US gov’t faces pushback on its efforts to limit digital currency excesses, protect consumers

Pro-blockchain interests are pushing back on U.S. government efforts to rein in digital currency excesses and offer greater consumer protections.

On January 14, the District of Columbia-based non-profit research and advocacy group Coin Center issued its response to a late-December demand by Sen. Elizabeth Warren (D-MA). Warren sought more information on efforts by Coin Center and other advocacy groups to hire former government officials to lobby Congress on pro-digital currency issues.

Warren’s demands were sparked by a Politico report that cited the growing number of formerly high-ranking officials and ex-Representatives that had signed on with the
Coinbase (NASDAQ: COIN) exchange’s ‘global advisory council.’ The Blockchain Association appeared on Warren’s radar after they sent a letter signed by some prominent ex-military officials to congressional banking committees, urging them to ignore media reports of digital currency’s growing popularity with terrorist groups.

The response from Coin Center’s executive director Jerry Brito makes its view unmistakable from the get-go, saying, “We have no obligation to answer these questions beyond the public disclosures we make under the law.” Brito says Warren’s letter “discourages participation in important public policy and chills [free speech] rights.”

Brito says Coin Center opposes Warren’s Digital Asset Anti-Money Laundering Act and the CANSEE Act because they are “unfair, unworkable, and most importantly, unconstitutional proposals.” Brito says Warren “confused our patriotic duty to oppose an unconstitutional and draconian expansion of surveillance for political bias.”

Brito says Warren’s time would be better focused on “foreign rogue exchanges that are invariably at the center of terrorist use of crypto” and suggests that “if you truly care about the effectiveness of antiterrorist efforts you would work on securing more funding for FinCEN, the FBI and DOJ’s crypto enforcement units.”

Brito’s letter came just four days after Warren participated in a Senate Banking, Housing and Urban Affairs Committee hearing calling for action to address digital currency’s alleged role in facilitating the illicit fentanyl trade.

Warren stated at the hearing that “crypto plays a role in every stage of the illicit fentanyl trade.” Mexican cartels use digital currencies to pay for fentanyl precursors from Chinese manufacturers; the cartels sell fentanyl to dealers via darknet marketplaces where digital assets are the common currency; “drug kingpins” use digital currency to pay for weapons and other tools of their trade, while also greasing the wheels of corruption with digital currency-denominated bribes of law enforcement and other state officials.

The mostly retired cops and agents who’d been invited to testify at the hearing largely agreed with Warren, claiming that digital currency “makes it harder to follow the money” and cartels and other organized crime groups were “exploiting … the lack of compliance and oversight within the crypto industry.”

Protecting consumers, harming operators?

Warren was one of the major forces behind the birth of the Consumer Financial Protection Bureau (CFPB), a federal watchdog tasked with overseeing how banks, credit unions, payday lenders, debt collectors, securities firms, and other financial entities conduct themselves in their dealings with the public.

Last November, the CFPB proposed an expansion of its remit to include “larger nonbank companies that offer services like digital wallets and payment apps.” The proposal would also address “providers of funds transfer and wallet functionalities through digital applications for consumers’ general use in making payments to other persons for personal, family, or household purposes.”

This proposal has already met with cautious approval from the American Bankers Association (ABA), who support greater oversight of digital payment platforms but oppose lumping digital currencies under the definition of ‘funds.’ The ABA claims this “would place bitcoin transactions made for household purposes under the definition of ‘consumer payment transaction’ in the rule.”

The Blockchain Association submitted its own comments, openly challenging the CFPB’s jurisdiction over digital currencies while suggesting that additional oversight might “pre-empt ongoing congressional examination of the proper regulatory framework.”

The Association suggests that the CFPB “narrow the rule to expressly exclude digital assets.” The Association adds that not all digital assets are ‘funds’ that, under the Proposed Rule, “have monetary value and are readily usable for financial purposes.” For example, non-fungible tokens (NFTs) are ill-equipped to function as a currency.

The CFPB’s proposed threshold for who/what in the digital payments sector requires oversight is five million transactions per year. The Association wants this raised “much higher” to avoid impacting smaller entities “for whom the burdens of CFPB supervision would be unreasonably demanding.” The Association is equally concerned with the CFPB’s plan to aggregate transactions across affiliated companies to determine whether the five million threshold has been met.

The Association warns that the Proposed Rule needs clarification “to avoid pulling in unintended developers.” These include developers of non-custodial wallet software who “do not intermediate” wallet users’ transactions with the blockchain. While the Proposed Rule exempts token purchases with fiat or the exchanging of one token for another, the Association notes that wallet developers lack the ability to distinguish one type of transaction from another.

The Association wonders if storing the private key to one’s personal assets “would constitute “stor[ing] account or payment credentials” under the Proposed Rule. The Association also doubts that custodial wallet services “can be properly subjected to CFPB supervisory authority as a consequence of this rulemaking,” while noting that the costs of submitting to additional oversight will kill smaller companies.

DeFi(ant)

Next up to bat is the DeFi Education Fund (DEF), another ‘research and advocacy’ group focused on so-called decentralized finance protocols. They, too, (a) take issue with the “vague” definitions in the Proposed Rule, (b) fret about the costs of compliance, and (c) want to give Congress more time to pass bespoke legislation before letting any agency oversee DeFi smart contracts.

The CFPB stated that its cursory examination of the sector shows 17 entities currently meet its ‘larger participant’ test for requiring oversight, but DEF believes this to be “vastly underestimating just how many participants” would clear this hurdle.

DEF expresses concern that any software developer “who creates an application that simply communicates payment instructions without ever taking custody of such funds” would come under CFPB oversight.

The CFPB claims to limit scrutiny to those digital consumer payment application providers who facilitate transactions “primarily for personal, family, or household purposes.” But the CFPB also includes those who provide applications “for consumers’ general use in making consumer payment transactions.” DEF claims that “as written, it is impossible to parse which payment applications that allow for person-to-person transfers would not be included in the proposed market.”

DEF also notes that the Securities and Exchange Commission (SEC) has “already claimed authority” over wallet developers, but the 2010 Dodd-Frank financial legislation prohibits SEC-regulated activities from also being regulated by the CFPB. DEF warns that granting the CFPB’s wishes will introduce “additional statutory contradictions” and darken the already “gray area of shifting agency jurisdiction and regulation.”

One final note re the DEF’s letter: given the deluge of DeFi exploits that have occurred in recent years, DEF’s assertion that DeFi protocols offer “greater security to users” than tradfi networks is a bit of a stretch. Just sayin’.

Coinbase: let Congress do its (no)thing

Coinbase’s letter begins by offering up its usual homilies to all things compliance before telling the CFPB to GTFO and leave these matters to Congress. Given the inability of Congress to agree on anything, it appears Coinbase wants to preserve the current (alleged) lack of ‘regulatory clarity’ it’s always moaning about. This alleged absence of rules would
permit Coinbase to continue claiming it’s not violating any rules, so perhaps there’s some method to their madness.

Coinbase dedicated almost the entirety of its letter to arguing that the CFPB “does not articulate any reasonable basis for the CFPB’s presumption of supervisory authority and assertion of new authority over crypto-assets.” The catch-all major questions’ doctrine is trotted out for another lap around this rhetorical cul de sac, claiming that ‘the Congressional cavalry is coming’ to deliver the digital currency-friendly legislation that Coinbase’s major lobbying expenditure has paid for.

If Congress fails to ride to Coinbase’s rescue and the CFPB insists on ignoring Coinbase’s admonitions, then Coinbase wants a 24-month implementation period, so both the CFPB and the digital asset operators that would fall under its oversight can “implement the processes required to comply with this unprecedented and complex area of CFPB supervision.”

We’ll pause here to note that three days after this letter was sent, Coinbase CEO Brian Armstrong dumped another nearly $3.4 million of his shares. That’s on top of the $31.5 million he’s sold since mid-November and pushes his two-year total to nearly $91.5 million. Coinbase’s share price closed Tuesday at just under $134, down from over $186 on December 28.

Congress might not be coming, but other help could be on its way for Coinbase on Wednesday. Coinbase attorneys have a four-hour appointment in Manhattan for oral arguments on their motion to dismiss the SEC’s suit accusing Coinbase of selling unregistered securities. While U.S. District Court Judge Katherine Polk Faila is unlikely to render a verdict on Coinbase’s motion for weeks or even months afterward, the arguments offered could provide insights into which way she might be leaning. Watch this space.

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