Lame-duck Congress working to fund the government before Dec. 16 deadline
CFTC Chair urges Ccongress to act on legislation to give it authority to regulate crypto commodity markets and suggests additional reforms to prevent conflicts of interest in the industry
Crypto exchanges and crypto retirement plan offerings come under fire following FTX collapse
DOJ pursues—and gets—criminal conviction on monopolization charges, a shift from previous practice of civil penalties
Lame-duck plods on with usual chaos, limited progress
With government funding set to expire December 16, lawmakers are inching closer to a deal to either fund the government through the next fiscal year, or enact a continuing resolution (CR) of undefined length. One complication is that Republicans are debating whether to support only a short-term CR, which would delay the funding expiration into 2023 when they would take control of the House, giving them more influence over a longer-term funding package. Congress did act this week to avert a looming rail strike, which would have crippled supply chains and critical deliveries.
SAFE Banking: Bipartisan group of policymakers, including Leader Schumer, are working to attach SAFE Banking legislation, which would clarify the legal ability to provide banking services to cannabis businesses, to the must-pass National Defense Authorization Act. Not done, but trending positive.
Retirement bill coming together:The bipartisan SECURE 2.0 retirement bill remains in play for an end-of-year deal. Lead negotiators are making progress, but still need to reconcile several provisions. We are tracking a provision that would limit the cessation of IRA treatment to only the portion of the account involved in a prohibited transaction rather than the entire account.
Historic leadership transition
House Democrats elected Rep. Hakeem Jeffries as minority leader for the 118th Congress. He is the first Black person to lead a party in Congress.
Carta Equity Summit
Next week on December 7, Carta will convene the Carta Equity Summit, a gathering of the brightest minds in venture and entrepreneurship committed to creating more access to equity ownership. Discussions will touch on topics ranging from starting a fund, building companies, and how equity can be transformative. The Summit also focuses on Carta’s annual equity report, which looks at equity ownership across race, gender, geography, and ethnicity, with the goal of expanding opportunity across the venture ecosystem. To learn more and attend the Summit, please register here.
DOL reverses course, allows retirement plans to consider ESG factors
The Department of Labor (DOL) issued a final rule on Nov. 22 to allow plan fiduciaries to consider environmental, social and governance (ESG) factors (including climate change) when making decisions related to retirement investments and proxy voting, reversing actions taken by the Trump administration that limited investment focus to pecuniary factors such as risk and monetary return. The final rule softened language included in the proposal so that while ESG factors can be taken into account when providing retirement investment options, such ESG considerations are not required. While the rule was well received by Democrats, it drew swift criticism from Republicans, who argue the focus should be on investment return instead of social policy.
Crypto & digital Assets
FTX fallout continues: Congressional hearings begin, while SBF continues media tour
The effects of FTX’s spectacular collapse continue to spread through the ecosystem and remain top of mind in Washington. BlockFi, a major crypto lending platform that has had troubles of its own, filed for bankruptcy this week, citing its exposure to FTX and Alameda Research.
Congress also held the first congressional hearing to address the failures of FTX with CFTC Chair Rostin Behnam testifying before the Senate Agriculture Committee. Lawmakers pointed to the lack of clear rules and regulatory guidance as a contributing factor to FTX’s downfall, and the need for Congress to act to prevent future market events. Behnam continued to push Congress for more authority to regulate the crypto spot markets and reiterated his support for the Digital Commodities Consumer Protection Act (DCCPA)—bipartisan legislation championed by committee leadership that would give the CFTC primary oversight of crypto commodities, notably bitcoin, while preserving the SEC’s authority to oversee crypto securities. This bill, which has been scrutinized due to its backing by FTX, will likely serve as the basis for a crypto regulatory framework next Congress, though there is bipartisan consensus that further refinement is necessary. Such changes will likely focus on mitigating conflicts of interest, greater protections around custody and enhanced disclosure requirements. Lawmakers also expressed concern around the comingling of market making, lending, and custodial services offered by crypto platforms, a concern SEC Chair Gary Gensler has expressed on a number of occasions.
Meanwhile, FTX founder Sam Bankman-Fried (aka SBF) was a regular on the media circuit this week, giving a number of interviews, including an appearance at the Dealbook Summit. While SBF did not appear before Congress this week, he and others directly involved in the operations of FTX and Alameda Research are being targeted for the Dec. 13 hearing before the House Financial Services Committee. The panel has not confirmed its full witness list, but FTX’s new CEO John Ray is already slated to appear. The Senate Banking Committee (SBC) is also expected to convene a hearing before the end of the year.
The hearing was the culmination of a swirl of related activity this week, including:
Senate Banking Chair presses regulators for action: This week, SBC Chair Sherrod Brown urged Treasury Secretary Janet Yellen to work with Congress and other regulators to implement the recommendations from the Financial Stability Oversight Council to rein in the crypto industry. Brown, a longtime crypto skeptic who is expected to continue to lead the SBC next Congress, has generally stayed out of the crypto legislative debate and deferred to regulators like the SEC to exercise their authority to regulate crypto. Brown has announced intentions to craft legislation to crack down on the crypto industry and provide regulators more authority over digital assets. Brown has also been critical of the bipartisan DCCPA, which could hinder its prospects to advance unless concessions are made.
Senate Finance wades into the crypto reg debate: Senate Finance Chair Ron Wyden sent letters to six large cryptocurrency exchanges questioning them on consumer protection measures following the failure of FTX. Wyden requested information around controls and safeguards in place to protect customer assets, as well as information about the financial health of the exchanges, including balance sheets and audited financials. Wyden also probed whether the exchanges would participate in an industry-funded insurance fund similar to the compensation fund that exists in the brokerage space.
Pressure mounts to halt 401(k) crypto offerings: Senate Democrats pushed Fidelity to reconsider allowing 401(k) plan sponsors to offer Bitcoin investment to participants, citing the ongoing turmoil in crypto markets. Separately, New York Attorney General Letitia James wrote to congressional leaders in support of legislation that would expressly prohibit including digital assets in IRAs and defined contribution plans, citing the volatility and risks inherent in such assets. James also asked the lawmakers to reject legislative efforts that would allow plan fiduciaries to use digital assets in retirement funds. Growing opposition to retirement investment in crypto could also hinder efforts to expand retirement investments in private market assets, as the same legislation would also expand the ability for 401(k) providers to include venture capital and private equity offerings.
Banking & financial products
FDIC nominees appear before SBC with a focus on crypto
The SBC convened a confirmation hearing this week on President Biden’s Federal Deposit Insurance Commission (FDIC)—Travis Hill and Jonathan McKernan, nominees to the FDIC board, and Acting Chair Marty Gruenberg, nominated to formally lead the agency. Lawmakers’ questions focused on crypto, leading FDIC chair nominee Marty Gruenberg to caution banks against using crypto assets in the same manner as traditional assets.
On the fintech front, Gruenberg noted the agency is reviewing the relationships between traditional banks and nonbank financial companies. He emphasized that banks must uphold their supervisory responsibilities when partnering with nonbank entities such as fintechs. Democrats’ broader scrutiny of fintechs was reflected in a staff report, which asserted fintechs did not adequately safeguard funds distributed through the Paycheck Protection Program (PPP). While this subcommittee on COVID-19 that issued the report will end with the current Congress, policymakers’ focus on fintech operating outside the regulatory oversight will persist into the next session.
Taxation & accounting
Year-end capital loss harvesting and the crypto tax loophole
If you have not started year-end tax planning yet, there are only four weeks left in 2022 to set up a meeting with your tax advisor and take action to leverage important planning strategies. One strategy that could be particularly powerful in 2022 (due to market volatility) is capital loss harvesting—selling assets at a loss to offset capital gain. Investors can use capital loss harvesting to reduce or even eliminate their capital gains tax for the year.
Capital loss harvesting involves three steps:
Selling an investment that is underperforming and losing money
Using the loss from the sale to reduce any capital gains
Applying any remaining capital losses (that exceed capital gains) to offset up to $3,000 ($1,500 if married filing separately) of ordinary income.
Generally, taxpayers are prohibited (per the wash sales rule) from deducting any loss when they sell or trade stock or securities at a loss and replace them with “substantially identical” stock or securities within 30 days before or after the sale (unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities).
However, the wash sales rule does not apply to digital assets because the IRS treats crypto as property for tax purposes and wash sales only apply to stock or securities. This means that crypto investors can sell underperforming digital assets, accrue capital losses to offset gains, and repurchase other similar digital assets right away without having to wait 30 days or risk market price increases. This loss on the digital assets front can also be used to offset capital gains on stocks, real estate, and other investments.
Treasury releases guidance for companies seeking clean energy tax incentives
Treasury released its initial set of guidance on how the agency will deploy clean energy and climate tax incentives, including the investment tax credit, the energy efficient commercial buildings deduction, and other benefits. Startups and all businesses that aim to qualify for and leverage clean energy incentives on projects (beginning on or after January 29, 2023) must be aware of the new wage and apprenticeship requirements as well as Treasury’s forthcoming guidance.
Antitrust, privacy, & technology
DOJ gets criminal conviction for monopolization charges
Antitrust regulators continue to shift enforcement posture, having pursued—and obtained—a criminal conviction for the first time in 40 years, rather than just pursuing civil charges. The defendant who pled guilty owned an asphalt company and attempted to persuade a competitor to divide up territories in exchange for money. While not tech or venture focused, the case reflects the continued shift in the DOJ and FTC’s posture on antitrust issues, which has taken more proactive action in other areas such as interlocking directorates.
CFTC Commissioner Pham speaking at the Bloomberg Global Regulatory Forum “Optimising Capital Markets to Support Infrastructure and Growth Enhancing Investments.” – Dec. 6 at 9:15 a.m. ET
House Financial Services Committee hearing, “ Unfinished Business: A Review of Progress Made and a Plan to Achieve Full Economic Inclusion for Every American” – Dec. 6 at 10:00 a.m. ET
House Financial Services Committee hearing, “E, S, G and W: Examining Private Sector Disclosure of Workforce Management, Investment, and Diversity Data” – Dec. 6 at 2:00 p.m. ET
House Financial Services Committee hearing, “An Enduring Legacy: The Role of Financial Institutions in the Horrors of Slavery and the Need for Atonement, Part II.” – Dec. 7 at 10:00 a.m. ET
Carta Equity Summit 2022 – Dec. 7 at 1:00 p.m. ET
SEC Investor Advisory Committee Meeting to discuss investor account statements, corporate tax transparency, and single-stock ETFs – Dec. 8 at 10:00 a.m. ET
House Financial Services Committee hearing, “Investigating the Collapse of FTX, Part I.” – Dec. 13 at 10:00 a.m. ET
House Financial Services Committee hearing, “Consumers First: Semi-Annual Report of the Consumer Financial Protection Bureau.” – Dec. 14 at 10:00 a.m. ET
Carta live virtual event: State of Private Markets: Venture Deal Slowdown – Dec. 14 at 11:00 a.m. PT
FDIC “Money Smart Train-the-Trainer Webinar” – Dec. 15th at 1:00 p.m. ET
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