November 25, 2024

This week decoded

Politico reported that President-elect Donald Trump is considering creating a new crypto czar role to coordinate federal interagency actions on digital assets. The President-elect reportedly has chosen hedge fund manager and campaign fundraiser Scott Bessent as his nominee for Secretary of the Treasury.

We’ll be taking a break for the Thanksgiving holiday. See you here on December 9.

Read more below

Congress

Hearings and Meetings

• Last week
  • On November 20, the House Financial Services Committee held a hearing on Oversight of Prudential Regulators with Federal Reserve Vice Chair for Supervision Michael Barr, FDIC Chairman Marty Gruenberg, OCC Acting-Comptroller Michael Hsu, and NCUA Chairman Todd Harper
• This week
  • Congress is in recess until the week of December 2.

Legislation

• There was no relevant legislation introduced last week.

Correspondence

• Rep. Sean Casten (D-IL) led a letter with six other Democrats to Treasury requesting information about the use of Tornado Cash following OFAC sanctions. (Letter)(Press release)

• Senate Banking Ranking Member Tim Scott (R-SC) sent a letter to President Joe Biden calling on the “agencies overseen by the Committee to cease all rulemaking, including the finalization of any pending or proposed regulations or guidance, and to comply with federal record retention laws and preserve all agency documents, records, and communications” and “that all pending nominations within the Committee’s purview be withdrawn.” (Letter)(Press release)

Reports

• The Joint Committee on Taxation released its annual Description Of The Revenue Provisions Contained In The President’s Fiscal Year 2025 Budget Proposal. The report provides a detailed analysis of the revenue-raising proposals impacting digital assets, including proposals to impose digital asset mining energy excise tax, apply the wash sale rules to digital assets and address related party transactions, modernize rules treating loans of securities as tax-free to include other asset classes and address income inclusion, provide for information reporting by certain financial institutions and digital asset brokers for purposes of exchange of information, require reporting by certain taxpayers of foreign digital asset accounts, and amend the mark-to-market rules to include digital assets. (Report)

• As part of his bid for Chair of the House Financial Services, Rep. Andy Barr (R-KY) issued an agenda on his priorities, such as passing the American Dream Act, which would “foster innovation in fintech and digital assets.” (Agenda)

Biden-Harris Administration

Consumer Financial Protection Bureau (CFPB)

• The CFPB released its final rule on large nonbank companies offering digital funds transfer and payment wallet apps. The final rule includes analysis of the public comments received regarding digital assets and concludes, “the Final Rule limits the definition of “annual covered consumer payment transaction volume” to transactions denominated in U.S. dollars. With this clarification… the larger-participant test in this Final Rule excludes transfers of digital assets, including crypto-assets such as Bitcoin and stablecoins.” (Press release)(Final rule)

Commodity Futures Trading Commission (CFTC)

• The CFTC Global Markets Advisory Committee (GMAC), led by Commissioner Caroline Pham, approved a recommendation to expand the use of non-cash collateral through the use of distributed ledger technology. The GMAC also released materials supporting their project to consider a regulatory approach to utility tokens. (Press release)

Securities and Exchange Commission (SEC)

• SEC Chair Gary Gensler announced he will step down on January 20, 2025. (Press release). In addition, SEC Commissioner Jaime Lizárraga announced his last day at the SEC will be January 17, 2025. (Press release) The remaining SEC commissioners will be two Republicans, Hester Peirce and Mark Uyeda, and one Democrat, Caroline Crenshaw.

• The SEC released its enforcement results for Fiscal Year 2024, “583 total enforcement actions in fiscal year 2024 while obtaining orders for $8.2 billion in financial remedies, the highest amount in SEC history.” The report includes a detailed section on enforcement actions in emerging technologies, introduced with, “Fiscal year 2024 saw heightened investor risk from emerging technologies and cybersecurity incidents and from market participants using social media to exploit elevated investor interest in emerging investment products and strategies. The Division kept pace, investigating noncompliance and false or misleading disclosures involving artificial intelligence, social media, cybersecurity, crypto, and more.” (Press release)

Trump-Vance Transition

• President-elect Donald Trump reportedly has chosen hedge fund manager and campaign fundraiser Scott Bessent as his nominee for Secretary of the Treasury.

Noteworthy Quotes and Events

ADMINISTRATION

Department of Treasury

• Treasury Assistant Secretary for International Finance Brent Neiman gave remarks on the U.S. cross-border payments agenda, in which he said, “Domestically, Treasury and the Financial Stability Oversight Council have repeatedly recommended that Congress develop a clear regulatory framework for stablecoins, a technology often described as showing promise in facilitating cross-border transactions. But stablecoins are structurally vulnerable to runs, which can pose risks to consumers and investors, and to financial stability. Analogous to how, in pegged currency regimes, foreign reserves back the value of the exchange rate, most stablecoin issuers require dollar-denominated liquid assets to peg their stablecoin to the dollar. Doubts about the quality of those backing reserves, or about the redeemability of the stablecoin at par, can lead to runs on the issuer. This is not theoretical. In the last three years, we’ve seen prominent stablecoins break their peg during periods of market stress. And in 2022, we saw the complete collapse of the Terra/Luna arrangement, which had a totally inadequate mechanism for trying to stabilize the value of its token. Last year, the Financial Stability Board published high-level recommendations for the oversight, supervision, and regulation of broadly adopted stablecoins, consistent with the key features we have advocated in a U.S. stablecoins framework. Treasury has also advocated for common-sense reforms of its tools and authorities to address the increasing use of stablecoins by a variety of illicit actors, including to evade sanctions.” (Prepared remarks)

• Treasury Assistant Secretary for Investment Security Paul Rosen spoke about CFIUS review of digital asset mining facilities at the Third Annual CFIUS Conference, “Treasury’s non-notified team screens thousands of transactions, ultimately putting forward those that may raise national security considerations to the Committee for consideration to request a filing.  The President’s order in May of this year prohibiting the purchase and requiring the divestment of certain real estate operated as a cryptocurrency mining by facility by MineOne initially came to the Committee’s attention through our non-notified process after we received a tip from the public. The MineOne case also showcases the importance of our jurisdiction over real estate transactions.  CFIUS reviewed and investigated this transaction pursuant to authorities provided by Congress in FIRRMA to cover real estate transactions in close proximity to certain sensitive U.S. facilities.” (Prepared remarks)

CONGRESS

Treasury Secretary Nomination

• Senate Banking Committee Ranking Member Tim Scott (R-SC) released a statement regarding the nomination of Scott Bessent for Treasury Secretary, “Scott Bessent has lived the American Dream, built a successful business from the ground up, and has a deep understanding of what it means to be a good steward of our nation’s economy. I’m looking forward to working with Scott to extend and expand my Opportunity Zones initiative and usher in a tax code that enhances growth, investment, and economic opportunity for all Americans. We also must ensure our economic national security tools – including sanctions, illicit finance protections, and export controls – work together to advance our national security interests. I’m confident that Scott’s decades of knowledge and job-creating experience will serve President Trump, the economy, and the American people well.” (Press release)

• On Face the Nation, Rep. Jim Himes (D-CT) said about President-elect Trump’s potential nominee for Treasury Secretary, “Well, you know, it’s obviously up to the president to decide who he’d like his Treasury Secretary. You know, I would note that his first Treasury Secretary Steve Mnuchin, and I certainly had disagreed with disagreements with him on any number of topics including de-sanctioning the Russian Aluminum Company. But you know, in the cast of characters in version 1.0 of the Trump administration, Steve Mnuchin was far from the creepiest and crawlies of them. So we’ll see what he does on Treasury. What I will say is that look, crypto, you know, it’s a little bit like the Gaetz ethics report, crypto has yet to make an impact on most Americans’ lives. And so I would just argue, and by the way, I’m open to crypto I helped work on the legislation to regulate it. But this is not the determinative factor in our financial lives right now.” (PoliticoPro transcript)

Potential White House Crypto Czar

• Regarding the potential creation of a crypto czar in the White House, Sen. Bill Hagerty (R-TN) told Politico in an interview, “The president has developed tremendous insight into the potential of the crypto industry, and it doesn’t surprise me that he’s thinking organizationally about how to make certain that the United States stays at the forefront of innovation there.” (PoliticoPro)

• On the potential creation of a White House crypto czar, Sen. Katie Britt (R-AL) tweeted, “Another positive development from the incoming Administration. The era of villainizing an entire industry and sending innovation overseas has ended.  We need regulatory clarity for digital assets and an Admin that not only understands – but embraces – its potential.”

Gensler Announcement

• House Financial Services Chair Patrick McHenry (R-NC) tweeted, “Chair Gensler will leave the SEC with less authority, independence, and credibility. I hope the next SEC Chair will provide clarity for digital assets, facilitate capital formation, and ensure American capital markets remain the envy of the world.”

• Sen. Cynthia Lummis (R-WY) tweeted, “Gary Gensler’s anti-digital asset reign at the SEC will officially end in January. This is welcome news for the digital asset industry. I’m hopeful the next SEC Chair will follow the law and not try to stand in the way of financial innovation.”

• Rep. Zach Nunn (R-IA) tweeted, “See you later Gary Gensler! I look forward to helping usher in new leadership at the SEC that will promote strengthening our digital asset ecosystem, promoting innovation, and supporting capital formation in rural Iowa! I won’t forget when you couldn’t point to ONE thing you have done to promote capital formation in rural Iowa!”

• Rep. Mike Flood (R-NE) issued a statement on the announcement of SEC Chair Gary Gensler stepping down, “Chair Gensler’s decision to step down in January comes none too soon. When he leaves the SEC, he will leave a legacy of overreach and chaos. During his tenure, he pushed ESG on investors, tried to quash up-and-coming crypto markets, and refused to work with Congress on a digital assets framework. The world looks to the United States for clarity and stability in financial markets, and Chair Gensler has delivered neither. I look forward to seeing whom President Donald Trump nominates and will collaborate with his administration to help restore trust in the SEC.” (Press release)

Stabenow Revised Market Structure Draft

• On her revised draft of a CFTC market structure bill on digital assets, Senate Agriculture Chair Debbie Stabenow (D-MI) said, “It’s a good balanced bill [and is] something industry thinks is workable and is something that has consumer protections in it.” (PoliticoPro)

• Regarding Stabenow’s revised draft, Ranking Member John Boozman (R-AR) said, “We’ll be looking at the bill, talking to industry, talking to all the different players, and see if it satisfies what needs to be done.” (PoliticoPro)

• On the same topic, Sen. Cynthia Lummis (R-WY) commented, “I’d love to see a major issue put to bed that I’ve been working on for a long time. It depends on what this deal looks like.” (PoliticoPro)

House Financial Services Hearing with Prudential Regulators

• House Financial Services Chair Patrick McHenry (R-NC) issued a press release in advance of the committee’s hearing with prudential regulators highlighting McHenry’s prepared opening statement, which includes, “Your backward-looking approach to regulation has harmed our financial system, innovation, and consumers. In contrast, the House overwhelmingly voted to reject your approach and embrace our inevitable technology-based future by passing FIT21. Our digital asset market structure bill represents the largest rewrite of financial regulatory law since Dodd-Frank, and more than 71 Democratic Members supported the legislation. I repeat: the most extensive rewrite of financial regulation since Dodd-Frank passed with overwhelming bipartisan support. We need new, technology-based solutions that strengthen our financial system, help consumers, and make our regulators more efficient.” (Press release)

• Rep. French Hill (R-AR) tweeted, “Under Operation Choke Point 2.0, FDICgov politically targeted American business and pressured banks to sever ties with entire industries like crypto. Next Congress FinancialCmte stands ready to work with realDonaldTrump to halt and reverse these practices, and finally conduct a full investigation.”

• Rep. Andy Barr (R-KY) retweeted Hill’s tweet and added, “Agreed! That is why we should pass my Fair Access to Banking Act which would ensure legal crypto companies have access to banking services.”

• Rep. Tom Emmer (R-MN) tweeted, “Gruenberg got fired the moment 76 million Americans voted to send President Trump back to the White House and end the Biden-Harris administration’s war on crypto once and for all.”

• Rep. Zach Nunn (R-IA) tweeted, “Crypto innovation should thrive in America, not be driven overseas. In today’s FinancialCmte hearing, I questioned financial regulators on their anti-crypto stance and the chilling effect it’s having on U.S. innovation, jobs, and the next generation of technology.”

CFPB Larger Participant Rule

• Rep. Mike Flood (R-NE) tweeted, “While I’m relieved to see that the CFPB’s Larger Participant rule carves out crypto, the final rule still constitutes a a troubling example of a regulator working overtime to expand its power and authority. This final rule was rushed out, with a 30-day implementation deadline, to ensure that the incoming Director’s team couldn’t assess for themselves whether the rule is necessary. The people have spoken, we don’t need more rushed, ill-conceived regulatory action from Biden-appointed regulators at the eleventh hour. Thankfully, Congress has the Congressional Review Act available to remedy this situation.”

• House Financial Services GOP retweeted Flood’s tweet and added, “The larger participants final rule is yet another power grab—exploiting broad language to expand the agency’s reach. It’s positive the CFPB excluded digital assets from the scope of this rule, which would further stifle innovation, as Republicans called for earlier this year.”

SEC Dealer Rule

• On the United States District Court of the Northern District of Texas ruling striking down the SEC’s dealer rule, finding the SEC exceeded its statutory authority, Financial Services GOP tweeted, “Another L for Gary Gensler’s crusade against the digital asset ecosystem on his way out the door—this time on the “dealer” rule. Chair Gensler’s constant power grabs will leave the SEC with less authority, while weakening our capital markets and stifling innovation.”

Miscellaneous

• Sen. Cynthia Lummis (R-WY) tweeted, “I enjoyed discussing digital assets in the upcoming Congress. This will be the most pro-digital asset administration EVER.”

• Rep. Bill Huizenga (R-MI) tweeted, ad a great time joining BloombergTV to discuss Financial Services Committee leadership, the future of crypto and year end govt funding.”

• Huizenga also retweeted a link to an interview with Sen. Cynthia Lummis (R-WY), adding, “Well said and nicely done SenLummis. I’m so glad we had a few minutes to catch up this week and discuss ideas about the future of crypto. I look forward to working with you again on this important issue in the new 119th Congress!”

• Rep. Dan Meuser (R-PA) tweeted, “Under President-elect Trump, we have a real opportunity to create a strong, fair, and innovative environment for crypto—one that strengthens the economy, protects its consumers, and continues the progress the FinancialCmte has made this Congress. We need to move on from the SECgov’s backwards approach and embrace a pro-growth, pro-crypto economy going forward.”

• Sen. Chuck Grassley (R-IA) released his annual Q&A on Seasonal Shopping Scams, including, “The Iowa Attorney General advises Iowans to only do business with established sellers, avoid unsolicited messages and be wary when sending money electronically – such as Cash App, cryptocurrency, or Pay Pal – and avoid such payments to people you haven’t met.” (Press release)

Highlights of the Week in Blockchain Policy

• On November 21, I had the honor of joining SEC Commissioner Mark Uyeda; Rich Widmann, Head of Strategy, Web3 at Google; Ignacio Sandoval, Partner at Orrick; and Ashley Ebersole, General Counsel of ZeroEx, on the DC Bar Association Fintech Regulation & Enforcement subcommittee panel discussion on Regulation of AI in Financial Services.    

• Tax policy will be a major focus for the upcoming 119th Congress, providing a critical opportunity to clarify and future-proof the tax treatment of digital assets and blockchain technologies. On November 21, I attended the 25th annual Tax Prom (my 13th), a uniquely DC event in which the tax policy community gathers on a bipartisan basis to socialize and form connections ahead of a busy year. 

What I’m Reading This Week

• Op-ed by Rebecca Rettig, Chief Legal Office at Polygon Labs, Beyond the Ballot: How DeFi is Preparing for DC’s Next Chapter.

• Report from DeFi Education Fund, Square Peg in a Round Hole: Why the Bank Secrecy Act Should Not Apply to Blockchain Participants.

About Zero One Strategies

Zero One Strategies is a boutique government relations practice dedicated to navigating the complex landscape of U.S. federal policy in emerging technologies. As advancements in technology continue to outpace regulatory frameworks, Zero One Strategies aims to provide strategic guidance and bipartisan advocacy for innovators and businesses operating at the forefront of technological development.

The practice focuses on key areas such as artificial intelligence, blockchain, decentralized technologies, cybersecurity, data, and digital infrastructure, as well as the multiple policy issues impacting these sectors, including tax and financial services.

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