Crypto & Fintech

By Mark Hays, Associate Director for Cryptocurrency & Financial Technology with AFR/AFREF and Demand Progress

The latest version of the Senate crypto legislation was released late on May 11, just two days before the bill gets debated and voted on in the Senate Banking Committee. Negotiations on this bill have lasted months, largely behind closed doors and the crypto industry had a front seat at the drafting table. Even many Senate Democratic offices, including the Ranking Member of the Banking Committee, saw only excerpts during the negotiations. 

Now we know why: the bill is piled high with giveaways that will enrich the crypto industry and that puts the rest of us at risk, regardless of whether we choose to invest in crypto. 

Lets Trump’s Corruption Continue Unchecked:

The bill doesn’t even pretend to address the First Family’s multibillion dollar crypto business empire. It has no provisions restricting or prohibiting public and elected officials and their families from promoting, sponsoring, or endorsing crypto ventures while in office. The Trump family crypto ventures have raised national security alarms and give the appearance that the White House is for sale. Senate Democrats have said that tough ethics provisions are a red-line for them, but the bill contains none. Rumors continue to swirl that future ethics measures — pitifully weak, one suspects — will come later. As written, the bill rewards Trump for his corrupt self-dealing and sets him up to make billions of dollars more off shady crypto deals while in the White House.

Allows Risky Tokenized Shadow Stocks:

The bill allows crypto firms to issue “tokenized” versions of traditional assets like stocks and bonds — bypassing more robust investor protection rules and creating a whole new class of shadow stocks. These would be securities in all but name and regulation, loosely correlated with the stock of existing firms. This would generate billions in fees from retail investors for firms like Coinbase, the biggest U.S. crypto exchange, but at a high cost. It would undermine investor protections and financial stability measures for working families, retirement savers, and all investors. And not just those who touch crypto. This version contains even weaker language on tokenization than previous drafts by exempting more assets from securities laws. These changes primarily benefit one party — Coinbase — at the expense of everyone else.

Creates Huge Carveouts in Investor Protection:

The bill authorizes the Securities and Exchange Commission to create Regulation Crypto, which would let crypto token issuers offer products to investors without providing  investors adequate information about their companies, the tokens they are issuing, their management, or financial records through registration and disclosures that protect markets and investors. The crypto industry has long demanded exemptions from these securities requirements and sought refuge in the far weaker regulatory regime of the Commodity Futures Trading Commission. But the crypto industry wants to have its cake and eat too — it wants to sell crypto assets to investors in securities markets without letting investors really look under the hood, so they can sell whatever they want, to whomever, regardless of the risk. The bill would hinder the SEC from  requiring all crypto issuers to  meet  the same reporting and disclosure requirements as traditional firms.

Adds Anti-Money Laundering Escape Hatches:

Crypto has become the medium of choice for organized crime, rogue states, human traffickers, and more. These bad actors value the speed and relative anonymity of crypto transactions to launder hundreds of billions of dollars each year. Crypto firms have resisted applying the same anti-money laundering rules as the rest of the financial system, even as major firms like Coinbase and Binance have repeatedly been found guilty of major, willful failures that allowed billions of dollars in illicit financial flows to move through their platforms. Yet the bill’s anti-money laundering provisions water down current standards. They partially or totally exempt some decentralized finance (DeFi) platforms and crypto developers from these requirements. Earlier in the negotiations, when Democrats shared initial language offering modest DeFi regulatory requirements, Republicans leaked the text and the crypto industry panned it. The results show up here — this bill will continue to enable drug and human traffickers, rogue states and sanctioned oligarchs, and other fraudsters to launder their criminal proceeds with crypto. 

Undermines Private Right of Action and State Investor Protections:

State securities regulators have led efforts to protect investors from widespread crypto fraud and scams. Now that Trump’s regulators have given a green light to crypto criminals, state regulators are a critical backstop. But the bill’s provisions undermine state regulators’ civil and criminal law enforcement authority and jurisdiction, and other state consumer protection laws to boot. The bill also undermines the rights of private investors. Under existing law, private investors can sue to recoup losses and hold bad actors accountable. But the bill’s provisions undermine that right, meaning investors exposed to risky, deregulated crypto investors will have even fewer options to protect themselves against crypto predation and exploitation. 

Lets Banks Pursue Risky Crypto Business:

The bill allows banks to engage in a range of risky financial activities as long as they are linked to crypto. Banks are restricted or prohibited from high-risk activities like trading junk bonds, engaging in-house, proprietary trading, or operating hedge funds. That’s for good reason: These dangerous activities can lead to bank failures and financial instability that harms depositors, communities, and the economy. But under this bill, those risky activities would be totally allowed if they are tied to crypto. Banks will take advantage of these loopholes to chase risky crypto investments for high profits will expose more of the banking system — and the economy — to crypto’s volatility, risks, and harms. 

Generous Giveaways for Stablecoin Rewards Will Harm Community Reinvestment:

The flawed GENIUS Act stablecoin bill allowed crypto platforms to skirt the prohibitions against interest-bearing stablecoins that let the exchanges offer risky, speculative yield rewards for stablecoin holders. Crypto firms’ efforts to vacuum deposits out of community banks by offering outsized rewards will drain resources from community lending. If people switch from holding their cash in bank accounts to risky, not-so-stable stablecoins, it reduces community lenders’ ability to make home mortgage, small business, and farm loans. Senate negotiators recently brokered a stablecoin yield deal that gave crypto platforms and exchanges lots of legal leeway that permits a wide variety of risky and lightly regulated crypto rewards. 

Senators Can and Should Block This Flawed Bill 

The bill fulfills all of the crypto industry’s key wishes — which it should, it was written by and for crypto. It will enrich the crypto billionaires, crypto cronies, and the Trump family and it is packed with deregulatory giveaways for the industry. 

It is time for the Senate to reject this bill and go back to the drawing board. Cosmetic amendments just won’t cut it. Last August, a handful of Senate Democrats claimed they were going to only accept legislation that delivered high-watermark principles. This bill doesn’t meet that standard.

This bill represents a consequential moment in the legislative history of our financial system. Senators are facing a choice between standing up for the public interest and the fidelity of our economy or bowing to the wills of a billionaire-backed industry seeking to unabashedly buy political influence to line their pockets. Senators must oppose this bill and block its advancement at every vote.