Hiltzik: Sensation with donations, politician opens the crypto floodgates

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

This is surely what accounts for the concern the cryptocurrency industry has received from Congress.

On Wednesday, the House passed a law reducing regulation of crypto, despite ample evidence that the asset class has been a haven for fraudsters, extortionists and worse.

The law would “make the United States safer for drug traffickers, for terrorist financiers, for child and drug traffickers and those who buy and sell child pornography,” said Rep. Sean Casten (D-Ill.) said. users of crypto in the past year. “I didn’t know those groups had such proud advocates in Congress.”

Casten could find himself in the House minority in more ways than one. Crypto promoters have managed to peel away several Democrats in the House and Senate from the party’s strong opposition to reducing regulations on the asset class.

Earlier this month, bipartisan majorities in both chambers voted to roll back a two-year-old Securities and Exchange Commission guideline for how financial institutions must account for crypto assets left in their care by customers. President Biden said he would veto the change, and the majority in neither chamber was large enough to override a veto.

The congressional crypto caucus handed the industry another win 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 Republican majority.

The fate of the measure is uncertain in the Senate, which has not yet taken it up. Biden declared his opposition to FIT21 but did not promise a veto, which seems to be a major victory for the crypto gang and its supporters. Biden said he is willing to negotiate a regulatory system that protects crypto consumers and investors without unnecessarily interfering with innovation, but “further time will be needed.”

If it becomes law, FIT21 will deliver their earnest desire to crypto promoters: 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, as the SEC has been explicit about its intention to regulate crypto as securities, subjecting the asset class to the disclosure rules and anti-fraud safeguards that have made traditional US financial markets the safest in the world.

During Wednesday’s floor debate, the bill’s advocates touted the virtues of freeing an innovative technology from “overzealous regulators” — it was Rep. Cathy McMorris Rodgers (R-Wash.), who uttered words that could be dictated to her by crypto executives — relieving them of “regulatory uncertainty.”

Gary Gensler, chairman of the SEC, put the latter claim to rest in a statement about FIT21 that he issued a few hours before the vote on Wednesday. “The crypto industry’s record of failures, fraud and bankruptcies is not because we don’t have rules or because the rules are unclear,” he said. “This is because many players in the crypto industry do not play by the rules.”

The bill’s advocates tried to pump up the importance of crypto as a financial asset with claims that 20% of Americans are crypto owners. There is no evidence for this. On the contrary, the Federal Reserve has found that interest in crypto among ordinary Americans is weak and fading.

In its most recent survey of the economic state of US households, released this month, the Fed determined that only 7% of Americans have bought or held crypto as an investment (down from 11% in 2021) and only 1 % used it to buy. anything or make a payment. This underscores the most important truth about crypto, albeit one that its promoters rarely acknowledge: no one has yet identified a real purpose for crypto in the real world.

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

Waters accurately described the effect of FIT21 as effectively placing crypto in a regulatory “no man’s land.” She described the bill as “an extreme MAGA libertarian 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 notable about the push for FIT21 is that it comes so close on the heels of major scandals in the crypto space. Sam Bankman-Fried, the founder of crypto firm FTX, was sentenced to 25 years in prison for crypto fraud in March, after being found guilty in November on seven federal fraud-related charges.

During the heyday of FTX, Bankman-Fried appeared before congressional committees to promote a custom regulatory scheme for crypto very similar to the one embodied in FIT21.

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

The SEC is suing the crypto exchange Coinbase for selling unregistered securities. In March, federal judge Katherine Polk Failla denied the firm’s motion to dismiss the case. Her reasoning effectively explains why FIT21 is not only unnecessary, but harmful: “The ‘crypto’ nomenclature may be of recent vintage,” she wrote, “but the disputed transactions fall comfortably within the framework courts have used to define securities for nearly eighty identifiable years.”

The counterweight to the arguments against FIT21 is cash – the green variety, not the imaginary type marketed by cryptocurrency firms. Three super PACs formed by crypto executives and investors have raised about $85 million to spend on 2024 political races.

The financial strength of this industry’s campaign spending is not in question. One of the PACs, Fairshake, has spent more than $10 million in opposition to Rep. Katie Porter (D-Irvine) in her race for the Democratic nomination for the US Senate.

Porter was known to be a strong critic of crypto. In 2022 she joined Sen. Elizabeth Warren (D-Mass.) – the most vocal crypto critic on Capitol Hill – in an investigation into how crypto “mining” by computer affected the power grid in Texas and increased energy prices for consumers.

Porter lost the Senate race. Her victorious opponent in the primary, Rep. Adam Schiff, has taken a much more lenient position towards crypto, listing it on his campaign website under the “new developments in technology…we need to grow” to keep jobs and regulatory oversight in American hands.

In the current congressional election cycle, Fairshake made $702,300 in donations to Democratic campaigns and $551,700 to Republicans. Its largest single recipient is Rep. Patrick McHenry (RN.C.), chairman of the House Financial Services Committee and sponsor of FIT21. His campaign received $126,626, even though he has announced he is not running for re-election this year and is retiring from Congress.

In his statement, Gensler sought to reinforce lawmakers’ understanding of the risks they are underwriting with the measure. The bill would “create new regulatory gaps and undermine decades of precedent” in regulating investment contracts, he wrote, “putting investors and capital markets at immeasurable risk.”

This would allow crypto promoters to “self-certify” that their products are outside of traditional regulations and give the SEC only 60 days to respond. Removing crypto-trading platforms from the regulatory structure that oversees stock and bond exchanges will open the door to conflicts of interest by reducing consumer protections against platforms that commingle their funds with client funds.

The bill also exempts crypto promoters from rules requiring risky investments to be offered only to accredited investors — those with a net worth of more than $1 million, not including their primary residence, or income of more than $200,000 (for couples , $300,000) in each of the previous two years.

The cynical device FIT21 uses to neutralize the SEC’s oversight of crypto-investments is to transfer that task to the CFTC. As regulatory watchdog Better Markets notes, the CFTC has a budget of just $365 million, compared to the SEC’s $2.1 billion, and fewer than 700 employees, compared to the SEC’s roughly 4,500 staff).

The bill “would heap a whole new set of responsibilities on the CFTC, making it the de facto regulator of countless new crypto exchanges and broker-dealers,” Better Markets wrote, even though the CFTC “doesn’t have the funding to handle all of its current statutory assignments.”

The debate on Wednesday that preceded the House portion of FIT21 was typically tone-deaf and filled with fictitious and factual allegations. Rep. Mike Flood (R-Neb.) invoked the FTX scandal, which saw billions of dollars in clients’ and investors’ crypto deposits illegally appropriated by the firm’s leaders. “We need to ensure that there are the protective rules that prevent something like this from happening again,” he said.

Flood claimed that under FIT21 FTX would have been prevented from registering as an exchange, and it would not have been able to commingle its funds with those of its clients. One wonders what he was talking about. FTX was prohibited from registering as an exchange, and did not. Why? Because Bankman-Fried, its founder, knew that to do so would have subjected the firm to SEC oversight, which no one in crypto wants to undergo.

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

The bottom line is very clear. There is no justification for giving crypto a hand-crafted regulatory scheme on its own. Its promoters have no other argument than to claim that they need regulations to promote “innovation”, when the result will be to facilitate the fraud of customers, money laundering or smearing ransomware attacks like the one that the critical operations of UnitedHealth Group subsidiary Change Healthcare, which manages reimbursement processes for medical providers nationwide.

If there’s a corner of the financial world crying out for tighter regulation, it’s crypto. For Congress to even consider relaxing the regulation that already exists is nothing short of absurd. But Congress does not respond to practicalities; it responds to money. This is the sole driver of efforts like FIT21.