Crypto divide deepens as House and agencies grapple with regulation | Carta

Crypto divide deepens as House and agencies grapple with regulation

Author:

The Carta Policy Team

Published date:

June 8, 2023

House approves slate of bipartisan measures to expand access to private markets.

Topline

Debt crisis averted, but at a cost

Congress raised the debt ceiling in a deal Speaker McCarthy negotiated. Then the far-right retaliated. A small conservative faction in the House has begun to block procedural measures, essentially paralyzing any floor activity. This group is holding the House—and its ability to legislate—hostage. While McCarthy’s gavel has not yet been challenged, the impasse caused GOP leadership to cancel votes for the remainder of the week. Deepening fractures in the Republican caucus will make navigating a narrow majority even more difficult—and is a dynamic that could upset the ability to govern and pass a capital markets package this Congress.

House approves slate of bipartisan measure to expand access to private markets

Before the House closed down, it unanimously passed two additional measures to further expand onramps for individuals to qualify as accredited investors, building on last week’s efforts to allow individuals to qualify through examinations. The Fair Investment Opportunities for Professional Experts Act and the Accredited Investor Definition Review Act would enable more individuals to qualify as accredited investors based on educational and professional experience and enshrine the SEC’s current financial thresholds.

Next week the SEC’s small business advisory committee is meeting to discuss ways to remedy funding gaps for underrepresented founders—including by expanding accredited investor criteria. This support could help bolster legislative efforts. However, as we have discussed previously, the path forward in the Senate will be challenging, particularly in light of anticipated SEC rulemaking activit y that would likely reduce the number of investors who qualify as accredited.

Why it matters: Expanding accredited investor onramps could transform the private market landscape by democratizing access to investment opportunities that have been traditionally reserved for only the wealthy, and making capital available for more entrepreneurs in growing ecosystems across the country. This shift could expand the pool of investors for startups, emerging funds, and special purpose vehicles. This is a win, not only to pass these bills, but to do so with such bipartisan support. Carta supported these measures and will continue to advocate for these policies while defending existing parameters.

House takes joint action around crypto regulatory framework

Republican leaders of the House Financial Services and Agriculture Committees released a draft proposal for a comprehensive framework to regulate digital assets. At its core, the Digital Asset Market Structure draft would delineate authority between the SEC and the CFTC.

Here are a few key highlights:

Why it matters: This is the most significant and comprehensive crypto oversight proposal to date; it spans committee jurisdictions that can normally become a procedural block. That said, Democrats were not consulted in the drafting process and may take issue with so much authority being directed to the CFTC. SEC Chair Gensler will likely be making efforts to keep Democrats from engaging to shape and advance such legislation. Put simply, between the SEC and a Democratic-controlled Senate, the bill will need to evolve and garner SEC support to become law. It’s a positive step forward, but signals a long journey ahead.

SEC announces lawsuits against both Coinbase and Binance

While the House discussed a, well, discussion draft, the SEC announced charges against both Coinbase and Binance. On Monday, the SEC announced that they were suing Binance and its CEO for operating a “web of deception” by inflating its trading volume, misusing customer funds, and offering 12 cryptocurrency coins without registering them as securities. The next morning, the SEC announced that it was also suing Coinbase—a U.S. publicly traded company whose registration statement was approved by the SEC—for acting as an unregistered broker, alleging that Coinbase traded at least 13 securities that should have been registered with the SEC. Both companies have denied the SEC’s charges, and plan to fight back against their respective lawsuits and support efforts in Congress to establish clearer rules of the road for crypto. The flurry of action from the SEC is a cause of concern for other crypto exchanges, who now wonder if they might be at risk of regulatory action.

Why it matters: Gensler unveiled the cases as the House held its hearing on the new framework—flexing the SEC’s authority as Congress continues to debate the ways to limit it. Legislative efforts will take time. And during that period, the SEC will likely continue to regulate through enforcement, with Gensler doubling down on the SEC’s recent actions. The crypto industry is pushing back against charges that call their business models into question, and it is ultimately the court decisions that may dictate the crypto regulatory regime in the medium-term—not an SEC rulemaking or a congressional bill.

Small business incentives on deck for economic package

House Republicans are developing an economic-growth package that will include policies to bolster small businesses. While the package is unlikely to become law, it will be an important marker of Republicans’ priorities. Although still fluid, we expect provisions to include:

Carta and its coalition partners have been working to include language from the Small Business Investment Act, which would expand the scope of businesses that are eligible for the QSBS. Expanding QSBS helps startups and growth-stage companies attract capital and talent.

Why it matters: This package will be partisan and does not have a clear path to passage, but laying markers can inform future debates and—in the case of QSBS—also set a defensive perimeter that can help defend against possible future efforts to curtail the tax benefit. Congress considered diminishing QSBS last Congress, but our coalition successfully fended it off. Carta will continue to advocate for QSBS, but such changes will not happen overnight, so these efforts are important building blocks. There’s only a week before Chair Jason Smith’s soft deadline for an initial draft of the package, but we expect continued focus on tax relief for small businesses in other committees of jurisdiction regardless of what makes the final cut.

Announcing Carta Carry

This week, the Carta team announced the arrival of Carta Carry for fund managers—a mobile app that makes fund admin more transparent by proactively notifying users when a task is received, completed, and every step in between. Click here to learn more.

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