The United States Office of Government Ethics (OGE), released their Legal Advisory 22-04 July 5. Most attention was paid to the conclusion that federal employees who have any amount of crypto or stablecoins may not be able to participate in regulation or policymaking related to crypto. There were some eyebrows raised by the legal advisory (LA). De minimis exemptions, which are threshold amounts below which assets can be held, are common in government. It is easier to understand the LA when it is viewed in a wider context.
They were thinking.
Interviews are not granted by the OGE. So it was lucky that an OGE Senior Associate Counsel Christopher Swartz video discussing the LA appeared on their YouTube channel just days after Cointelegraph inquired. Swartz addressed several points and stressed that the LA was an interpretation of current law in order to assist federal employees. The OGE does not have a position on digital assets.
In 2018, the OGE issued an advisory on federal employees disclosing crypto assets. Swartz explained that cryptocurrency is being increasingly adopted by federal employees and the public.
“We recognized that it was time for us to revisit the area. Make sure we have established ground rules, especially as it relates conflict of interest law which is a criminal.
Swartz said that Swartz was referring specifically to a 1962 law. It “prevents federal workers from participating in any matter in which they may have a financial interest.” It is deliberately broad and “agnostic”, in terms of the details. The law does not contain any substantiality elements, but there is a de minimis exception to allow federal employees to have small amounts of anything.
Related: US Congressional Hearing on Digital Asset Regulation focuses on Disclosure
The law gives the OGE the power to waive conflict of interest laws on employees and classes of employees if the financial interest is not too distant to impact the expected services of the employees. In consultation with the OGE, agencies can offer exemptions on a case by case basis.
In 1996, the OGE made some exceptions. An exemption covers publicly traded equity in companies that offer crypto services. According to the LA, a mutual fund that is registered and has exposure to crypto derivatives such as futures may be exempt from one of two exemptions. The de minimis exemption of $50,000 applies to sectoral funds, while the exemption applies to diversified mutual funds.
Crypto is not exempt from OGE, as it is not a publicly traded security. This applies even if individual stablecoins or cryptocurrencies are securities for the purposes of Federal or state securities laws,” states the LA states.
Cryptocurrency cannot be traded publicly.
According to the LA, “publicly traded security” has a narrower definition than “security”. The LA doesn’t address the wider question of whether cryptocurrencies or stablecoins can be considered securities. It also does not address the reasons why an exemption is not granted.
Aitan Goelman (partner at Zuckerman Spaeder) and ex-director of the Commodity Futures Trading Commission’s enforcement division told Cointelegraph:
“If Ripple were my client, I would ask the OGE for their opinion, even though they take pains not to differentiate its definition of publicly traded securities and the securities under the [the] Howey [test].
Goelman said, “The OGE’s views are very influential at agencies.”
Cointelegraph consulted all experts who agreed that the agency had high moral authority, and no political agenda.
Philip Moustakis is a counsel in the Seward & Kissel cryptocurrency and blockchain practice groups. He was formerly a member of the SEC asset manager unit.
Experts also agreed that the LA should be observed across the government, even though OGE does not have enforcement powers. It seems that ethics standards are well-known. Although the LA’s commentary and interpretation of how mutual funds are subject to disclosure requirements may be new, ethics requirements are not.
Moustakis stated that employees of the Securities and Exchange Commission must already report their securities holdings.
Elizabeth Boison is a partner at Hogan Lovells, a former Department of Justice (DOJ), prosecutor, and member of the department’s National Cryptocurrency Enforcement Team.
“Before regulators gave clarity on these rules, this was what the regulators were doing in any way. […] We would discuss this issue [at DOJ] even if there was no guidance. However, it was not something we were holding.
Goelman noted that corruption perceptions have been a major political issue in recent years. The LA helps to reduce the perception of financial impropriety within government.
The downside to the OGE LA
Goelman was asked what it would take to make an OGE regulation that allows de minimis cryptocurrency holding. He replied, “motivation.” Swartz rejected the argument that a ban on crypto ownership would discourage people from seeking government jobs. Swartz stated that the OGE had created ways to help “remove financial entanglement” for new federal employees. There are still arguments for policymakers to hold crypto.
Boison stated that one of the most important things a regulator must understand is how these things function. Boison cited Know Your Customer procedures as an example of activity where regulators can benefit from real-life experience. She suggested that regulators be allowed to use a “sterile, sterilized lab” environment in which they can go through the procedures.
Related: Know your customer: The future for KYC in crypto
LA 22-04 was followed ten days later by another advisory on crypto-related matters, this one focusing on disclosure of nonfungible tokens (NFT) holdings. If “held for investment, production of income” or fractionalized or collectible NFTs in excess of $1,000 must be reported. Profits from NFT investments exceeding $200 during the reporting period also need to be reported.