U.S. Sen. Cynthia Lummis had a pointed question for Federal Reserve Chairman Jerome Powell during a recent Senate Banking Committee hearing.
What is the United States doing to ensure it maintains a globally competitive edge when it comes to digital assets?
“The European Union, United Kingdom, Australia, Switzerland and Singapore, among others, have already moved to create legislative frameworks governing digital assets,” said the Wyoming Republican. “The European Union, in particular, is attempting to be a standard-setter in this space.
“Without action, the United States stands to be a rule-taker instead of a rule-maker. We must act swiftly to fully integrate digital assets into our financial system in order to remain the global financial leader.”
Powell’s response lobbed the tennis ball straight back to Lummis.
“I think it’s important for us to have a workable legal framework around digital activities,” Powell said. “I think that is important, and something Congress, in principle, needs to do because we can’t really do that.”
Battle Lines Being Drawn
The exchange is one of many from politicians in various camps at a time of increasing turmoil in the financial sector.
Not only has the FTX meltdown rocked the cryptocurrency industry, but no fewer than three crypto-friendly banks failed in as many days in the past week. Even though the cryptocurrency aspect was a mere bystander in those bank failures, they were still talking points from a Biden administration that has become increasingly hostile toward digital assets.
Lummis told Cowboy State Daily on Thursday that she will try again for a national regulatory framework that would make at least some of Wyoming’s framework national.
A rewritten version of the Lummis-Gillibrand legislation she and Sen. Kirsten Gillibrand, D-New York, introduced last year should be ready sometime in April.
“If the United States falls behind, and the SEC continues to regulate digital assets through enforcement actions instead of by setting out a clear set of regulations with which digital assets can comply, the digital asset innovators are going to leave the United States,” Lummis said. “They will go to places where there is a more well understood, clear regulatory framework.”
That will have extremely negative implications for Wyoming’s own digital aspirations.
The Cowboy State is working to attract the leaders of this emerging sector, similar to the way South Dakota captured credit card companies. Thanks to that, South Dakota has around 40,000 jobs in that sector and is home to the headquarters for about half of credit card companies.
“It’s absolutely critical that the United States Congress get off its rear and regulate in the space in a manner that allows for innovation here in the U.S.,” Lummis said.
Crypto Crackdown Hits Wyoming
Lummis’ effort comes amid a crackdown on all things digital by federal regulatory agencies. Wyoming companies, which were attracted to the Cowboy State because of its robust and clear regulatory framework, have been prominent victims.
State-chartered Custodia Bank, for example, which has been fighting for access to the Federal Reserve system for three years, found its application summarily rejected. That’s despite laws written hand-in-glove with the Federal Reserve for Wyoming’s Special Purpose Depository Institutions, like Custodia Bank.
In fact, Gov. Mark Gordon, who was among the architects of Wyoming’s SPDI laws, is himself a Federal Reserve insider having once served on a board for the Kansas City Federal Reserve.
The SEC, meanwhile, has targeted the nation and Wyoming’s first legally recognized Decentralized Autonomous Organization, American CryptoFed DAO, with an enforcement action. DAOs are not banks. They are more like a digital club, whose members come together for a common purpose. That purpose could involve any number of things, from trading digital artwork and kickstarting new companies to collecting funds to buy something, such as a copy of the American constitution.
American CryptoFed wants to set up a frictionless payment system that would eliminate costly transaction fees like those merchants pay when customers use credit cards.
The SEC’s enforcement action is despite repeated requests from American CryptoFed DAO for guidance, company officials have told Cowboy State Daily. They are still hopeful, based on some of the judge’s comments in the case, for a favorable outcome — eventually.
And then there’s Kraken, another Wyoming SPDI. It was slapped with a $30 million settlement over its crypto-staking product, which lets customers pledge their coins to run blockchains like Ethereum.
The coins can generally be unstaked at any time, and the popular service was making customers a 24% return, according to company officials. But the SEC has accused it of being an unregistered security.
Kraken has agreed not to offer the staking product in the United States anymore. But it’s still available everywhere else in the world, through a subsidiary.
No Help For DAOs
Lummis said the bill she and Gillibrand are bringing will clarify what is a commodity and what’s a security, and will be a good start on a comprehensive regulatory framework.
It will not, however, contain any help for Wyoming CryptoFed DAO. The portion that dealt with DAOs has been removed from the legislation.
“It’s just too early,” Lummis said. “Wyoming is really way ahead, and has been since Day One, ahead of the rest of the nation in its creation of statutory recognition for some of these new laws.”
Eventually, Lummis believes, Wyoming’s frameworks will find widespread adoption just as Wyoming LLCs did back in the day.
“It took a while for the IRS to determine that (an LLC) is a pass-through entity,” Lummis said. “But as soon as the IRS made that designation, the rest of the nation adopted limited liability companies, and now they’re absolutely ubiquitous.”
Eventually, Lummis believes the same dynamic will hold true for Wyoming’s digital asset laws.
“(Wyoming’s laws) are yet another example of how states are incubators of innovation,” she said. “And certainly, when it comes to the world of digital assets, the Wyoming Legislature has truly been way ahead of the rest of the nation, including Congress, in its vision.”
Custodia Also Not Covered
The bill also doesn’t have much help for Wyoming’s digital banks.
The lawsuit Custodia has filed against the Federal Reserve over the rejection of its master account is the most likely avenue there, Lummis said.
“If federal agencies want to stonewall the American people, regardless of what the law says, they do,” Lummis said. “They do it at the EPA, for example, when it comes to issuing federal oil and gas leases. We see it all the time around the federal government, and this is yet another case of human beings taking more authority than I believe they have by statute.”
Lummis said the rejection of Custodia Bank’s master account application was particularly shocking, given the level of cooperation Wyoming gave to the Federal Reserve when it crafted its legislation.
“They even ran the bank examination manuals – which are very comprehensive, very thorough – they ran them by the U.S. Treasury Department and they ran it by the Federal Reserve Bank of Kansas City,” Lummis said. “And both entities were complimentary of (them) and didn’t really criticize Wyoming’s bank examination manuals as inadequate in any way.”
For Custodia to then “get the door slammed in its face” has been a “source of frustration” for both Wyoming and her office, Lummis said.
“Custodia complied in every way with the federal laws necessary to be awarded a federal master account, and yet the Fed won’t do it,” she said. “So, I’m somewhat beside myself that the Federal Reserve is treating the Wyoming SPDI law and applicants for master accounts pursuant to Wyoming law with such disdain.”
Despite the areas the bill won’t cover, it’s still a key starting point, not just when it comes to talking about NFTs, cryptocurrencies and stablecoins, she said. The regulatory framework could help stem the tide of hostility that seems to be emerging from the Biden administration.
“That creates additional challenges for the digital asset community because, without Congress weighing in and creating a statutory regulatory framework, these executive agencies have sort of free range to interpret the law the way they wish and to use the existing regulatory framework against digital assets,” Lummis said.
A reset button is urgently needed, Lummis suggested, along with consumer protections.
“If Lummis-Gillebrand were in place, and if FTX had been an American company instead of a Bahamas company, FTX could not have done what they did,” she said.
FTX’s rehypothecation, which refers to loaning the same dollar over and over again, and the creation of its own digital asset — which was pumped up with sales to Alameda and then summarily dumped, leaving investors high and dry – are all spelled out as illegal in the Lummis-Gillibrand framework, as is a lender acting simultaneously as a custodian.
“Those are just blatantly fraudulent behaviors,” Lummis said. “And under Lummis-Gillebrand, that cannot happen. So, there’s consumer protection (there) that does not exist in law, which is important and necessary,” Lummis said, if America wants to be the place where digital asset innovation not only occurs, but is shaped.