CryptoLink is a compilation of news stories published by outside organizations. Akin aggregates the stories, but the information contained in them does not necessarily represent the beliefs or opinions of the firm. Akin's February CryptoLink update includes developments and events that occurred between January 2024 and February 2024.

On February 15, 2024, outgoing House Financial Services Chair Patrick McHenry (R-NC) told reporters that Republicans "have an understanding" with Ranking Member Maxine Waters (DCA) on stablecoin legislation. This "understanding" has been a long time coming. The two sides were close in the Summer of 2022, when the combination of upcoming elections and the FTX collapse halted any serious legislative progress on crypto policy. Revisiting the subject in the Summer of 2023, Waters and the White House objected to the McHenry stablecoin framework at the Financial Services Committee markup, and even with bipartisan support, the legislation has still not made it across the House floor. Still, both sides continued their talks, and it is fair to say that an "understanding" is a positive movement. While not a completed deal or locked-in legislative text, and though the administration remains a wildcard, it is clear that McHenry and Waters are in the mode of 'let's get something done.' And at least on stablecoin legislation, it seems that the administration understands the importance of providing some regulatory clarity on the subject, as Treasury Secretary Yellen recommended during her congressional testimony as head of the Financial Stability Oversight Council (FSOC).

But how to get it done? McHenry is still pursuing his market structure bill - the FIT for the 21st Century Act – that the Financial Services Committee reported last summer. But this remains a much heavier lift than stablecoin legislation. With Chairman Gensler at the SEC still content to pursue regulation by enforcement, getting comprehensive market structure legislation across the line that takes at least some regulatory authority away from the SEC, a comprehensive deal is an elusive goal. Yet negotiations continue. Members of the House and the Senate – Sens. Sherrod Brown, Tim Scott, Cynthia Lummis, Kirsten Gillibrand, and Chuck Schumer, along with McHenry and Waters in the House – are attempting to cobble together an omnibus financial services bill that would include some combination of crypto policy, cannabis banking, and capital markets legislation. It seems premature that such a bill would come together this spring (to be attached to the Fiscal Year 2024 spending bills), but the work will continue throughout the spring and summer with an eye toward landing this plane during a Lame Duck session of Congress.

In other House news, on February 29, the Financial Services Committee approved House Joint Resolution 109 (H.J.R.109), which would unwind SEC Staff Bulletin No. 121 (SAB 121). The controversial Staff Bulletin requires that a bank holding a client's cryptocurrencies should do so on its own balance sheet, which opponents contend forces banks to hold too much capital to offset that risk. H.J.R.109 now heads to the House floor for a full vote. This resolution will likely get a vote in both chambers (it is a 'privileged resolution' in the Senate, meaning that it cannot be filibustered). But ultimately, to become law, it needs to pass both the House and the Senate, and be signed by the President. Though there is some value to putting Congress on the record on this issue, it seems unlikely that the President will sign a bill unwinding an action by his own SEC.

Meanwhile, Senate Agriculture Committee Chair Debbie Stabenow (D-MI) announced in an interview on February 28 that she would revive her proposed crypto legislation from the 117th Congress. Stabenow's draft bill, the Digital Commodities Consumer Protection Act, would grant the Commodity Futures Trading Commission (CFTC) new tools and authorities to regulate digital commodities. The bill had senior bipartisan support when it was originally introduced, having been co-authored by Senate Ag Ranking Member John Boozman (R-AR), Minority Whip John Thune (R-SD), and Sen. Cory Booker (D-NJ). When asked in the interview if she would beef up the bill, Stabenow claimed it was already "very tough" on the industry. This legislative effort was shelved in the Fall of 2022 after the collapse of FTX, but it had (and will still have) important bipartisan commitments.

The industry continues to closely watch the SEC's litigation against several cryptocurrency companies, including Coinbase, Binance and Kraken. These cases commonly involve allegations that the companies operated as unregistered securities exchanges, brokers, dealers or clearing agencies in connection with the sale of digital assets. The SEC's lawsuit against Kraken is still at an earlier stage than the cases against Coinbase and Binance. On February 22, 2024, Kraken moved to dismiss the SEC's lawsuit, challenging the SEC's position on what constitutes an "investment contract," as overly broad and as regulatory overreach. Kraken's motion to dismiss also focused on how the SEC did not allege direct consumer harm to Kraken's consumers. While the SEC's case against Binance is still ongoing, the remainder of the U.S. regulatory actions against Binance were settled through a $4.3 billion plea deal, which was officially approved by a federal judge on February 23, 2024.However, Binance is still facing regulatory challenges abroad, including a demand from the Nigerian government for $10 million in fines due to Binance's alleged foreign exchange rates manipulation.

Looking ahead, the SEC's trial against Terraform Labs and its founder, Mr. Kwon is set to start in March 2024. The SEC had alleged that Terraform orchestrated a "multi-billion-dollar crypto asset securities fraud." Last December, the presiding judge, issued a ruling on summary judgment, siding with the SEC and finding that there was "no genuine dispute" that the digital assets Terraform sold, including UST, LUNA, wLUNA and MIR, were securities. However, there remain many live issues in the SEC's case against Terraform, as the court has not yet addressed remedies nor entered any money judgment, which will be determined through the trial.

In this issue:

  • Key Developments
  • Key Enforcement Actions
  • Akin Thought Leadership

Key Developments

Lawmakers Introduce Legislation to Overturn SEC Crypto Accounting Bulletin

On February 1, 2024, U.S. Sen. Cynthia Lummis alongside Reps. Wiley Nickel and Mike Flood introduced a bipartisan, bicameral Congressional Review Act resolution to overturn the U.S. Securities and Exchange Commission's (SEC) Staff Accounting Bulletin (SAB) 121. According to Sen. Lummis, "SAB 121 has massive implications, and the SEC should have received feedback on it from the federal banking regulators and the public before implementing this legally binding directive". Rep. Nickel also stated that "Gary Gensler and the Security and Exchange Commission continue to overstep their authority, and it's time for Congress to weigh in on Staff Accounting Bulletin No. 121". SAB 121 directed all consumer cryptocurrency firms to track crypto funds as liabilities on their balance sheets. Lawmakers have criticized the rule for creating risks for consumers and creating uncertainty in bankruptcy proceedings. The joint resolution provides for "congressional disapproval" of the rule and expressly states that the rule "shall have no force or effect".

The joint resolution can be found here and Sen. Lummis' press release can be found here.

Nominee to OECD Responds to Senator Warren's Letter

On February 9, 2024, Patrick Maloney, President Biden's nominee to the Organization for Economic Cooperation and Development (OECD), released a letter stating that he will recuse himself "from participating in the OECD's decision-making processes regarding cryptocurrency and digital assets policy" and refuse any "employment, board service, or compensation from any company or organization primarily engaged within the cryptocurrency or digital assets industry" for four years after the conclusion of his service. Maloney's letter came in response to Sen. Warren's public concern over a revolving door between crypto firms and crypto policymakers in Washington.

Maloney's letter can be found here.

Hong Kong Monetary Authority Issues Tokenization and Custodial Standards for Crypto Firms

On February 20, 2024, the Hong Kong Monetary Authority (HKMA) issued two letters regarding tokenization and custody of digital assets. These letters require authorized institutions to "apply these standards in safeguarding client digital assets, whether the assets are received in the course of conducting virtual asset (VA) related activities as an intermediary, distributing tokenized products, or providing standalone custodial services." With reference to international standards and practices, the HKMA set out the expected standards, which have incorporated flexibility for authorized institutions to put in place "operational arrangements that are commensurate with the nature, features and risks of the digital assets under custody."

The letter on custodial services can be found here, and the letter on tokenization can be found here.

SEC Seeks Comments on Proposed Rule Change to Permit Listing and Trading of Options on Bitwise and Grayscale Bitcoin ETFs

On February 23, 2024, the SEC issued a notice of filing of proposed changes to permit the listing and trading of options on the Bitwise Bitcoin ETF, the Grayscale Bitcoin Trust (BTC), and any trust that holds bitcoin. The SEC published the notice to solicit comments on the proposed rule change from interested persons. If approved, the options will trade "in the same manner as options on other ETFs (including commodities ETFs) on the Exchange".

The SEC's notice can be found here.

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