The crypto Congress: Momentum builds for 'most significant' digital-asset law in history

By Chris Matthews

Industry hopes to see at least 40 Democrats support the bill

Crypto industry insiders are becoming more optimistic that new legislation that would sideline the U.S. Securities and Exchange Commission will get strong bipartisan support in a vote this week, and potentially even become law by the end of the year.

The House of Representatives is expected to vote on the Financial Innovation and Technology for the 21st Century Act on Wednesday, legislation that would clarify oversight boundaries of the crypto industry, granting the Commodity Futures Trading Commission primary jurisdiction over the industry at the expense of the SEC.

It would create a tailored disclosure and registration regime for digital asset companies, who have long complained that the SEC's insistence that these enterprises conform to traditional disclosure regimes is unworkable.

"Though facing an uphill road in the Senate and a potential presidential veto if it gets that far, the effort marks what would be the most significant milestone to date to establish a much-needed comprehensive U.S. regulatory framework for digital asset markets," wrote lawyers from Davis Polk in a Monday client letter. "Simply bringing the bill to a vote on the House floor reflects the importance many members of Congress place on this issue."

See: Ether price jumps ahead of SEC's ETF decision as speculation on approval rises

Though most analysts and insiders see the bill passing the House and languishing in the Senate, some see an outside chance that Wednesday's vote results in a bipartisan statement that can't be ignored.

"I don't think we should write off the Senate, and assume they won't act on this before the end of the year," one industry insider close to the congressional negotiations told MarketWatch.

One reason for optimism is last week's vote in the House and Senate to overturn accounting guidance from the SEC that opponents say made it too expensive for financial institutions to custody crypto assets, like bitcoin (BTCUSD) or ether (ETHUSD), for their clients.

More than 20 House Democrats and a dozen Senate Democrats, including Majority Leader Chuck Schumer of New York, defied the Biden administration's wishes in voting to overturn the rule. President Joe Biden has promised to veto the bill, but has yet to do so.

Biden has also not yet weighed in on the FIT-21 bill, which one crypto lobbyist with Democratic ties told MarketWatch is evidence that "the Biden administration has realized it doesn't understand the issue," and the political risks associated with being seen as anti-crypto ahead of a tough reelection fight.

SEC Chair Gary Gensler came out forcefully against the bill in a public statement Wednesday morning - a rare example of a top financial regulator attempting to publicly sway Congress.

The legislation "would create new regulatory gaps and undermine decades of precedent...putting investors and capital markets at immeasurable risk," he said.

Gensler also argued that the law would give fraudsters a way to avoid securities laws by cynically declaring their products to be crypto assets.

"The crypto industry's record of failures, frauds, and bankruptcies is not because we don't have rules or because the rules are unclear. It's because many players in the crypto industry don't play by the rules," Gensler added. "We should make the policy choice to protect the investing public over facilitating business models of noncompliant firms."

The bill does contain many provisions that Democrats support, including expanding the CFTC's authority to regulate crypto spot markets and exchanges and requirements that crypto intermediaries be subject to anti-money laundering requirements and the Bank Secrecy Act.

Insiders say that another argument that has swayed some Democrats is that the current Supreme Court, which has been highly skeptical of financial regulators asserting novel authorities, could end up determining the future of crypto regulation if Congress doesn't act now.

Todd Phillips, a financial-regulation expert at the left-leaning Roosevelt Institute made this argument in a recent brief, writing that "The crypto industry has not-unconvincing legal arguments that are based in history and interpretations of Congressional intent that may persuade this Court, the most conservative in nearly a century" to take the industry's side.

Powerful Democrats in Congress, including Rep. Maxine Waters of California, the top Democrat on the House Financial Services Committee, "strongly oppose" the legislation, according to a Monday letter sent to their Democratic colleagues, but leadership has decided not to rally support against the bill, according to Politico.

"Congress should consider whether this legislation could potentially open loopholes to avoid SEC regulation, similar to unregulated derivatives before the 2008 crisis," said Cantrell Dumas, Director of Derivatives Policy at the financial reform group Better Markets, in a Tuesday statement, expressing concerns shared by many Democrats in Congress.

"Legislators must also ask if the resources provided to the CFTC in the bill are adequate for an already underfunded agency," he added. "Without proper funding, adding more mandates to the CFTC will inevitably and significantly compromise the agency's ability to fulfill its vital roles that all Americans depend on and benefit from."

The crypto industry is hoping to see at least 40 Democrats vote in support of the bill, and insiders say that surpassing that goal will send a strong signal to the Senate that the upper chamber can't ignore this legislation.

Convincing top Democrats like House Minority Leader Hakeem Jeffries of New York to support the bill is also a top priority.

Even with a strong bipartisan vote, observers say it's unlikely the Senate will take up the legislation, given that Senate Banking Committee Sherrod Brown, an Ohio Democrat, has signaled no support for crypto market-structure legislation.

"The Senate doesn't typically take House bills and just vote on them," wrote Ian Katz, a financial-services analyst with Capital Alpha Partners, in a Monday client note. "So while the Senate might eventually be interested in considering some kind of crypto legislation, it almost surely won't be this one."

-Chris Matthews

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-22-24 0835ET

Copyright (c) 2024 Dow Jones & Company, Inc.