State of Crypto: What to expect in today's Congressional hearings

How policy and regulation impact the crypto world – and the other way around

By Nikhilesh De

Managing Editor, Global Policy & Regulation

July 27, 2021

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Hey folks,

Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De. You’re probably here because you signed up, but in case you're not a fan, you can unsubscribe here.

Congress is continuing to hold hearings around the digital asset sector, with three simultaneous meetings today to discuss different uses for cryptocurrencies.

—Nik

Crypto in Congress

Congress is holding so many hearings that touch on crypto today. (Darren Halstead/Unsplash)

The narrative

I originally pitched this newsletter a year ago as a vehicle to discuss regulatory issues in a more in-depth way than in a straight news article. Part of my thesis at the time was that I fully expected to see more regulatory interactions with the crypto world. Anyways, Congress is holding three (or two, depending on how you look at it) hearings that are important for crypto today. At the same time.

Why it matters

The Senate Judiciary Committee is holding a hearing on ransomware, the Senate Banking Committee is holding a hearing on crypto uses and the House Financial Services Committee is holding a hearing on central bank digital currencies. The fact we’re seeing three simultaneous hearings on different aspects of the crypto industry shows how much attention lawmakers are paying to this sector.

Breaking it down

The hearings all start at 10:00 a.m. Eastern, or about 30 minutes after this newsletter is emailed out. CoinDesk will, of course, be covering all three hearings.

I’m going to take this in order of most adjacent to crypto to most direct.

Senate Judiciary

The Senate Committee on the Judiciary will hold a hearing titled “America Under Cyber Siege: Preventing and Responding to Ransomware Attacks,” with a witness panel of government officials. As of my writing this, there’s no hearing memo and no pre-published witness testimony, so it’s hard to gauge just how much crypto will actually come up.

However, we know that regulators are eyeing cryptocurrencies as a payment tool for ransomware attacks, and this did come up during a House Committee on Homeland Security hearing last week. I fully expect crypto to come up again today, and it’ll be worth paying attention to government officials’ recommendations on regulating or restricting ransomware payments through crypto.

The witnesses at this hearing are:

Sheridan was a witness at the aforementioned House hearing, where he told lawmakers that criminals can use cryptocurrencies for a variety of illicit activities.

“The rapid expansion of cryptocurrencies, as well as other digital stores of value, presents a significant challenge to law enforcement, and a growing area of risk to the U.S. and our foreign partners,” Sheridan said in his testimony to last week’s House committee.

The rest of his testimony is worth a look but tl;dr the U.S. Secret Service has some concerns about how crypto might be used in money laundering. I imagine we’ll hear something similar in today’s hearing.

I plan to livetweet this hearing – you can follow along on Twitter @nikhileshde.

House Financial Services

The House Committee on Financial Services hearing titled “The Promises and Perils of Central Bank Digital Currencies” (CBDCs) should take a different tack. A hearing memo raises a number of questions we’ve heard before, including how a CBDC might address monetary policy and financial stability concerns, national security concerns, privacy, financial crimes and cybersecurity concerns.

The witness statements likewise focus more on policy concerns around a digital dollar/U.S. CBDC than they do on arguments about whether a U.S.-issued crypto is even a good idea – in other words, so far it seems like this will be pretty substantive.

It’s important to note that this hearing will be held by the Subcommittee on National Security, International Development and Monetary Policy, the same subcommittee which held a hearing on how cryptocurrencies might be used in terrorist financing earlier this year.

The witnesses are:

The witness list is an interesting blend of industry insiders, researchers and academics.

In pre-written testimony shared with CoinDesk ahead of the hearing, Baldwin recommended policymakers look at how a CBDC might impact the commercial payment system in addition to how it could be administered and used.

My colleague Sandali Handagama will cover this hearing. You can follow her on Twitter @iamsandali.

Senate Banking

Last, certainly not least (and possibly most), the Senate Committee on Banking, Housing and Urban Affairs will host a hearing titled “Cryptocurrencies: What are they good for?”

It’s a loaded title, but the witness list suggests that this will also be a very substantive hearing. We’ll hear from:

In other words, the three witnesses all have deep expertise within the crypto industry, whether as researchers or as participants in crypto-focused organizations.

I don’t have a whole lot on what sort of questions might be asked, but as Ron Hammond of the Blockchain Association points out, this hearing will have both crypto critics and advocates asking questions.

The hearing will also take place a day before SEC Chair Gary Gensler is expected to explain his agency’s authority in regulating crypto exchanges, as well as answer a host of other questions about the industry in response to a public letter from Sen. Elizabeth Warren (D-Mass.).

“I'm looking forward to discussing cryptocurrency's use cases and the promise of decentralized technologies at the hearing. I think it's an important dialogue to have in order to ensure that future legislation does not have unintended consequences that could chill innovation in this space,” Belcher told me via email.

My colleague Daniel Nelson will cover this hearing. You can find him on Twitter @realDannyNelson.

Tether investigation

Yesterday, Bloomberg reported that the U.S. Department of Justice was investigating Tether on bank fraud allegations.

“Specifically, federal prosecutors are scrutinizing whether Tether concealed from banks that transactions were linked to crypto, said three people with direct knowledge of the matter who asked not to be named because the probe is confidential,” according to the report.

Tether’s banking woes aren’t exactly new: In its settlement with the company, the New York Attorney General’s office detailed some of its banking issues. Tether and Bitfinex, its sister firm with which it shares key ownership and managers, both used banks in Taiwan, with Wells Fargo acting as a correspondent bank, according to the legal filing.

Wells Fargo cut Tether off in early 2017, at which point the stablecoin issuer found a few other banks before ultimately landing with Deltec (though it’s possible this isn’t Tether’s only bank right now).

In response to the Bloomberg report, Tether claimed that it was “repackaging” old claims but the stablecoin issuer stopped short of actually denying the allegations (a spokesperson did not answer a direct question about this).

The Biden Bunch

Changing of the guard

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)

I’m getting an increasing number of emails about U.S. President Joe Biden nominating officials for various roles, but nothing about making the acting heads of the Commodity Futures Trading Commission, Office of the Comptroller of the Currency or the Financial Crimes Enforcement Network permanent heads or otherwise naming new chiefs for these agencies.

Elsewhere

Bank of Russia Tells Stock Exchanges to Avoid Crypto-Related Funds: The Russian central bank warned stock exchange operators not to list any sort of product that might have exposure to the crypto industry or crypto-related investment products.

Brazilian Police Seize $33M in Crypto Money Laundering Probe: Brazilian law enforcement officials seized or placed holds on the crypto exchange accounts of individuals and entities accused of money laundering, totaling about $33 million worth of crypto.

US Credit Union Regulator Wants to Know How Its Firms Handle DeFi: The National Credit Union Administration has published a request for information about how credit unions in the U.S. might interact with crypto, including decentralized finance. The regulator is seeking input from the general public on a total of 26 questions across different categories like risk, compliance, actual usage and operations.

CoinDesk DFX Launch

The CoinDesk DeFi Index (DFX), benchmarking the investable DeFi sector, is now available for investors watching decentralized finance, the first true "sector" in cryptocurrencies.

It is the latest index by CoinDesk Indexes, the market standard for crypto assets since 2014. The DFX provides a market-cap-weighted benchmark for a representative basket of DeFi-sector cryptocurrencies, composed of assets suitable for long-term holding.

Find out more at coindesk.com/indexes/dfx, or email indexes@coindesk.com.

Outside CoinDesk

(FT) Hedge funds are growing wary of Binance due to the increased regulatory backlash to the exchange, reports the FT’s Laurence Fletcher, Eva Szalay and Adam Samson. Citing Tyr Capital and ARK36, the report says hedge funds are trading less on the exchange than they used to due to concerns about the regulatory risk.

(Politico) Regulators are concerned about decentralized finance (DeFi) and “working to get their arms” around this aspect, Politico’s Kellie Mejdrich reports. In what I’m sure must be a coincidence, this report came out right around the time Uniswap Labs announced it was taking tokenized stocks (among other tokens) off the frontend portal it controls. The whole article is worth a read.

(New York Times) The New York Times’ Ephrat Livni and Eric Lipton profile Sam Bankman-Fried and other “crypto nomads,” crypto startup founders from North America who set up their businesses outside the region. And yet, despite their efforts to avoid U.S. regulators, some of these exchanges still have plenty of U.S.-based customers.

Today's Tweet

If you’ve got thoughts or questions on what I should discuss next week, or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.

You can also join the group conversation on Telegram.

See ya’ll next week!

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