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KYC Act; Senate Stablecoin Hearing; BlockFi Settlement

1. Rep. Warren Davidson’s Keep Your Coins Bill

What happened?

This week, Congressman Warren Davidson (R-OH) introduced the “Keep Your Coins” Act (KYC Act) in the House of Representatives. The bill would prohibit federal agencies from restricting “the ability of a covered user to— (1) use virtual currency or its equivalent for such user’s own purposes, such as to purchase real or virtual goods and services for the user’s own use; or (2) conduct transactions through a self-hosted wallet.”

Representative Davidson has been working on this bill for some time but introduced it this week in response to the Canadian Government’s invocation of emergency powers to freeze citizens’ assets in response to ongoing protests.

What does this mean?

We applaud Rep. Davidson’s efforts to protect people’s right to self-custody their assets and look forward to advocating for the passage of this bill. Self-hosted wallets are a prerequisite for individuals to use DeFi, and their use should be preserved and protected.

The Constitution protects US citizens’ right to self-custody their possessions, but we expect further efforts attempting to limit their use both here in the U.S. and around the world. As the Cato Institute, a think tank participating in the DEF’s policy fellowship program, wrote, “...while financial privacy should already be protected by the Constitution (namely, the Fourth Amendment), preventing the government from being able to prohibit or restrict the use of self-​hosted wallets is a much-​needed policy improvement. And it seems that it’s a step forward that is needed now more than ever.”

2. Senate Stablecoin Hearing

What happened?

The Senate Committee on Banking held a hearing on stablecoin policy. Undersecretary of the Treasury for Domestic Finance Nellie Liang answered senators' questions about the President’s Working Group on Financial Market’s “Report on Stablecoins.”

Notably, Senator Kirsten Sinema (D-AZ) addressed DeFi: “I’m encouraged to see this discussion of decentralized finance and Web3 evolve. I think it has potential to make everyday transactions faster, safer, simpler, and more affordable… Our job is to think through what works and what doesn’t, what helps consumers and what doesn’t, and to create common sense rules of the road that provide certainty for everyone. It’s important to me that we address some of the short term challenges with these technologies, while also not losing sight of the long game when it comes to potential benefits of DeFi and Web3.”

The House Financial Services Committee held a hearing on the same topic last week. As a reminder, the PWG Report argued that stablecoins pose three broad types of risk to the financial system: (1) the risks of a run on stablecoins, (2) the risks accompanying stablecoins’ role in payments, and (3) the risks associated with the concentration of economic power in potentially-large stablecoin issuers. To address these risks, the PWG made a number of recommendations, notably the recommendation to limit the issuance of stablecoins to insured depository institutions (“IDIs”), i.e. traditional banks.

What does this mean?

Compared to the Banking Committee’s December hearing, this hearing’s relatively inquisitive and open-minded tone was encouraging to see. Senators are engaging in good faith with the policy issues raised by reserve-backed stablecoins, an interest that can serve as a conduit for diving into DeFi and the broader crypto ecosystem.

As the policy debate surrounding reserve backed stablecoins continues to develop, our priority remains explaining and protecting the critical importance of allowing individuals to retain the right to self-custody their digital assets, including stablecoins.

3. BlockFi’s $100 Million Settlement with the SEC

What Happened?

The SEC announced that it reached a settlement with BlockFi over alleged violations of the Securities Act and the Investment Company Act related to its BlockFi Interest Accounts (“BIA”) business. BIAs allow users to deposit their crypto assets with BlockFi in exchange for a percentage yield depending on the size of the customer’s account.

TL;DR: The SEC holds that BIAs are securities under the relevant legal tests and that BlockFi misrepresented the risk associated with depositing assets into a BIA. BlockFi will pay $50 million to the SEC plus $50 million to state regulators, and it will register their crypto lending product with the SEC on a Form S-1.

Commissioner Hester Peirce dissented, stating that she did not believe the approach the SEC is taking towards crypto is the best way to protect consumers. Commissioner Peirce argued that the $100 million in total fines was disproportionate to the Commission’s findings because BlockFi never failed to pay money it owed to its customers or return customer assets. Peirce is concerned that the SEC’s approach is insufficiently accommodating of innovation and may be causing American retail investors to miss out on promising investment opportunities.

What does this mean?

The settlement further evidences the SEC’s “regulation by enforcement” strategy; BlockFi publicly welcomed the $100M settlement because it at least provides market participants with some regulatory clarity. This story isn’t over, though. We’ll be paying attention to the SEC’s review of BlockFi’s S-1 filing, as its approval isn’t guaranteed.

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