Congressmen Task SEC and CFTC to “Eliminate Barriers” to Digital Asset Innovation through Joint Working Group of Stakeholders, Promoting Competitive Environment in the United States

By Amy Davine Kim, Chief Policy Officer, Chamber of Digital Commerce

March 8, 2021

As other countries continue to lead in the rapidly growing digital asset industry, now is the time for the United States to build and maintain clear and uniform regulatory framework across agencies to position this industry for success in the coming decades. Bipartisan legislation introduced yesterday by Ranking Member Patrick McHenry (R-NC) of the House Committee on Financial Services and co-sponsored by Congressman Stephen Lynch (D-MA), Chair of the House Financial Services Committee FinTech Task Force, Congressman Glenn Thompson (R-PA), Ranking Member of the House Committee on Agriculture, Congressman Ted Budd (R-NC), and Congressman Warren Davidson (R-OH) would promote that goal by formalizing a joint working group on digital assets between the U.S. Securities and Exchange Commission (SEC) and U.S. Commodity Futures Trading Commission (CFTC), the two leading agencies that oversee digital asset markets in the United States, as well as key industry groups.

The United States can no longer do nothing. For more than a decade, despite good intentions, the industry has operated in an opaque, fragmented, and confusing regulatory environment with respect to standards for custody, private key management, cyber security, business continuity, and registration and reporting requirements, to name a few.  In recent years, the SEC has viewed most digital assets exchanged or sold as a security while the CFTC has considered most to be a commodity – two different financial assets.  We need a solution that will take input from the experts across all stakeholders, in both industry and government, to forge meaningful recommendations of standards for adoption and regulation.

The SEC’s recent enforcement actions against blockchain companies for distributing digital tokens as unlicensed securities offerings plainly illustrates the serious and market-moving consequences of ongoing regulatory confusion and opacity. In other words, the industry needs more guidance specific to the unique characteristics of digital assets and their markets.

We are proud to support the Eliminate Barriers to Innovation Act of 2021 that requires the SEC and CFTC to form a “Working Group on Digital Assets” to convene key stakeholders, including industry representatives, for one year to work together to resolve regulatory issues surrounding digital assets, and to provide recommendations to relevant Congressional committees. This type of legislative concept – establishing a group of experts to consider the problems presented to them and make recommendations – is well-understood in Congress and has the ability to gain traction among Members from both sides of the aisle.

The working group would include equal representation from both organizations as well as at least one representative from a financial technology company, a financial services institution, an investor protection group, a small business or entrepreneur, an institution or organization supporting investment in historically-underserved businesses, and someone engaged in related academic research or advocacy.

Specifically, the legislation calls for the working group to deliver a report to SEC and CFTC leaders and relevant Congressional committees that contains recommendations to:

• • • Improve the efficiency, transparency, availability and efficacy of primary and secondary markets in digital assets;
    • Support market integrity and improve customer protection; and
    • Establish protocols concerning custody, private key management, cybersecurity and business continuity relating to digital asset intermediaries.

Importantly, the legislation also requires the working group to deliver comprehensive analysis of developments in other countries relating to digital assets and how those trends impact the United States and our competitive position in this evolving industry.

Ranking Member McHenry and Congressman Lynch’s leadership have been instrumental in driving this urgent and ongoing dialogue forward.

Simply put, clear and uniform guidance from the SEC and CFTC is sorely needed if we are to remain competitive globally in the digital asset marketplace and remain innovation leaders. This legislation will help move the needle toward a framework for greater clarity and transparency with respect to how digital assets interplay between securities and commodities laws. We also believe this legislation will make the United States a much more attractive country to launch or grow any digital asset business.

What’s Next for Treasury’s Proposed Rule for Digital Assets?

February 10, 2021

In late December 2020, the Financial Crimes Enforcement Network (FinCEN) published a lengthy and complex notice of proposed rulemaking (NPRM) to impose potentially devastating reporting and recordkeeping requirements on digital asset transactions involving the use of self-managed wallets (read our blog on the NPRM’s impact here). For example, the proposed verification requirements for banks and MSBs would create a new standard that significantly exceeds existing know-your-customer (KYC) obligations that would erode financial privacy for lawful transactions.

The repercussions of such new rules cannot be understated.

In addition to the dramatic negative impact that the proposed rule would have, the U.S. Department of the Treasury only provided 12 days to comment on their proposed action during a period spanning two federal holidays and two weekends. This effectively truncated the comment period to a mere 6 business days.

Rome wasn’t built in a day; nor should policies impacting the future foundation of the global economy. The Chamber of Digital Commerce recognized the effect such a “midnight rulemaking” could have for the digital asset industry and spearheaded an advocacy effort on behalf of its members and the broader industry.

Beyond our petition, which garnered over 5,000 signatures, as well as through outreach to industry leaders and then-Treasury Secretary Mnuchin (read our Letter to Secretary Mnunchin here), the initial focus was pressing for an extension of the comment period. In addition to the commonsense requirement for reasonable time to comment on a significant set of new proposals, policymakers need time to understand the effect such rules could have on these emerging technologies for the U.S. economy.  

The Chamber was pleased to learn, per our request to Secretary Mnuchin and our comment letter, that on January 14^th, FinCEN reopened the comment period and added 15 more days to comment, extending the comment deadline into the new Administration, which subsequently froze rulemaking activity. The comment period was extended again on January 26^th by 60 days, the amount we requested.  This was a critical success. The Chamber’s coordinated efforts made a huge impact on preventing this rushed rule from being imposed on the blockchain industry without proper time to consider its consequences.  

However, our work is not over!

The industry now has the opportunity to further consider the proposed regulations’ impact and the Chamber is currently working with our members to develop additional comments to FinCEN. 

We are also engaging with leadership under the new Administration on sound policies that address illicit activity concerns while not stifling the development of this nascent, yet critically important technology.

The United States has some catching up to do.

As with any technology with global implications, blockchain innovators in the United States are competing against industry leaders across Asia and Europe. Many of them are startups in countries with far more developed policy frameworks for digital assets and blockchain. All of those countries desire to be the next “Silicon Valley” for the digital tools that will be the foundation for the global economy moving forward for government, businesses, and consumers. 

Recent history shows that when U.S. policymakers work collaboratively with the industries investing and innovating in the emerging technologies, rules of the road can be developed that both spur investment and innovation, protect consumers and businesses, and enhance America’s global leadership.

If the United States expects to capture a global leadership position in this transformative industry, the Biden Administration and Congress must make clear that addressing digital asset and blockchain policies are a priority. As new and hold-over legislation from the 116^th Congress are introduced and federal agencies begin to lay out their policy agendas for the coming four years, the Chamber of Digital Commerce and its members look forward to helping shape a national policy framework for blockchain technology that will lay the foundation for America’s leadership role.

Treasury’s Rush To Regulate Violates Law and Creates Unprecedented Surveillance for Everyday Americans

January 4, 2021

Chamber’s Comments to FinCEN’s Proposed Rulemaking on Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets

Late Friday, December 18, FinCEN released an unofficial version of its Notice of Proposed Rulemaking on the “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets” (the “NPRM”), publishing the official version in the Federal Register on Wednesday, December 23.  As we discuss in our response letter, the NPRM raises serious concerns for those who transact in virtual currency.

The NPRM purports to do two primary things for transactions involving convertible virtual currency (“CVC”) and legal tender digital assets (“LTDA”):

1. At $3,000 and above, a bank or MSB must verify its customer’s identity and obtain at least the name and physical address for all counterparties to a transaction involving a wallet not maintained at a Bank Secrecy Act (“BSA”)-regulated financial institution (essentially, self-hosted or self-managed wallets); and
2. At $10,000 and above, in addition to the above, a bank or MSB must submit a report to the Treasury Department on a form not yet provided that includes the above information as well as information related to the transaction itself, including the transaction hash and wallet addresses.

The proposed verification requirements would create a new standard for this technology that rises above existing know-your-customer (KYC) obligations. Providing this level of detailed information about non-customers (the counterparties to transactions) to the government for lawful transactions would erode financial privacy for lawful transactions of all amounts – even those not conducted through banks or MSBs and its repercussions cannot be understated.

In addition to the dramatic negative impact that the proposed regulations would instill, the U.S. Department of the Treasury has only provided for 12 days to comment on their proposed action during a period spanning two federal holidays and two weekends, which has effectively truncated the comment period to a mere 6 business days.

Such a short period renders it impossible to fully evaluate the proposed rule’s effects, legal concerns, and unforeseen consequences. Additionally, the current comment period impedes industry’s ability to respond to the two dozen questions raised for public comment. As a result, we argue that the 12-day/6 business day comment period is wholly inadequate and undermines the legitimacy of the proposed rule under the Administrative Procedure Act.

We delivered a letter to U.S. Treasury Secretary Steven Mnuchin requesting an extension of 90 days to respond to the proposed rule – expressing procedural concerns under law with these timeframes.  Members of U.S. Congress recently did the same.  We also circulated a petition, which as of the time of this writing, has attracted over 5,0000 signatures.

Regarding the proposed rule itself, it is critical to highlight the unprecedented scope of information FinCEN would collect regarding nearly every CVC transaction.  By combining information contained in CVC transaction reports, including the name, physical address, and blockchain address of the customer and all counterparties, the government will be able to track every transaction those wallet owners make, past, present, or future, at any transaction level and at any time.  The magnitude of this expanded data collection is unprecedented – it includes not only the information related to the transaction at hand, which is customary for cash transactions at this level, but also every transaction that the counterparties to the transaction make both before and after that one transaction.

To spell this out more clearly, this means that a counterparty to a transaction, who never had an account relationship with the bank or MSB, will have its entire wallet history and future transactions exposed to both that financial institution and the government.  This is an extraordinary expansion of the amount of information provided to third parties about non-customers.

The proposed rule could spell the end of financial privacy for CVC and LTDA users (including CBDCs).  The Chamber believes that giving the government the ability to track every financial transaction people make is a shocking invasion of privacy.  While there are good reasons to report certain transactions to the government, such as when suspicious or illegal activity is detected, enabling such granular tracking of individuals’ lawful, everyday financial activities is beyond common principles of government oversight.  Quite simply, this action would open the door to unprecedented personal data collection, individual monitoring, and a tremendous loss of privacy for millions of investors, businesses, and consumers.

The Chamber believes that the very significant compliance and privacy questions raised by this proposed rule, as well as potential for much broader implications for people and businesses demand significantly more evaluation and time for comment from multiple stakeholders.

The Chamber of Digital Commerce Delivers Letter to U.S. Treasury Secretary Steven Mnuchin Urging Extension of NPRM Comment Period

On Tuesday, December 22, Chamber of Digital Commerce Founder and President Perianne Boring and Chief Policy Officer Amy Davine Kim delivered a letter to U.S. Treasury Secretary Steven Mnuchin requesting an extension of 90 days to respond to the Financial Crimes Enforcement Network’s (FinCEN) proposed rule – expressing procedural concerns. FinCEN released an unofficial version of its Notice of Proposed Rulemaking on the “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets” (the “NPRM”) late on Friday, December 18, publishing the official version in the Federal Register on Wednesday, December 23.

The NPRM only allows for 15 days to comment – a period spanning two federal holidays and two weekends – effectively truncating it to a mere 8 business days. Such a short period renders it impossible to fully evaluate the proposed rule’s effects, legal concerns, and unforeseen consequences. Additionally, the current comment period impedes industry’s ability to respond to the two dozen questions raised for public comment. As a result, we argue that the 15-day comment period is wholly inadequate and undermines the legitimacy of the proposed rule under the Administrative Procedure Act.

Read the full letter here.

Chamber Launches Petition to Stop 11th Hour Treasury Rulemaking

We recently delivered a letter to U.S. Treasury Secretary Mnuchin expressing procedural concerns over the Financial Crimes Enforcement Network’s (FinCEN) proposed rule on certain digital assets. 

In short, the far-reaching implications that this proposed rule would impose on industry warrant a longer comment period – not over two federal holidays and two weekends. As it stands, at the time of press there were only 8 business days allotted for consideration and response. This truncated time frame makes it impossible to fully evaluate the effect of the rule, identify any problems of compliance and unforeseen consequences of the proposed regulation, and decide how to respond to two dozen questions raised for public comment.

To help give our industry and the wider blockchain technology community even more of a voice, we have created a petition (link) calling on Secretary Mnuchin to extend the comment period by 90 days. We welcome and encourage you to join us and have your voice heard. 

Sign our petition here.

Why Impeding the Use of Self-Hosted Wallets Puts the U.S. at an Economic, Social, and National Security Disadvantage

By Amy Davine Kim, Chief Policy Officer, Chamber of Digital Commerce

Self-hosted wallets (wallets that are not hosted by a financial institution) play an important role in the digital asset ecosystem. These self-hosted digital wallets are no different than the leather wallet in your handbag or pocket: they help you hold different tools and assets that you use in the digital world, just like a leather wallet holds your cash, credit cards, or driver’s license.

Often digital wallets are “hosted” by an exchange like Coinbase, eToro, Gemini, Bittrex, and others, meaning that those companies help administer the wallet by providing custody and other services for you.  When you want to use something in your digital wallet, you simply instruct them to do it for you.  A self-hosted wallet is similar to when you yourself reach into the wallet in your pocket or handbag to grab your cash to spend it where you wish – whether at the coffee shop, the hardware store, or at Overstock or another online retailer.

Some policy makers, such as the Financial Action Task Force (FATF), a multigovernmental body that sets anti-money laundering recommendations globally, have expressed concern over self-hosted wallets, even suggesting they be banned outright.

 

Proscribing or severely limiting the use of self-hosted wallets is a bad idea, and here’s why:

1. Self-hosted wallets are the equivalent of the wallet in your pocket or handbag. We would never suggest that consumers can no longer use cash.  This concept is no different simply because we are operating in a digital environment.  As we have seen with the Covid-19 crisis, the world is moving rapidly toward the need to operate digitally, but that does not mean that we lose our rights to privacy and security in the process.

2. According to a recent BIS report, 80% of central banks are looking to potentially issue their own currency digitally. This includes the United States.  If self-hosted wallets are prohibited or severely limited, citizens would have to conduct all activity using a digital dollar through their bank or other regulated financial institution.  Also, among that 80% are key economic competitors such as China, the E.U., Japan, and others.  Any proscription would greatly tilt the playing field in their favor at our expense.

3. Wallets hold value. Value constitutes more than just fiat money.  It can also include your identity, which is intricately connected to the way in which you authenticate yourself to banks and every other account-based website.  They can also hold value generated online, including airline miles and customer points.  None of these things should be prohibited or limited in the digital world any more than they are in the physical world.

4. Of the countries that are actively testing issuing their own currency digitally is China, which has already processed over the equivalent of $300 million in digital yuan through pilot programs. We were caught flat-footed in remaining competitive with 5G in the telecom sector.  Must we again fall behind because we are unwilling to invest in and support another technology sector?  Everyone is aware there are risks when operating in a digital environment.  What we must do is understand those risks, mitigate them, and march forward.

 

These are just 4 examples of why a hasty move under a perceived deadline of January 20 can greatly impact an entire world of possibilities for global digital economies.  We should not impose anything this drastic without following proper rulemaking procedures, including extensive consultation with industry and policy makers over the effects on social and economic progress and national security and how we can address concerns of all involved.

Self-hosted wallets have been on policy makers’ radars for some time, and we have engaged with both U.S. and multilateral policy makers in educating and advocating on this issue. This work must continue, ideally through a coordinated approach, to ensure that we do not further inhibit the technology leadership of the United States and the commercial rights of all who do business here.