Lowenstein Crypto advises leading digital asset and cryptocurrency projects, exchanges, and trading firms. Our practice covers regulatory advice, transactions and structuring advice, investigations, and adversarial matters including commercial disputes, bankruptcy, and related litigation. As these markets continue their rapid growth and market participants continue to evolve and mature their businesses, we are providing this weekly digest as a resource that highlights and summarizes a selection of key recent legal regulatory developments.
Senate Cloture Vote on Clarity Act Fails
On September 15, the Senate’s cloture vote on the Digital Asset Market Clarity Act (Clarity Act) failed to advance the Clarity Act in a 49-50 vote with one nonvote. At least 60 votes were required for the motion to pass. The day before, Sens. Cynthia Lummis, R-Wyo.; John Boozman, R-Ark.; and Tim Scott, R-S.C., released the proposed final substitute text of the Clarity Act ahead of the procedural vote providing compromises addressing ethics enforcement, protections for software developers from registration requirements, and restrictions on covered digital asset service providers with regard to paying U.S. customers interest or yield solely for holding payment stablecoins. See the Senate’s cloture vote roll call here and a press release relating to the draft final text of the Clarity Act here.
SEC Issues Innovation Exemption To Facilitate Trading of Tokenized NMS Stocks
On September 17, following the Senate’s failed cloture vote on the Clarity Act, the Securities and Exchange Commission (SEC) issued an order granting temporary conditional exemptive relief to facilitate the permissioned trading of tokenized national market system (NMS) stocks on blockchain-based venues using automated market makers (AMMs) and liquidity pools. The order creates two new exemptions: the “TSV Exemption,” which exempts qualifying “Tokenized Securities Venues” (TSVs) from the definition of “exchange” under Section 3(a)(1) of the Exchange Act, and the “Covered Firm Exemption,” which exempts certain liquidity providers from the definition of “dealer” under Section 3(a)(5), enabling them to supply tokenized NMS stock to AMM liquidity pools without triggering broker-dealer registration requirements. TSVs must operate on public permissionless distributed ledgers with auditable smart contracts, implement permissioned access controls (including AML/KYC and OFAC compliance), publish detailed public notices, maintain books and records, and halt trading in a tokenized stock when trading in the underlying NMS stock is halted on its primary exchange. Tokenized NMS stocks may be paired for trading with other tokenized NMS stocks, nonsecurity crypto assets such as payment stablecoins under the GENIUS Act, or tokenized money market funds. The exemptions are effective for five years (through September 17, 2031) and are intended as an interim measure while the SEC considers permanent rulemaking. See the order here and the related press release here. Please be on the lookout for Lowenstein Sandler’s client alert for additional details.
CFTC Issues No-Action Letter Granting Relief to All Passive Software Providers
On September 17, the Market Participants Division (Division) of the Commodity Futures Trading Commission (CFTC) issued a no-action letter extending the no-action relief originally granted to Phantom Technologies to all passive software providers (PSPs) that develop front-end interface software, including self-custodial crypto wallet applications, that passively enable users to trade CFTC-regulated derivatives such as event contracts and perpetual contracts on designated contract markets. Under the no-action letter, the Division stated that it will not recommend enforcement action against qualifying PSPs for failure to register as introducing brokers (or against their personnel as associated persons), provided they satisfy ten enumerated conditions, including delivering conflict-of-interest and risk disclosures to users, ensuring users are onboarded directly with registered intermediaries and can access them independently of the PSP, executing joint and several liability undertakings with each registrant, maintaining compliant recordkeeping, adopting NFA-consistent advertising policies, and filing a notice of consent to CFTC jurisdiction. Critically, the relief is limited to a “custodial” trading model in which users’ assets remain with a designated clearing organization or clearing futures commission merchant. PSPs may not hold user funds, generate trading signals, or exercise discretion over order routing. See the CFTC’s press release about the no-action letter here.
SEC Chairman Gives Remarks Indicating Focus on Crypto-Custody Questions
On September 14, SEC Chairman Paul Atkins announced that he has asked SEC staff to develop a proposal addressing two significant crypto-custody questions under the Investment Advisers Act of 1940 and Investment Company Act of 1940: (i) whether an investment adviser may self-custody crypto assets for clients, including regulated funds, and (ii) whether advisers may use state trust companies as crypto custodians. Atkins said the contemplated proposal would seek to answer both questions affirmatively under specified circumstances and subject to appropriate conditions, noting that qualified third-party custodians do not yet exist for certain assets and that state trust-company custody already operates in practice. He characterized the prospective custody framework, the pending Regulation Crypto Assets proposal, and the SEC’s transfer-agent modernization proposal as three components of a broader regulatory architecture governing how crypto assets are issued, traded, transferred, and held. See Atkins’ statement here.
White House Council of Economic Advisers Releases Analysis on the Effects of Stablecoin Yield
On September 15, the White House Council of Economic Advisers (Council) published a new FAQ and interactive model defending its earlier economic analysis of restrictions on stablecoin interest and yield, an issue addressed directly in the final Clarity Act negotiations. The Council estimates that, under its baseline assumptions, a broad prohibition on stablecoin yield would shift approximately $54 billion from stablecoins into bank deposits but generate only approximately $2.1 billion of additional bank lending, or 0.02 percent of total loans, including roughly $500 million of additional community bank lending. The Council further estimates an approximately $800 million annual net welfare cost. The analysis responds to arguments that yield-bearing stablecoins could cause significant deposit flight and concludes that materially larger lending effects require assumptions including a much larger stablecoin adoption, substantially greater reserve holdings in cash, a heightened consumer yield sensitivity, and a departure from the Federal Reserve’s ample-reserves framework. See the release here.
U.S. House Advances Crypto Tax Bill in Wake of Clarity Act
On September 16, the U.S. House of Representatives Committee on Ways and Means (Committee) held a markup hearing for the Digital Asset Tax Certainty Act (Act) resulting in a 38-5 vote to advance the Act before the rest of the House of Representatives. The Act was introduced on September 14 and, among other things, aims to provide clarity for the tax treatment of certain crypto asset transactions. Key provisions include a de minimis exclusion for network and transaction fees of $10 or less, an elective simplified accounting method for gains and losses on widely traded digital assets, a clarified tax treatment of U.S. dollar stablecoin transactions, parity between digital assets and traditional financial instruments for lending agreements and mark-to-market elections, the extension of existing anti-abuse rules, new rules for the sourcing and characterization of mining and staking income, updated broker reporting requirements, the establishment of a Digital Asset Voluntary Disclosure Program, a Treasury study on using blockchain technology (including zero-knowledge proofs) for tax compliance, and a final title reinstating preexisting wagering-loss limitation rules. See the markup hearing here and a copy of the markup of the Act here.
