This article was compiled and organized by BlockWeeks
U.S. Department of the Treasury Sends Letter to Congress Seeking Sweeping Expansion of Authority Over Crypto and DeFi
On Tuesday, the U.S. Department of the Treasury submitted a letter to Congress proposing a series of legislative amendments aimed at strengthening counter-terrorism financing measures. This letter, which has not yet been made public, builds on concerns raised last month by more than 100 U.S. lawmakers in a letter to the Treasury Department and the National Security Advisor.
The letter points out that existing financial sanctions tools struggle to cope with terrorists' increasingly sophisticated financing methods. The Treasury Department's core recommendations are two.
First, develop a brand-new secondary sanctions tool specifically targeting the financial technology (FinTech) and cryptocurrency sectors. This tool is similar to existing correspondent account or payable-through account (CAPTA) sanctions, but has been adjusted to address the unique challenges of modern financial platforms. The Treasury Department notes that existing CAPTA sanctions work effectively in traditional banking, but are inadequate against cryptocurrency exchanges and some money services businesses that do not rely on traditional correspondent banking relationships.
Second, substantially update the legal and regulatory framework for financial transactions, including amending the Bank Secrecy Act (BSA) and the International Emergency Economic Powers Act (IEEPA). The proposed amendments would redefine the scope of "financial institutions" under the BSA to include cryptocurrency exchanges, virtual asset service providers (VASPs), virtual asset wallet providers, blockchain validators, and decentralized financial services. In addition, the Treasury Department recommends creating explicit authorization for IEEPA to designate specific blockchain nodes or cryptocurrency transaction elements, in order to address the decentralized characteristics of such technologies.
The letter also recommends expanding the Office of Foreign Assets Control (OFAC)'s jurisdiction over U.S. dollar-backed stablecoin transactions, even if the transactions do not involve any U.S. touchpoint. Specifically, this means clarifying that IEEPA and BSA jurisdiction should apply to foreign entities that have dealings with the U.S. financial system, while providing alternative compliance arrangements for entities located in Financial Action Task Force (FATF) compliant jurisdictions.
These recommendations signify a major shift in the Treasury Department's regulatory orientation—to adapt to the new global landscape of crypto finance and fintech, the U.S. financial regulatory mechanism will undergo a systematic overhaul.
Why It Has Sparked Strong Concerns
The CAPTA-like crypto and fintech secondary sanctions tool proposed by the Treasury Department is relatively targeted and may help limit correspondent banks from processing transactions for sanctioned entities. However, redefining a category of "financial institutions" under the BSA that includes exchanges, VASPs, wallet providers, certain blockchain validator nodes, and DeFi services brings multiple hidden dangers.
This approach would require entities such as blockchain validators and DeFi protocols to handle sensitive personal and financial information, thereby opening up new user data acquisition and attack surfaces. More critically, the proposal is extremely broad, encompassing pure software providers or infrastructure components as well, without distinguishing between the technology itself and the transactions occurring on it. As Austin Campbell said on X: "It's a bit like requiring ACH itself to do KYC/AML... requiring browsers to undergo KYC... and requiring roads to KYC cars before they can proceed."
In addition, the proposal repeatedly brings up OFAC's jurisdiction over U.S. dollar-denominated stablecoins, regardless of who issues the stablecoin, who holds primary regulatory authority, or where it is issued—all should be subject to its jurisdiction. This is something any crypto practitioner, or anyone who believes banking law and trade finance rules should not be rewritten in this context, should be wary of. Essentially, this would re-underwrite U.S. banking law, granting the Treasury Department broad and unprecedented power over any form of U.S. dollar anywhere in the world. If it actually comes to pass, entities with no connection to or interaction with the United States would likely find it hard to accept. Imagine if foreign governments began asserting regulatory jurisdiction over banking transactions between U.S. individuals—how would the United States and its entities feel?
Beyond its content, the very existence of this letter and its submission to Congress are also significant. The Treasury Department does not often send targeted "calls to action" to Congress, and even when it does, it is usually done through closed-door communications, executive orders, or reports. This time, the Deputy Secretary of the Treasury personally wrote to Congress, suggesting that coordinated discussions around policy are taking shape, perhaps intending to hitch a ride on a "must-pass" piece of legislation currently under consideration by Congress—the most relevant being the National Defense Authorization Act (NDAA), to which lawmakers have long sought to attach their own policy priorities (not limited to crypto).
A New Generation of Bitcoin Mining Pools and Stratum V2
The Bitcoin mining pool landscape is undergoing new changes. Ocean mining pool has explicitly stated it will filter OP_RETURN transactions, especially Ordinals and BRC-20 related transactions, a stance that has drawn fierce criticism from the Bitcoin community on Twitter. The root of the criticism is that inscription-related transactions have historically accounted for 20% to 60% of network transactions, which are highly profitable for miners. Notably, Ocean's first mined block included inscription-related transactions but may have filtered out OP_RETURN-related transactions.
Previously, well-known mining pools such as Braiins have launched Stratum V2 pools, requiring miners to run SV2 software and send SV2 packets. Demand, meanwhile, is an innovative model for solo mining and a step in the SV2 implementation process. With Braiins, Ocean, and Demand all beginning to adopt Stratum V2, SV2 developers can use these three pools as case studies to further stress-test the protocol.
This new wave of mining pools embracing Stratum V2 is progress in optimizing how pools and miners communicate and in spreading awareness of SV2's importance throughout the mining industry. Although large pools such as AntPool, Foundry, and ViaBTC have not yet adopted it, the technical improvements brought by SV2 should not be overlooked. A previous Stratum V2 research report noted that the Stratum V1 protocol was not originally designed for today's such high hash rates—when V1 was introduced, Bitcoin's total network hash rate was only about 12 Th/s, whereas today it has grown exponentially to over 480 EH/s. Faced with continuously and rapidly rising hash rates, upgrading this core protocol that has served the mining industry for over a decade is imperative, and Stratum V2 is therefore seen as the most promising upgrade direction: its protocol is clearly defined, well-documented, and can lower the barrier to entry for miners.
DeFi Hacks: When Code Fails, Law Is Still Law
Regarding this DeFi attack incident, one reality is: even if hackers obtain the assets, it is very difficult for them to freely spend the stolen funds without increasing the risk of identity exposure—on-chain forensics and investigations will continue to track them. The claim that "code is law" and that the rules executed and not executed by smart contracts can ultimately determine the ownership of on-chain assets does not hold. In most cases, especially in DeFi hack incidents, protocol parties such as the Kyber development team will rely on law enforcement to recover user funds. When code fails—which happens from time to time in DeFi protocols—law is still law.
On-Chain Yields Begin to Cross a Key Threshold
On-chain interest rates are crossing an important threshold. The annual percentage yield (APY) on stablecoin supply is gradually approaching off-chain U.S. dollar rates, while the output efficiency of other crypto assets is beginning to outperform competing off-chain assets and strategies. This is crucial for understanding the crypto demand narrative: the incentive to hold and utilize on-chain assets is beginning to exceed off-chain alternatives. The recent bottoming and rebound of stablecoin supply also suggests the tide may be turning.
The yields achievable on leading DeFi stablecoins have been testing off-chain U.S. dollar yields. Although liquidity contraction (fewer stablecoins deployed into on-chain lending markets) has pushed up on-chain yields, this in turn gives users an incentive to deploy dollars on-chain rather than through off-chain channels.
On the other hand, the output capacity of crypto assets in key application models such as MakerDAO is steadily increasing. The blended average rate Maker charges users who mint DAI using crypto assets has reached a year-to-date (YTD) high; the spread between the rates achievable on these assets and off-chain assets is also at a YTD high. The average RWA rate is 3.68%, while the average for crypto assets is 5.51%, a spread of 1.83%—a signal that demand for crypto assets is rising.
Other Notable Developments This Week
- Coinbase informed some customers that it received subpoenas related to Bybit.
- The Sei blockchain will add Ethereum Virtual Machine (EVM) support in its V2 upgrade.
- AntPool agreed to refund a record $3 million Bitcoin transaction fee.
- MicroStrategy bought $593.3 million worth of Bitcoin and may raise up to $750 million more through a new stock offering.
- The Cosmos founder will airdrop forked ATOM1 tokens to voters who opposed lowering the Hub's inflation.
- Circle partnered with SBI Holdings to seek to expand USDC's presence in Japan.
- After Binance announced the delisting of Tornado Cash tokens, their price plummeted 56%.
