Senate Banking to Vote on Market Structure Bill, Federal Court Issues Holding in Event Contracts Case, Fed Governor Addresses Tokenization, SEC Proposes Semiannual Reporting

Sens. Thom Tillis (R-NC) and Angela Alsobrooks (D-MD) reportedly reached a compromise aimed at resolving a standoff between the crypto industry and banking groups over whether digital asset exchanges should be permitted to pay yield to stablecoin holders. Banking industry groups responded with a joint letter arguing the compromise falls short of a full prohibition on the payment of yield on stablecoins. The Senate Banking Committee is scheduled to vote on market structure legislation on Thursday, May 14.

A federal District Court granted the CFTC’s motion for preliminary injunction and ordered defendants to be enjoined and restrained from enforcing Arizona’s gambling laws through any criminal or civil enforcement actions related to event contracts listed on CFTC-regulated designated contract markets.

Separately, Federal Reserve Gov. Lisa D. Cook delivered a speech on the financial stability considerations and opportunities presented by tokenization in financial markets. In addition, the SEC issued a proposed rule that would permit U.S. public companies to elect to file a single semiannual report in lieu of quarterly reports on Form 10-Q.

Congressional Updates

CLARITY Act Update

• On May 1, it was reported that an agreement crafted by Sens. Thom Tillis (R-NC) and Angela Alsobrooks (D-MD) was reached that aims to end a standoff between crypto and banking groups over whether digital asset exchanges should be able to pay annual percentage yield to stablecoin holders via rewards programs.
• On May 4, banking industry groups issued a joint letter arguing the Tillis-Alsobrooks compromise falls short in prohibiting the payment of yield and interest on stablecoins.
• On the same day, at the Milken Institute Global Conference, CFTC Chairman Michael Selig said he is hopeful the CLARITY Act can reach the President’s desk by July 4.
• On May 8, it was reported that the Senate Banking Committee is set to vote on market structure legislation on Thursday, May 14.

Regulatory Updates

SEC Proposes Optional Semiannual Reporting

• On May 5, the SEC issued its anticipated proposed rule to allow U.S. public companies to elect to drop their Q1 and Q3 quarterly reports. Companies can elect annually to file a single semiannual report rather than three Form 10-Qs. The public comment period will close on July 6. Please find additional detail in this client alert.
• SEC Chairman Atkins stated the proposal is part of the Commission’s initiative to incentivize more companies to “go and stay public” by providing them with greater regulatory flexibility.
• SEC Commissioner Mark Uyeda stated the proposal will allow companies to pick the “optimal reporting period” for their business.

Fed Vice Chair for Supervision Bowman on Payment Fraud

• Federal Reserve Vice Chair for Supervision Michelle Bowman noted payments fraud is a prevalent issue the agency is supervising and combatting at the Women in Housing and Finance Symposium on May 5. Vice Chair Bowman announced that the Federal Reserve, Treasury and FCC will soon host a public-private roundtable focused on solutions to payment fraud.

Federal Reserve Gov. Cook Addresses Tokenization in Financial Markets

• Federal Reserve Gov. Lisa D. Cook delivered a speech at the Central Bank of West African States Conference on Digital Assets in Dakar, Senegal on May 8, addressing the opportunities and financial stability considerations presented by tokenization in financial markets.
• Gov. Cook identified collateral and liquidity management as a primary institutional use case for tokenization, noting that smart contracts could automate margin calls and collateral substitutions. On financial stability, Gov. Cook highlighted two principal areas of concern should tokenization scale: liquidity transformation risk, including the potential for runs on tokenized fund issuers whose underlying assets are less liquid than the tokens themselves, and the interconnectedness of risk because the assets underlying some of the issuers will be held in the traditional financial sector, causing the digital asset ecosystem to potentially amplify shocks as they transmit orders into the traditional financial system.

SEC Chairman Atkins on Rulemaking for On-Chain Markets

• On May 8, at the Special Competitive Studies Project AI+ Expo in Washington, D.C., SEC Chairman Atkins noted that the existing framework identifies regulated market functions through distinct categories: namely, brokers or dealers, exchanges, clearing agencies and transfer agents. But software applications today do not always organize themselves neatly along these categorical lines. A single protocol can execute a trade, manage collateral, route liquidity, execute trading strategies through vault structures and settle the transaction, all within a unified, automated system, often within seconds.
• As a result, Chair Atkins outlined four areas in which the Commission could provide greater clarity for on-chain markets. First, so that market participants have a clear sense of how on-chain trading systems can operate within the regulatory perimeter, he anticipates the Commission will consider a limited innovation pathway in the near future, in addition to a future-proofed framework in the form of notice and comment rulemaking and would address the “exchange” definition as applied to on-chain trading system. Second, the Commission may consider the application of the broker and dealer definitions through notice and comment rulemaking. Third, the Commission may consider rulemaking on the definition of “clearing agency” with respect to persons facilitating on-chain clearing and settlement. Fourth, the Commission may consider ways to provide clarity surrounding “crypto vaults,” which he describe as “on-chain software applications that are often designed to allow users to earn yield passively through the deployment of their assets into yield-generating opportunities on-chain.”

Additional Updates

Prediction Market Updates

• On May 5, the U.S. District Court for the District of Arizona granted the CFTC’s motion for preliminary injunction and ordered defendants to be enjoined and restrained from enforcing Arizona’s gambling laws through any criminal or civil enforcement actions related to event contracts listed on CFTC-regulated designated contract markets. The court held: “Here, the Court concludes that federal law preempts state gambling laws insofar as they seek to regulate derivatives exchanged on markets regulated by the CFTC.”
• On May 7, Rep. Ashley Hinson (R-IA) introduced a resolution that would amend the House rules to ban members and their staff from trading on prediction markets.

Three Crypto Industry Groups File Amicus Brief on Staking Tax

• On May 1, three digital asset associations filed an amicus brief in Jarrett v. United States, asserting that new tokens created by stakers are not taxable as income, and that treating new tokens created by staking as income risks degrading the important security and policy interests that staking furthers.