Will Congress Finally Do Its Job?

Congress seems drugged and inert most of the time. Even when the problems it ignores build up to crises and erupt in strikes, riots, and demonstrations, it has not moved. Its idea of meeting a problem is to hold hearings or, in extreme cases, to appoint a commission. – Representative Shirley Chisholm, writing in her book Unbought and Unbossed

The U.S. Constitution vests in Congress the power to create laws and in the executive branch the responsibility of implementing and enforcing those laws, while the judicial branch interprets laws and assures they do not violate the Constitution. This vaunted system of checks and balances is designed to ensure a separation of powers, preventing an undue concentration of authority and fostering a system of governance that upholds the primacy of the rule of law over the whims and prejudices of the moment.

With the recent string of cases in which U.S. courts have reprimanded Gary Gensler and the Securities Exchange Commission – including a D.C. appeals court calling its refusal to approve a Bitcoin ETF “arbitrary and capricious” – and Tuesday’s multibillion dollar Binance bombshell, the failure of Congress to do its job in providing clarity on crypto could not be more overdue, glaring or costly to digital asset holders, corporations, developers and taxpayers.

Binance Holdings Limited – operator of the world’s largest cryptocurrency exchange, Binance.com – pleaded guilty and agreed to pay $4.3 billion to resolve the Justice Department’s investigation into violations related to the Bank Secrecy Act, failure to register as a money transmitting business, and the International Emergency Economic Powers Act. Additionally, Binance’s founder and CEO, Changpeng “CZ” Zhao also pleaded guilty to failing to maintain an effective anti-money laundering (AML) program, resigned as CEO of Binance and personally paid a $50 million fine to the Commodity Futures Trade Commission (CFTC) for “intentionally sabotaging and subverting Binance’s superficial compliance controls, including controls designed to restrict the participation of U.S. persons”. Attorney General Merrick B. Garland said in a press conference, “Binance became the world’s largest cryptocurrency exchange in part because of the crimes it committed – now it is paying one of the largest corporate penalties in U.S. history”. 

In Congress’ absence, many states have made efforts to fill the void. New York was the first to regulate crypto, creating its BitLicense regulatory framework in 2015, which empowers its Department of Financial Services to regulate and oversee virtual currency businesses operating in the state. While a subject of debate and criticism for its potential impact on innovation and the high compliance costs associated with obtaining and maintaining the license, nevertheless the BitLicense was seen by many as a significant step in bringing regulatory clarity to the cryptocurrency industry.

Fast forward to 2023 and the United States still does not even have a single money transmitter license, so companies are required to obtain a money transmitter license from 49 different states (the exception being Montana, which does not have a money transmitter license) plus Washington D.C., Puerto Rico, the US Virgin Islands and Guam.

States are also going further, creating structures that recognize the unique characteristics of and opportunities resulting from the many forms of decentralized autonomous organizations (DAOs) being created every day. Wyoming – the first state to pioneer the limited liability company in 1977 – is in the vanguard here, passing legislation in 2021 that recognized DAOs as legally distinct business entities, with protections for token holders similar to those offered to corporation stockholders or limited liability company members. Tennessee followed a year later, with the bill’s sponsor saying the aim was to make “Tennessee the Delaware of DAOs… With this new business structure, Tennessee will be a beacon for blockchain investment, new jobs and investment”. And in March of this year Utah passed its “Utah Decentralized Autonomous Organizations Act”.

But these are no substitute for thoughtful federal legislation. And there are other ramifications. The New York Times reported in September that the FTX bankruptcy last year has been a bonanza for lawyers, who have racked up more than $700 million in fees already. A spokesman for FTX’s new management called the bankruptcy, “extraordinary in almost every conceivable way,” requiring the recreation of records from scratch and huge efforts to track down missing funds (not to mention the time and money spent by the FBI and other agencies in tracking the $600 million hacked from company wallets within hours of the bankruptcy announcement). “Andrew Dietderich, a partner at Sullivan & Cromwell,” the Times reported, “said in a statement that the lack of clear crypto regulations made the cases more complex and time-consuming, driving up costs.”

This may change in 2024, though being a presidential election year could complicate matters. In a flurry of legislative activity, Congress has engaged in discussions and markups of several stand-alone cryptocurrency bills this year. Lawmakers are focusing on legislation addressing various aspects of the cryptocurrency industry. Key topics under consideration include establishing a formal process to determine whether digital assets should be treated as securities regulated by the SEC or commodities under the CFTC. Stablecoin legislation is also in focus due to concerns about its potential impact on the U.S. government’s ability to oversee monetary policy, and many have questions about the safety of Tether and Circle, the largest issuers in the $120 billion stablecoin market.

Addressing AML, bills like the Financial Technology Protection Act – introduced in April by Senator Ted Budd (R-NC) and Kirsten Gillibrand (D-NY) – are advancing to set regulatory clarity for cryptocurrency entities, particularly regarding Bank Secrecy Act compliance. In July, Senators Gillibrand, Cynthia Lummis (R-Wyo.), Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kans.) introduced an amendment to the National Defense Authorization Act for 2024 that would help prevent the use of crypto assets in illicit financial transactions. The legislators noted that “the amendment would require regulators to set examination standards for financial institutions engaged in crypto asset activities and require the Treasury Department to give recommendations to Congress regarding crypto asset mixers and anonymity-enhancing crypto assets”.

Also in July, Senators Warren, Marshall, Joe Manchin (D-W.Va.) and Lindsey Graham (R-SC), reintroduced the Digital Asset Anti-Money Laundering Act, 2022 legislation by Warren and Marshall aimed at closing gaps in the existing AML and countering of the financing of terrorism framework as it applies to digital assets. Not to be outdone, Senators Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA), and Mitt Romney (R-UT) presented the CANSEE Act, requiring decentralized finance (DeFi) services to meet the same AML and economic sanctions compliance obligations as other financial companies. Coincenter called that legislation, “a messy, arbitrary, and unconstitutional approach to DeFi”.

Striking a more positive tone, a few legislators are proposing bills that aim to protect individuals’ ability to self-custody cryptocurrency and shield certain blockchain platforms from being designated as money-services businesses. Senator Budd announced in early November that he had introduced the Keep Your Coins Act, which “would protect an individual’s right to conduct transactions with cryptocurrency assets without the need to utilize a third-party intermediary.” Specifically, the bill cites the FTX collapse in seeking to “prohibit Federal agencies from restricting the use of convertible virtual currency by a person to purchase goods or services for the person’s own use, and for other purposes.”

And majority whip Tom Emmer (R-Minn.) said in March, when introducing The Blockchain Regulatory Clarity Act: “Crypto and blockchain technology, by nature, does not easily fit into the frameworks policymakers have considered when crafting regulations in the past. For too long, federal regulators and lawmakers have jammed the blockchain ecosystem into statutory definitions that just do not make sense. It should be simple: If you don’t custody consumer funds, you aren’t a money transmitter. My bill provides that necessary confirmation for the blockchain community.”

You’re jammin’ me, you’re jammin’ me, quit jammin’ me
Baby you can keep me painted in a corner
You can look away, but it’s not over

… Take back your angry slander