US GAO says lack of interagency cooperation needs to be addressed in crypto regulation

July 24, 2023 Coin Telegraph

CFTC

In a report requested by Rep. Maxine Waters, the country’s top watchdog is carefully neutral but dissatisfied with agencies’ abilities to work together.

The United States Government Accountability Office (GAO), a Congressional watchdog agency, has released a report it completed in June on the regulatory framework for the use of blockchain in finance.

The 77-page report was requested by Reps. Maxine Waters and Stephen Lynch before the midterm elections, when they were the chair and ranking member, respectively, of the House of Representatives Financial Services Committee. The report unsurprisingly found that more regulation is needed. The agency has a framework for evaluating regulatory reform proposals developed in 2009.

The report pointed to crypto asset trading platforms and stablecoins as products that lack regulation, but it examined regulators’ policies and activities without straying into “turf war” controversies related to defining securities. Thus, it identified the spot markets for nonsecurity crypto assets as the center of a regulatory gap and stated:

“By designating a federal regulator to provide comprehensive federal oversight of spot markets for nonsecurity crypto assets, Congress could mitigate financial stability risks and better ensure that users of the platforms receive protections.”

Traditional assets in that category enjoy robust regulation, the report noted. Crypto assets are subject to limited oversight, such as from the Treasury’s Financial Crimes Enforcement Network and through state money transmitter licensing.

Stablecoins need regulation regarding the composition of their reserves, auditing and disclosures, and redemption rights. The report said current regulation is a hodgepodge of measures by the Securities and Exchange Commission, Commodity Futures Trading Commission and states that does not amount to “consistent and comprehensive prudential regulation and oversight.”

Decentralized finance is capable of being regulated in inverse relationship to the level of its decentralization, the GAO said. When an ecosystem is fully decentralized, there is no individual who can be identified as responsible for developing, operating or governing it. It may also span multiple regulatory jurisdictions in its operations.

Blockchain technology—like #cryptocurrency—could offer faster, cheaper financial transactions. But recent price crashes & bankruptcies have raised concerns about gaps in federal regulations that could put consumers at risk. Our new report & video explore: https://t.co/1vyIgZVaYi pic.twitter.com/nxHrk1g5dQ
— U.S. GAO (@USGAO) July 24, 2023

Moving closer to turf war issues, the report identified a need for greater coordination between regulators and noted complaints from market participants about the slow response of regulators to innovations in the market. The report noted that the Treasury’s Financial Stability Oversight Council was tasked with leading an effort to create a unified approach to crypto asset oversight by the March 2022 Executive Order on Ensuring Responsible Development of Digital Assets.

The report recommended that the seven pertinent regulatory agencies “jointly establish or adapt an existing formal coordination mechanism […] for collectively identifying risks posed by blockchain-related products and services and formulating a timely regulatory response.” Furthermore:

“This mechanism could include formal planning documents that establish the frequency of meetings and processes for identifying risks and responding to them within agreed-upon time frames.”

The National Credit Union Administration expressed agreement with that finding, while the others did not agree or disagree. The GAO is the country’s highest auditor. While its recommendations are not legally binding, the century-old agency’s findings carry considerable moral weight.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

Congressman Warren Davidson calls to ban and criminalize CBDCs

July 24, 2023 Coin Telegraph

CBDC

“Money should not be programmable by a central authority,” argues Republican Representative Warren Davidson.

United States Republican Representative Warren Davidson has spoken out against Central Bank Digital Currencies (CBDCs), urging Congress to ban them and criminalize its development.

In a July 23 Twitter post, Congressman Davidson accused the Federal Reserve of “building the financial equivalent of the Death Star," stating that CBDCs corrupts money into a tool for coercion and control, adding:

“Congress must swiftly ban then criminalize any effort to design, build, develop, test or establish a CBDC.”

Davidson’s comments came in response to a position advertised by San Francisco’s Federal Reserve Bank for a “senior crypto architect” to work on a CBDC project.

The Federal Reserve is building the financial equivalent of the Death Star.

Central Bank Digital Currency (CBDC) corrupts money into a tool for coercion & control.

Congress must swiftly ban then criminalize any effort to design, build, develop, test or establish a #CBDC. pic.twitter.com/9JWiyj5H2f
— Warren Davidson (@WarrenDavidson) July 23, 2023

Responding to a comment from a Twitter user, Davidson argued that money should be a stable store of value, and should not be programmable by a central authority.

“Sound money should facilitate permission-less peer-to-peer transactions,” he added.

The Federal Reserve has been actively researching the technology for a potential digital dollar but has not made any decisions on whether to issue one. The possibility of a digital version of the U.S. dollar has stirred controversy in the country and is expected to be a key talking point in the upcoming presidential election.

Congressman Davidson is also not alone in his concern over a potential Fed-controlled digital dollar.

On July 14, U.S. presidential candidate and Florida Governor Ron DeSantis said he would “nix any central bank digital currency” if he became president. In May, DeSantis signed a bill restricting the use of CBDCs in the state.

Republican Tom Emmer has also been vocal in his warnings over state-controlled digital money. In March, the libertarian think tank said a programmable CBDC would be “easily weaponized” as a spying tool to “choke out politically unpopular activity.”

Emmer introduced the CBDC Anti-Surveillance State Act in February to “halt efforts of unelected bureaucrats in Washington, DC from stripping Americans of their right to financial privacy.” The bill was endorsed by Texas Senator Ted Cruz who introduced his own CBDC blocking bill in March.

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?

US House Republican committees introduce joint digital assets bill

July 20, 2023 Coin Telegraph

CFTC

The House Agriculture and Financial Services Committees have been working together all year on a bill to rival Lummis and Gillibrand’s RFIA.

A bill to create a regulatory framework for digital assets has been introduced by Republican members of the Agriculture and Financial Services Committees of the United States House, the result of several months of joint effort by the two committees.

The 212-page bill — called the Financial Innovation and Technology for the 21st Century Act — was introduced on July 20. According to an accompanying explainer, it's intended to address regulatory gaps by creating a framework for the "specific risks of different digital asset-related activities.”

The bill gives the Commodity Futures Trading Commission (CFTC) jurisdiction over digital commodities, clarifies the jurisdiction of the Securities and Exchange Commission (SEC) and creates a process for digital assets originally deemed securities to be sold as commodities.

The bill also sets conditions for a digital asset to be considered a commodity, with decentralization being the main requirement. Digital asset commodities could be sold on SEC-registered digital asset trading systems. Market participants are subject to new and more comprehensive disclosure requirements and could have registration with both agencies.

Introducing the Financial Innovation and Technology for the 21st Century Act. This bill establishes a regulatory framework for digital assets, protects consumers, fosters innovation, and positions America as a leader in finance and technology. #crypto https://t.co/0ihzY3MP0k
— House Committee on Agriculture (@HouseAgGOP) July 20, 2023

The agencies would also be required to work with foreign regulators to create consistent regulatory standards. The Government Accountability Office would be required to complete a study on nonfungible tokens (NFTs) and how they fit into traditional marketplaces.

Reps. French Hill and Dusty Johnson, who are among the cosponsors of the bill, sent a letter to SEC chair Gary Gensler a day before the introduction of the bill criticizing the agency’s so-called "regulation by enforcement" of the crypto industry.

SEC policy was also highlighted in the bill’s introductory materials. One of the documents stated:

“The SEC’s existing regulatory regime is not designed to accommodate the registration and regulation of digital assets. The SEC has failed to provide the clarity these entities need to operate.”

The other cosponsors of the bill were Glenn Thompson, Tom Emmer and Warren Davidson. The two House committees began working together on a digital assets bill earlier this year and held more than one joint meeting in preparation for it.

Last week, Sens. Cynthia Lummis and Kirsten Gillibrand introduced a new version of their bipartisan Responsible Financial Innovation Act (RFIA), which this bill will compete with.

Magazine: Opinion: GOP crypto maxis almost as bad as Dems’ ‘anti-crypto army’

SEC Fishing for Publicity and Political Impact With Crypto Agenda, Republican Representatives Say

July 19, 2023 The Daily Hodl

Bipartisan bill to regulate DeFi, crypto security risks introduced into US Senate

July 19, 2023 Coin Telegraph

ATM

The bill was introduced in the evening and has not been published yet, but it is already causing a stir. Crypto Twitter calls it a “nonstarter.”

United States Sen. Jack Reed sponsored a bipartisan bill introduced into the Senate on July 18 that would tighten Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations and sanctions requirements for decentralized finance (DeFi). According to a news release on Reed’s website, the bill is titled the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act.

The bill would subject DeFi operations to the same requirements as “other financial companies, including centralized crypto trading platforms, casinos, and even pawn shops.” The bill would make “anyone who controls that project” liable for the use of the DeFi service by sanctioned persons. Furthermore:

“If nobody controls a DeFi service, then — as a backstop — anyone who invests more than $25 million in developing the project will be responsible for these obligations.”

The bill would also “modernize” Treasury Department AML powers by extending them beyond the traditional financial system. According to the statement:

“As new technologies like cryptocurrency increasingly enable new ways to conduct financial transactions, it is critical to extend Treasury’s authority to crack down on illicit financial activity that may occur outside the banking sector.”

The bill also set new requirements for operators of crypto kiosks (or ATMs) to prevent their use in money laundering. Kiosk operators would be required to verify the identities of both counterparties in a transaction.

The bill has not been published at the time of writing. A member of Reed’s staff contacted by Cointelegraph could not say when the bill would be published. A text purporting to be the draft bill has been posted on GitHub.

Case in point:

The definition of "control" is so broadly worded that it's meaningless. No thresholds, no specifics, just "control," as determined by the Secretary of the Treasury. Completely and utterly unworkable.https://t.co/rVk26MJwfA
— Meat (,) (@MeatEsq) July 19, 2023

Crypto Twitter has wasted no time in condemning the bill. One commenter called it “an existential threat to DeFi” and a “nonstarter.” Another said that “imposing control responsibility for a $25mm investment is going to chill VC investment into DeFi b/c passive tokenholding does NOT equal control.”

Sens. Mike Rounds, Mark Warner and Mitt Romney are cosponsors of the bill. Reed and Warner were cosponsors of a bill introduced by Sen. Elizabeth Warren — the Digital Asset Sanctions Compliance Enhancement Act — in March 2022.

Magazine: US enforcement agencies are turning up the heat on crypto-related crime

US Representative Torres demands investigation of SEC deal with Prometheum

July 14, 2023 Coin Telegraph

Coin Telegraph

The United States Securities and Exchange Commission might be investigated for a “haphazard and heavy-handed approach to digital assets.”

The United States Securities Exchange Commission (SEC) could be investigated for a "haphazard and heavy-handed approach to digital assets,” or, more specifically, for its “sweetheart deal” with crypto platform Prometheum.

Such requests were filed on July 13 to the SEC's Inspector General Deborah Jeffrey and the Government Accountability Office's Comptroller General Gene Dodaro by Congressman Ritchie Torres. In the letters, published by the congressman on his Twitter, he writes:

“The SEC refuses to bring even the barest amount of clarity to the application of securities law to digital assets. Its preferred means of communicating is neither rule nor guidance but enforcement”.

Torres emphasizes the SEC’s May decision to grant a special broker purpose dealer (SPBD) license to Prometheum, a digital assets platform, created in 2017 by two American financial attorneys. According to Torres, “Prometheum appears to be nothing more than a Potemkin platform, operating as a timely talking point for crypto critics rather than a true trading platform for crypto customers.”

He calls for an examination of both the SEC’s failure to create “a workable process for registering” digital assets platforms and “the unusual backdoor deal” for Prometheum.

Prometheum recently became a public enemy for the crypto industry and Torres’ demand for investigation is not the first one. The company was thrust into the spotlight after a Congress testimony of its co-founder, Aaron Kaplan in June. The problem seems to be Kaplan’s general support of the SEC’s regulatory strategy under current securities laws.

Immediately after the hearing, theories about Prometheum started swirling on Twitter, emphasizing its possible ties to Chinese investors. On June 15, Blockchain Association filed a request with the SEC, seeking information about the company. In July, Six Republican Congressmen called on SEC to investigate Prometheum’s “ties to the Chinese Communist Party.”

Collect this article as an NFT to preserve this moment in history and show your support for independent journalism in the crypto space.

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US lawmakers allege CCP connection in calling for SEC, DOJ investigation of Prometheum

July 10, 2023 Coin Telegraph

China

Republican members of Congress stepped up their allegations of Prometheum’s ties to the Chinese Community Party, claiming potentially false or misleading statements to the SEC.

Six members of the United States Congress have called on the U.S. Securities and Exchange Commission (SEC) and Department of Justice to investigate Prometheum, claiming the firm has ties to the Chinese Communist Party.

In a July 10 letter, Alabama Sen. Tommy Tuberville and five members of the House of Representatives alleged Prometheum co-CEO Aaron Kaplan may have provided false testimony at a June 13 hearing on regulatory clarity in the crypto space. The U.S. lawmakers claimed Prometheum was connected to investors with “with ties" to the Chinese Community Party: Shanghai Wanxiang Blockchain and HashKey Digital Asset Group.

According to Tuberville and the Representatives, Kaplan’s testimony before Congress suggested Prometheum had been developed independently of Wanxiang and HashKey, allegedly contradicting information the firm had provided in SEC filings. The lawmakers called on SEC Chair Gary Gensler and Attorney General Merrick Garland to look into the matter.

.@SenTuberville op-ed: It’s past time for the DOJ and the SEC to investigate Prometheum’s ties to Chinahttps://t.co/57yMDtMt7V
— 1819 News (@1819News) July 10, 2023

Many lawmakers within the Republican party — which includes the six members who signed onto the July 10 letter — have often invoked concerns about affiliations with China-based entities or the country’s government in considering regulation or laws on digital assets. Former Sen. Pat Toomey and Minnesota Rep. Tom Emmer both issued warnings on using China’s digital yuan at the Beijing 2022 Winter Olympics.

Cointelegraph reached out to Aaron Kaplan for comment but did not receive a response at the time of publication. However, a June 23 Wall Street Journal op-ed by Aaron Kaplan and co-CEO Benjamin Kaplan claimed Tuberville’s concerns on Prometheum’s alleged ties to China were “without merit” and relied on “out-of-date information.”

“We formally terminated all co-development work and strategic relationships with Wanxiang and its affiliates on Oct. 21, 2021,” said the co-CEOs. “Prometheum has severed all intellectual property and technology ties to Wanxiang, giving it and its affiliates no access to any information that could expose the U.S. or its citizens to risk.”

The Prometheum co-CEO said the firm left the U.S.-based crypto advocacy group Chamber of Digital Commerce in early 2023.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

‘Who the hell’ is Prometheum and what did it say to Congress about SEC compliance?

June 15, 2023 Coin Telegraph

aaron kaplan

A testimony given at a United States House of Representatives hearing by the blockchain firm’s co-founder, Aaron Kaplan, has drawn the attention of those in the crypto space.

The relatively under-the-radar crypto company Prometheum has been thrust into the spotlight after a recent testimony from its co-founder before a United States House Committee, discussing crypto regulatory clarity.

On June 13, Prometheum co-founder and co-CEO Aaron Kaplan appeared before the U.S. House at a hearing to discuss providing regulatory clarity to the crypto industry.

Contrary to recent commentary from crypto industry players such as Coinbase, Kaplan’s testimony appears to be supportive of regulating crypto under current securities laws — a view also shared by the Securities and Exchange Commission.

This Prometheum storyline has got to be the strangest thing I have seen in awhile in this industry. Has anyone actually looked into this? Beyond bizarre…
— Matt Walsh (@MattWalshInBos) June 14, 2023

Attention was also brought to Kaplan’s testimony on social media, including a widely shared June 14 Twitter thread from Castle Island Ventures partner Matt Walsh, who shared what he claims are “bizarre” facts about the company and its co-founder.

The thread has also prompted many — including Cardano and Ethereum co-founder Charles Hoskinson — to ask just who Kaplan and Prometheum are, and why they appear to be unheard of before.

Who the hell are these Prometheum guys? https://t.co/PHuqVGStlS
— Charles Hoskinson (@IOHK_Charles) June 14, 2023

The Wall Street-based Prometheum was founded in 2017 by Aaron and Benjamin Kaplan, co-CEOs of the firm. The pair are also listed as attorneys at the financial services-focused law firm Gusrae Kaplan.

Subsidiaries of the company are notable for their registrations with the SEC and approvals from the Financial Industry Regulatory Authority.

In May, subsidiary Prometheum Ember Capital was the first firm to offer custody of digital assets as a qualified custodian after receiving FINRA approval to operate as a special purpose broker-dealer for digital assets.

In October 2022, its subsidiary Prometheum Ember ATS launched its SEC-registered alternative trading system offering digital asset trading, clearing, settlement, and custody.

What did Kaplan say?

In his prepared testimony, Kaplan argued that multiple frameworks provided by the SEC have “clearly laid out” a “compliant path forward for crypto in the United States.”

He even provided a glowing review of the regulator, calling it “the most capable financial markets regulatory agency in the world.”

Prometheum's stance is clear: There is a path forward for digital assets in the U.S. through the current regulatory frameworks set up by federal securities laws. Hear Aaron Kaplan's testimony in front of the House Financial Committee here: https://t.co/qqVd0ryqe2 #digitalassets
— Prometheum (@PrometheumInc) June 14, 2023

Kaplan claimed crypto exchanges and custodians “are required to be regulated by the SEC” and slammed those not currently regulated as being “reckless, unlawful platforms.”

He went on to say existing securities laws and regulations apply to cryptocurrencies and those who argue for new crypto-specific laws are “simply not willing to comply.” He added new laws are “not in the best interest of the investing public or the blockchain industry.”

However, some have criticized the crypto firm, saying Prometheum doesn’t have much to show product-wise despite its years in business and regulator approvals.

During the hearing, Kaplan was asked by Representative Mike Flood if Prometheum offered trading for Bitcoin (BTC) or Ether (ETH), which together make up nearly 65% of the $1 trillion crypto market cap, according to CoinGecko.

Kaplan responded to both questions by saying it did not.

For those that didn’t stick around until the end of the @FinancialCmte hearing today, this exchange between @USRepMikeFlood and @PrometheumInc CEO Aaron Kaplan is an absolute must-watch.

Flood explicitly lays out why Prometheum’s claims that their SPBD approval is evidence of a… pic.twitter.com/yCDDKHiLea
— Alexander Grieve (@AlexanderGrieve) June 13, 2023

'Bizzare' claims

Meanwhile, theories about the company are are swirling on social media, with some alleging the firm's links to the Chinese Communist Party, pointing to 2019 SEC filings from Prometheum stating HashKey and Shanghai Wanxiang Blockchain are “strategic partners and joint venturers.”

Others have pointed to Prometheum’s team that includes former SEC and FINRA staffers.

Cointelegraph contacted Prometheum to ask for a comment surrounding some of these claims.

DeFi Dad, Hall of Flame: Ethereum is ‘woefully undervalued’ but growing more powerful

US lawmaker invokes SEC lawsuits in considering crypto regulatory framework

June 13, 2023 Coin Telegraph

Coin Telegraph

According to Rep. Maxine Waters, granting crypto firms provisional registration under a proposed framework "could reward bad actors with a ‘get out of jail free’ card".

Members of the United States House Financial Services Committees met to discuss clarity for the digital asset ecosystem, with some invoking recent legal action from the Securities and Exchange Commission (SEC) against crypto firms.

In a June 13 hearing of the committee, ranking member Maxine Waters said Democrats were taking a “serious and thoughtful look” at a proposed framework introduced by Republicans on the regulation of digital assets. Committee chair Patrick McHenry said he expected bipartisan input on a draft bill, with markups following a congressional recess in July.

Waters suggested that without extensive analyses and collaboration between the two political parties, the digital asset legislation could leave the door open for potential fraud and misuse of customer funds. The California Representative cited the collapse of FTX, former CEO Sam Bankman-Fried’s criminal charges, and the SEC’s recent actions against Binance and Coinbase.

“I’m particularly worried that the Republican bill would allow crypto firms that are currently being sued for violating our securities laws to continue doing business through provisional registration,” said Waters. “The bill appears to halt any enforcement actions by the SEC against crypto firms even when they have committed fraud. This provisional registration could reward bad actors with a ‘get out of jail free’ card and allow them to continue harming consumers and investors.”

#TODAY @ 10 AM - RM @RepMaxineWaters leads Democrats as the full Cmte holds a hearing entitled “The Annual Testimony of the Secretary of the @USTreasury on the State of the International Financial System.”

: https://t.co/4RoxMIa04b
: https://t.co/x1uLfTjtuI
— U.S. House Committee on Financial Services (@FSCDems) June 13, 2023

The draft bill introduced on June 2 would prohibit the SEC from denying digital asset trading platforms from registering as a regulated alternative trading system and allow such firms to offer “digital commodities and payment stablecoins.” It would also restructure the roles the SEC and Commodity Futures Trading Commission (CFTC) playe in regulating digital assets in the United States.

“The American public was the one left holding the bag when it came to FTX and when it came to the violations, or the alleged violations when it comes to Binance and Coinbase,” said Prometheum founder and co-CEO Aaron Kaplan at the hearing. “The best way forward is pretty clear and logical, is the application of federal securities laws [through the SEC].”

Other lawmakers have responded differently to the seeming regulation-by-enforcement approach by the SEC. On June 12, Ohio Rep. Warren Davidson — a Republican also on the House Financial Services Committee — proposed firing SEC chair Gary Gensler through legislation that would also restructure power at the commission. The legality of this move is unclear.

Amid the SEC lawsuits, Binance.US has pushed back against the commission’s efforts to freeze its funds. At the time of publication, a District of Columbia federal judge was considering competing motions from the SEC, Binance, and Binance.US on how to handle the assets, and other pending legal actions.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

US senators propose AI bills for transparency and innovation

June 9, 2023 Coin Telegraph

The bipartisan bills target government transparency when using AI and the formation of a new Office of Global Competition Analysis to stay on top of innovation.

Lawmakers in the United States have proposed two new bipartisan bills targeting issues of transparency and innovation in artificial intelligence (AI).

On June 8, Democratic Senator Gary Peters, and Republican Senators Mike Braun and James Lankford, introduced the first bill, which would require the government to be transparent with its AI usage.

Under such a measure, U.S. government agencies would need to inform the public when it uses AI to interact with them, along with a system for citizens to appeal any decisions made by AI.

Braun stated:

“The federal government needs to be proactive and transparent with AI utilization and ensure that decisions aren’t being made without humans in the driver’s seat.”

The second bill was brought to the table by Democratic Senators Michael Bennet and Mark Warner, along with Republican Senator Todd Young, to establish an official Office of Global Competition Analysis.

This new division is aimed at helping the U.S. stay on top of AI development. Bennet commented that:

“We cannot afford to lose our competitive edge in strategic technologies like semiconductors, quantum computing, and artificial intelligence to competitors like China.“

The introduction of the bills follows an announcement from Senate Majority Leader Chuck Schumer, which called for three upcoming AI briefings to educate lawmakers on the technology.

Regulations targeting AI are beginning to pop up in discussions among lawmakers across the globe.

Earlier this week, officials in the United Kingdom stressed that AI models need regulation similar to those in the medicine and nuclear power industries. The same day, another U.K. official warned that if these models are not under control within the next two years, they could threaten humanity.

Meanwhile, in Europe, lawmakers are finalizing the European Union’s Artificial Intelligence Act, which is a comprehensive set of regulations for the development and deployment of generative AI.

European regulators have taken a similarly urgent approach to AI regulation, most recently saying they are considering requiring all AI-generated content to be labeled as such.

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What did Kaplan say?

'Bizzare' claims

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