CryptoLink - May 2024 Updates

May was a historic month for the digital assets industry in Washington, D.C.

On May 22, 2024 the Financial Innovation and Technology for the 21st Century Act (FIT21) (H.R.4763) passed the House by a comfortable margin of 279-136. FIT21 is a proposed landmark piece of legislation that would enact a comprehensive regulatory framework for the digital assets industry. The bill was crafted collaboratively between Republicans on the House Financial Services and House Agriculture Committees and, to the surprise of many—including outgoing House Financial Services Committee Chair Patrick McHenry (R-NC), crypto’s chief advocate on Capitol Hill—it garnered significant Democratic support. In all, 71 House Democrats voted in favor of FIT21, including notable figures like Minority Whip Katherine Clark (D-MA), Democratic Caucus Chair Pete Aguilar (D-CA), and former Speaker Nancy Pelosi (D-CA). Despite SEC Chair Gary Gensler’s strong objections to the bill—Gensler issued a statement in the hours leading up to the vote sharply criticizing FIT21, which would blunt the Securities and Exchange Commission’s (SEC) ability to regulate the crypto industry by enforcement and give regulatory authorities to its sister industry, the Commodity Futures Trading Commission (CFTC)—the overwhelming bipartisan support for FIT21 indicates that it may well be considered in the Senate before the end of the 118th Congress. However, a number of issues complicate its path towards full passage. Chief among them is time—Majority Leader Chuck Schumer (D-NY) determines what is considered on the Senate floor, and Schumer will almost certainly not allow FIT21 to be considered as a standalone bill. However, this late in the Congress, there are only a handful of bills FIT21 could be attached to, and even if it ultimately passes the Senate, the upper chamber will leave its mark on FIT21—by amending what the House passed or by passing similar legislation, such as Sens. Cynthia Lummis (R-WY) and Kirsten Gillibrand’s (D-NY) Lummis-Gillibrand Responsible Financial Innovation Act (S.2281). In either case, the House and Senate would need to reconcile the differences between their two versions of the bill. It would then, of course, still need to be signed into law by the President—and the White House has been reluctant to sign off on other crypto legislation, having previously stalled McHenry and Financial Services Committee Ranking Member Maxine Waters’ (D-CA) Clarity for Stablecoins Act (H.R. 4766). However, in an election year, and with former President Donald Trump championing crypto as a campaign issue, Biden may feel it necessary to throw his support behind FIT to neuter crypto-centric attacks from the Trump campaign.

On May 23, 2024, the House also passed H.R. 5403, the CBDC Anti-Surveillance State Act, sponsored by Majority Whip Tom Emmer (R-MN), also a Financial Services Committee member. H.R. 5403 would prohibit the Federal Reserve from issuing a central bank digital currency (CBDC) without explicit authorization from Congress. Emmer’s bill, however, was passed along partisan lines, and thus stands little chance of being considered in the Senate.

In May, there were several significant developments in connection with regulatory approvals and enforcement actions in the cryptocurrency space brought by U.S. regulators and prosecutors. On May 23, 2024, the SEC approved exchange-traded funds tied to the cryptocurrency Ether—this was an unexpected approval, which follows the agency’s January 2024 approval of similar products tied to Bitcoin. The SEC has continued to vigorously pursue enforcement actions against digital asset exchanges, and in early May, issued a Wells Notice to Robinhood over its crypto business. Last month, the decentralized finance platform Uniswap also received a Wells Notice, showing that SEC enforcement continues to remain very active in investigations involving the cryptocurrency industry. Last, the CFTC announced a settled order against the prime brokerage firm, Falcon Labs, a Seychelles-domiciled firm, for failing to register as a Futures Commission Merchant, its role in facilitating customer trading on various digital asset exchanges, including Binance, for customers with ties to the U.S. This settled order is notable because of its implication that the CFTC may look past a customer’s place of incorporation to determine whether they are, in operation, a U.S. “located” entity under the Commodity Exchange Act. On this point, one of the CFTC commissioners released a concurring opinion noting that the settled order broke new ground.