White House Economic Report
On Wednesday, the White House released its annual Economic Report of the President (“Report”), an economic analysis produced by the President’s Council of Economic Advisors that presents the Administration’s domestic and international economic priorities.
The Report devotes a considerable amount of its attention to the Administration’s concerns with digital assets, with the Administration seeming unconvinced by the claims and stated goals of the crypto industry:
“It has been argued that crypto assets may provide other benefits, such as improving payment systems, increasing financial inclusion and creating mechanisms for the distribution of intellectual property and financial value that bypass intermediaries that extract value from both the provider and recipient. Looking under the hood at these arguments, however, shows a more complicated picture. So far, crypto assets have brought none of these benefits.”
The Report also addresses the Administration’s concerns with DeFi, claiming that because protocols allow users to conduct activities that are traditionally provisioned by regulated financial intermediaries, the protocols must comply with existing regulatory requirements for those intermediaries:
“DeFi platforms acting as unregulated banks, broker-dealers, exchanges, and other entities subject to regulation should be operating in compliance with existing regulations and rules.”
The Report concludes its discussion of digital assets by acknowledging that distributed ledger technology “may still find productive uses in the future” and that “some crypto assets appear here to stay” but went on to highlight that this ecosystem “continue[s] to cause risks for financial markets, investors, and consumers.”
What does this mean?
Despite its concluding acknowledgements, the Report marks a shift by the Administration to a blatantly skeptical position on crypto. This shift comes amid growing concern with statements from the Administration’s federal banking agencies that discourage institutions from servicing crypto firms.
Further, the Report suggesting that DeFi protocols must comply with the existing regulatory requirements is unresponsive to the technology; regulations must be responsive to how an activity is conducted and how it functions, not the other way around. For example, automobiles and airplanes are both means of transportation. Although these examples enable the same activity, transportation, we intuitively understand that the risks posed by automobile travel are fundamentally different from aviation and regulate them accordingly. The same reasoning must apply here.
Coinbase Receives SEC Wells Notice
Coinbase—well known for its voluntary effort to work with the US Securities and Exchange Commission—received a Wells notice on Wednesday “regarding an unspecified portion of [their] listed digital assets, [their] staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet…”
Coinbase states that the notice came after they “provided multiple proposals to the SEC about registration… which the SEC ultimately refused to respond to.” Their statement went further:
“The Wells notice comes out of the investigation that we disclosed last summer. Shortly after that investigation began, the SEC asked us if we would be interested in discussing a potential resolution that would include registering some portion of our business with the SEC. We said absolutely yes. Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register. We developed and proposed two different registration models. We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none. We also reiterated that we stand by our listings process – we don’t list securities today – and repeatedly invited the SEC to raise any questions about any asset at all on our platform. They raised none.”
What does this mean?
Wednesday’s Wells notice to Coinbase demonstrates the SEC’s determination to eradicate good-faith digital asset businesses in the United States. Congress must act to rein in this rogue agency and prevent it from unilaterally placing a de facto ban on crypto innovation in the United States. Otherwise, its strategy of the past ten years will continue to empower bad actors, punish good actors, and drive US consumers to off-shore businesses.
Sushi DAO and its Head Chef Served With SEC Subpoena
A Decentralized Autonomous Organization (DAO) governing the decentralized exchange (DEX) Sushi and its “head chef” (i.e., CEO), Jared Grey, was reportedly served with an SEC subpoena, according to a forum post published on Tuesday by Grey.
“We’re cooperating with the SEC. We do not intend to comment publicly on ongoing investigations or other legal matters,” said the forum post.
While the details of the subpoena were not specified, he proposed the creation of a legal defense fund to cover attorneys’ fees for the protocol’s core contributors. The proposed initial budget for the fund is $3,000,000 USDT.
Based on the latest poll results, 75% of the voters favor the creation of the fund.
What does this mean?
The alleged subpoena has only been made public via Grey’s legal defense fund proposal so details are limited. However, it is our hope that the SEC is not continuing their “regulation by enforcement” strategy with this case as this approach is stifling US innovation.
Amendments to Illinois’ Digital Asset Regulation Act
Just two weeks ago, we discussed Illinois’ chilling “Digital Asset Regulation Act”, which deems unlicensed “digital asset business activity” with or on behalf of any Illinois resident a criminal act. The main concern was that the use of “activity” was broad and could potentially capture a validator on a blockchain used by an Illinoisan.
However, last Friday, House Representative Mark Walker filed amendments to this Act with the most substantive concerning definition of activity. The key amendment cites that the term “digital asset business activity” (on page 86, line 11 of the original bill), “does not include the development and dissemination of software in and of itself."
What does this mean?
While this is a good faith amendment to reduce the impact of this overreaching bill on actors it was not intended to affect, as it stands, DeFi continues to be at risk. The lack of clarity still provides an immense chilling effect on all actors within DeFi—customers, institutional parties, and even node validators who underpin the functioning of most DeFi protocols yet who technically do not develop or disseminate the software in and of itself.
U.S. CBDC’s Receive Scrutiny at State and Federal Levels
On Monday, Florida Governor Ron DeSantis announced comprehensive legislation aimed at banning Central Bank Digital Currencies (CBDCs) within the state. The proposal is framed as a measure to protect Floridians' financial privacy and safeguard them from potential overreach by the federal government.
The legislation includes the following key points:
Prohibiting the use of federally adopted CBDCs as money within Florida's Uniform Commercial Code (UCC).
Instituting protections against any CBDC issued by a foreign reserve or foreign sanctioned central bank.
Governor DeSantis’s proposal also encourages other states to join Florida in adopting similar prohibitions within their respective Commercial Codes as part of a broader effort to oppose federally adopted CBDCs nationwide.
Days before Governor Desantis’s announcement, House Majority Whip Tom Emmer (R-MN) expressed similar reservations around a federally adopted CBDC. Speaking at an event hosted by the CATO Institute, Representative Emmer lamented CBDCs for their potentially degradative effects on privacy and autonomy. Representative Emmer’s comments were made just less than two months after he himself introduced federal legislation that would prohibit the Federal Reserve from issuing a CBDC.
What does this mean?
In tandem, Governor DeSantis' proposal and Representative Emmer’s comments highlight a growing concern among politicians and citizens about the risks and implications of introducing a government-controlled digital currency. If Florida's legislation is enacted, it may set a precedent for other states to follow suit. The growing opposition to CBDCs may encourage further debate on the balance between financial innovation, privacy, and government control. It remains to be seen how this will affect the overall trajectory of digital currency development and regulation in the United States and around the world.