Good morning and happy Friday. This week, we cover a House hearing on the SEC, some newly proposed crypto bills, and Former President Trump's latest attempt to court the crypto voter.

Top Points

The House Financial Services subcommittee on digital assets held a hearing where Members debated the merits of the SEC's current regulation-by-enforcement approach and whether new rules tailored for digital assets would better protect consumers and innovation in the U.S.
Rep. Zach Nunn (R-IA) introduced a bill to combat pig-butchering and financial fraud by clarifying that the federal government may help state and local law enforcement use blockchain tracing tools.
House Majority Whip Tom Emmer (R-MN) and HFSC Chairman Patrick McHenry (R-NC) are asking the SEC to clarify the SEC's position on digital asset distributions via airdrops.
President Trump used bitcoin to purchase cheeseburgers at the Bitcoin-themed PubKey bar in New York City.

HFSC SEC Hearing

On Wednesday, the House Financial Services subcommittee on digital assets held a hearing on “Breaking Down the SEC’s Politicized Approach to Digital Assets.”

Hearing, committee memo, and witness testimony.

At a high-level, the hearing centered around whether the SEC should continue applying existing securities laws to bring enforcement actions against crypto market participants—or shift its focus to creating new rules better suited for the unique nature of digital assets, issuers, and intermediaries to better protect customers and innovation in the U.S.

The Rules Are Working

On one side of the debate, Democrats like Ranking Member Waters (D-CA), Stephen Lynch (D-MA) (Digital Asset Subcommittee Ranking Member), Brad Sherman (D-CA) and witness Lee Reiners (Lecturing Fellow at Duke University) echoed SEC Chair Gensler’s position that investors are best protected under the “long-standing” protections embedded in existing securities law. Creating new “light touch” regulations would only undermine such protections, they argued.

In support, they cited SEC successes in enforcement cases (e.g., LBRY) and rampant fraud in the industry. Reiners argued that passing bespoke laws for crypto would provide a “veneer of legitimacy” to the industry, which would ultimately hurt a greater number of retail investors.

The Rules Are Not Working / Could Be Improved

On the other side, committee Republicans, Democratic Reps. Ritchie Torres (D-NY) and Wiley Nickel (D-NC), and the majority of witnesses argued that updated rules are necessary, and would ultimately better protect customers while keeping innovation in America.

Here are some specific examples raised throughout the hearing as to why they believe the current regime isn’t working:

Intermediaries Struggle to Register

According to Robinhood’s CLO, Dan Gallagher, existing registration rules:

(1) do not accommodate blockchain technology and
(2) prohibit firms, like Robinhood, from listing non-security digital assets alongside digital asset securities.

Robinhood tried to heed Chair Gensler's call to “come in and register,” but to no avail. Gallagher said his team worked with SEC staff for months on developing a workable framework before receiving notice, without explanation, that talks would go no further. Months after that, Robinhood received a Wells notice.

Interestingly, this seemed to surprise even Rep. Maxine Waters, who replied “that’s odd,” after learning of Robinhood’s inability to register.

As a potential solution to registration roadblocks (absent legislation), Gallagher suggested the SEC could rely on its exemptive authority under Section 36 of the Exchange Act to work with market participants on tailoring frameworks.

What's a Digital Asset Security? / Disclosures

Members and witnesses also highlighted confusion around the threshold issue of determining when the SEC thinks a digital asset is a security or is offered/sold as a security.

For example, Rep. Torres noted that the term “digital asset security” is not defined in securities laws or any rules issued thereunder.

Rep. Torres also highlighted the fundamental differences between traditional securities like apple stock – whose value is primarily determined by a centralized issuer (Apple corp.) – and certain decentralized digital assets, like a Pokemon card tokenized on a blockchain - whose value is not primarily determined by any centralized corporation.

Given such differences, Rep. Bryan Steil (R-WI), Jennifer Schulp (Cato), and Michael Liftik (Quinn Emmanuel) explained why they believe disclosure requirements for traditional securities don’t always make sense for digital assets. For example, current disclosure requirements may mislead investors by suggesting a connection between an issuer and a digital asset which may not, in fact, exist. In addition, the existing disclosure framework fails to contemplate information likely to be of high-importance to a digital asset investor (e.g., tokenomics).

Other

Reps. Torres, Nickel, and others criticized SAB 121 and the SEC’s opaque process for granting relief (see, e.g., non-binding staff remarks last week);
Teddy Fusaro (Bitwise Asset Management) explained how existing SEC rules increase costs for Bitcoin Spot ETPs by effectively prohibiting in-kind redemptions;
Reps. Lynch and Casten flagged Trump’s son’s DeFi project, World Liberty Financial, as a serious conflict-of-interest concern.

Legislation

Throughout the hearing, there were calls for Congress to pass bipartisan market structure legislation like FIT 21 to address the issues outlined above.

There were also five pieces of draft legislation noticed for the hearing:

H.R. 5741 – The “Uniform Treatment of Custodial Assets Act” would effectively codify the repeal of SAB 121.
Rep. Timmon’s “New Frontiers in Technology Act” (Draft) would clarify that certain NFTs, like a collectible work of art, and transactions in those NFTs are not subject to securities laws.
Rep. Lucas’s “Securing Innovation in Financial Regulation Act” (Draft) would codify the Strategic Hub for Innovation and Fin Tech at the SEC and LabCFTC at the CFTC.
Rep. John Rose’s “BRIDGE Digital Assets Act” would establish a joint advisory committee on digital assets to advise the SEC and CFTC and harmonize digital asset policy.
A discussion draft bill would codify criteria for a securities broker or dealer to register as a “special purpose broker dealer” with the SEC.

It would seem unlikely these bills could become law this year given the extremely limited time remaining in the 118th Congress (though a SAB 121 repeal may have a chance), but they still offer a glimpse into how members are thinking about digital asset policy.

New Bill: Empowering Law Enforcement to Combat Financial Fraud

On Wednesday, Rep. Zach Nunn (R-IA) introduced H.R. 9480, the Empowering Law Enforcement to Combat Financial Fraud Act.

Text.
Cosponsors: Josh Gottheimer (D-NJ), Scott Fitzgerald (R-WI), and Brittany Pettersen (D-CO).

In short, the bill would:

(1) Permit state, local and Tribal law enforcement agencies to use Federal grant funds to investigate financial frauds like “pig-butchering,” including by using blockchain intelligence tools. § 3.
(2) Clarify that Federal law enforcement may assist state, local, and Tribal law enforcement in using blockchain tracing tools. § 5.

Pig-butchering is defined as:

“a confidence and investment fraud in which the victim is gradually lured into making increasing monetary contributions, generally in the form of cryptocurrency, to a seemingly sound investment before the scammer disappears with the contributed monies.”

Background

Pig-butchering and the use of cryptocurrency to facilitate financial fraud, particularly against seniors, has increasingly come under lawmakers' scrutiny.

Last week, Senate Banking held a hearing on financial fraud targeting seniors, and the CFTC announced a joint initiative with federal agencies aimed at educating the public on pig butchering and “cryptocurrency romance scams.”

On Wednesday, an HFSC subcommittee held a hearing on the “Romance Confidence Scam Industry.” H.R. 9480 was one of three bills noticed for that hearing.

Look Ahead

A message from Coinbase Institute

Join us for the DC Privacy Summit!

Explore the future of privacy online with leading technologists, privacy advocates, and policy-minded professionals.

Thursday - October 24, 2024

USC Capital Campus - Washington, D.C.

Please note registration is required!

Learn more about this groundbreaking event exploring the intersection of decentralized networks, advanced cryptography, and the law here.

Hearings

House Financial Services

Tuesday, Sept. 24 - 10AM - 2128 Rayburn
- SEC oversight hearing, all five SEC Commissioners are expected to testify.

Senate Banking

Wednesday, Sept. 25 - 10AM - Dirksen 538
- SEC oversight hearing with SEC Chair Gensler.

Movie Night?

Screening of Dirty Coin: The Bitcoin Mining Documentary, Monday, September 23, 6pm @ Miracle Theatre DC. (Discount Code: Web3dc.)

Quick Hits

Congress

Letters

GOP Majority Whip Tom Emmer (R-MN) and HFSC Chairman Patrick McHenry (R-NC) sent a letter to SEC Chair Gary Gensler seeking clarification on the SEC's regulatory treatment of digital asset airdrops.
- Letter.

SEC

Consensys

A federal district court granted the SEC's motion to dismiss Consensys's lawsuit filed in April.
- Order by Judge Reed O'Conner, N.D. Tex.
Consensys had sought declaratory judgments that ETH is not a security and that transactions in ETH are not securities transactions (Counts I, II, III).
- The Court dismissed these “ETH claims” as moot:
- “Plaintiff concedes the ETH claims are now moot because of the ETH investigation termination and the SEC staff’s refusal to recommend an enforcement action.” Order at 4.
Consensys had also sought a declaratory judgement preventing the SEC from subjecting Consensys to any unlawful investigation or enforcement action related to Consensys's MetaMask Swaps and Staking products (Count IV).
- The Court dismissed this claim as unripe, finding “Plaintiff failed to identify final agency action that would render the claim fit for judicial review,” and “withholding consideration subjects Plaintiff to scant, if any, hardship.” Order at 6-9.
Consensys statement in X Post (click for full statement):

Note: Consensys is still facing SEC charges in the Eastern District of New York, where the SEC charged the software company with operating its MetaMask swap service as an unregistered broker and offering unregistered securities through MetaMask staking.

NFTs

The SEC charged Flyfish Club, LLC with offering unregistered securities via its sale of 1,600 Flyfish NFTs.
According to the Complaint, Flyfish marketed the NFTs, which could be used to gain access to a private dinner club, as an investment.
- Flyfish agreed to pay a $750,000 civil penalty to settle the charges.
- Press Release & Order.
- Commissioners Peirce, Uyeda Dissent.
- “The securities laws are not needed here, and their application is harmful both in the present case and as future precedent. The Flyfish NFTs were simply a different way to sell memberships. Why shouldn’t a chef be able to sell memberships to eat at her kitchen table and to collect royalties on resales of those memberships?”

DeFi

The SEC charged DeFi platform, Rari Capital, and its founders with misleading investors and acting as unregistered brokers.
- Press Release, Order, & Complaint.

2024 Election

Former President Trump used Bitcoin to purchase cheeseburgers at PubKey, a Bitcoin-themed bar in NYC.
- Video.
- Article by Frank Corva, Bitcoin Magazine.

Creator Economy

a16z, Stand With Crypto, and Open Sea launched the Creator Defense Fund, a “legal defense fund for creators using blockchain technology to connect with fans, monetize their work, and bring more creativity to the world.”

Trivia

Last Week's A: John Quincy Adams (1824), Rutherford B. Hayes (1876), Benjamin Harrison (1888), George W. Bush (2000), and Donald Trump (2016) won the Electoral College but lost the popular vote.

This Week's Q: Which four U.S. states use the designation of “commonwealth” in their official title?

Thanks for reading and have a great weekend.

-GSL

SEC Hearing, New Bills, & Bitcoin Burgers