Law Decoded: New threats to self-custody take shape in the US, Nov. 27–Dec. 4

Every Friday, Law Decoded delivers analysis on the week’s critical stories in the realms of policy, regulation and law. 

Editor's note

For several weeks, rumors have circulated in the United States that the Treasury Department under Steven Mnuchin is planning some sort of rulemaking to ban or severely restrict self-hosted cryptocurrency wallets.

The Treasury hasn’t made any public statements to support these rumors, but they are persistent and pervasive enough to be worth paying attention to. In the broader cycle of financial news, Secretary Mnuchin is currently under a lot more scrutiny for his plans to return nearly half a trillion dollars of unspent funds from the March CARES Act to the General Fund by the end of the year, which the administration of Joe Biden would need congressional approval to access. He’s also on his way out the door, so he’s really just settling up his tabs at this point.

Potential Treasury rulemaking is not the only threat to crypto on the horizon this week, but it is an interesting question. Without statutory defenses for self-custody and unhosted wallets from Congress, there’s really nothing to stop a Treasury order from holding legal weight, at least for some time. I, for one, have no faith in the Treasury’s technological wherewithal to actually enforce any blockade on unhosted wallets. However, if the department has the legal right to sue Coinbase, or Kraken, or Gemini for transactions with unhosted wallets, there is no question that such a move would cause the whole market to frost over.

A war on stablecoins?

Thursday evening, Rep. Rashida Tlaib (D-MI) introduced a new bill that would force stablecoins to abide by banking regulations.

Tlaib’s stated logic for the bill was “numerous barriers to accessing and utilizing mainstream financial institutions” that had led many low- and middle-income people to seek alternatives like stablecoins, which Tlaib’s announcement argued can take advantage of those people — which is not unfair, but the proposed solution of replicating the requirements of the existing financial system seems to put those people right back at square one.

The bill was met with immediate, widespread condemnation from all corners of the cryptocurrency community, which roundly criticized the legislation for disregarding crypto’s potential for aiding the unbanked and also for seemingly considering node operators to be the same as money transmitters.

Tlaib and co-sponsors Stephen Lynch (D-MA) and Jesús García (D-IL) are all on the House Financial Services Committee, which has been at the front lines of conflicts with Facebook’s Diem (née Libra) and legislation to expand federal payments in the aftermath of the COVID-19 pandemic. The actual odds of this bill passing into law are minimal, especially given that a new Congress is about to convene. But it does seem to be part of a broader narrative from these members of the committee that they plan to keep private-sector crypto innovation on a tight leash, which is fairly foreboding.

Facebook’s Libra, alias Diem

Speaking of controversial stablecoins, the Libra Association has changed its name to the Diem Association as of the beginning of the week.

There is an old rule that you don’t get to pick your own nickname. Conjuring images of a new day rising, the shift to Diem comes after Libra spent the first year and a half of its development getting totally rocked by regulators. The association subsequently stocked up on compliance professionals on its executive team. But it’s pretty clear that the name change is largely a PR maneuver to distance the initiative from those early struggles.

Alongside Facebook’s announcement of Libra last spring was a schema for the Libra Association, which would theoretically disperse authority away from Facebook into 100 corporate members of the association that would make decisions by vote. But nobody bought it. Congress dragged Mark Zuckerberg in to answer for the project. Headlines still identify it as “Facebook’s Libra.”

The corporate registry of Switzerland — where Libra is based — has yet to publicly change the Libra Association to the Diem Association. But nonetheless, it will be interesting to see how effective the shift ends up being. It will ultimately depend on how forgetful regulators are and how much traction the first Diem token, which will be dollar-pegged, can pick up when it launches.

The SEC’s FinHub gets an upgrade

Yesterday the Securities and Exchange Commission announced that the Strategic Hub for Innovation and Financial Technology, or FinHub, is becoming a stand-alone office.

There is very little reason for most people to know what that independence means. It does not mean that FinHub is going rogue, but it means that the office is on the same level as others like International Affairs or Compliance and Inspections.

Since 2018, FinHub has been the go-to venue for financial technologies companies looking to reach out to the Securities and Exchange Commission, but it has always been within the Division of Corporate Finance. FinHub leader Valerie Szczepanik, who previously reported to Corporate Finance Director William Hinman, will now be a director in her own right, reporting to the SEC’s chair.

As with much of what is happening right now with regulators facing turnover of appointees, this has the air of unfinished business. Both Hinman and SEC Chair Jay Clayton are leaving soon. The fact that they considered a structural shift to emphasize emerging technologies at the SEC a matter worth taking care of before departure is in itself significant. It’s pretty hard to undo that sort of institutional change once it’s happened.

Further reads

Coin Center’s Peter Van Valkenburgh spells out the myriad issues with the STABLE Act.

Writing for the Atlantic Council, Hung Tran argues that a digital yuan would have a long road ahead of it before seriously threatening the dollar’s dominance.

David Zaslowsky of law firm Baker McKenzie blogs on the crypto community’s response to the STABLE Act.