Business
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.”
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.
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.”
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.”
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.
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.”
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.
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.
He sits in a conspicuous baseline seat, where he cheers like nobody’s watching.
The large balding man in long sleeves roars with every splashed basket, gestures with every scintillating pass, face reddening, arms flailing, celebrating so hard he once ripped a hole in his dress shirt.
He could be any die-hard Clippers fan, with one exception.
He owns the team.
Steve Ballmer is the perfect symbol of the power of Hollywood hope, the strength of California dreaming and the resilience of those who come here searching for a miracle.
Discover the changemakers who are shaping every cultural corner of Los Angeles. This week we bring you The Money, a collection of bankers, political bundlers, philanthropists and others whose deep pockets give them their juice. Come back each Sunday for another installment.
Ranking eighth on the Forbes 500 list with an estimated net worth north of $120 billion, Ballmer could afford to buy any sports team in any league.
He chose to buy the Clippers, spending $2 billion in 2014 for a perennial loser and one of five teams to never reach the NBA Finals.
“A team comes up for sale in a city I love that’s near me?” said Ballmer, 68, a former Microsoft executive who lives in Washington state. “You say, ‘OK, but it’s the Clippers,’ and my theory is, you can do anything if you put your mind to it.”
As the richest owner in North American professional sports, he had the wealth and influence to move the bedraggled franchise to a city far away from the big brother Lakers, perhaps even into his adopted hometown of Seattle.
‘It was clear to me, we had to have our own home, our own identity.’
— Clippers owner Steve Ballmer
Yet he doubled down and not only kept the Clippers in town but spent another $2 billion to build his own arena: the glitzy Intuit Dome, which is scheduled to open in October in Inglewood.
“It was clear to me, we had to have our own home, our own identity,” Ballmer said.
Cynics would describe his ownership of the Clippers as charity work, but his real philanthropy has had an even larger impact in the region, with his Ballmer Group investing hundreds of millions of dollars in everything from inner-city businesses to the renovation of 500 Clipper Community Courts in diverse pockets of the city.
“Impacting kids is the kind of thing that pulls at my heart,” Ballmer said. “A fan will tell me that he drove past a Clipper court and I’ll think, that’s really, really, really cool.”
Ballmer is accessible, generous and, most of all, the head cheerleader for a drowned-out swath of a Lakers-owned city.
“I love our die-hard fans,” he said. “I love the culture of c’mon, we have a chip on our shoulder, we’ve got something to prove, we’ve never done it before, c’mon!”
It is a Thursday afternoon early in the 2023-24 NBA season and Steve Ballmer is shouting into the phone, because of course he is, the sound of undying faith, the voice of a true believer, c’mon!
More from L.A. Influential
Occidental College’s Board of Trustees voted this week not to divest from companies with ties to Israel, saying the move would further divide the campus and limit freedom of expression.
In a letter to students, faculty and staff on Monday, Occidental Board of Trustees Chair Lisa H. Link acknowledged the devastating effects of the Israel-Hamas war but said that taking a position on a complex geopolitical situation could alienate certain members of the community and undermine its diversity.
“The diversity of community members’ opinions was a compelling reason to refrain from acting on the proposal, as the Board believes a decision in favor of the proposal would be divisive and damaging to the College community,” she said.
The divestment proposal set forth by leaders of the Occidental chapter of Students for Justice in Palestine in May called for the college to identify and disclose any investments in four manufacturing companies that have provided arms and equipment to the Israeli military.
The board said Occidental’s endowment does not include direct investments in any of the four companies.
Indirect investments in the Israel-linked companies make up less than 0.1% of the college’s endowment assets and are managed by third parties that restrict the college’s ability to divest from specific parts of a fund, Link said.
“The Board believes it is not in the best interests of the College, or our current and future students, to jeopardize the endowment by divesting from managed funds that have minimal exposure to certain companies,” she said in the letter.
The board’s vote on the divestment proposal hinged on students taking down their pro-Palestinian encampment, not impeding commencement and not returning to occupy a space on campus without prior approval.
The board held the vote after Occidental’s school year ended in early June.
Matthew Vickers, a co-organizer of the encampment and spokesperson for Occidental’s Students for Justice in Palestine, said he was disappointed by the board’s decision but not surprised.
“Based off of the pressure from Zionist parents and off-campus organizations such as the Brandeis Center and [the Anti-Defamation League] and personal political biases of the Board of Trustees, they caved in to rejecting divestment,” he said.
The Louis D. Brandeis Center for Human Rights Under Law and the Anti-Defamation League filed complaints with the U.S. Department of Education’s Office for Civil Rights in May against Occidental and Pomona College, accusing the universities of permitting discrimination and harassment of Jewish students on their campuses.
Occidental Hillel directed inquiries to Director for Religious and Spiritual Life Susan Young, who declined to comment on the board’s decision not to divest and the alleged antisemitism on campus.
Although the board’s vote came after many students had vacated campus for the summer, Vickers said students who are still in L.A. are planning to hold actions on and off campus to protest the board’s refusal to divest.
On UCLA’s campus, students continue to stage pro-Palestinian protests into the summer, erecting a new encampment on Monday that resulted in about two dozen arrests.
“People are still galvanized and willing to continue the struggle,” Vickers said.
For decades, it seemed that Pixar couldn’t lose.
Starting with “Toy Story” in 1995, the Emeryville, Calif.-based computer animation studio rolled out hit after hit, with movies that achieved critical acclaim as well as box office riches.
But after the COVID-19 pandemic struck, even the once-unflappable Pixar fell victim to the doldrums plaguing the entertainment industry and the company’s own missteps.
Films such as “Lightyear” did poorly at the box office, partly due to their timing during the pandemic and a perceived falloff in quality, for which Pixar had long been considered the gold standard. Parent company Walt Disney Co. has cut back spending across the board, resulting in about 175 layoffs at Pixar, largely due to the studio pulling back on series for streaming service Disney+.
Now with “Inside Out 2,” the much-anticipated sequel to 2015’s “Inside Out,” Pixar is looking to make a comeback.
Hitting theaters this week, “Inside Out 2” is tracking for one of the highest opening weekends of the year so far, with a projected $80 million to $85 million in ticket sales from the U.S. and Canada. Some analysts say the movie could become the first film of the year to clear $100 million in its domestic box office opening weekend. (The movie’s budget is estimated at $175 million.)
“Pixar was the leading edge of creating this art form,” said Ron Bernard, academic chair of animation and motion design at Otis College of Art and Design. “I’m hoping that [“Inside Out 2”] would revitalize the interest in Pixar films.”
“Inside Out 2” continues the story of Riley, now a teenager, who grapples with new emotions such as Embarrassment, Anxiety and Envy alongside longtime pals Joy, Sadness and Anger.
The anticipated numbers are remarkable, considering so many movies this year have come in below expectations on opening weekend, including George Miller’s prequel “Furiosa: A Mad Max Saga” and the Ryan Gosling- and Emily Blunt-led action-comedy “The Fall Guy.” A strong debut will give a jolt of confidence to not only Pixar but beleaguered theaters, whose box office revenues are down 26% so far this year compared with 2023.
Presale numbers are promising. As of earlier this week, online ticketseller Fandango said “Inside Out 2” had already outsold its predecessor in advance ticket sales at five days before opening and is currently the highest advance ticket-selling Pixar film since 2019’s “Toy Story 4” at the same point in the sales process.
“Enthusiasm for the film is impressive as we prepare to dive back into the beloved world of ‘Inside Out,’” Jerramy Hainline, executive vice president of Fandango, said in a statement.
The overall box office this year has been muted due to the combination of still-slow-to-recover theater attendance, production delays from last year’s dual labor strikes and a handful of high-profile flops. Pixar hasn’t been immune to these larger, industry-wide challenges.
Bad timing doomed Pixar’s “Onward,” which was released in theaters on March 6, 2020, right before the pandemic shuttered cinemas across the nation. The movie went on to gross just $141 million worldwide. It also got mixed reviews by Pixar standards.
The move by studios early in the pandemic to move most theatrical films to streaming services also diminished the cultural effect of new Pixar releases.
“Soul” went directly to Disney+ in December 2020 and to theaters in some select countries; it wound up winning Oscars for animated feature and original score. 2022’s “Turning Red” also got sent to Disney+ first, despite theaters having reopened by then.
Exhibitors and cinephiles grumbled that Disney was training family audiences to stay home and stream new movies, rather than load up the minivan and trek to theaters.
“When a movie is a hit in theaters, you can’t do better,” said David A. Gross, who publishes FranchiseRe, a movie industry newsletter. “The theatrical release is the locomotive pulling the train.”
The studio also had some creative stumbles. 2022’s “Lightyear” bombed after replacing Tim Allen with Chris Evans as the voice of Buzz Lightyear. Last year’s “Elemental” had a slow start but eventually made about $496 million worldwide. It got decent — but not stellar — reviews.
Pixar’s quality also suffered from Disney’s orders across the board to produce more content for its streaming service, experts say. Churning out so many films and animated series led to creatives being spread thin at Disney studios, including Pixar, Lucasfilm and Marvel.
But the studio is also a victim of its own success. Disney’s 2006 acquisition of Pixar for $7.4 billion is widely credited with reviving Disney’s animation business. Pixar movies of the past regularly hit $750 million at the global box office, making even “Elemental” seem like a flop in comparison.
“There’s nothing wrong with that at all, it’s just the Pixar standard is so incredible,” Gross said. “Pixar has such a remarkable track record, and they’ve set such a high standard for the industry and for themselves.”
The original “Inside Out” generated $858 million in global sales after opening with $90 million in the U.S. and Canada. Pixar’s best-performing movie, 2018’s “Incredibles 2,” tallied $1.24 billion worldwide.
More broadly, families were slow to return to theaters due to health concerns as well as the ease of watching movies in their living rooms. But they are coming back. Last year’s animated “The Super Mario Bros. Movie” from Universal Pictures and Illumination Entertainment brought in $1.4 billion worldwide.
Box office watchers are hopeful for an animation-heavy slate toward the end of this year, with “Despicable Me 4,” “Moana 2” and “Sonic the Hedgehog 3.”
While “Inside Out 2” will be a major test for Pixar, the next question, Gross said, will be whether the studio can recapture its old magic with a new story — not a sequel or spinoff. Its next opportunity to answer that is in June 2025, when Pixar is slated to release “Elio,” an original movie about a young boy’s intergalactic adventure.
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