Blog /Policy Weekly 06 09 23
Crypto divide deepens as House and agencies grapple with regulation

Crypto divide deepens as House and agencies grapple with regulation

Author: The Carta Policy Team
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Read time:  8 minutes
Published date:  June 8, 2023
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Updated date:  May 10, 2024
House approves slate of bipartisan measures to expand access to private markets.
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Topline

  • Right wing shutters House over objections to debt deal

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

  • House Committees unveil comprehensive bill on crypto regulatory framework

  • SEC announces lawsuits against both Coinbase and Binance

  • QSBS & small business tax incentives on deck for economic package

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:

  • Definition of securities vs. commodity: Provide the CFTC with jurisdiction of “digital commodities” if they are decentralized and clarify the SEC’s jurisdiction over digital assets offered as part of an investment contract 

  • Platform registration: Provide a clearer pathway for trading platforms to register and trade digital securities, commodities, and stablecoins and permit digital assets to be traded on alternative trading systems (ATSs)

  • Custody: Require the SEC to modify its rules to enable broker-dealers to provide custody services for digital assets

  • Exempt offering: Create an exempt offering process through which digital assets that meet certain conditions can raise capital

  • Spot markets: Designate the CFTC to oversee the spot markets for crypto commodities

  • Safe harbor:Provide a safe harbor for current crypto assets while the agencies implement the new regime

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:

  • R&D: restoration of immediate R&D expensing under IRC section 174 

  • Net business interest: return to the use of EBITDA, not EBIT, for calculating the deduction for net business interest expense under Section 163(j)

  • Equipment expensing: expanding the scope of small businesses eligible for equipment expensing 

  • 1099-K: raising the reporting threshold for third-party payment platforms to issue a Form 1099-K; this trigger dropped from $20,000 and 200 transactions to a flat $600 in 2023 

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.

News to know

  • SEC errors force dismissal of 42 enforcement cases. After completing an investigation into reports that the SEC’s enforcement division had improper access to materials meant for the agency’s in-house court, the agency decided to dismiss 42 pending enforcement cases. 

  • Senate plans AI briefings. A group of bipartisan senators and Senate Majority Leader Chuck Schumer are organizing three senator-only briefings on AI sometime this work period. One will be the first classified briefing on the intersection of AI with defense and national security, and the other two will provide background information on AI and explore American leadership in this space.

  • California Senate advances bill to require venture capital funds to disclose diversity metrics around portfolio investments. While this bill will likely pass the CA assembly as well, it could face federal preemption challenges moving forward.

  • Sequoia spins off businesses. By March 2024, Sequoia will separate its current operations into three independent businesses, maintaining its U.S. and European operations and spinning off China and India/Southeast Asia into distinct firms amid mounting geopolitical tensions. The firm credited the decision to the complexities of operating a decentralized global investment business. 

  • Sen. Tim Scott and Rep. James Comer pen letters on ESG rules. The letters to Treasury and the SEC caution against the adoption of EU-like ESG regulations in the United States, citing potential harm to a broad range of U.S. businesses. Meanwhile, the House Financial Services Committee’s ESG working group is crafting a report on its preliminary findings and recommendations ahead of hearings slated for July.

  • CFIUS publishes new FAQs around foreign LPs. In recently published FAQs, CFIUS put funds on alert that it can require detailed information on all direct or indirect foreign ownership involved in a particular transaction, including with respect to limited partners in an investment fund, despite confidentiality agreements that may exist between the fund manager and investor. This new FAQ signals a shifting approach regarding the breadth and specificity of information that CFIUS may seek from funds about their foreign LPs, even if they are passive investors.  

  • Rep. McHenry and Rep. Luetkemeyer send letter to FinCEN and Treasury on beneficial ownership. The letter demands that FinCEN outline its plan to inform small businesses about their reporting responsibilities as they pertain to the agency’s forthcoming beneficial ownership proposed rule.

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The Carta Policy Team
Author: The Carta Policy Team
Carta’s Policy Team aims to connect the policymaking community and venture ecosystem to build an ownership economy and advance policies that support private companies, their employees, and their investors.