U.S. ethics advisory on federal employee crypto has basis in legislation

When the United States Office of Government Ethics (OGE) issued its legal advisory 22-04 on July 5, most attention was paid to the conclusion that federal employees who own any amount of cryptocurrency or stablecoins cannot participate in any way in regulating and policy making relating to crypto. The Legal Advisory (LA) raised some eyebrows, which de minimis exceptions, threshold amounts below which assets are allowed, are common in government. LA is more understandable in a larger context.

What they were thinking

OGE does not grant interviews, so it was fortunate that a video of OGE Senior Associate Counsel Christopher Swartz discussing LA appeared on the office’s YouTube channel the day after Cointelegraph made a request. Swartz discussed several points in detail, emphasizing that the LA is an interpretation of current law to aid in its application to federal employees and “understand the law as it exists.” OGE has no position on digital assets in general.

OGE issued an advisory in 2018 on federal employee disclosure of crypto assets. In light of the growing use of cryptocurrency by the public and federal employees, Swartz explained:

“We realized that it was now ripe for us to revisit this area, make sure we have established ground rules, especially when it comes to conflicts of interest, which is a criminal law.”

The law Swartz referred to dates back to 1962 and “prevents federal employees from participating in a particular matter in which they have a financial interest,” according to Swartz. It is intentionally broad and “agnostic” as to the details. There is no element of materiality in the law, that is to say one de minimis exemption, to allow federal employees to keep small amounts of anything.

Related: The US Congressional hearing on digital asset regulation focuses on disclosure

Under the Act, OGE has the authority to waive the conflict of interest laws for all employees or classes of employees when the financial interest is too remote to affect the expected services of the employees. Agencies can grant exceptions on a case-by-case basis in consultation with OGE.

The OGE created some exemptions in 1996. Listed shares of a company engaged in crypto services are already covered by an exemption, for example. The LA specifies that a registered mutual fund with exposure to crypto derivatives, such as futures, may have one of two exceptions: a per se exemption for diversified securities funds or a de minimis exemption of $50,000 for sector funds.

No OGE exemption covers crypto, the LA states, because crypto does not qualify as an exchange-traded security. “This is true even if individual cryptocurrencies or stablecoins constitute securities under federal or state securities laws,” the LA says.

Cryptocurrency is not a listed security

The definition of “publicly traded security” is narrower than the definition of “security,” LA notes. The LA does not address the larger question of which cryptocurrencies or stablecoins are securities, nor does it address reasons for non-exemptions.

Nevertheless, Aitan Goelman, partner at Zuckerman Spaeder and former director of the Commodity Futures Trading Commission (CFTC) enforcement division, told Cointelegraph:

“If I were a lawyer representing Ripple, I think I would take up OGE’s opinion, even though OGE is trying to separate the definition of publicly traded securities from the definition of securities under [the] Howey [test].”

“OGE’s opinions are very influential at the agencies,” Goelman continued.

All the experts consulted by Cointelegraph agreed on the agency’s high moral authority and absence of political agenda.

Philip Moustakis, counsel in the Seward & Kissel blockchain and cryptocurrency practice groups and a former member of the SEC’s asset management unit, told Cointelegraph in an email, “I don’t think there’s any subtext to read at all.”

The experts also agreed that the LA would be observed throughout the government, although OGE has no enforcement authority to follow its regulatory authority. In fact, it appears that ethical standards are already widely adhered to. The LA’s interpretation and detailed comments on how disclosure requirements apply to mutual funds may be new, but ethical requirements are not.

“Employees of the Securities and Exchange Commission are already required to report their securities holdings,” Moustakis said.

Elizabeth Boison, partner at Hogan Lovells and former Department of Justice (DOJ) attorney and member of the department’s national cryptocurrency enforcement team, told Cointelegraph:

“Before the regulators clarified these rules, this is what the regulators did in any sense. […] Even absent guidance, we would talk about this issue [at the DOJ] and we generally did not keep it.”

Goelman observed that the perception of corruption has been a political issue recently, and LA contributes to a reduction in the perception of financial impropriety in government.

The downside of OGE LA

When asked what it would take for OGE to publish a regulation to create an exception to allow de minimis cryptocurrency holding, Goelman simply answered “motivation.” Swartz dismissed the argument that the ban on owning crypto would discourage people from pursuing government careers, saying the OGE had developed ways to help “remove the financial entanglement” of new federal employees. Nonetheless, there are arguments for politicians holding crypto.

“One of the things a regulator needs to understand is how these things work,” Boison said. She cited Know Your Customer procedures and wallet setup as examples of activities where real-world experience is valuable to regulators. She suggested the creation of a “sterile, sanitized lab” setting where regulators could go through the motions of the procedures.

Related: Know Your Customer: The Future of KYC in Crypto

LA 22-04 was followed 10 days later by another crypto-related advisory, this time on the disclosure of non-fungible token holdings (NFTs). Fractional and collectible NFTs worth $1,000 or more must be reported if they are “held for investment or the production of income,” as well as NFT investments that generate over $200 in profit during a reporting period.