Senate Bill Targets Crypto Exchanges Linked to Terrorism, Industry Pushes Back

Key Takeaway

• A Senate bill could impose strict sanctions on crypto exchanges linked to terrorism, requiring significant user identification changes.
• Industry insiders are pushing back, with discussions ongoing and potential removal from the National Defense Authorization Act (NDAA).
• The House's recent pro-crypto legislation suggests bipartisan support, complicating the bill's passage without open debate.

Senate Bill's Crypto Implications

A recent piece of legislation embedded within the Senate Select Committee on Intelligence's funding package has significant implications for the digital assets sector. The bill, which aims to fund U.S. intelligence operations, includes a provision from an earlier bill designed to prevent the use of cryptocurrency to support terrorism. This provision could necessitate a substantial shift in the crypto industry towards identifying users' identities to prevent sanctions, potentially strangling digital assets businesses. If enacted, it would represent the most consequential U.S. crypto policy to date, all without substantial debate on its merits.

The provision would expedite and automate the process of sanctioning "foreign digital asset transaction facilitators," including crypto exchanges linked to users supporting terrorist groups. Despite the Intelligence Authorization Act passing the committee with a unanimous 17-0 vote, the crypto section was not publicly mentioned or listed among the bill's major provisions. Senator Mark Warner's office has since been arranging meetings with crypto sector representatives to discuss this section, indicating that the matter is still under consideration as the spending package moves towards wider Senate deliberation.

Industry Pushback and Legislative Dynamics

The crypto industry has expressed immediate pushback against the provision. Cody Carbone, chief policy officer for the Digital Chamber, stated, "We’ve chatted with Warner staff on this, and they’re open to broader engagement here from industry." Carbone believes the provision is likely to be removed from the National Defense Authorization Act (NDAA) process due to industry resistance.

The House of Representatives may also be reluctant to support such a provision, especially after recently approving the Financial Innovation and Technology for the 21st Century Act (FIT21), which aims to regulate the crypto industry without stifling it. The FIT21 Act saw bipartisan support, suggesting that crypto regulation could garner wide acceptance across Congress. This bipartisan support was further evidenced when 11 Senate Democrats voted with Republicans to overturn an SEC accounting policy, despite a veto from President Joe Biden.

The original bill backing the provision was supported by Senators Warner, Jack Reed, Mike Rounds, and Mitt Romney. However, the language in the spending bill could implicate a broader array of crypto interests than intended, potentially including central banks issuing central bank digital currencies (CBDCs) and software developers. This has raised concerns among industry insiders and users of market-leading stablecoins like Tether (USDT), which has been scrutinized for its use by bad actors.

Stablecoin Market Dynamics

Stablecoins have become a cornerstone of the cryptocurrency industry, facilitating transactions and providing a hedge against volatility. Tether's USDT, with $112 billion in assets, and Circle's USDC, with $32 billion, are among the largest stablecoins. These assets are invested in safe instruments like U.S. Treasuries, generating significant yields for issuers. However, stablecoin issuers have traditionally not shared these profits with token holders.

Rob Hadick, general partner at Dragonfly, noted that rising interest rates have made stablecoin issuers extremely profitable, leading to increased demands from partners and power users for a share of the revenue. While regulations in the U.S. and Europe prohibit stablecoin issuers from returning yield to users, competition is heating up globally. Firms like Ondo, Mountain, and Agora are introducing stablecoins that offer more equitable economic models. Paxos recently launched a yield-generating stablecoin regulated in the UAE.

PayPal's entry into the stablecoin market with PYUSD aims to leverage its extensive fintech and payments network. PYUSD is integrated with the Solana blockchain to facilitate faster, cheaper payments. Jose Fernandez da Ponte, PayPal's SVP and head of blockchain, envisions a future where corporate treasurers use stablecoins for payments while keeping liquidity in money-market funds.

Street Views

• Cody Carbone, Digital Chamber (Cautiously Optimistic on the legislative process):

  "We’ve chatted with Warner staff on this, and they’re open to broader engagement here from industry. I think it likely does get zapped out of the NDAA process given the immediate pushback from the industry."

• Cody Carbone, Digital Chamber (Neutral on crypto regulation):

  "Overall, we’re aligned with the goal of the legislation to cut off funding for foreign terrorist organizations, and I appreciate that it limits coverage to those groups that have 'knowingly' facilitated funds to bad actors... But the guidelines for identifying violators and the lack of a proportional – perhaps tiered – sanctions system could be problematic."