DeFi’s turn in the hot seat

Jan 09, 2024

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QUICK FIX

A key agency is opening a new front in Washington’s Biden-era push to rein in crypto.

An advisory committee at the CFTC is out with a first-of-its-kind report urging U.S. policymakers to scrutinize decentralized finance, an emerging corner of the digital currency world that’s been steadily moving up the agenda of regulators and lawmakers.

The committee, which is made up of government officials, traditional Wall Street players, crypto executives and crypto skeptics, said in a sweeping report Monday that the government should pay attention to DeFi’s development to protect markets, investors and national security. It calls for a much greater focus on illicit finance and money laundering, an issue that is increasingly plaguing DeFi services.

“It’s still in its very nascent stages, but it can be shaped right now,” CFTC Commissioner Christy Goldsmith Romero, who sponsors the committee, told MM. “This is the center of a lot of the really bad stuff happening in crypto.”

Long touted as middlemen-less, the promise of DeFi revolves around automated code guiding consumers and investors through the markets — offering a potentially cheaper and more efficient alternative to traditional models of finance. The industry has largely avoided the brunt of U.S. crypto policy debates. But DeFi is coming under new scrutiny in Washington as concerns about criminal activity in crypto mount.

Treasury called for changes to anti-money laundering and terrorist financial rules to address DeFi last year, noting that such systems were being used by criminals of all stripes, including North Korean cybercriminals. Sens. Jack Reed (D-R.I.), Mike Rounds (R-S.D.), Mark Warner (D-Va.) and Mitt Romney (R-Utah) introduced legislation last year targeting DeFi exchanges.

Jason Somensatto, head of North American public policy at analytics firm Chainalysis, told MM that the “unique structure” of DeFi is partly to blame for the industry’s woes. There is no central gatekeeper to step in before cybercriminals can steal funds and anyone can access the systems to move money throughout the vast cryptoverse, said Somensatto, a former adviser to CFTC Chair Rostin Behnam. Still, he added that all activity on DeFi platforms — unlike other centralized crypto systems — is publicly recorded.

The advisory committee’s report urges regulators to beef up safeguards around money laundering and terrorism financing in DeFi. It also raises questions about who is responsible when things go awry at DeFi services.

For some in Washington, DeFi — and crypto more broadly — still lacks justification. In the lone dissent for issuing the report, Hilary Allen, a prominent crypto skeptic and professor at American University, questioned DeFi’s “hyped potential” and the need for regulators to “expend scarce resources” on it.

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Driving the day

Fed Vice Chair for Supervision Michael Barr talks bank regulation at a Women in Housing and Finance event at noon

First in MM: Tech execs press CFPB to halt payments rule — TechNet, a trade association that represents executives of many of the largest technology companies, is calling on the CFPB to pause and reconsider plans to ramp up oversight of tech giants in the payments space, including Apple and Google. The group argues that the CFPB failed to abide by rulemaking requirements. The Financial Technology Association, a separate group that includes PayPal and Block, is also asking the CFPB to pause the rule.

The demands indicate that CFPB Director Rohit Chopra faces a fierce lobbying fight as he tries to ratchet up supervision of tech firms that have come to dominate how Americans pay for goods and services. At stake is a major expansion of federal oversight for the tech industry.

Banks support boosting supervision of their growing competitors but have their own complaints about the CFPB proposal. The American Bankers Association and the Consumer Bankers Association said in a joint letter that they have “serious concerns” about plans to apply the rule to digital assets such as bitcoin. They want the CFPB to scrap the provision and pursue a separate rulemaking with other regulators.

“The topic of digital asset supervision is larger than consumer protections for payments and should be subject to its own comprehensive public comment and debate process instead of being shoehorned into this rulemaking,” they said.

The Chamber of Progress, another tech industry group fighting the rule, told the CFPB that its plan may stifle competitors taking on big banks. (You can also read the group’s 2024 policy outlook here.)

The case for Barr — Rep. Andy Barr is getting closer to making a bid to succeed Rep. Patrick McHenry as the top Republican on the House Financial Services Committee. Eleanor Mueller reports that the Kentucky Republican had planned to stay on the sidelines but reconsidered after last week’s surprise retirement announcement from Rep. Blaine Luetkemeyer, who was a potential frontrunner.

Barr is now in discussions with House leadership and is hoping to lean on his legislative and fundraising track records to make his case. He would likely face off against Reps. French Hill and Bill Huizenga.

A Yellen hearing (and more) coming soon — Eleanor reports that Treasury Secretary Janet Yellen is expected to appear before House Financial Services on Feb. 6 to present FSOC’s annual report to Congress, according to a Republican aide. The hearing has not been announced.

Committee Republicans are also tentatively planning to have a member retreat on Jan. 16 to map out the year ahead. In addition, McHenry, Barr, Foreign Affairs Chair Michael McCaul and Speaker Mike Johnson are set to resume talks this month on a compromise to police investment in China.

In the Senate, rapper-turned-country star Jelly Roll has been added to the witness list for Thursday’s Senate Banking hearing on fentanyl trafficking.

Bowman’s pivot — Reuters reports that Fed Governor Michelle Bowman is retreating from her hawkish view on monetary policy and signaling willingness to support eventual rate cuts as inflation eases.

Carta to scale back after controversy — Carta, a software company that startups use to track their investors, is exiting the secondary trading business following accusations that it tried to transact in customer shares without their consent. “We have decided to prioritize trust,” Carta CEO Henry Ward said on Medium.

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Housing

Another Realtors leader steps down — National Association of Realtors president Tracy Kasper resigned Monday because of a blackmail threat, per CNBC. It’s the latest leadership tumult to hit the group in recent months. Kenny Parcell stepped down as president in August amid sexual harassment allegations. Then-CEO Bob Goldberg left NAR in November after the association was found liable for inflating brokers’ commissions.

Crypto

Bitcoin boom — Bitcoin on Monday topped $47,000 for the first time since April 2022, fueled by expectations that the SEC will allow bitcoin ETFs to start trading this week, per Coindesk.

Ahead of the decision, SEC Chair Gary Gensler warned in a post on X: “Investments in crypto assets also can be exceptionally risky & are often volatile.”

Anthony Scaramucci told The Hill’s Kevin Cirilli that the involvement of some of the largest financial institutions on Wall Street “will make it safer for the general public.”

Mining under fire — President Joe Biden’s proposed tax on crypto miners is facing criticism from the Competitive Enterprise Institute, which says in a new report that it’s discriminatory and could push miners to operate in countries where their electricity would more likely come from fossil fuels.

Regulatory Corner

Corporate transparency — Yellen said the government’s new database of business owners received more than 100,000 filings since launching Jan. 1. Yellen appeared at FinCEN’s headquarters in Virginia as Treasury tries to raise awareness of the so-called beneficial ownership reporting requirement, which is expected to impact 32 million businesses.

First look: Overdraft pushback — The fight over bank overdraft fees is heating up ahead of an upcoming CFPB rule. Accountable.US is out today with a new report that found the 10 largest banks that still charge overdraft fees made $2.34 billion from the practice last year. The progressive group also responded to news in Monday’s MM about the Consumer Bankers Association launching a website to defend overdraft services, saying “the excessive penalties are often buried in the fine print.”

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