House turns its attention to crypto

Topline

• House turns its attention to crypto

• SEC continues crusade against crypto

• IRS to triple audit rates for corporations with assets over $250 million

• SEC advisory committee pushes for more accredited investor on-ramps

• State of Private Markets: Q1 2024

House turns its attention to crypto 

The House of Representatives approved a resolution to revoke the SEC’s controversial crypto custody accounting guidance ( SAB 121). The guidance would require digital assets to be booked as liabilities on the balance sheet, which would impose onerous capital requirements and effectively block banks from providing crypto-asset custody. Despite veto threats from President Biden, 21 Democrats voted with Republicans to approve the resolution. Though it ultimately will not become law, this is the first standalone crypto bill passed by the House—and with bipartisan support. 

The House is expected to remain focused on crypto, with additional actions on the horizon:

• Lawmakers are trying to chart a bipartisan path to pass a revised version of legislation that would establish a regulatory framework for digital assets and divide authority between the SEC and CFTC. This effort is a priority for House Financial Services Committee (HFSC) Chairman Patrick McHenry. McHenry’s package is still undergoing changes (including with respect to whistleblower and congressional trading provisions).

• The House is also expected to vote on legislation to block the Federal Reserve from issuing a central bank digital currency (CBDC).

• Leadership is targeting the last week of May for a floor vote on the digital asset framework and CBDC bills, while negotiations continue on the bipartisan stablecoin bill.

Why it matters: There is a lot of momentum in the digital assets space, but the contours of a crypto package are in flux. While legislation to create a digital asset regulatory framework is unlikely to move in the Senate, a vote could put members in competitive races in a tough spot as crypto becomes a bigger election issue.  

SEC continues crusade against crypto

A series of recent legal victories by the SEC has revived their campaign to police cryptocurrencies. A federal judge recently ruled that the SEC could move forward with their case arguing that Coinbase is operating as an unregistered broker—a huge win for the agency. Bolstered by this outcome, the SEC is pushing forward with new enforcement actions. This week, the SEC served Robinhood a Wells notice, warning that the trading platform could face an enforcement action related to its crypto business in the U.S.

The SEC’s regulatory approach to crypto, however, has faced continued scrutiny on the Hill. The HFSC held a hearing this week examining the SEC’s enforcement practices, primarily focusing on cryptocurrency. Republicans on the committee criticized the SEC for issuing penalties against crypto firms despite an unclear regulatory regime, noting that the current strategy of “regulation by enforcement” is not subject to the Administrative Procedure Act’s notice and comment requirements.

Why it matters: The HFSC will continue pushing for SEC reforms next week during markup. While these efforts likely will not go anywhere, they will provide a roadmap for legislative reform of the SEC should the administration change hands in November.

IRS to triple audit rates for corporations with assets over $250 million

The IRS announced plans to nearly triple audit rates on large corporations in tax year 2026 under a new updated roadmap for spending Inflation Reduction Act (IRA) funds, as well as increase audits on large, complex partnerships.

• The IRA funding will allow for nearly 20,000 new full-time IRS employees to aid in the plan to increase the audit rate for corporations with assets over $250 million to 22.6% in tax year 2026, up from 8.8% in tax year 2019.

• The agency also plans to increase audits on large, complex partnerships to 1%, up from 0.1% (ten times higher).

• The IRS will raise audit rates on individuals earning more than $10 million from 11% in tax year 2019 to 16.5% in tax year 2026.

Why it matters: Increased funding and technology will change the way the IRS can tackle examinations of large corporations and partnerships—and their sophisticated shareholders. Those taxpayers should expect more scrutiny this coming season than in years past as the IRS deploys AI and onboards higher-skilled staff.

SEC advisory committee pushes for more accredited investor on-ramps

The SEC’s Small Business Capital Formation Advisory Committee (SBCFAC) issued recommendations on the accredited investor definition. The committee recommended:

• Leaving the current financial thresholds in place without inflation adjustments (either retroactively or going forward).

• Permitting individuals to invest 5% of income or net worth per year in private market assets upon completion of an educational program.

• Bolstering educational efforts outlining risks of investing in the private markets, including risk of loss and limited liquidity.

Why it matters: The SEC is expected to propose reforms to the accredited investor standard, including increasing the financial thresholds. This would lower the number of individuals who can invest in private markets and reduce an important source of capital for founders and fund managers, particularly in lower-income regions that may lack access to established capital-raising networks. The SEC is not required to act on the SBCFAC’s recommendations, but they could help inform and potentially blunt future rulemaking proposals, as well as drive congressional action to expand accredited investor on-ramps.

State of Private Markets: Q1 2024

The startup fundraising market got off to a cautious start in 2024. After experiencing a pandemic-era surge and subsequent correction, the venture market settled into a quieter place in 2023. So far, that relative tranquility has continued into 2024. Q1 highlights include: 

• VCs look to the West: Startups based in the West census region captured 62% of all venture capital raised by companies on Carta in Q1, the highest quarterly figure since Q1 2019. The Northeast, South, and Midwest all saw their market share decline.

• The Series C market bounces back: Series C startups raised $4.6 billion in new capital in Q1, a 130% increase from the previous quarter. The median primary Series C valuation was $195.7 million, up 48% from the prior quarter.

• Layoffs still linger: Companies on Carta laid off more than 28,000 employees in Q1. But job cuts have grown less frequent since January, with March seeing the fewest monthly layoffs in nearly two years.

Check out the full report here.

News to know

• FDIC investigation finds culture rife with sexual harassment, discrimination. A a damning independent report was released highlighting findings of a toxic workplace culture at the FDIC, including pervasive instances of sexual harassment and discrimination. The report called for “cultural and structural change” and questioned whether FDIC Chair Martin Gruenberg is the right person to lead those reforms. Gruenberg is scheduled to testify before Congress next week.

• TikTok sues U.S. government, saying potential ban violates First Amendment. TikTok is suing the U.S. government to stop enforcement of a bill passed last month that seeks to force the app’s Chinese owner to sell the app or have it banned. The lawsuit, filed Tuesday in the DC Circuit, argues that the bill violates constitutional protections of free speech.

• Bipartisan senators urge SEC to reissue stock buyback rule. The SEC’s buyback rule, which would have required companies to disclose information around share repurchases, was struck down by the Fifth Circuit last year. Sens. Tammy Baldwin and Marco Rubio are urging the SEC to re-propose to benefit investors and improve price discovery.

• CFTC to vote on election betting. The CFTC commissioners voted to issue a rule banning event contracts that allow traders to speculate on the outcome of specific events, such as elections. Republicans on the panel argued that the proposal may actually end up creating “more uncertainty and confusion” around event contracts, and could stifle innovation and push trading overseas. 

• Fed Governor Lisa Cook argues that it is too early to regulate private credit. In a speech this week, Federal Reserve Governor Lisa Cook commented that private credit “has not materially adversely affected the financial system's resilience,” noting that private credit funds appear well positioned to hold the riskiest parts of corporate lending.

• FTX creditors to be made whole. FTX announced this week that all of their creditors, except the government, will get 100% of their money back in cash plus interest, pulling from a pool of between 16.3 billion to distribute to customers and other creditors from the assets it has collected.

Upcoming events

• CFTC Commissioner Commissioner Goldsmith Romero to participate on an artificial intelligence panel at the Asian Pacific American Institute for Congressional Studies’ Legislative Leadership Summit - May 13 at 8:15 a.m. PT / 11:15 a.m. ET

• Carta event: Startup Fundraising 101: Building Strategic Partnerships - May 21 at 11:00 a.m. PT / 2:00 p.m. ET

• Carta event: Private Equity Firm Operations: In-House v. Outsourced - May 30 at 10:00 a.m. PT / 1:00 p.m. ET

• House Financial Services Committee hearing: Oversight of Prudential Regulators - May 15 at 7:00 a.m. PT / 10:00 a.m. ET

• House Committee on Appropriations budget hearing: Fiscal Year 2025 Request for the Federal Trade Commission - May 15 at 7:00 a.m. PT / 10:00 a.m. ET

• SEC’s 2024 Conference On Emerging Trends In Asset Management - May 16 at 6:00 a.m. PT / 9:00 a.m. ET

• House Financial Services Committee markup - May 16 at 7:00 a.m. PT / 10:00 a.m. ET

• Senate Committee on Banking, Housing and Urban Affairs hearing: Oversight of U.S. Financial Regulators: Accountability and Financial Stability - May 16 at 7:00 a.m. PT / 10:00 a.m. ET

• SEC Chair Gensler to speak at the Investment Company Institute 2024 Leadership Summit - May 23 at 5:30 a.m. PT / 8:30 a.m. ET

• CFTC Commissioner Commissioner Pham to speak at the Hellenic Capital Market Commission Public Conference at the IOSCO Annual Meeting - May 29 at 5:45 a.m. PT / 8:45 a.m. ET

• U.S. Department of Treasury: 2024 Conference on Artificial Intelligence & Financial Stability - June 6 - 7

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