Crypto, ESG and new equity rules top US watchdogs’ 2023 agenda

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Crypto is squarely in the crosshairs of regulators in Washington, with renewed calls for tougher controls before the industry becomes big enough to affect the broader financial system.

Oversight of digital assets is one of the most pressing issues for US financial watchdogs for 2023. Next year, they are also set to finalize an overhaul of Wall Street stock trading rules, focus more on environmental, social and governance issues and to review the criteria. to approve bank mergers.

The debate over how to regulate digital assets and which agencies should be monitored simmered for most of 2022. It then reached a boiling point in November when crypto exchange FTX failed, leaving investors face billions of dollars in potential losses. The situation was also embarrassing for lawmakers who received donations from entities and people connected to the company and for regulators who met extensively with its leaders.

Read more: Bankman-Fried released on $250 million bond in FTX case

Politically, the sudden and dramatic collapse of FTX has sparked a long-running debate over whether Congress should step in to write new rules, or whether regulators like the Securities and Exchange Commission already have the tools. they need to oversee the asset class.

Gary Gensler, Chairman of the Securities and Exchange Commission

Photographer: Al Drago/Bloomberg

Either way, the uproar reinforced calls for tougher regulation by SEC Chairman Gary Gensler and Commodity Futures Trading Commission Chairman Rostin Behnam. Top of Washington’s agenda for the next year will be sorting out the jurisdictional boundaries of these two watchdogs and other federal agencies.

The policy will make it more complicated to deal with these priorities for regulators appointed by President Joe Biden, a Democrat.

Republicans will hold a majority in the House and take the helm of the powerful Financial Services Committee in January. Gensler, Behnam and other political appointees are sure to face a barrage of scrutiny from emboldened lawmakers.

Rostin Behnam, Chairman of the United States Commodity Futures Trading Commission

Photographer: Ting Shen/Bloomberg

Partisan fissures were already starting to show in recent congressional hearings, with some GOP lawmakers arguing that the crypto industry shouldn’t be punished for the actions of former FTX CEO Sam Bankman-Fried. The 30-year-old has been charged by US prosecutors with a series of crimes for his role in the collapse of the businesses.

Meanwhile, longtime crypto-skeptics, mostly Democrats, said the crisis highlights bigger issues and a sweeping crackdown is needed.

Any new regulations must be robust enough to ensure that people feel confident in the cryptocurrency industry again. Otherwise, there are serious doubts about its future, said Yesha Yadav, a Vanderbilt University law professor who specializes in financial and securities regulation.

Sam Bankman-Fried, co-founder of FTX

Photographer: Ting Shen/Bloomberg

So far, the Biden administration seems to want both tougher enforcement of existing rules for crypto and Congress to write new laws. Treasury Secretary Janet Yellen warned this month that the broader U.S. financial system was largely insulated from the last crypto winter, but that could change if ties between traditional Wall Street businesses and corporate investors digital assets were getting stronger.

Read more: US regulators warn of risks of deeper ties between crypto and Wall Street

One thing seems certain: After making inroads with lawmakers on both sides of the aisle before the recent market turmoil, crypto companies will now face a colder reception on Capitol Hill.

It’s important for the industry to understand that when it goes to speak with members of Congress, the reception may not be as welcoming or curious as it once might have been, said Alex Grieve, lobbyist for the crypto industry and vice president. in the government relations practice of Tiger Hill Partners.

In addition to advocating for a lighter touch on digital assets, House Republicans are expected to push against SEC proposals to require disclosure of greenhouse gas emissions for publicly traded companies and disclosures ESG by investment firms.

In particular, the House GOP majority should take aim at corporate executives and regulators like Gensler for embracing what some in the party have seen as woke capitalism.

Representative Patrick McHenry, the top Republican legislator on the House Financial Services Committee

Photographer: Al Drago/Bloomberg

BlackRock Inc., which is often described by Republicans as the leader in including environmental or social issues in investment decisions, has increased face time and political spending on Capitol Hill in anticipation of backlash against -ESG.

Other asset managers, like State Street Corp. and Vanguard Group Inc., are trying to preempt Republican criticism that they are using their stakes in public companies to vote proxies for a Liberal agenda.

Read more: BlackRock, Vanguard lambasted by GOP senators for ESG proxy voting

The financial services sector is unified in hopes it will become an increasingly important part of the industry’s dialogue with the Hill next year, said John McKechnie, Republican financial services lobbyist and senior partner at Total. spectrum.

Wall Street will also be watching four SEC proposals that represent the most sweeping overhaul of trading in stocks and other securities in nearly two decades. They will be at the center of the agencies’ work over the next year.

The market regulator proposed the plans in December after Gensler for months teased the outline of his vision for pushing more trades onto exchanges and out of dark markets dominated by market makers such as Virtu Financial Inc. and Citadel Securities.

Read more: Wall Street stock trading set for overhaul in new SEC plan

The industry and the public have until at least the end of March to weigh in on the 1,600-page packages. They’re going to be extremely busy once the comments start rolling in, said Ian Katz, managing director of Capital Alpha Partners, a policy research firm.

Developing final versions of what promises to be some of the most complex and interconnected rules in Gensler’s tenure will likely further delay other regulatory efforts, including new workforce disclosures, a he declared.

–With assistance from Laura Davison.

To contact the reporters on this story: Allyson Versprille in Washington at [email protected]; Lydia Beyoud in Washington at [email protected]

To contact the editors responsible for this story: Ben Bain at [email protected]

Stephanie Stoughton

2022 Bloomberg LP All rights reserved. Used with permission.

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