Last week, Deputy Secretary of the Treasury, Wally Adeyemo, issued a letter and legislative proposals to Congress concerning the Treasury’s jurisdiction over digital assets. Overall, the legislative proposals aim to grant the Treasury the statutory authority to deploy sanctions in the FinTech and cryptocurrency space.
First, the Treasury suggests for Congress to “define a new cryptocurrency-related category of ‘financial institution’ under the [Bank Secrecy Act]” (BSA). This would include exchanges, wallet providers, validator nodes, and other DeFi services. The Treasury also suggests creating an explicit authority under the International Emergency Economic Powers Act (IEEPA) that would allow the Treasury to designate blockchain nodes or other elements of cryptocurrency transactions as sanctioned entities.
Second, “clarify” that the Office of Foreign Assets Control (OFAC) has authority over USD–backed stablecoins. Specifically, the Treasury suggests that Congress grant it “extraterritorial reach” — which means OFAC would have jurisdiction over USD-backed stablecoins including those outside the U.S..
Finally, the Treasury suggests clarification for BSA and IEEPA jurisdictions to extend to entities abroad with defined U.S. touchpoints, targeting offshore cryptocurrency platforms.
What does this mean?
These proposals are breathtaking in their scope and set out to mandate the intermediation of financial transactions by making folks like developers and validators regulated exactly like TradFi institutions. Such regulations are predicated on the existence and powers of financial intermediaries and can only be complied with by those types of businesses. Unfortunately, we think the extremely high cost of banning crypto would bring few, if any, benefits to U.S. law enforcement, which would be left to police a solely off-shore industry and technology with almost no-U.S. touchpoints outside of consumer participation. We recommend Cato’s take on these proposals and we hope to continue working with the Treasury Department to come up with solutions to AML/CFT risks that have a chance of being effective.
HFSC Hearing on Financial Innovation and Regulation
On Tuesday, the House Financial Services Committee’s Subcommittee on Digital Assets, Financial Technology and Inclusion conducted a hearing titled, “Fostering a Culture of Financial Innovation: How Agencies and their Offices of Innovation Can Shape the Future of Financial Services.”
In this hearing, representatives from financial regulatory agencies’ innovation offices provided testimony on their work, which has been subject to criticism by the Committee. In a memorandum released before the hearing, the Subcommittee stated that “many of these offices have been restructured or repurposed from their original mandates.”
In his opening remarks, Subcommittee Chairman French Hill (R-AR) said that “government agencies, while they're not at the forefront of innovation frequently, they definitely can stop innovation dead in its tracks.” Full Committee Chairman Patrick McHenry (R-NC) noted that he is “concerned that these offices are not operating as intended… [and] cannot continue to regulate only by enforcement.”
However, in his remarks, Majority Whip Tom Emmer (R-MN) referenced the SEC’s commitment to regulatory ambiguity — an approach in which he felt “is not adhering to the law” and why the SEC “keeps losing in court.”
What does this mean?
This hearing highlights federal regulatory agencies’ hostility to innovation, despite these offices’ core purpose being just that. Congress will have to provide clear, actionable, and balanced regulatory frameworks for innovative technologies that do not undermine the very essence of innovative technologies like DeFi. Until then, DEF will continue to vigilantly monitor some of these agencies “innovative” approaches to their own statutory authority.