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Column: With Democratic assent, House votes to open loopholes in crypto regulation

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Column: With Democratic assent, House votes to open loopholes in crypto regulation

Money, as we all know, is the mother’s milk of politics in America. It can look even more nourishing if you can manufacture it yourself.

That’s surely what accounts for the solicitude that the cryptocurrency industry has been receiving from Congress.

The House on Wednesday passed a law reducing regulation of crypto, despite ample evidence that the asset class has been a haven for fraudsters, extortionists and worse.

The law will “make the United States safer for drug traffickers, for terrorist funders, for child and drug traffickers and those who buy and sell child pornography,” said Rep. Sean Casten (D-Ill.), listing a few of the documented users of crypto in recent years. “I did not know those groups had such proud advocates in Congress.”

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The crypto industry’s record of failures, frauds, and bankruptcies is not because we don’t have rules or the because the rules are unclear. It’s because many players in the crypto industry don’t play by the rules.

— SEC Chairman Gary Gensler

Casten may find himself in the House minority in more ways than one. Crypto promoters have managed to peel several Democrats in the House and Senate away from the party’s strong opposition to reducing regulations on the asset class.

Earlier this month, bipartisan majorities in both chambers voted to roll back a two-year-old Securities and Exchange Commission guideline for how financial institutions should account for crypto assets left in their care by customers. President Biden said he would veto the change, and the majorities in neither chamber were large enough to overrule a veto.

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The congressional crypto caucus handed the industry another victory Wednesday, when the House passed the Financial Innovation and Technology for the 21st Century Act, known as FIT21. The vote was 279 to 136, with 71 Democrats joining the Republican majority.

The measure’s fate is unsure in the Senate, which hasn’t yet taken it up. Biden has stated his opposition to FIT21 but hasn’t promised a veto, which the crypto gang and its supporters seem to think is a big victory. Biden said that he was willing to negotiate a regulatory system that protects crypto consumers and investors without unduly interfering with innovation, but “further time will be needed.”

If it becomes law, FIT21 would deliver to crypto promoters their most heartfelt desire: removing them from the jurisdiction of the powerful SEC and transferring oversight to the chronically underfunded and understaffed Commodity Futures Trading Commission.

Their goal is understandable, since the SEC has been explicit about its intention to regulate crypto as securities, subjecting the asset class to the disclosure rules and safeguards against fraud that have made the traditional financial markets in the U.S. the safest in the world.

During Wednesday’s floor debate, the bill’s advocates talked of the virtues of freeing an innovative technology from “overzealous regulators” — that was Rep. Cathy McMorris Rodgers (R-Wash.), mouthing words that could have been dictated to her by crypto executives — and relieving them of “regulatory uncertainty.”

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SEC Chairman Gary Gensler put the latter claim to rest in a statement about FIT21 he issued Wednesday a few hours before the vote. “The crypto industry’s record of failures, frauds, and bankruptcies is not because we don’t have rules or because the rules are unclear,” he stated. “It’s because many players in the crypto industry don’t play by the rules.”

The bill’s advocates tried to pump up the importance of crypto as a financial asset with claims that 20% of Americans are crypto owners. There’s no evidence for this. On the contrary, the Federal Reserve has found that interest in crypto among ordinary Americans is weak and fading.

In its most recent survey of the economic condition of U.S. households, issued this month, the Fed determined that only 7% of Americans bought or held crypto as an investment (down from 11% in 2021) and only 1% had used it to buy anything or make a payment. That underscores the most important truth about crypto, albeit one its promoters seldom acknowledge: No one has yet identified a genuine purpose for crypto in the real world.

“The entities that stand to benefit from this bill are not ordinary investors trying to build wealth,” Rep. Maxine Waters (D-Los Angeles), the ranking Democrat on the House Financial Services Committee, said from the House floor Wednesday, “but rather the crypto firms. … They have already made billions of dollars unlawfully issuing or facilitating the buying and selling of crypto securities.”

Waters accurately described the effect of FIT21 as placing crypto effectively into a regulatory “no man’s land.” She described the bill as “an extreme MAGA libertarian approach, where companies can operate without regulatory scrutiny, and consumers and investors are on their own on detecting and avoiding fraudulent schemes.”

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What’s most striking about the push for FIT21 is that it comes so closely on the heels of major scandals in the crypto space. Sam Bankman-Fried, the founder of the crypto firm FTX, was sentenced in March to 25 years in jail for crypto fraud, after having been convicted in November on seven federal counts related to fraud.

During the heyday of FTX, Bankman-Fried appeared before congressional committees to promote a tailor-made regulatory scheme for crypto bearing close resemblance to the one embodied in FIT21.

Just last month, Changpeng Zhao, founder of the international crypto firm Binance, was sentenced to four months in prison on federal money-laundering charges; Zhao had earlier agreed to pay a $50-million fine, and Binance settled the government case against it for $4.3 billion.

The SEC is pursuing a lawsuit against the crypto exchange Coinbase for selling unregistered securities. In March, federal judge Katherine Polk Failla denied the firm’s motion to quash the case. Her reasoning effectively explains why FIT21 is not only unnecessary, but harmful: “The ‘crypto’ nomenclature may be of recent vintage,” she wrote, “but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.”

The counterweight to the arguments against FIT21 is cash — the green variety, not the notional type marketed by cryptocurrency firms. Three super PACs formed by crypto executives and investors have raised about $85 million to spend on 2024 political races.

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The financial potency of this industry’s campaign spending isn’t in question. One of the PACs, Fairshake, spent more than $10 million over the last year in opposition to Rep. Katie Porter (D-Irvine) in her race for the Democratic nomination for U.S. Senate.

Porter was known as a strong critic of crypto. In 2022 she joined Sen. Elizabeth Warren (D-Mass.) — the most vociferous crypto critic on Capitol Hill — in an investigation of how crypto “mining” by computer had affected the energy grid in Texas and raised energy prices for consumers.

Porter lost the Senate race. Her victorious opponent in the primary, Rep. Adam Schiff, has taken a much more indulgent position toward crypto, listing it on his campaign website among the “new developments in technology … we need to grow” in order to keep jobs and regulatory oversight in U.S. hands.

In the current congressional election cycle, Fairshake has made $702,300 in donations to Democratic campaigns and $551,700 to Republicans. Its largest single recipient is Rep. Patrick McHenry (R-N.C.), chairman of the House Financial Services Committee and sponsor of FIT21. His campaign has received $126,626 even though he has announced that he is not running for reelection this year and retiring from Congress.

In his statement, Gensler tried to strengthen the lawmakers’ understanding of the risks they were endorsing with the measure. The bill would “create new regulatory gaps and undermine decades of precedent” in the regulation of investment contracts, he wrote, “putting investors and capital markets at immeasurable risk.”

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It would allow crypto promoters to “self-certify” that their products lay outside traditional regulations and give the SEC only 60 days to respond. By removing crypto trading platforms from the regulatory structure overseeing stock and bond exchanges, it would open the door to conflicts of interest by reducing consumer protections against the platforms commingling their funds with client funds.

The bill also exempts crypto promoters from rules requiring risky investments to be offered only to accredited investors—those with a net worth of more than $1 million, not counting their primary residence, or income over $200,000 (for couples, $300,000) in each of the prior two years.

The cynical device FIT21 uses to neuter the SEC’s oversight of crypto investments is to turn that task over to the CFTC. As the regulatory watchdog Better Markets observes, the CFTC has a budget of only $365 million, versus the SEC’s $2.1 billion, and fewer than 700 employees, compared to the SEC’s approximately 4,500 staffers).

The bill “would heap a whole new set of responsibilities on the CFTC, making it the de facto regulator of countless new crypto exchanges and broker-dealers,” Better Markets wrote, even though the CFTC “does not have the funding to fulfill all its current statutory mandates.”

The debate Wednesday that preceded the House passage of FIT21 was typically tone-deaf and filled with fictitious and factitious assertions. Rep. Mike Flood (R-Neb.) invoked the FTX scandal, which saw billions of dollars in clients’ and investors’ crypto deposits illegally appropriated by the firm’s leaders. “We need to ensure that there are the protective rules that prevent anything like that happening again,” he said.

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Flood asserted that, under FIT21, FTX would have been barred from registering as an exchange, and it would not have been able to commingle its funds with those of its clients. One wonders what he was talking about. FTX was barred from registering as an exchange, and didn’t do so. Why? Because Bankman-Fried, its founder, knew that to do so would have subjected the firm to SEC oversight, which no one in crypto wants to undergo.

As for commingling funds, it’s already illegal — it’s one of the practices that landed Bankman-Fried in prison.

The bottom line is very clear. There’s no justification for bestowing on crypto a hand-manufactured regulatory scheme all of its own. Its promoters have no argument other than to claim that they need regulation-lite to foster “innovation,” when the result will be to facilitate the cheating of customers, laundering money or lubricating ransomware attacks like the one that has disrupted the crucial operations of the UnitedHealth Group subsidiary Change Healthcare, which manages reimbursement processes for medical providers nationwide.

If there’s a corner of the financial world crying out for tougher regulation, it’s crypto. For Congress to even contemplate a slackening of the regulation that already exists is nothing short of absurd. But Congress doesn’t respond to practicalities; it responds to money. That’s the only driver of efforts like FIT21.

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After a pandemic strike, nurses union must pay Riverside hospital millions in damages

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After a pandemic strike, nurses union must pay Riverside hospital millions in damages

The union representing nurses at Riverside Community Hospital has been ordered to pay more than $6 million to the hospital for the fallout from a 2020 strike.

The unusual financial penalty was imposed by an arbitrator who found the 10-day work stoppage during the pandemic violated the terms of the labor agreement signed by HCA Healthcare, which operates the hospital, and Service Employees International Union Local 121RN. The $6.26-million fine, the arbitrator determined, was necessary to compensate the hospital for the cost of replacing workers who walked off the job during the strike, according to a statement released Wednesday.

Nurses walked off the job in June 2020 in an effort to force the hospital to increase staffing and improve safety as COVID-19 infections surged, the union said at the time. But hospital officials argued that because nurses also voiced complaints about shortages of personal protective equipment, the reasons for the strike were too expansive to be allowed under the collective bargaining agreement the two sides had signed.

“Our contract was clear, and the union showed reckless disregard for its members and the Riverside community by calling the strike,” said Jackie Van Blaricum, president of HCA Healthcare’s Far West Division, who was the hospital’s chief executive during the strike. “We applaud the arbitrator’s decision.”

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SEIU 121RN Executive Director Rosanna Mendez objected to the arbitrator’s findings, saying nurses were permitted under their contract to go on strike. She called the arbitrator’s decision “absurd and outrageous.”

“It is absolutely shocking that an arbitrator would expect nurses to not talk about safety issues,” Mendez said, adding that the union was exploring its options to contest the arbitrator’s decision.

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Supreme Court rejects California man's attempt to trademark Trump T-shirts

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Supreme Court rejects California man's attempt to trademark Trump T-shirts

The Supreme Court on Thursday turned down a California attorney’s bid to trademark the phrase “Trump Too Small” for his exclusive use on T-shirts.

The justices said trademark law forbids the use of a living person’s name, including former President Trump.

The vote was 9-0.

Trump was not a party to the case of Vidal vs. Elster, but in the past he objected when businesses and others tried to make use of his name.

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Concord, Calif., attorney Steve Elster said he was amused in 2016 when Republican presidential candidates exchanged comments about the size of Trump’s hands during a debate. Florida Sen. Marco Rubio, whom Trump had mocked as “Little Marco,” asked Trump to hold up his hands, which he did. “You know what they say about guys with small hands,” Rubio said.

After Trump won the election, Elster decided to sell T-shirts with the phrase “Trump Too Small,” which he said was meant to criticize Trump’s lack of accomplishments on civil rights, the environment and other issues.

Legally he was free to do so, but the U.S. Patent and Copyright Office denied his request to trademark the phrase for his exclusive use.

When he appealed the denial, he won a ruling from a federal appeals court which said his “Trump Too Small” slogan was political commentary protected by the 1st Amendment.

The Biden administration’s Solicitor Gen. Elizabeth Prelogar appealed and urged the Supreme Court to reject the trademark request.

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She acknowledged that Elster had a free-speech right to mock the former president, but argued he did not have the right to “assert property rights in another person’s name.”

“For more than 75 years, Congress has directed the U.S. Patent and Trademark Office to refuse the registration of trademarks that use the name of a particular living individual without his written consent,” she said.

Writing for the court, Justice Clarence Thomas said Thursday: “Elster contends that this prohibition violates his 1st Amendment right to free speech. We hold that it does not,”

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Elon Musk blasts Apple's OpenAI deal over alleged privacy issues. Does he have a point?

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Elon Musk blasts Apple's OpenAI deal over alleged privacy issues. Does he have a point?

When Apple holds its annual Worldwide Developers Conference, its software announcements typically elicit cheers and excitement from tech enthusiasts.

But there was one notable exception this year — Elon Musk.

The Tesla and SpaceX chief executive threatened to ban all Apple devices from his companies, alleging a new partnership between Apple and Microsoft-backed startup OpenAI could pose security risks. As part of its new operating system update, Apple said users who ask Siri a question could opt in for Siri to pull additional information from ChatGPT.

“Apple has no clue what’s actually going on once they hand your data over to OpenAI,” Musk wrote on X. “They’re selling you down the river.”

The partnership allows Siri to ask iPhone, Mac and iPad users if the digital assistant can surface answers from OpenAI’s ChatGPT to help address a question. The new feature, which will be available on certain Apple devices, is part of the company’s operating system update due later this year.

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“If Apple integrates OpenAI at the OS level, then Apple devices will be banned at my companies,” Musk wrote on X. “That is an unacceptable security violation.”

Representatives for Musk and Apple did not respond to a request for comment.

In a keynote presentation at its developers conference on Monday, Apple said ChatGPT would be free for iPhone, Mac and iPad users. Under the partnership, Apple device users would not need to set up a ChatGPT account to use it with Siri.

“Privacy protections are built in for users who access ChatGPT — their IP addresses are obscured, and OpenAI won’t store requests,” Apple said on its website. “ChatGPT’s data-use policies apply for users who choose to connect their account.”

Many of Apple’s AI models and features, which the company collectively calls “Apple Intelligence,” run on the device itself, but some inquiries will require information to be sent through the cloud. Apple said that data is not stored or made accessible to Apple and that independent experts can inspect the code that runs on the servers to verify this.

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Apple Intelligence will be available for certain models of Apple devices, such as the iPhone 15 Pro and iPhone 15 Pro Max and iPad and Mac with M1 and later.

So does Musk have a point? Technology and security experts who spoke to The Times offered mixed opinions.

Some pushed back on Musk’s assertion that Apple’s OpenAI deal poses security risks, citing a lack of evidence.

“Like a lot of things that Elon Musk says, it’s not based upon any kind of technical reality now, it’s really just based upon his political beliefs,” said Alex Stamos, chief trust officer at Mountain View, Calif.-based cybersecurity company SentinelOne. “There’s no real factual basis for what he said.”

Stamos, who is also a computer science lecturer at Stanford University and a former chief security officer at Facebook, said he was impressed with Apple’s data protection efforts, adding, “They’re promising a level of transparency that nobody’s really ever provided.

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“It’s hard to totally prove at this point, but what they’ve laid out is about the best you could do to provide this level of AI services running on people’s private data while protecting their privacy,” Stamos said.

“To do the things that people have become accustomed to from ChatGPT, you just can’t do that on phones yet,” Stamos added. “We’re years away from being able to run those kinds of models on something that fits in your pocket and doesn’t burn a hole in your jeans from the amount of power it burns.”

Musk has been critical of OpenAI. He sued the company in February for breach of contract and fiduciary duty, alleging it had shifted its focus from an agreement to develop artificial general intelligence “for the benefit of humanity, not for a for-profit company seeking to maximize shareholder profits.” On Tuesday, Musk, who was a co-founder of and investor in OpenAI, withdrew his lawsuit. Musk’s San Francisco company, xAI, is a competitor to OpenAI in the fast-growing field of artificial intelligence.

Musk has taken aim at Apple in the past, calling it a “Tesla graveyard,” because, according to him, Apple had hired people that Tesla had fired. “If you don’t make it at Tesla, you go work at Apple,” Musk said in an interview with German newspaper Handelsblatt in 2015. “I’m not kidding.”

Still, Rayid Ghani, a machine learning and public policy professor at Carnegie Mellon University, said that, at a high level, he thinks the concerns Musk raised about the OpenAI-Apple partnership should be raised.

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While Apple said that OpenAI is not storing Siri requests, “I don’t think we should just take that at face value,” Ghani said. “I think we need to ask for evidence of that. How does Apple ensure that processes are there in place? What is the recourse if it doesn’t happen? Who’s liable, Apple or OpenAI, and how do we deal with issues?”

Some industry observers also have raised questions about the option for Apple users who have a ChatGPT account to link it with their iPhone, and what information is collected by OpenAI in that case.

“We have to be careful with that one — linking your account on your mobile phone is a big deal,” said Pam Dixon, executive director of the World Privacy Forum. “I personally would not link until there is a lot more clarity about what happens to the data.”

OpenAI pointed to a statement on its website that says, “Users can also choose to connect their ChatGPT account, which means their data preferences will apply under ChatGPT’s policies.” The company declined further comment.

Under OpenAI’s privacy policy, the company says it collects personal information that is included in the input, file uploads or feedback when account holders use its service. ChatGPT has a way for users to opt out of having their inquiries used to train AI models.

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As the use of AI becomes more entwined with people’s lives, industry observers say that it will be crucial to provide transparency for customers and test the trustworthiness of the AI tools.

“We’re going to have to understand something about AI. It’s going to be a lot like plumbing. It’s going to be built into our devices and our lives everywhere,” Dixon said. “The AI is going to have to be trustworthy and we’re going to need to be able to test that trustworthiness.”

Night Archiving Supervisor Valerie Hood contributed to this report.

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