Senate Majority Leader Chuck Schumer (D-N.Y.) steps up to a new job and becomes an effective floor leader for President Biden's broad progressive program, making him a top Wall Street figure in Washington. Surprising and delighting longtime critics of his frequent roles as . But when it comes to insider trading in the financial industry, Schumer can still be Schumer.
The latest example is a complex scheme that helps the cryptocurrency industry circumvent stablecoin regulations. Stablecoins are cryptographic tokens that are pegged to a trusted currency such as the US dollar or a commodity such as gold and are used to make payments, often purchasing digital assets. Schumer plans to tie the bill to an unrelated bill that would allow marijuana businesses to obtain bank accounts. Yes, that's right.
Schumer wants to avoid hearings and scrutiny from the Senate Banking Committee, whose chairman, Sen. Sherrod Brown (D-Ohio), doesn't like weakening crypto regulations. Instead, Schumer wants to incorporate both measures into a must-pass holdover bill that would fund the Federal Aviation Administration. You can't make this up.
What a triple beat! Perhaps Boeing executives could get stoned and fly on the marijuana they bought from the store they banked while speculating in stablecoins.
Part 1 of the agreement is the law for protection Companies that issue and speculate in stablecoins with effective federal standards and oversight, as sought by Stock Exchange Chairman Gary Gensler. The bill, heavily promoted by the industry and Republican House Financial Services Chairman Patrick McHenry (R-North Carolina), leaves regulation of stablecoins up to the states and is being adopted by the New York State Department of Financial Services. It follows a weak regulatory template. Under Superintendent Adrian Harris.
Ms. Harris was appointed by Gov. Kathy Hochul, another Wall Street friend. Mr. Harris began his career at the big law firm of Sullivan & Cromwell, then worked at the Obama Treasury Department before bringing fintech to the land title industry.
Schumer's goal is clearly to keep New York the epicenter of the crypto industry. However, this could lead to a race to the bottom as other states bid for stablecoin business with the weakest regulations. He called Schumer's office for an interview or comment, but did not receive a response.
Other works by Robert Kuttner
In principle, stablecoins differ from crypto products, which are more volatile, as they are pegged to some physical currency or asset. The issuer claims to ensure stability by having adequate reserves. But in reality, stablecoins are never stable. By the end of 2022, all major stablecoin issuers will be the subject of federal investigations, and since then, several issuers have gone bankrupt, had their assets unpegged, or faced hefty fines and criminal charges. I received it.
The stablecoin market is currently worth $157 billion and continues to grow. It is also possible that new federal legislation preempting increased regulation will be deemed approved and may override the SEC.
One of the most popular stablecoins is USDT, issued by Tether, a company owned by Hong Kong-registered company iFinex, which also owns cryptocurrency exchange Bitfinex. This shows you the potential regulatory rabbit hole.
You might ask, why do we need stablecoins if they are essentially a civilian version of the dollar or gold? Governments issue fiat currency, not private companies. The United States tried it during the free banking era of the 19th century, but it was a huge failure. The industry answer is that stablecoins provide a good way for users to obtain reliable units of value that can be used to trade digital currencies. In that sense, the existence of stablecoins only facilitates more risky and potentially fraudulent schemes that threaten consumers.
What we need is regulatory oversight, and the crypto industry wants to avoid that.
The cryptocurrency industry has relied on Representative McHenry to push for their preferred version of this bill. Mr. McHenry has been in on-and-off negotiations with the committee's Democratic partner, Rep. Maxine Waters (D-Calif.), to see if a bipartisan bill could be passed. Mr. Waters is primarily a progressive, but he is under pressure from House Democrats who want to raise money from the crypto industry and wants to work with Mr. McHenry as much as possible. Mr. Schumer met privately with Mr. McHenry and Mr. Waters late last week to discuss the details of the bill, two very well-informed sources said.
In effect, there are several important things that New York's regulatory model does not accomplish. One of the risks is a conflict of interest on the part of issuers who both create and trade stablecoins. Publishers, by definition, know more than their customers. New York State's regulatory scheme also does not prohibit commingling of assets.
An extensive analysis by Americans for Financial Reform notes that last year's House bill, the Stablecoin Payments Transparency Act of 2023, is too permissive in what counts as stablecoin reserves. Failed to request an audit. Failed to mandate deposit insurance. The authority of the SEC also declined. There is an ongoing battle between Schumer, McHenry and Waters over this year's language.
Schumer's goal is clearly to keep New York the epicenter of the crypto industry. However, this could lead to a race to the bottom.
Another concern is that stablecoins fall between the established rules of banking and securities regulation. New laws may provide further insulation. Some versions of the Stablecoin Bill fail to prevent the use of stablecoins for money laundering.
In 1999, Congress repealed most of the Glass-Steagall Act, but some provisions remained. Under Section 21(a) of Glass-Steagall, if a financial institution accepts deposits, it may be regulated as a bank. That can and should also apply to stablecoin creators.
In September 2022, after an extensive interagency process following up on President Biden's Executive Order on the Responsible Development of Digital Assets, the White House announced a whole-of-government approach to regulating cryptocurrencies. This comes on the heels of the May 2022 crypto crash that wiped out $600 billion in consumer and investor assets.
While this framework disappointed those who had no desire for government blessing of cryptocurrencies, the mandate and framework called attention to multiple risks of abuse and placed the SEC in the lead regulator's seat. Mr. Schumer's bill would undermine the White House framework.
Previously, when crypto industry friends in Congress tried to sway the White House with weak stablecoin regulations, two allies in senior White House positions supported tougher regulations: National Economic Council Director Brian Deese; I heard Deputy Commissioner Bharat blocked that idea. Ramamurti. Both men are now gone, and it's unclear who in the current White House is paying close attention. Lael Brainard, the current head of the NEC, is said to be skeptical of the legislation being pushed by the industry. Deputy Treasury Secretary Wally Adeyemo also warned against the misuse of blockchain.
One of the few critical lawmakers paying close attention is Sen. Elizabeth Warren (D-Mass.), who argues that any bill should include tough measures against money laundering. Mr. Schumer is reportedly willing to comply with Mr. Warren's request, but it is unclear whether Mr. McHenry will do so, and money laundering issues could undermine the entire bill.
Warren outlined her concerns in a letter to McHenry and Waters last week. She writes in part: “Policymakers will not integrate stablecoins into the formal banking system or extend accompanying safety net protections to stablecoin issuers without strong rules to ensure safety and soundness.” We must be cautious in our approach and 'same risks, same activities, same regulations' to reduce risks to consumers, financial stability and national security. ”
With the Republican-led House in turmoil, Mr. McHenry may not be able to get enough of his own caucus on the bill, which could mean he will have to join Mr. Waters, Mr. Schumer and the Democrats. That's why we need staff. The entire plan could collapse under its own weight.
What happens to the rest of the proposed deal?: A bank account for a pot shop? The problem for the marijuana industry is that marijuana remains illegal under federal law, even in states that have legalized its sale for medical or recreational purposes. Because of this, banks have become reluctant to allow cannabis businesses to open bank accounts.
Under current federal guidelines from the Financial Crimes Enforcement Network (FinCEN), these banks could be significantly challenged by several due diligence requirements. The proposed bill, known as the SAFER Banking Act, would create a “safe harbor” that protects banks from regulatory hassles if they open accounts for marijuana businesses in states where marijuana is legal.
Over the past few years, versions of this bill have passed the House of Representatives a whopping seven times, but have never passed the Senate and become law. Last September, the SAFER Act passed the Senate Banking Committee on a 14-9 vote with Schumer's support.
Every time the House advances a bill, the Senate tries to add to or expand upon it to win votes or districts. That never worked. This time, our crypto friends are getting the attachment. Reauthorizing the FAA is just a convenient tool that is likely to pass the House and Senate by next month.
There are two puzzles left. The SAFER bill would not legalize marijuana under federal law, so it's not entirely clear how much safety it would actually provide. Many banks may remain wary of opening bank accounts, as restrictions on banking regulations still need to be heard in court.
It's also not clear who Schumer's proposed deal is with. Replacing light-touch stablecoin regulations with the SAFER bill does not appear to garner votes for either bill. Perhaps both are good for the banking industry, especially the New York banks and finance players that Schumer wants to help.
Some believe the transaction involved campaign funds. The cryptocurrency industry remains one of the country's largest campaign spenders. Last month, a crypto super PAC publicly targeted two of the most threatened Senate Democrats, Sen. Brown and Sen. Jon Tester (D-MT). These two men happen to be ranking members of the Senate Banking Committee. Cryptocurrency PAC already needs to spend about $80 million in 2024.
By courting the banking and cryptocurrency industries in this way, Democrats may be able to avoid a barrage of campaign ads. But the financial industry would clearly be much happier with a Republican Senate. There are multiple ways for political money to flow, and even with an unenforceable agreement, Mr. Brown and Mr. Tester are likely to remain on the hit list.
Democratic complicity in weak regulation of risky financial products is egregious enough. It's even worse if it's done in stealth.
