PHFintech: Crypto Policy Tracker - November 22, 2024

In this update, we focus on the potential changes in the executive branch and on the congressional committees that have jurisdiction over cryptocurrency. As the transition unfolds, much attention is on who will stay from the current Biden Administration and who will be replaced, particularly in key economic positions.

We also cover recent developments in crypto and banking, as well as key anti-money laundering legislation.

The Executive Branch

The incoming Trump Administration has been deliberating over several critical choices for senior leadership roles that have an impact on the financial services and the economy. These appointments will have broad ramifications for the adoption of policy and legislative goals by the upcoming administration and 119th Congress.

As the transition unfolds, much attention is on who will stay from the current Biden Administration and who will be replaced, particularly in key economic positions.

• President-elect Donald Trump has announced Scott Bessent, head of the macro hedge fund Key Square Group, as his nominee for U.S. Treasury Secretary. Bessent, a key adviser to the President-elect, is expected to play a pivotal role in shaping and implementing the administration’s sweeping economic agenda. Known for his pro-crypto stance, Bessent’s nomination signals a potential shift toward a more favorable regulatory environment for digital assets as the incoming administration’s economic team begins to take shape.
• President-elect Donald Trump also announced that Russell Vought will return as director of the Office of Management and Budget director in his new administration.
• Howard Lutnick, the chief executive officer of Cantor Fitzgerald and a crypto proponent, has been tapped to lead the Commerce Department, a position with significant influence over technology policy, including crypto and generative AI. Lutnick’s appointment underscores the Trump Administration’s potential impact on emerging technologies.
• The announcement of Chairman Gary Gensler’s departure from the U.S. Securities and Exchange Commission (the SEC) could mark a pivotal moment for the crypto industry. As a vocal advocate for increased oversight of digital assets, Gensler’s tenure was marked by enforcement actions aimed at applying traditional regulatory frameworks to the crypto industry. Following the announcement of Chairman Gensler’s departure, industry observers have speculated as to who might replace Gensler and in what direction that individual will steer the SEC and that agency’s approach to digital assets.
• Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg announced his intention to step down on January 19, 2025, a day before President-elect Donald Trump's inauguration, which will allow the incoming administration to appoint new leadership for the FDIC.
• Federal Reserve Chairman Jerome Powell has stated that he will not resign. Chairman Powell, who was appointed by President Trump in 2017 to lead the Board of Governors of the Federal Reserve System, will end his term in 2026. Members of the Board of Governors can only be removed for cause, but the Federal Reserve Act is silent on whether a president can demote the chair of the Board of Governors and promote a new chair in his or her place. Other presidents have concluded that they lacked that authority.
• Michael Barr, the Federal Reserve's vice chair for supervision, has not announced any plans to step down. During a House Financial Services Committee hearing on November 20, 2024, Barr stated his intention to serve his full term; Barr’s term as vice chair ends in July 2026, but he will remain a board member until 2032.

The Trump Administration is reportedly considering the creation of a first-ever White House crypto role, which would be a significant step forward for the industry’s presence in federal policymaking. The administration has yet to announce decisions for other top economic roles, including the director of the National Economic Council, the U.S. trade representative, and the head of the Council of Economic Advisors.

Congress – Senate and House Updates

Four key congressional committees have jurisdiction over crypto legislation. The House Financial Services Committee and the Senate Banking Committee have authority over financial services issues, including oversight of the SEC, and the House and Senate Agriculture Committees oversee the Commodity Futures Trading Commission

• Senate: Senator Elizabeth Warren (D-MA) is set to become the ranking member of the Senate Banking Committee, ensuring continued focus on financial oversight.
• • As stated in last week’s edition of this newsletter, the Senate Banking Committee will be led by Tim Scott (R-SC) as chairman and Elizabeth Warren (D-MA) as ranking member, while the Senate Agriculture Committee is expected to be chaired by John Boozman (R-AR), with Amy Klobuchar (D-MN) expected as the ranking member.
• House: Jim Costa (D-CA) is challenging David Scott (D-GA) for the position of ranking member on the House Agriculture Committee. Meanwhile, the House Republican Steering Committee is set to vote after the Thanksgiving break to decide the next chair of the House Financial Services Committee.
• • As stated in last week’s edition, with current House Financial Services Committee Chair Patrick McHenry (R-NC) retiring, there will be a new Financial Services Committee chair, and Congressmen Andy Barr (R-KY), French Hill (R-AR), Bill Huizenga (R-MI), and Frank Lucas (R-OK) are reportedly being considered for the position. Chairman GT Thompson (R-PA), who has been a strong supporter of crypto issues, will remain the Agriculture Committee chair. If the new Administration chooses GT Thompson as the Secretary of Agriculture, the Republicans will have to determine who would fill the Agriculture Committee chair position.

Crypto and Banking: Current Challenges and the Road Ahead

One of the most pressing issues in the crypto space is the relationship between crypto and traditional banking. Many companies in the digital asset space struggle to secure and maintain relationships with banks due to regulatory risks.

The incoming administration’s stated support for digital assets could lead to a more favorable environment for crypto-banking relationships and effectively lead to the end of what has become known as Operation Choke Point 2.0 (see description below). Key appointments at the Federal Reserve, OCC, and FDIC may prioritize collaboration with the industry rather than adversarial oversight.

Operation Choke Point 2.0

• Operation Choke Point 2.0 refers to an alleged coordinated effort by U.S. regulatory agencies to restrict the cryptocurrency industry’s access to traditional banking services, thereby hindering its operations and growth.

• The Federal Reserve, the FDIC, and the OCC have published a number of notices placing strict limitations on banks and their activities involving digital assets, including but not limited to the following:

  • OCC Interpretive Letter #1170 dated July 22, 2020, addressing custody services.
  • OCC Interpretive Letter #1172 dated September 21, 2020, addressing stablecoin reserves.
  • OCC Interpretive Letter #1174 dated January 4, 2021, addressing node verification services.
  • OCC Interpretive Letter #1179 dated November 18, 2021, addressing safety and soundness.
  • Federal Reserve Board, FDIC, OCC Joint Statement on Crypto-Asset Risks to Banking Organizations dated January 3, 2023.
  • Federal Reserve Board SR 22-6 / CA 22-6: Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised Banking Organizations dated August 16, 2022.
  • Establishment by the Federal Reserve of a novel activities supervision program on August 8, 2023.
• Some members of Congress sent letters to the federal prudential regulators expressing concern.
• Materials revealed by a recent FOIA request indicate that the FDIC told banks to “pause” or “refrain from providing” or “not proceed” with offering crypto-banking services.
• At a House Financial Services Committee hearing, representatives from the Federal Reserve, FDIC and OCC stated there are no plans to finalize major rulemakings until next year. Ranking Member Tim Scott (R-SC) called on the Biden administration’s financial and housing regulators to cease all rulemaking activity and for President Biden to withdraw nominations before the committee.

Staff Accounting Bulletin 121 (“SAB 121”)

• Overview. On March 31, 2022, the SEC released Staff Accounting Bulletin 121 (17 CFR Part 211) (SAB 121), requiring banks to treat crypto assets held in custody as part of their balance sheets, increasing regulatory capital requirements, making bank custody of digital assets unfeasible. Select traditional finance entities received an ;exemption from SAB 121, and many in the crypto industry were frustrated by the lack of transparency.
• Congressional Review Act. In October 2023, the U.S. Government Accountability Office (GAO) determined that SAB 121 qualifies as a “rule” under the Congressional Review Act and therefore should have been submitted to Congress for review. This finding sparked debate, yet SAB 121 remains enforceable.
• Is SAB 121 Still in Effect? In May 2024, a resolution passed in the House and Senate to overturn SAB 121 under the Congressional Review Act on a bipartisan basis. In June, President Biden vetoed the resolution leaving SAB 121 in place. SAB 121 remains in effect. A new SEC chair could make changes or eliminate SAB 121.

Anti-Money Laundering Legislation

Anti-money laundering (AML) legislation continues to evolve as lawmakers work to address the risks associated with digital assets, focusing on strengthening compliance measures, enhancing transparency, and combating illicit financial activity in the crypto space.

• National Defense Authorization Act
  • The National Defense Authorization Act (NDAA) is an annual U.S. federal law that specifies the budget of the Department of Defense. In recent years, certain provisions related to crypto and anti-money laundering have been proposed for inclusion in the NDAA. As of November 12, 2024, the final text of the 2024 NDAA is still under negotiation. We may see an effort from some lawmakers to include in the NDAA AML/KYC provisions, including, potentially, provisions from the bills highlighted below.
• H.R. 2969 - Financial Technology Protection Act of 2023
  • Introduced by Representatives Zach Nunn (R-IA) and James Himes (D-CT), H.R. 2969, establishes an Independent Financial Technology Working Group to Combat Terrorism and Illicit Financing. The bill passed in the House in July 2024. In the Senate, a companion bill was introduced by Senators Ted Budd (R-NC) and Kirsten Gillibrand (D-NY).
• S. 2669 - Digital Asset Anti-Money Laundering Act of 2023 (DAAMLA)
  • Introduced by Senators Elizabeth Warren (D-MA), Roger Marshall (R-KS) (who later withdrew), Joe Manchin (ID-WV), Lindsey Graham (R-SC), and others as S. 2669, this legislation extends AML requirements to digital asset wallet providers, miners, digital asset kiosks (e.g. bitcoin ATMs), and other network participants, ensuring they adhere to the same standards as traditional financial institutions. The bill would also seek to impose reporting obligations for certain virtual currency transactions involving more than $10,000 (i.e. the Virtual Currency Transaction Report). This bill has not been received favorably by many in the crypto industry.
• S. 2355 - Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act
  • In July 2023, Senators Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA), and Mitt Romney (R-UT) introduced the CANSEE Act as S. 2355. This legislation seeks to impose AML and economic sanctions compliance obligations on decentralized finance (DeFi) services. The bill would seek to ensure that participants in decentralized autonomous organizations are subject to AML requirements based on the extent to which they are invested in a decentralized protocol. The bill would also impose certain KYC obligations on digital asset kiosks.