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Crypto-Focused National Defense Authorization Act Amendments
What happened?
Last week, several crypto-related amendments were proposed to the House version of the fiscal year 2025 National Defense Authorization Act (NDAA). Amendment 165, proposed by Representative Brad Sherman (D-CA) not made “in order” by the Rules committee (meaning it did not receive further consideration), would have provided the Treasury Secretary with authority to “prohibit digital asset trading platforms and transaction facilitators under U.S. jurisdiction from transacting with cryptocurrency addresses that are known to be, or could reasonably be known to be, in Russia.” The amendment would have also directed FinCEN to require U.S. taxpayers engaged in a transaction with a value greater than $10K of cryptocurrency offshore to file FinCEN Form 114 (FBAR).
However, several blockchain related amendments did make it into the House rule, including: Amendment 256, which establishes a working group to identify potential applications for blockchain technology, smart contracts, or distributed ledger technologies to improve efficiencies or functions at the Department of Defense. Next, Amendment 1012 prohibits the Department of Defense from acquiring, procuring, or utilizing blockchain network infrastructure or capabilities originating from foreign adversaries. The legislative package passed the House 217-199 and will now need to be reconciled with the Senate version that is currently in progress.
What does this mean?
The NDAA is a large, annual legislative package that outlines the funding and priorities for the U.S. military and defense-related activities for a given fiscal year. The NDAA is an annual act that Congress must pass each fiscal year to avoid disrupting national security operations. Because it is one of the few bills each session that usually passes, many members of Congress try to attach various amendments to it. As the NDAA process is a long one, with over a thousand amendments being proposed, there is still time for plenty of debate and advocacy. We’ll be keeping an eye on the Senate’s version for potentially relevant provisions as well.
Senator Warner Amendment to Intelligence Authorization Act
What happened?
Senate Intelligence Chair Mark Warner’s (D-VA) included an amendment to the Senate’s Intelligence Authorization Act for 2025 (IAA), which authorizes annual funding for intelligence-related programs and activities, that would dramatically expand sanctions authorities related to digital asset transactions.
The amendment would require the President and Treasury to identify and designate for secondary sanctions “Foreign Digital Asset Transaction Facilitators” (FDATFs) that “knowingly facilitated” transactions with specially designated nationals (SDNs). The amendment defines FDATFs as “any foreign person or group of persons that, as determined by the Secretary, controls, operates, or makes available a digital asset protocol or similar facility, or otherwise materially assists in the purchase, sale, exchange, custody, or other transaction involving an exchange or transfer of value using digital assets.” In other words, the definition of FDATFs would encompass all participants in the digital asset space.
Additionally, the amendment would revise and expand Section 311 of the PATRIOT Act, which authorizes the Secretary of the Treasury to impose a set of “special measures” on US financial institutions’ interactions with foreign financial institutions, accounts, or classes of transactions the Secretary deems to be a “primary money laundering concern” (PMLC). This provision would implement a sixth special measure that would allow the Treasury to prohibit US financial institutions from engaging in “transmittal of funds” (a term the Secretary would be authorized to define) with PMLCs.
Of note, POLITICO’s Eleanor Mueller reported that Senator Warner is “open to tailoring his crypto sanctions bill to address industry concerns that it’s too broad.”
What does this mean?
The amendment to the IAA has broad implications for the crypto industry at large. First, because of the amendment’s catchall definitions, the secondary sanctions could prohibit US persons from transacting with any foreign person involved in the industry, be it a miner, validator, or any other person who “makes available” protocols (as determined by the Secretary) or “materially assists” in exchange of value.
Second, by adding special measure six to Section 311 of the PATRIOT Act, the Treasury would now have the authority to impose prohibition or conditions on financial institutions’ association with a class of transactions they deem to be a PMLC, which was not previously included in their special measures. So, if, for example, the Treasury deems transactions to or from noncustodial wallets as a PMLC, financial institutions, like Coinbase, could be prohibited or restricted from engaging with said transactions on behalf of their customers, basically eliminating their on- and off-ramp utility.
Fortunately, because this is a “must-pass bill,” it will still likely go through heavy negotiation. As Alex Grieves expressed in a tweet, the House’s version of the IAA never looks like the Senate's version and that there are still “many months and opportunities to make changes.”
SEC Chair Gensler and CFTC Chair Benham Testify Before the Senate
What happened?
Last Thursday, the Senate Appropriations Committee held a hearing on the 2025 federal budget requests to fund the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). The hearing featured witness testimony from SEC Chair Gary Gensler and CFTC Chairman Rostin Behnam. Chair Gensler emphasized the need for greater regulation and additional resources for capital markets regulation, while Chair Behnam highlighted the importance of technological innovation in derivatives markets as the world becomes more digitized.
Republican Senators challenged Chair Gensler, particularly concerning privacy issues related to the SEC’s rollout of the Consolidated Audit Trail (CAT). They also stressed the need for clear regulations on digital assets and warned about the potential offshoring of the crypto industry. In contrast, Democratic Senators vindicated the SEC’s implementation of CAT and praised its efforts to pursue “bad actors” in digital asset markets.
A major focus of the hearing was the allocation of resources to the SEC to support its numerous enforcement actions and ongoing litigation against crypto companies. Senators criticized the SEC for its increased 2025 budget request, cautioning that the added funding would be allocated to supporting the SEC’s anti-crypto enforcement campaign. Chair Gensler defended the agency, stating that it is “budget neutral” and arguing that many participants in the digital assets market have not properly registered. He reiterated his public position that the majority of crypto tokens are securities and thus should be registered and provide disclosures under SEC jurisdiction. Yet when asked if Ethereum is a commodity, Chairman Behnam responded with a simple “yes” while Chair Gensler equivocated for several minutes.
What does this mean?
The hearing highlighted a growing concern among members of Congress that the SEC is exploiting its funding and resources to pursue an enforcement campaign that has a chilling effect on the digital asset industry rather than focusing resources on its mandate to protect American investors. The testimony of Chair Gensler suggests that his stance has not changed in any material way. Chair Behnam’s testimony also indicates that CFTC’s perspective has not changed: that Ethereum is a commodity rather than a security.
DEF Hosts First Ever State of the Union
On June 11, DEF held its first DeFi State of the Union on X Spaces. We took stock of where things were on DeFi policy in the US, including how things developed in the last few years and the outstanding major legislative, regulatory, and legal issues. We also discussed how the community can engage with us to help make DeFi and crypto thrive.
