Recent/upcoming developments… Senate activity is intensifying regarding crypto market structure legislation, with a group of Republicans led by Sen. Lummis (R-WY) and Banking Committee Chair Scott (R-SC) releasing a discussion draft and working on building bipartisan support among the committee’s membership.  Scott reportedly intends for the committee to consider the bill in September.  To-date no committee Democrats have openly embraced these efforts, and Sen. Warren (D-MA), the committee’s Ranking Member, has been critical.  The Senate Agriculture Committee, which also has jurisdiction over the issue, has not yet moved forward on this issue.  This is in contrast to the House, which passed its version of crypto market structure legislation (the CLARITY Act) in July with the support of 78 Democrats, more than supported a similar bill last year.

Our outlook… There is a 45% probability that crypto market structure legislation is enacted this year, marginally higher than was previously the case based on strong Democratic support in the House (which is correlated to eventual Democratic support in the Senate) and the emphasis that Chair Scott is now putting on the issue.  If the Banking Committee is successful in passing the legislation in September (which we’re skeptical they’ll be able to do in that timeframe) with three or more Democrats supporting it, the probability of enactment this year will move above 50%.  In order for the bill to be enacted this year, we will also want to see the Senate Agriculture Committee pass it in the coming month or so.  This would provide (barely enough) time for it to pass on the Senate floor prior to the end of the year, at which point the House would likely be forced to accept the Senate version.  There is sufficient bipartisan alignment on this issue, a strong enough interest from the White House, and sufficient industry pressure for the probability of enactment to be above 50% next year if it is not enacted this year.  There will be a strong push for crypto market structure legislation to be enacted prior to the next election when Democrats may gain majorities in the House and/or Senate and likely be less willing to move quickly on it.

* There is some divergence between the Lummis legislation and CLARITY Act on key issues, such as token classification and the fullness of the carve out for DeFi, which will need to be addressed to the satisfaction of industry before the bill passes in the Banking Committee.  While there are differing industry views on these issues, they do not appear to be significant enough to fundamentally inhibit the bill’s passage.  There also are a number of other issues that will need to be addressed in order to satisfy the Senate Democrats who may support the market structure legislation.  These include KYC/AML protections and restrictions on the vertical integration of crypto exchanges.

* The banking industry is expressing concern that crypto exchanges may offer stablecoin holders with rewards that could undermine prohibitions in the GENIUS Act (recently enacted legislation) on offering yield on stablecoins.  The industry is concerned that this will cause banks to lose deposits to stablecoins.  We are watching closely for any indications that members of the Banking Committee are sympathetic enough to this argument that they would be willing to tighten these prohibitions as part of their market structure legislation.  Even if this is not addressed legislatively, the banking industry is likely to push regulators to aggressively implement the GENIUS Act prohibitions.

Watch for these developments… Among the near-term indicators we are watching to determine if the legislation has momentum is whether Senate Banking Committee members Warner (D-VA) and Gallego (R-AZ), or others such as Gillibrand (R-NY) express support for it.  They are the among the Democrats most likely to support the legislation, but as with other Democrats, they have been less vocal in supporting crypto legislation in the wake of controversies surrounding the Trump family’s crypto activities.  We are also watching for whether Agriculture Committee Chair Boozman (R-AR) and Ranking Member Klobuchar (D-MN) get behind the legislation in the near-term.