Senate Majority Leader Chuck Schumer (D-NY) surprised and pleased longtime critics of his frequent role as Wall Street’s man in Washington by stepping up to his new job and becoming an effective floor leader for President Biden’s expansive progressive programs. However, when it comes to insider deals for the financial industry, Schumer can still be Schumer.
The latest example is a convoluted scheme to help the crypto industry avoid regulation of stablecoins, crypto tokens that are pegged to a reliable currency, like the U.S. dollar or a commodity like gold, and are used for payments, often the purchase of digital assets. Schumer is poised to tie that bill to unrelated legislation that allows cannabis businesses to get bank accounts. Yes, you read that right.
Schumer hopes to avoid hearings or scrutiny by the Senate Banking Committee, whose chair Sen. Sherrod Brown (D-OH) doesn’t like weakening crypto regulation. Instead, Schumer wants to tack both measures onto must-pass pending legislation that funds the Federal Aviation Administration. You couldn’t make this up.
What a trifecta! Maybe Boeing execs can fly, stoned on marijuana purchased from shops that have bank accounts, while they speculate with stablecoins.
PART ONE OF THE DEAL IS LEGISLATION TO PROTECT companies that issue and speculate in stablecoins from effective federal standards and supervision, of the kind sought by Securities and Exchange chair Gary Gensler. The legislation, heavily promoted by the industry and by the Republican House Financial Services chair, Patrick McHenry (R-NC), would leave stablecoin regulation to the states, and follow the template of weak regulation used by the New York State Department of Financial Services under Superintendent Adrienne Harris.
Harris was appointed by Gov. Kathy Hochul, another good friend of Wall Street. Harris began her career at the BigLaw firm of Sullivan & Cromwell, then worked in the Obama Treasury, then brought fintech to the land title industry.
Schumer’s goal is evidently to keep New York as the center of the crypto industry. But this could lead to a race to the bottom, as other states bid for stablecoin business by offering the weakest regulation. I asked Schumer’s office for an interview or comment, and received no response.
In principle, a stablecoin differs from more volatile crypto products because of the peg to some physical currency or asset. Issuers claim to ensure stability by keeping adequate reserves. But in practice, stablecoins have been anything but stable; by the end of 2022, all the major stablecoin issuers were under federal investigation, and since then, several have disintegrated, de-pegged from their asset, or suffered major fines and criminal indictments.
The stablecoin market is currently worth $157 billion, and growing. New federal legislation preempting tougher regulation would be taken as a seal of approval, and could also sideline the SEC.
One of the most popular stablecoins is USDT, which is issued by Tether, a company owned by iFinex, the Hong Kong–registered company that also owns the crypto exchange Bitfinex. This gives you a sense of the potential regulatory rabbit hole.
You might ask, why do we need stablecoins at all, if they are basically a private version of the dollar or gold? Governments issue fiat currency, not private players. The U.S. tried that in the 19th-century era of free banking, and it was a disaster. The industry’s answer is that stablecoins provide a good way for users to have a reliable unit of value to use to trade digital currencies. In that sense, the stablecoin’s existence only facilitates more dangerous and potentially fraudulent schemes that threaten consumers.
What we need is regulatory scrutiny, and that’s what the crypto industry hopes to avoid.
The crypto industry has been relying on Rep. McHenry to carry its preferred version of this legislation. McHenry has engaged in on-and-off negotiations with his Democratic counterpart on the committee, Rep. Maxine Waters (D-CA), to see whether they can get a bipartisan bill. Waters is mostly a progressive but is under pressure from House Democrats who’d like to raise money from the crypto industry, and also likes to work with McHenry when she can. According to two very good sources, Schumer met personally with McHenry and Waters late last week to discuss details of the bill.
Substantively, there are several important things that the New York regulatory model fails to do. One risk is conflicts of interest on the part of the issuer, who both creates stablecoins and trades them, and who by definition knows more than the customer. New York’s regulatory schema also fails to prohibit commingling of assets.
Extensive analysis by Americans for Financial Reform points out that last year’s draft House legislation, the Clarity for Payment Stablecoins Act of 2023, was too permissive on what can be counted as stablecoin reserves; failed to require audits; failed to require deposit insurance; and diminished SEC authority. There continues to be jockeying among Schumer, McHenry, and Waters over this year’s language.
Schumer’s goal is evidently to keep New York as the center of the crypto industry. But this could lead to a race to the bottom.
Another concern is that stablecoins fall between the cracks of established rules of banking and securities regulation; new legislation could provide further insulation. Some versions of the stablecoin bill fail to prevent the use of stablecoins for money laundering.
In 1999, Congress gutted much of the Glass-Steagall Act, but some provisions were retained. Under Section 21(a) of Glass-Steagall, if an institution takes deposits, it can be regulated as a bank. That could and should apply to creators of stablecoins.
In September 2022, after an extensive interagency process following up on an executive order by President Biden on “Responsible Development of Digital Assets,” the White House released a whole-of-government approach to regulation of crypto. This came on the heels of a May 2022 crypto crash that wiped out $600 billion in consumer and investor assets.
While the framework disappointed those who didn’t want government blessing crypto at all, the order and framework called attention to the multiple risks of abuses and left the SEC as the lead regulator. Schumer’s legislation would undercut the White House framework.
When friends of the crypto industry in Congress previously tried to roll the White House on weak stablecoin regulation, I’m told that two allies of tough regulation in senior White House posts shut the idea down: National Economic Council director Brian Deese and deputy director Bharat Ramamurti. Both are now gone, and it’s not clear who at the current White House is paying close attention. Lael Brainard, the current head of the NEC, is said to be skeptical of the legislation the industry is pushing; and Wally Adeyemo, deputy Treasury secretary, has also warned against blockchain abuses.
One of the few critical legislators who is paying close attention is Sen. Elizabeth Warren (D-MA), who is insistent that any legislation contain tough measures against money laundering. Schumer is reportedly receptive to Warren’s demand, but it’s not clear that McHenry would go along, and the money-laundering issue could kill the whole bill.
Last week, Warren summarized her concerns in a letter to McHenry and Waters. She wrote, in part: “Policymakers should be wary of efforts to integrate stablecoins into the formal banking system—or extend any of the concomitant safety net protections to stablecoin issuers—without strong rules that ensure safety and soundness, respect the bedrock principle of ‘same risk, same activity, same regulation,’ and mitigate risks to consumers, financial stability, and our national security.”
With the Republican-led House in disarray, McHenry may not be able to deliver enough of his own caucus for this bill, which is why he needs Waters, Schumer, and the Democrats. The whole scheme might collapse under its own weight.
WHAT OF THE OTHER PART OF THE PROPOSED DEAL: bank accounts for pot shops? For the marijuana industry, the problem is that even in states that have legalized its sale for medical or recreational use, marijuana remains illegal under federal law. This makes banks reluctant to allow businesses that deal in cannabis to open bank accounts.
Under current federal guidelines by the Financial Crimes Enforcement Network (FinCEN), such banks can incur massive headaches with several due diligence requirements. The proposed bill, known as the SAFER Banking Act, would create a “safe harbor” that insulated banks from regulatory hassles if they opened accounts for marijuana businesses in states where pot is legal.
In past years, versions of this bill have passed the House a whopping seven times, but have never made it past the Senate and into law. Last September, the SAFER bill made it out of the Senate Banking Committee, 14-9, with Schumer’s support.
Every time the House has advanced the bill, the Senate has tried to attach something or other or broaden the bill to bring votes or a constituency along. It’s never worked. This time, the crypto bros are getting the attachment. The FAA reauthorization is just a convenient vehicle that is likely to pass the House and Senate by next month.
Two puzzles remain. The SAFER bill does not make marijuana legal under federal law, so it’s far from clear just how much of a safe harbor it would actually provide. Since its constraints on bank regulation would still have to be tested in court, a lot of banks might remain gun-shy about opening bank accounts.
It’s also less than clear who Schumer’s proposed deal is a deal with. Trading light-touch stablecoin regulation for the SAFER bill doesn’t seem to pick up any votes for either. More likely, both of these are favors for the banking industry, especially those banks and financial actors in New York, whom Schumer would like to give a helping hand.
There are also some who see campaign finance in this deal. The crypto industry remains one of the biggest campaign spenders in the country. Last month, crypto super PACs openly targeted the two most threatened Senate Democrats, both of whom happen to be senior members of the Senate Banking Committee: Sens. Brown and Jon Tester (D-MT). Crypto PACs already have about $80 million to spend in 2024.
Doing these favors for the banking and crypto industry may result in Democrats avoiding a barrage of campaign ads. But the financial industry would obviously be much happier with a Republican Senate. There are multiple ways to channel political money, and even with some unenforceable deal, it’s likely that both Brown and Tester will remain on their hit lists.
Collusion by Democrats in weak regulation of hazardous financial products is bad enough. It is even worse when it is done by stealth.
