Carta

Carta Policy: Midterm elections & crypto havoc

November 10, 2022
The Carta Policy Team

The Topline

  • Republicans are close to securing a House majority by a much slimmer margin than anticipated
  • Control of the Senate may come down to a runoff in Georgia—again
  • Major financial meltdown at FTX bolsters calls for greater crypto industry regulation
  • FTC revives Section 5 authority to target gig economy 

Friday is Veterans Day. This week Americans went to the polls, a privilege and opportunity we have in many ways because people fought for this country and the rights of its people. Please take a moment to thank and remember the service members. 

The Policy Desk

No matter who holds Congress, public policy will continue to permeate the innovation ecosystem as lawmakers and regulators try to catch up with rapidly evolving markets and technology. Carta will continue to engage stakeholders across the ecosystem to help shape that policy framework in favor of innovators, investors, and employees. As part of that effort, we have launched the Policy Desk, which describes our policy priorities and offers resources and other insights on policy developments.  

Carta networking in DC — November 16

If you’re in the DC area, come visit Carta at Harvest Tide at 5:30 p.m. on Wednesday, November 16th. We are convening investors, founders, and policy influencers, and other stakeholders to connect our local network, and we hope you will join us. Please RSVP here

Macro matters

Results: Congress still too close to call

The dust is still settling on the midterm elections, but one thing is certain: The predicted “red wave” of Republican victories failed to materialize, and Democrats outperformed expectations. 

While the final tallies are still coming in, Republicans are expected to gain control of the House, though with a much smaller majority than originally anticipated. This tight margin will diminish the power of House Republican leadership while increasing the influence of individual members and factions, as every vote counts to hold the party together to pass legislation.

The Senate remains too close to call, with races in Arizona, Nevada, and Georgia outstanding. Republicans needed to net one seat to gain the majority. That task became harder after Democrats flipped a key battleground seat in Pennsylvania. If Democrats take Arizona and Nevada, they will control the Senate. If, however, Democrats lose Nevada, Georgia will once again determine control of the Senate. Neither candidate in this contest obtained 50% of the vote, which triggered a December 6 runoff election. 

Palace intrigue: Congressional party dynamics

The political environment, economic conditions, and historical norms strongly favored Republicans heading into election day. The results, however, didn’t reflect that. No matter the reason for GOP underperformance—former President Trump’s involvement, poor candidate quality, or the Supreme Court’s Dobbs decision—the Republican party will need to navigate a tougher political dynamic than expected. In the House, Rep. Kevin McCarthy is expected to become Speaker and will now lead an increasingly fractured and polarized caucus, and with little room for losing support or votes. Democrats may face their own inflection point, as it is possible Speaker Nancy Pelosi steps aside from Democratic leadership after leading the conference for nearly 20 years. No matter the outcome in the Senate, leadership likely stays in place, with Sens. Charles Schumer and Mitch McConnell leading the Democrats and Republicans, respectively. 

Looking ahead: Divided government with thin margins and finding bipartisan ground

With Republicans expected to gain control of at least one chamber in Congress, President Biden will have to find common ground with Republicans over the remaining two years of his first term to advance any legislative priorities. Razor-thin margins in both the House and Senate will give individual lawmakers considerable influence, and with a deeply divided Congress, reaching consensus will be no easy feat. 

Although each side will continue to draw contrasts over the next two years, bipartisan compromise is possible. Given the tightening economic conditions, policymakers across the spectrum will be focused on job creation and driving economic growth. Barring drastic changes in conditions, Congress is unlikely to agree to a substantial fiscal stimulus package—like cutting checks to people or cutting taxes. Any stimulus is more likely to come in the form of policy reforms that promote access to capital, foster innovation, and support small businesses. There is opportunity here, and Carta will work with partners to build bipartisan consensus on these issues, specifically focused on expanding access and driving capital to private markets, lowering barriers to entry for companies, and broadening ownership. 

Beyond the hill: agency action 

Despite areas of bipartisan interest, divided government likely means there is less legislating. Under that dynamic, agencies will drive policy both through rulemakings and enforcement actions. This will be particularly true for more progressive policy objectives, as the opportunity to legislate toward those ends is likely dead for the next two years. While Republicans will not be able to stop regulators from moving forward on their respective agendas, aggressive oversight could slow their reform efforts. For more controversial proposals, regulators will also have to be mindful of the courts, where there has been increased scrutiny of agencies acting without explicit congressional authority. The more controversial the proposal, the more likely it will be subject to legal challenge.

Carta will release a policy analysis on the issues that affect the innovation ecosystem once more of the election dynamics are resolved.

Crypto & digital assets

All is not well in the crypto realm 

Perhaps the only thing that could rival the election drama this week was the rapid fall of FTX, its brief—and now abandoned—acquisition by Binance, and the resulting implications for the crypto market and policy framework. 

Last week, CoinDesk reported that a significant portion of the balance sheet held by Alameda Research, a large crypto hedge fund owned by FTX CEO Sam Bankman-Fried (also known as SBF), consisted of FTT tokens, the native token of the FTX platform, rather than an independent asset like fiat currency or another cryptocurrency. The revelations in the report showed that FTX, which allows customers to buy and sell crypto, was not backing user funds 1:1—signaling the exchange was at risk of insolvency. 

Not long after CoinDesk’s report, Binance CEO Changpeng Zhao tweeted that it would be liquidating its remaining holdings of FTT due to “recent revelations,” which added to growing concerns about FTX’s liquidity and customer unease, ultimately causing a run that forced FTX to halt fund withdrawals of both crypto and fiat currencies from the exchange. Binance then announced that it was potentially pursuing a rescue deal of FTX to help cover the liquidity crunch—only to reverse course on the offer less than 24 hours later following its review of FTX’s finances and reports of mishandled customer funds and regulatory investigations. 

In calls with investors and via tweets, SBF is seeking to raise $4 billion in emergency equity to fill the liquidity shortfall that was sparked by customer withdrawal requests in recent days. The latest reports indicate that FTX had a total of $16 billion in customer assets that were deposited on the exchange for trading purposes, of which it extended $10 billion in loans (more than half of its customer funds) to its sister company, Alameda.

The effects have been felt throughout the crypto ecosystem. Crypto prices are plummeting, with bitcoin hitting a two-year low. The extent of the broader financial contagion is unknown, but given the size and connectedness of FTX, it could be far-reaching within the crypto crypto ecosystem. Most damaging is the loss of confidence in the crypto industry.

Political and regulatory implications

The shockwaves from the FTX bombshell will have significant policy implications. SBF has been DC’s crypto darling and “white knight” who advocates for the industry on Capitol Hill and serves as the go-to resource for crypto policy development. The crypto industry has built a strong, bipartisan support network in Congress, including through substantial political contributions. This influence is in jeopardy as some may be losing confidence in the stability in the market.

The FTX collapse will almost certainly spur new rounds of congressional crypto oversight and expedite congressional action around a crypto regulatory framework, though it may look much different from proposals the industry has been advocating for. The crypto industry has been pushing for the Commodity Futures Trading Commission (CFTC) to be the primary crypto regulator instead of the SEC. FTX championed bipartisan legislation that would give the CFTC more resources and authority to oversee the crypto spot markets, but recent events (and Gensler’s criticism of the bill) may derail those efforts. We still expect bipartisan work to develop a legislative framework for stablecoins to continue, but Democrats will likely demand more investor protection concessions and increased regulatory authority to move forward on a broader crypto framework.

The problems for FTX (and the broader industry) stem beyond Congress: Reportedly FTX is under investigation from several state and federal regulators, most notably the SEC. The SEC under Chair Gary Gensler has been aggressive in crypto enforcement and in defending its jurisdictional turf to regulate the industry. Gensler—one of crypto’s biggest skeptics—has raised concerns around crypto platforms commingling services and the interconnectedness of the industry. He has called for crypto intermediaries to register with the SEC or face enforcement action, though no one has done so to date. After the events of this week, they may be out of time: Gensler has signaled an impending ramp-up in enforcement. Other major crypto platforms have been actively trying to distinguish and distance themselves from FTX. 

The regulatory scrutiny could also extend beyond crypto into the private fund space, where there were substantial investments in FTX. This could bolster efforts to provide more information to investors on fund holdings and performance, such as those outlined in the SEC’s private fund adviser proposal. There could be action from the Financial Stability Oversight Council (FSOC) as well, which has warned about the risks around interconnectedness in the digital asset industry. 

Taxation & accounting

Carta live virtual event: How to prepare your fund for tax and audit season

Tax and audit season is approaching and ending the year with everything in order can be a complicated process at any stage of your fund. Join us Nov. 17th at 10:00 am (PT) alongside a panel of tax and audit experts for a virtual event that will conclude with a live Q&A session. We’ll review how your earnings are taxed, tax write-offs, what to expect in an audit, important deadlines, how to best prepare for year end, and more. 

Antitrust, privacy, & technology

FTC expands competition authority to target gig economy

The Federal Trade Commission issued a new policy statement indicating it will prioritize policing of “unfair methods of competition,” under Section 5 of the FTC Act. The provision allows the agency to go beyond the powers of the Sherman Act, the country’s primary antitrust law. In the policy statement, FTC Chair Lina Khan argued that Congress intended for Section 5 of the FTC Act to expand the agency’s powers, and the new statement is simply fulfilling its legislative mandate. Previously, Section 5 claims challenged business practices in industries like retail, healthcare, and manufacturing—but Khan has signaled her focus will remain on the tech industry and more specifically, the perceived imbalance in bargaining power between companies and gig workers.

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