This Week in Policy (8/10)

This Week in Policy (8/10)

привет финтех-энтузиастам! Challenging hint: Think of the country that has recently expanded its ban on the use of digital assets for domestic payments, but still wants to use them for international payments. It also gave the world War and Peace (no pun intended)!

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This week has been a busy crypto week on the Hill. Believe it or not, after the Toomey, Lummis-Gillibrand, and Waters-McHenry crypto bills that we saw earlier this year, last week a fourth crypto bill was introduced in the Senate. Four Senators on the Agricultural Committee, Debbie Stabenow (D-MI), John Boozman (R-AR), Cory Booker (D-NJ), and John Thune (R-SD), proposed a new crypto bill titled the Digital Commodities Consumer Protection Act. The new bipartisan bill primarily aims to grant the Commodity Futures Trading Commission (CFTC), which is overseen by the Agricultural Committee, an “exclusive jurisdiction” over “digital commodities.” The bill defines a “digital commodity” as a “fungible digital form of personal property that can be possessed and transferred person-to-person without necessary reliance on an intermediary.” This would definitely include, as the bill expressly states, both Bitcoin and Ether while excluding “securities,” which are nowhere defined in the bill.

Any highlights from the bill? The CFTC is given more authority to specify which cryptoassets constitute digital commodities, but the Securities and Exchange Commission (SEC) still preserves its full authority to name the cryptoassets it considers securities. So, not much departure from the status quo. The other highlight is that the bill lays out a detailed regime for “digital commodity brokers,” primarily crypto exchanges, which is similar to the one applicable to traditional brokers. So far, state law has been the primary regulatory framework for most crypto exchanges in the U.S. Needless to say that the bill is not expected to pass anytime soon but will rather line up with the other crypto bills for consideration after the mid-term elections.

Can you think of some reasons why the sponsors of the bill introduced it now? How might it contribute to the ongoing debates about the scope of the SEC’s jurisdiction?

Aside from the members of the Agricultural Committee, five other senators took interest in crypto brokers last week. Senators Pat Toomey (R-PA), Mark Warner (D-VA), Cynthia Lummis (R-WY), Kyrsten Sinema (D-AZ), and Rob Portman (R-OH) reintroduced a bill that seeks to amend the 2021 Infrastructure Investment and Jobs Act. The Act established anyone who provides for consideration "any service effectuating transfers of digital assets on behalf of another person" as a broker for tax purposes. The main goal of the amendment is to exclude certain actors, such as miners and network validators, who do not actually perform brokerage services from the broad definition of the Infrastructure Act. Any timeline for approval? As you could probably guess, this remains unknown.

Do you think this amendment has a greater chance of passing as a mere amendment or as part of a larger crypto regulation?

Now onto some hot, complex, and potentially uplifting or worrisome crypto news, depending on how you see it. On August 8, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced sanctions against Tornado Cash, an open-source, fully-decentralized, non-custodial cryptocurrency mixer. What on earth is that? A cryptocurrency mixer or tumbler is an open-source code that operates on a blockchain and is used by some cryptocurrency owners to hide their identities. And in the case of Tornado Cash, it was fully decentralized, meaning that it has no single owner. The goal of hiding one’s identity sounds suspicious, of course. But imagine that you are a well-known person who wants to buy something and prefers to keep your identity anonymous to protect your own privacy. If the transaction is in cryptocurrency, you can use a mixer. A mixer works by pooling cryptocurrencies from different sources, mixing them up, and reallotting new currencies to the same sources. So, if you conduct a transaction using these new currencies, no one will know your real identity. Because of this, it is fair to expect that mixers are more likely to be used in money laundering than in ordinary transactions.

This is what happened in the case of Tornado Cash. OFAC stated that Tornado Cash was used to launder more than $7 billion worth of cryptocurrency since it was created in 2019. The said figure included more than $455 million laundered by the Lazarus Group, which is a hacking group sponsored by North Korea. Notably, the OFAC did not say that the use of mixers per se is illegal: It rather emphasized that the problem is that “Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis.” Quickly after OFAC’s announcement, Circle, the issuer of USDC stablecoin, froze $75,000 USDC in “tainted” wallets, and the software host GitHub suspended the accounts of Tornado Cash. At the end of the day, “sanctioning the code” seemed to work!

Some saw in the Tornado Cash incident a threat to privacy since many users are now prohibited from using a mixer for legitimate purposes. Others saw it as an affirmation that effective law enforcement can positively influence both users and companies and make blockchains a safer space for financial transactions. How about you? What do you make of this incident?

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See you next week!