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Carta Policy: Weekly Brief for June 3

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Executive summary

  • Senators plan to drop comprehensive crypto legislation while investors take Coinbase to court to gain financial redress and regulatory clarity
  • New SPAC bill aims to curb abuses and losses, placing pressure on the SEC to regulate
  • International banking forum plans a framework for crypto in banking as FDIC pauses crypto work with other U.S. banking supervisors
  • Senate Commerce Chair prepares to introduce data privacy legislation 

Macro matters

White House & Fed focused on inflation

Policymakers remain focused on the downward economic trends and rising inflation. President Biden met with Federal Chair Jay Powell this week to discuss the economic outlook, though the president reiterated the Fed’s independence. The Fed’s Beige Book, which details the economic conditions in each of the 12 Federal Reserve Bank districts, signaled modest economic growth in most districts, though four districts indicated a slowdown from the prior quarter. Employment levels rose in most districts, with worker shortages forcing many firms to operate below capacity. That said, some districts have reported hiring freezes and wages leveling. On inflation, most districts noted robust price increases, though levels and expectations ranged across the country, with over half the districts noting customer pushback and product substitution easing price pressures. Although economic conditions are tightening, The Fed continues to signal that inflation is the priority: Fed Governor Christopher J. Waller announced he and his colleagues are committed to doing whatever it takes to bring inflation down, while also articulating (with charts and graphs) why he believes the Fed can tame inflation without causing a sharp increase in unemployment. In short, expect the Federal Open Markets Committee to raise rates again in June.

Congressional update

Although on recess, Congressional policymakers continue to negotiate the Bipartisan Innovation Act (legislation to invest in U.S. competitiveness).  Congressional stakeholders are resolving a range of issues, but the final text is more likely to look like the original Senate version rather than the broader House bill, which included numerous extraneous provisions. This is positive, as we are seeking to strike an amendment that would direct the SEC to revamp capital formation in private markets. Timeline is likely to slip into fall or later.

Majority Leader Chuck Schumer and Senator Joe Manchin are quietly negotiating a slimmed down Build Back Better, though the path forward remains unclear. The rumored package is estimated to spend between $800 billion – $1 trillion, and would include provisions on prescription drugs, climate change, and taxation, with half of the revenue raised from the package going towards the deficit. This means policymakers may still curtail qualified small business stock treatment to offset spending—Carta continues to advocates for maintaining QSBS in its current form.

Capital markets

Warren’s SPAC Accountability Act would build on SEC guidelines

Sen. Elizabeth Warren is planning to introduce The SPAC Accountability Act of 2022, intended to curb misaligned incentives and abuses related to special purpose acquisition company (SPAC) transactions. Building on the SEC’s recent proposal, the bill proposes to incorporate the SEC’s expanded definitions of SPAC underwriters and close loopholes that exempt forward-looking statements and projections from liability. The proposed legislation would also increase the legal liability for stakeholders involved in SPAC deals, make investor disclosures more transparent, and lock in early backers of SPACs for a longer time period. While Warren’s bill will struggle to gain support with midterm elections quickly approaching, it ratchets up the pressure on a practice already facing increased scrutiny.

Crypto & digital assets

FDIC pauses interagency coordination on cryptocurrencies

The Federal Deposit Insurance Corporation has reportedly paused its engagement with fellow regulators on several cryptocurrency-related matters, including upcoming guidance for banks holding clients’ digital assets. Last November, federal banking regulators issued a joint statement outlining their plans to provide clarity on crypto-asset-related activities, including stablecoins, consumer protection standards, compliance regulations, and anti-money laundering rules. Stepping back from the interagency crypto work could signal the FDIC does not agree with the approach other regulators are taking, though no clarity on whether and where they diverge. 

Basel Committee to finalize crypto standards this year

The Basel Committee on Banking Supervision plans to publish another consultation paper this month, with the goal of finalizing a global capital framework that accounts for developments in digital assets by the end of 2022. The international organization of central banks and regulatory authorities, including some from the U.S., believes there needs to be a prudential regulatory framework to mitigate risks from crypto assets. The Committee’s Chair, Bank of Spain Governor Pablo Hernández de Cos, has been skeptical of the utility of digital assets and argued that most crypto assets cannot be considered robust or stable. 

U.K. considers stablecoin safeguards

Following the collapse of the algorithmic stablecoin TerraUSD, regulators in the U.K. have proposed amending existing regulations to incorporate safeguards against stablecoin volatility for the broader financial ecosystem. The U.K. seeks to position London at the forefront of crypto asset technology and innovation with an approach that first focuses on stablecoins as they offer the potential to grow into a widespread method of payment. The proposal highlights the need to create stablecoin regulations that mitigate risks to consumers, market integrity, and financial stability. Similar discussions are taking place in the U.S. as Treasury and the SEC.

Senators plan to release comprehensive crypto bill next week; tech experts warn about crypto

Senators Cynthia Lummis and Kirsten Gillibrand prepare to release their highly anticipated crypto legislation next week, a bill that policymakers and crypto industry insiders do not expect to pass but hope to use as a marker for future crypto legislation. Meanwhile, a group of 26 computer scientists and engineers published a letter warning Congress about the risks and ambiguities of blockchain technology. The letter calls on lawmakers to take a critical and skeptical approach towards crypto, and to resist pressures to create a regulatory safe haven that caters to the industry’s many lobbyists and supporters. The group disputed the public benefits of blockchain technology and reminded Congress that not all innovation is irrefutably good or merits further development. 

Investors look to courts to offer cryptocurrency guidance

While regulators consider guidance around crypto, investors are suing to push the courts to determine how digital tokens should be treated. Chairman Gensler asserts most tokens are securities, but the SEC has not issued formal guidance. There were 11 class action law suits in 2021 and eight class actions suits filed thus far. Recently, Coinbase users filed a class-action lawsuit against the company, to demand reimbursements on trading fees and market losses related to 79 tokens, or unregistered securities, listed on the Coinbase platform. As losses pile up, additional suits may come. 

Taxation

CBO report provides insights on expiring tax incentives, SALT limit, and R&D

Congress is beginning to scope end-of-year legislation to extend various tax provisions that expired in 2021 or that will expire in 2022. The Congressional Budget Office (CBO) report estimates the cost to extend these provisions will be $37 billion over 10 years. Congress may decide not to include revenue measures to pay for the extensions, but if they do, QSBS limits and other tax hikes that we’ve been working to keep off the list may again be up for discussion.  

The CBO also estimated that extending portions of the Tax Cuts and Jobs Act (TCJA) that expire at the end of 2025 will cost $169 billion in 2026 and $314 billion in 2027. This includes an extension of the limit on the state and local tax (SALT) deduction to $10,000 for individuals paying SALT on property and income. Extending 100% bonus depreciation and restoring R&D expensing would cost the government an additional $404 billion. The TCJA set bonus depreciation of business assets to begin phasing out in 2023 and replaced full R&D expensing with five-year amortization this year. While both of these policy changes are designed to generate short-term revenue, modeling for long-term R&D costs shows that restoring R&D expensing—a position Carta supports—would increase GDP in the long run.

OECD releases new tax framework elements

The Organisation for Economic Co-operation and Development (OECD) released a public consultation with a tax framework that includes elements designed to look at new and innovative ways to prevent double taxation. A crucial component of the OECD’s plan is to shift where the profits of about 100 large multinational corporations are taxed, moving it from where companies are headquartered to where they hold more operations. U.S. tax staffers from both parties and both chambers traveled to Europe this week to meet with European officials regarding international tax issues. While the OECD is pursuing a global agreement, any application in the U.S. would require debate and ratification by Congress.

Banking & financial products

CFPB holds firm on ECOA requirements 

The CFPB’s latest Consumer Financial Protection Circular affirms that credit providers are required to explain to applicants reasons for denial of credit, even if it is based on complex technology or algorithms. The circular notes that creditors cannot use technologies that prevent them from providing such explanations, effectively preventing them from complying with Equal Credit Opportunity Act requirements.

Antitrust, privacy, and technology

Federal privacy legislation

Sen. Maria Cantwell, Chair of the Senate Commerce Committee, has privately circulated a new draft of privacy legislation which includes a limited preemption of state laws and a broad private right of action (PRA). The PRA is limited to federal district court and allows for monetary relief for “actual damages sustained.”  The draft would also prohibit pre-dispute arbitration agreements if use of covered data results in substantial harm or dsicrimination. In addition, the bill would require opt-in for targeted advertising and prohibit outright targeted advertising for kids under 17. Notably the Chamber of Commerce sent a letter to the Commerce Committee this week, affirming its continued opposition to any federal privacy legislation that creates a blanket PRA. The draft legislation is restarting privacy discussion, but still lacks agreement and path to law. 

Upcoming events

Notable SEC proposed rules and comment deadlines

 

SPAC reform

Private fund adviser 

Reg ATS

Climate-related disclosures

Comment deadline

6/13/2022

6/13/2022*

6/13/2022*

6/17/2022

*Re-opened comment period

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DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security.  Carta does not assume any liability for reliance on the information provided herein. 
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