoin ETPs and

    • (2) not approve ETPs for other cryptocurrencies.

Hearing on CFPB Digital Payments Rule

On Wednesday, the House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing to discuss a CFPB rule covering the digital payments field.


The Proposed Rule would bring certain nonbank entities who provide products or services used for consumer payment transactions under the CFPB’s supervisory authority. Consumer payment transactions are defined as "the transfer of funds by or on behalf of a consumer physically located in a State to another person primarily for personal, family, or household purposes." See § 109.109(a)(2).

CFPB supervisory authority includes the power to examine covered entities, assess compliance with Federal consumer financial laws, obtain information about covered entities’ activities and compliance systems, and assess risks to consumers. See Proposed Rule at 4.

Key Hearing Takeaways

  • Republicans criticized the proposed rule as anti-innovation, overly broad, unclear, unjustified, and an unlawful expansion of the CFPB’s power.

  • Democrat leaders on the committee, including Ranking Members Maxine Waters (D-CA) and Rep. Stephen Lynch (D-MA), supported the proposal, arguing it would protect consumers and level the playing field between large non-bank financial firms (like PayPal and Venmo) and banks.

  • As for crypto, Republicans and several witnesses warned the rule's ambiguous scope hurts innovation by adding even more regulatory uncertainty to the digital asset ecosystem.

More On Crypto-Related Concerns

Discussion of the proposed rule's impact on the crypto ecosystem focused on three main concerns:

  • (1) added regulatory uncertainty,

  • (2) potential application to self-custody wallet providers, and

  • (3) the rule exceeds the CFPB's statutory authority.

(1) More Regulatory Uncertainty

Members and witnesses argued the scope of the rule is unclear in two key respects.

First, while the proposal includes "digital assets" in the definition of "funds," it fails to adequately explain which digital assets are covered by the rule. According to witness Jack Solowey (Cato): "There are very different types of digital assets out there, and the failure to distinguish between them is one of the shortcomings of the proposed rule."

Second, as written, it is unclear whether the proposal sweeps in self-custody wallet providers. Taken together, Members and witnesses worried the lack of clarity will hurt innovation in the payment space by forcing companies to divert time, money, and attention away from building products and towards compliance.

(2) Impact on Self-Custody Wallet Providers

If self-hosted crypto wallet providers were subject to the rule, Solowey argued this would lead to a bizarre policy outcome:

"It is inappropriate to apply a rule designed to supervise digital payment app providers’ ongoing compliance with consumer financial protection law where there is no ongoing consumer reliance on a service provider."

In January, Chair McHenry led a letter to the CFPB with Reps. French Hill (R-AR) and Mike Flood (R-NE), voicing similar concerns:

"Peer-to-peer transactions through “self-hosted wallets” is a core component for the digital asset ecosystem, as it eliminates third-party risk. Capturing certain digital asset wallet providers, who themselves do not maintain an ongoing relationship with consumers, would essentially introduce regulatory risk." Letter at 3.

(3) Exceeds the CFPB's Authority

Republican Members and witnesses often argued that Congress never granted the CFPB the authority it now claims. To regulate the broad range of products and services captured by the rule, including those relating to digital assets, the CFPB would have to point to clear congressional authorization. Or, at the very least, point to a clear consumer harm the rule seeks to address. And here, they argued, the rule fails on both accounts.

Democrats are Split

The Case for the Rule

Reps. Maxine Waters (D-CA), Stephen Lynch (D-MA), Brad Sherman (D-CA), Sean Casten (D-IL), Al Green (D-TX), and witness Professor Odinet (Professor at University of Iowa) expressed support for the rule. In particular, they emphasized that the rule aims to protect consumers and level the regulatory playing field for banks and non-bank firms engaging in payment activities. Reps. Lynch, Sherman, and Casten voiced support for including crypto within the scope of the rule, noting the need for enhanced customer protections in the space following FTX and Terra Luna.

Not All Democrats Support the Rule as Written

Rep. Wiley Nickel (D-NC) voiced concern over the rule's ambiguous scope and impact on innovation. Moreover, earlier this year, seven Democrats urged the CFPB to tighten up the rule's language and give stakeholders more time to share comments:

"[G]iven the current confusion about which products within this market are covered and which risks the CFPB seeks to mitigate with supervision, we believe it will be difficult for providers and users of these services to effectively comment on the rule and provide the information that will help the CFPB complete a successful rulemaking." Letter at 1.

What's Next?

The public comment period closed on January 8, 2024. It remains to be seen to what extent the CFPB incorporates feedback from Congress.

President Biden's Budget Proposal Includes Digital Asset Tax Reform Proposals


On Monday, President Biden published his budget proposal for Fiscal Year 2025. Because the Constitution vests Congress with the "power of the purse," the President's Budget (the "Budget") does not carry the force of law. Still, the Budget highlights the Administration's policy priorities and will guide Democrats in Congress.

Like last year, the Budget proposes a tax on energy used for mining and several updates to the existing tax code aimed at incorporating digital assets.

Here's a closer look at the proposals.

Digital Asset Mining Excise Tax

The Budget proposes a new tax on energy used for digital asset mining. Specifically, mining firms would have to pay a tax equal to 30% of the costs of electricity used for mining.

The tax would be phased in over three years, with a rate of 10% in the first year, 20% in the second year, and 30% each year thereafter. Greenbook at 72.

The Budget estimates the DAME tax would reduce the budget deficit by $7.73 billion dollars by 2034.

Modernization Rules

The Budget also proposes to "modernize tax rules" as follows.

(1) Applying the Wash Sale Rule to Digital Assets

Currently, if a taxpayer sells a security and then purchases the same or a substantially identical security within 30 days, the taxpayer cannot recognize loss from the sale (commonly referred to as a "wash sale"). There is no similar rule for wash sales involving digital assets.

The Budget proposes adding digital assets to the list of assets subject to wash sales rules. Greenbook at 218.

(2) Treating Loans of Securities Like Loans of Digital Assets

Under current law, a securities lending transaction does not result in the recognition of gain or loss to the lender.

The Budget proposes treating loans of digital assets the same way. According to the White House:

  • "The market for lending of financial and other assets has expanded over time to include digital assets and interests in publicly traded partnerships. The securities loan nonrecognition rules should be amended to take this expansion into account." Greenbook at 221.

(3) Information Reporting For Financial Institutions and Digital Asset Brokers

Foreign financial institutions must report information on U.S. accounts to the IRS, and any person doing business as a broker is required to report information about its customers to the IRS. Greenbook at 224. Under the IIJA, brokers include digital asset brokers (though Treasury is still finalizing implementation rules defining who is a digital asset broker and what a digital asset is).

The Budget proposes expanding the information that must be reported by foreign financial institutions and digital asset brokers to include, for example, foreign owners of passive entities holding digital assets with U.S. brokers. See Greenbook at 224-226 (explaining this proposal in significantly greater detail).

(4) Reporting of Foreign Digital Asset Accounts

Section 6038D of the tax code requires individuals holding $50,000 or more in certain foreign financial assets to report holding information to the IRS. The Budget proposes expanding the types of assets that would be counted towards this threshold to include "any account that holds digital assets maintained by a foreign digital asset exchange or other foreign digital asset service provider." See Greenbook at 228.

(5) Amending Mark-To-Market Reporting Rules

Under existing law, dealers in commodities and traders in securities or commodities may elect to use the mark-to-market method of accounting for tax purposes.

The Budget proposes allowing these dealers and traders to also mark-to-market "actively traded digital assets and derivatives on, or hedges of, those digital assets." Greenbook at 229. The Treasury Secretary would get to determine which digital assets are "actively traded." Id. at 230.

Here's a look at the estimated budgetary impacts of the proposals (minus sign = savings):

Tie to Congress

Title VIII of the Lummis-Gillibrand Responsible Financial Innovation Act includes similar tax modernization proposals, including provisions to apply wash sale rules to crypto assets (§ 805), clarify that crypto asset lending is not a taxable event (§ 804), and allowing crypto asset intermediaries to mark their crypto assets to market for accounting purposes at year end (§ 806).

Lummis-Gillibrand does not propose taxing energy used for digital asset mining.

Look Ahead

10AM - Wednesday - March 20

12:30PM-5:30PM - Wednesday - March 20

  • Coinbase hosts "Update the System Summit"

    • Where: Capital Turnaround, Washington, DC.

    • Speakers include: Senator Cynthia Lummis (R-WY) and Reps. Ritchie Torres (D-NY), Patrick McHenry (R-NC), Warren Davidson (R-OH), and Jim Himes (D-CT).

Quick Hits

Exchange Traded Products

  • Senators Jack Reed (D-RI) and Laphonza Butler (D-CA) sent a letter to the SEC, urging the SEC to:

    • (1) carefully scrutinize brokers' and advisers' communications re bitcoin ETPs

    • (2) examine brokers and advisers that recommend crypto ETPs to ensure they are acting in best interests of clients

    • (3) ensure bitcoin ETPs don't use misleading technology (like calling them ETFs)

    • (4) NOT approve ETPs for other cryptocurrencies.

      • ("We do not believe that other cryptocurrencies show the trading volumes or integrity to support associated ETPs.")


  • GOP Majority Whip Tom Emmer (R-MN) says his anti-CBDC legislation is still needed despite Fed Chair Powell's comments last week.

Mixers & Illicit Finance

  • Roman Sterlingov was found guilty of conspiracy, operating an unlicensed money transmitting business, and violations of the D.C. Money Transmitters Act, for allegedly operating Bitcoin Fog.

  • "FinCEN Is Analyzing $165M in Transactions That May Tie Crypto and Hamas, Senior Official Says"


  • Per former Senator Patrick Leahy's (D-VT) and Senator Thom Tillis's (R-NC) request, the U.S. Copyright Office and the U.S. Patent and Trademark Office (USPTO) published a report to Congress on NFTs and Intellectual Property.

    • TLDR: The report details diverse potential use cases for NFTs such as helping artists obtain royalty payments on downstream sales, incorporating licensing terms within NFTs, and using NFTs to enhance brands and reach new consumers. The Office agreed with the majority of stakeholders submitting feedback in that:

      • (1) NFT-specific legislation would be premature at this time, and

      • (2) changes to IP law or the Offices' registration and recordation practices are not necessary or advisable at this time.


  • Coinbase appealed the SEC's denial of its petition for rulemaking in the Third Circuit.

2024 Election

  • Paradigm publishes public opinion poll.

    • Key takeaways include: 69% of Americans are dissatisfied with the current financial system, 19% of registered votes say they've bought crypto, 7% of voters own more than $1,000 worth of crypto, Americans don't trust either party when it comes to crypto, and more crypto owners are planning to vote for Trump (48%) than Biden (39%).

TikTok Ban

  • House passes bill to ban TikTok in U.S. unless Chinese owner ByteDance divests stake within 6 months; prospects in the Senate are uncertain; Pres. Biden said he would sign the law.

Thank you for reading and please enjoy your weekend.


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