Hiltzik: A politician showered with donations opens the cryptographic floodgates

Money, as we all know, is the mother’s milk of politics in America. It may look even more nutritious if you can produce it yourself.

This certainly explains the concern the cryptocurrency industry is receiving from Congress.

On Wednesday, the House passed a bill restricting regulation of cryptocurrencies, despite ample evidence that the asset class has been a haven for fraudsters, extortionists and more.

This law “will make the United States safer for drug traffickers, terrorist financiers, child and drug traffickers, and those who buy and sell child pornography,” said Rep. Sean Casten (R-Ill.), naming several documented cryptocurrency users in recent years. “I didn’t know these groups had such proud supporters in Congress.”

Casten could find himself in the minority in the House of Representatives in many ways. Cryptocurrency promoters have managed to steer several Democrats in the House and Senate away from the party’s strong opposition to restricting regulation of the asset class.

Earlier this month, bipartisan majorities in both chambers voted to withdraw two-year-old Securities and Exchange Commission guidance on how financial institutions should account for crypto assets left in their custody by customers. President Biden said he would veto the change, but there was not a majority in either chamber large enough to override the veto.

The Congressional Crypto Caucus gave the industry another victory on Wednesday when the House passed the Financial Innovation and Technology for the 21st Century Act, known as FIT21. The vote was 279 to 136, with 71 Democrats joining the majority of Republicans.

The fate of this solution is uncertain in the Senate, which has not yet adopted it. Biden has expressed his opposition to FIT21 but has not promised a veto, which the crypto gang and their supporters seem to consider a major victory. Biden said he is willing to negotiate a regulatory system that protects consumers and cryptocurrency investors without unduly interfering with innovation, but “more time will be needed.”

If it becomes law, FIT21 will fulfill cryptocurrency promoters’ deepest desire: removing them from the jurisdiction of the powerful SEC and transferring oversight to the chronically underfunded and understaffed Commodity Futures Trading Commission.

Their goal is understandable because the SEC has made clear its intention to regulate cryptocurrencies as securities, subjecting the asset class to the disclosure rules and fraud protections that have made traditional U.S. financial markets the safest in the world.

During Wednesday’s floor debate, supporters of the bill talked about the benefits of freeing innovative technology from “overzealous regulators” – that is, Rep. Cathy McMorris Rodgers (R-Wash.), uttering words that could have been dictated to her by cryptocurrency executives – and freeing them from ” regulatory uncertainty.”

SEC Chairman Gary Gensler dispelled that last claim in a statement about FIT21 that he issued on Wednesday hours before the vote. “The crypto industry’s history of failures, frauds and bankruptcies is not due to a lack of rules or because the rules are unclear,” he said. “This is because many players in the cryptocurrency industry are not following the rules.”

Supporters of the bill tried to raise the importance of cryptocurrencies as financial assets, claiming that 20% of Americans own cryptocurrencies. There is no evidence for this. On the contrary, the Federal Reserve has stated that interest in cryptocurrencies among ordinary Americans is weak and fading.

In its latest survey of the economic health of American households, released this month, the Fed found that only 7% of Americans bought or held cryptocurrencies as an investment (down from 11% in 2021), and only 1% used them to buy anything or make a payment. This highlights the most important truth about cryptocurrencies, although its proponents rarely acknowledge it: no one has yet identified the true purpose of cryptocurrencies in the real world.

“The entities that stand to benefit from this bill are not ordinary investors trying to build wealth,” Rep. Maxine Waters (D-Los Angeles), the top Democrat on the House Financial Services Committee, said on the House floor Wednesday, “but rather crypto companies. … They have already made billions of dollars by illegally issuing or facilitating the purchase and sale of cryptographic securities.”

Waters accurately described FIT21’s impact as effectively placing cryptocurrencies in a regulatory “no man’s land.” She described the bill as “an extreme libertarian MAGA approach where companies can operate without regulatory scrutiny and consumers and investors are on their own to detect and avoid fraudulent schemes.”

What’s most striking about the push for FIT21 is that it comes on the heels of major scandals in the crypto space. Sam Bankman-Fried, founder of crypto firm FTX, was sentenced in March to 25 years in prison for cryptocurrency fraud, after being convicted in November of seven federal fraud-related charges.

During FTX’s heyday, Bankman-Fried appeared before congressional committees to promote a tailored regulatory regime for cryptocurrencies very similar to that included in FIT21.

Just last month, Changpeng Zhao, founder of international crypto company Binance, was sentenced to four months in prison on federal money laundering charges; Zhao previously agreed to pay a $50 million fine, and Binance settled a government case against him for $4.3 billion.

The SEC is pursuing a lawsuit against cryptocurrency exchange Coinbase for selling unregistered securities. In March, federal judge Katherine Polk Failla rejected the company’s request to have the case overturned. Her reasoning effectively explains why FIT21 is not only unnecessary but harmful: “The ‘crypto’ nomenclature may be recent,” she wrote, “but the transactions at issue fit easily within the framework that courts have used to identify securities for nearly eighty years.” years”. years.”

The counterweight to the arguments against FIT21 is cash – the green variety, not the hypothetical type sold by cryptocurrency companies. Three super PACs formed by cryptocurrency executives and investors have raised about $85 million for 2024 political races.

The financial potential of this industry’s campaign spending is unquestionable. One PAC, Fairshake, has spent more than $10 million over the past year opposing Democratic candidate Katie Porter (D-Irvine) in the race for the Democratic nomination for U.S. Senate.

Porter was known as a strong critic of cryptocurrencies. In 2022, she joined Sen. Elizabeth Warren (D-Mass.) – the most vocal cryptocurrency critic on Capitol Hill – in an investigation into how computer “mining” of cryptocurrencies impacted the Texas power grid and raised energy prices for consumers.

Porter lost the Senate race. Her winning primary opponent, Rep. Adam Schiff, took a much more lenient stance on cryptocurrencies, listing them on his campaign website among “new technological advances… we must evolve” to keep jobs and regulatory oversight in U.S. hands.

In the current congressional election cycle, Fairshake has donated $702,300 to Democratic campaigns and $551,700 to Republican campaigns. Its largest single recipient is Rep. Patrick McHenry (R-N.C.), chairman of the House Financial Services Committee and sponsor of FIT21. His campaign raised $126,626 even though he announced he would not seek re-election this year and was leaving Congress.

In his statement, Gensler tried to increase lawmakers’ awareness of the risks of the measure. He wrote that the bill would “create new regulatory gaps and undermine decades of precedent” in regulating investment treaties, “exposing investors and capital markets to immeasurable risks.”

It would allow cryptocurrency promoters to “self-certify” that their products do not meet traditional regulations and give the SEC only 60 days to respond. Removing cryptocurrency trading platforms from the regulatory structure that oversees stock and bond exchanges would open the door to conflicts of interest by reducing consumer protection from platforms mixing their funds with customers’ funds.

The bill also exempts cryptocurrency promoters from rules requiring they offer risky investments only to accredited investors – those with a net worth of more than $1 million, excluding their primary residence, or an income of more than $200,000 ($300,000 for couples) in each of the previous two years.

The cynical tool that FIT21 uses to neutralize SEC oversight of cryptocurrency investments is to delegate this task to the CFTC. As regulator Better Markets notes, the CFTC has a budget of just $365 million compared to the SEC’s $2.1 billion and employs fewer than 700 employees compared to the SEC’s roughly 4,500).

The bill “would impose an entirely new set of responsibilities on the CFTC, making it the de facto regulator of countless new cryptocurrency exchanges and broker-dealers,” Better Markets wrote, even though the CFTC “does not have the financial resources to fulfill all of its current statutory mandates.”

Wednesday’s debate preceding the House’s adoption of FIT21 was typically tone-deaf and full of fictitious and artificial claims. Rep. Mike Flood (Neb.) cited the FTX scandal, as a result of which the company’s leaders illegally misappropriated billions of dollars from cryptocurrency deposits of customers and investors. “We must ensure that protective rules are put in place to prevent similar events from happening again,” he said.

Flood argued that under FIT21, FTX would not be able to register as an exchange and would not be able to commingle its funds with those of its clients. You might wonder what he was talking about. FTX could not register as an exchange and did not do so. Why? Because Bankman-Fried, its founder, knew that doing so would subject the company to SEC supervision, which no one in the cryptocurrency industry wants to submit to.

As for commingling funds, it is already illegal – one of the practices that landed Bankman-Frieda in prison.

The conclusion is very clear. There is no justification for giving cryptocurrencies a manually crafted regulatory regime. Its proponents have no argument other than to say they need simple regulation to encourage “innovation” when the result will be to make it easier to defraud customers, launder money, or facilitate ransomware attacks like the one that disrupted key operations of UnitedHealth subsidiary Group Change Healthcare, which manages reimbursement processes for healthcare providers throughout the country.

If there’s one corner of the financial world crying out for tighter regulation, it’s cryptocurrency. Even Congress considering relaxing existing regulations is simply absurd. But Congress does not respond to practical issues; reacts to money. This is the sole driver of efforts like FIT21.