Good morning and happy return of college football weekend (yes, I count week zero)! Congress is still in recess, but there's still plenty to cover on the policy and political fronts this week.

Top Points

Treasury has officially withdrawn a rule first proposed under the Trump Administration that would have expanded Bank Secrecy Act reporting requirements to transactions involving crypto and self-custody wallets.
Prometheum Capital, a FINRA approved special purpose broker dealer, told Coin Desk that it plans to custody UNI and ARB for customers, despite regulatory guidance from the SEC suggesting that SPBDs may only custody digital assets that are securities and no clear legal indication that UNI and ARB are securities.
Brian Nelson, a campaign advisor to VP Harris, told Bloomberg News that Harris “is going to support policies that ensure that emerging technology and that sort of industry can continue to grow,” when asked about the VP's engagement with the crypto community.
Senator Tim Scott (R-SC) said he would establish a digital asset subcommittee within Senate Banking if Republicans control the Senate and he is Chairman next Congress.

Treasury Withdraws Unhosted Wallet Rule

Withdrawal

Treasury has withdrawn a proposed rule that would have required banks and money service businesses to apply recordkeeping and reporting requirements under the Bank Secrecy Act to certain transactions involving crypto assets held in unhosted wallets.

The announcement was published in the Federal Register as part of Treasury’s semiannual update on the agency’s regulatory agenda.

The semiannual update was issued pursuant to Section 602 of the Regulatory Flexibility Act, which directs federal agencies to describe the status of regulatory actions under development, if they will have a significant economic impact on a substantial number of small entities.

Proposed Rule Background

The draft wallet rule was initially proposed under President Trump by Treasury Secretary Steve Mnuchin in December 2020 (i.e., right before the Trump Administration ended).

Per the Notice of Proposed Rulemaking published at the time, Treasury would have required banks and money services businesses (e.g., exchanges) to submit reports, keep records, and verify customers’ identity in relation to transactions above certain thresholds if the transactions involved convertible virtual currency and an unhosted wallet (or wallets hosted in jurisdictions identified by FinCEN as having deficient crypto AML regulations (e.g., North Korea, Iran)).

From the outset, industry strongly condemned the proposal as rushed (initially only allowed for a 15 day comment period) and anti-innovation.

See, e.g., Coin Center Blog (Dec. 18, 2020) “A Midnight Rule for Cryptocurrency Transaction Reports:”
- “[T]his rulemaking takes a bulk warrantless surveillance regime and applies it to an innovative technology with little opportunity for public comment. This is especially problematic given the complicated implications of the proposed recordkeeping requirements which may, as described in the next section, meaningfully stymie innovation.”

The rule was never finalized.

So What?

The notice published in the federal register provides a sense of finality to a rule that had been pending in limbo for years. In theory, an administration could propose a similar rule in the future, but Treasury would have to start the rulemaking process anew (e.g., issue a new notice of proposed rulemaking, allow for a public comment period, etc.).

Another Prometheum Capital Announcement Raises Questions

Overview

According to a new story by CoinDesk's Jesse Hamilton, Prometheum Capital - an SEC and FINRA approved special purpose broker dealer (“SPBD”) focusing its business on digital assets - is planning to provide custody services to institutional customers for the Uniswap (“UNI”) and Arbitrum (“ARB”) tokens.

The move may draw Congressional and regulatory scrutiny, as current SEC guidance suggests SPBDs may only custody digital asset securities that are registered or qualify for an exemption under securities laws.

Background

FINRA approved Prometheum Capital as an SPBD on May 17, 2023.

SPBDs are broker-dealers that operate within the securities industry and have been authorized to engage in specific activities or cater to specific securities, in this case, digital asset securities.

In December 2020, the SEC published guidance (“SPBD Guidance”) setting forth conditions under which an SPBD could custody digital asset securities without fear of an enforcement action relating to certain violations of the SEC’s Customer Protection Rule.

Note: The guidance was issued as a “Commission statement” and “request for comment,” so it is technically not a rule, and expires in five years from its effective date.

More specifically, the Customer Protection Rule requires a broker-dealer to promptly obtain and maintain physical possession or control of securities they are holding for customers. The SEC, then chaired by Jay Clayton, issued the SBPD Guidance to address concerns that this requirement posed unique challenges in the context of custodying digital assets.

Crucially, to qualify for the enforcement action relief under the SPBD Guidance, a broker-dealer must limit its activities to those involving digital asset securities.

See SPBD Guidance Introduction (stating: “[T]he Commission's position in this statement is premised on a broker-dealer limiting its business to digital asset securities to isolate risk…”); See also SPBD Guidance at PDF pg. 5 (listing as a minimum requirement: “The broker-dealer limits its business to dealing in, effecting transactions in, maintaining custody of, and/or operating an alternative trading system for digital asset securities.”)(emphasis added).

Another minimum requirement is that: “The broker-dealer establishes, maintains, and enforces reasonably designed written policies and procedures to conduct and document an analysis of whether a particular digital asset is a security offered and sold pursuant to an effective registration statement or an available exemption from registration[.]” SPBD Guidance at PDF pg. 5 (minimum requirement number three).

Tie to Congress

Prometheum has already drawn Congress's attention on multiple occasions.

In June 2023, Prometheum Co-Founder Aaron Kaplan testified at a HFSC hearing on the “future of digital assets,” giving rise to a debate on the workability of existing registration requirements. On the one hand, Ranking Member Maxine Waters (D-CA), Rep. Stephen Lynch (D-MA), and Kaplan pointed to Prometheum’s SPBD license as a counter to industry arguments that it’s impossible for crypto firms to comply with existing securities laws.

On the other hand, Members like Rep. Mike Flood (R-NE) and hearing witnesses argued Prometheum has not actually shown it operates a viable business, and cannot, because of the lack of regulatory clarity around which digital assets are securities.

Shortly after the hearing, Rep. Ritchie Torres (D-NY) called for two investigations into the SEC’s decision to grant Prometheum an SPBD license stating:

“Prometheum appears to be nothing more than a Potemkin platform, operating as a timely talking point for crypto critics rather than a true trading platform for crypto customers.”

Senator Tommy Tuberville (R-AL) also led a letter to Attorney General Merrick Garland raising concerns about inconsistencies between Kaplan’s HFSC hearing testimony and SEC filings with respect to Prometheum’s relationship with two Chinese firms.

Most recently, when Prometheum Capital announced it would custody ETH earlier this year, House Financial Services Chairman Patrick McHenry (R-NC) and House Ag Chairman Glenn Thompson (R-PA) led 48 Republicans in a letter to SEC Chair Gensler seeking clarity on the SEC's position regarding an SPBD's ability to custody non-security digital assets and the regulatory classification of ETH.

Letter (March 26, 2024).

What’s Next?

Given all of the above, perhaps another Congressional letter is on the way, this time seeking clarification as to whether the SEC thinks ARB and UNI are securities and shared that view with Prometheum, whether Prometheum still plans to custody ETH despite the SEC now having recognized ETH is a commodity by approving a spot Ether ETP, and whether Prometheum could remain in compliance with existing SPBD Guidance by taking custody of any customer's digital assets.

Look Ahead

Congress returns to session on September 9th.

Congress needs to pass a funding bill by September 30th.

Quick Hits

Congress

Senator Tim Scott (R-SC) told an audience at the Wyoming Blockchain Symposium that he would establish a digital asset subcommittee within the Senate Banking Committee if Republicans control the Senate next Congress. Senator Cynthia Lummis (R-WY) would chair the committee, which would be the first of its kind in the Senate.
- As of this morning, Polymarket odds put GOP control of the Senate next Congress at 72%.
- More on Senator Scott's and Senator Lummis's panel, including discussion of how crypto legislation might be able to pass in the lame duck, by CoinDesk's Nikhilesh De here.

Campaign/Finance

Democratic Convention

On Wednesday, Vice President Kamala Harris's campaign advisor Brian Nelson told Bloomberg News at a roundtable event:
- “She's going to support policies that ensure that emerging technology and that sort of industry can continue to grow,” when asked about the VPs efforts to engage the crypto community. See full story in Bloomberg by Hadriana Lowenkron (paywalled).
The Democratic Party officially adopted its “Party Platform,” but there was no mention of crypto.

Former President Trump

Former President Trump shared a post on Truth Social promoting a telegram channel linked to his sons' forthcoming DeFi project.

Campaign Finance

Public Citizen published a report raising concerns with the amount of money “Big Crypto” has spent on federal elections.
- Report: “Big Crypto, Big Spending”
- According to the report relying on data from Open Secrets, crypto corporations have poured in over $119 million into federal elections, accounting for “nearly half (48%) of all corporate money contributed during this year’s elections.”
“Dem megadonor abandons crypto super PACs” - (Eleanor Mueller; Politico)
U.S. Attorneys in S.D.N.Y. are charging former Congressional Candidate Michelle Bond with violating campaign finance laws, alleging she illegally financed her campaign by arranging a “sham $400,000 payment” from FTX.
- Indictment.

SEC

ETPs

The SEC reportedly rejected filings for a Solana spot ETP - (Tim Copeland; The Block)

Consolidated Audit Trail

The Blockchain Association and DeFi Education Fund filed an amicus brief in support of a challenge to the SEC's Consolidated Audit Trail, arguing it undermines privacy and personal freedom.
- Amicus Brief.
- Thread breaking down the arguments:

Amanda Tuminelli

@amandatums

Today @fund_defi and the @blockchainassn filed an amicus brief in support of a challenge to the SEC’s Consolidated Audit Trail (CAT), arguing that the CAT, especially when it pertains to the digital asset sector, “unacceptably undermines privacy and personal freedom.”

…

Trivia

Last Week's A: Woodrow Wilson signed the Federal Reserve Act into law in 1913.

This Week's Q: In the 1972 Presidential election, a Vice Presidential candidate of a major political party was pulled from the ticket in July. Who was it? Bonus: Who was his replacement?

Thanks for reading Trivia

Last Week's A: Woodrow Wilson signed the Federal Reserve Act into law in 1913.

This Week's Q: In the 1972 Presidential election, a Vice Presidential candidate of a major political party was pulled from the ticket in July. Who was it? Bonus: Who was his replacement?

Thanks for reading

Treasury Withdraws Wallet Rule; Prometheum Raises Questions