Alternative assets go mainstream—crypto, PE, and more

Topline

• Congress sends historic crypto legislation to president’s desk

• Innovator coalition meets with SEC on capital formation priorities

• Anticipated EO to expand retirement access to alternative assets

• Quick hits

It was a good week for crypto…

It was a historic week for crypto in Congress: The House sent the Senate’s stablecoin framework to the president’s desk, marking the first successful legislative effort to regulate the industry. The House also sent a broader digital asset market structure framework to the Senate. Both passed with stronger-than-anticipated bipartisan votes, paving the way to help further legitimize the industry and further integrate it in mainstream finance.  

GENIUS Act: More than 100 Democrats joined most Republicans to create the first regulatory framework for payment stablecoins in the U.S., in an effort to bring clarity and promote broader adoption and integration in the financial system. At a high level, the GENIUS Act:

• Permits banks and nonbanks to issue payment stablecoins.

  • Banks that issue payment stablecoins through a subsidiary will be regulated by its primary regulator

  • Nonbanks with over $10B in issuance will be regulated by the OCC

  • Nonbanks with $10B or less in issuance can opt to be regulated by the relevant state regulator

• Requires payment stablecoins to be backed by highly liquid reserves on a 1:1 basis

• Imposes disclosures around composition and redemption policies, imposes capital, liquidity, and risk management requirements, and provides bankruptcy priority for stablecoin holders

• Subjects stablecoin issuers to anti-money laundering requirements under the Bank Secrecy Act

CLARITY Act: The market structure framework also got a big bipartisan vote despite heavy criticism targeted at the Trump family crypto ventures and perceived conflicts of interest. The effort lost key Democratic support in the House Financial Services Committee, but managed to carry more Democrats than a similar effort last Congress. The legislation would define the jurisdiction of the CFTC and SEC, giving the CFTC primary oversight for “digital commodities” and related intermediaries, while the SEC would retain authority over investment contracts involving digital assets. 

• On a related note, SEC Chairman Paul Atkins signaled support for combining the agencies. Not likely, but interesting commentary.

What’s next: The GENIUS Act will head to the White House for President Trump’s signature. Now the real work begins. Regulators will have to craft rules and guidance in a coordinated way to implement the framework within one year of enactment—a pretty short timeline for notice and comment rulemaking. And stablecoin issuers will now have to live with the regulation they have been pushing for…and the oversight that comes with it.

Stablecoins have always been the low-hanging fruit. The path on CLARITY is, well, a little less clear, though a better-than-anticipated vote in the House will likely help shape the contours of the Senate efforts—especially if the president puts his thumb on the scale like he did for stablecoins. Sen. Tim Scott has outlined a policy framework, with the goal of advancing his own bill in September. 

Meanwhile, the SEC is embracing tokenization. While Congress has made strides to put new rules in place for crypto, the regulators have been busy examining what existing rules to waive to clear the way for more blockchain integration into the traditional financial system. SEC Chairman Atkins is considering an innovation exemption that would permit new trading methods and provide exemptive relief to support the development of a tokenized securities ecosystem. Atkins has embraced tokenization as meaningful innovation that can bring more efficiency and certainty to both public and private markets, but it's not without bounds. Traditional industry players will want a say in how a blockchain-based securities market develops, and private issuers have raised concerns around investor rights and the legal validity of tokenized equity.  

Speaking of the SEC… 

Carta led a group from innovation-focused organizations to meet with Chairman Atkins’s office this week on the importance of prioritizing initiatives to bolster and broaden the private market ecosystem. Even aside from crypto, the SEC’s to-do list is long, so it’s important we show up to ensure that expanding access to capital for founders and funds and increasing investment opportunities remains top of mind. Read more about our policy priorities.

Big thanks to ACA, CAE, Engine, FTA, and NVCA for joining this effort!

Coming EO on 401(k)s in PE…coming changes to capital markets 

President Trump is expected to issue an executive order in the coming days to open U.S. retirement markets to alternative investment, unlocking portions of an ~$12.5 trillion pool of capital for private equity and private credit. The EO is expected to instruct the DOL and SEC to provide guidance to employers and plan administrators on including private assets and crypto in 401(k) plans., More details to come, but expect this to be more aggressive than previous efforts during the first Trump Administration. Though the 2020 guidance was helpful, it was limited, and many in industry still wrestled with liability risk and never fully embraced investing retirement assets into private equity.

• The liability risk: Though it is legal for 401(k) plans to invest in private equity today, few have embraced the strategy due to liability risks. Private market investments are less transparent, less liquid, and have higher fees—factors that have led to the perception these investments are not suitable for retirement accounts, even with the potential for higher returns. Under ERISA, plan fiduciaries can be sued, not just by the regulator, but also the plaintiffs’ bar and held personally liable for fiduciary breaches.

• On the one hand…private equity is different from public equity. The assets tend to be illiquid, there is less information, there can be information asymmetry, and there is always a question of access to appropriate deal flow. Smart people can claim this is not a market for broader investors, especially when it comes to their retirement security. And this at a particular time when PE performance is coming under more intense scrutiny.

• On the other hand…more assets remain in private markets, and too few investors have access to the diversification and growth this market provides. Smart people could argue that it would actually be ignoring one’s fiduciary duty to not think about a more holistic allocation that includes private equity. Plan fiduciaries, after all, would likely be professional advisers who could manage liquidity risk, have enough market size to gain access to necessary information for due diligence, and effective deal flow to allocate capital into. Not to mention, pension funds have provided their beneficiaries access to private funds for decades.

Bottom line: Retail investors will soon have more private market investment options through their retirement accounts. Industry is already shifting into this space, and the president’s anticipated directive and regulatory actions that follow will open this market even further. Smart, well-intentioned people are on both sides of this argument, but this is just one aspect of the broader arc. 

It’s our—the Carta Policy team—belief that private markets will continue to grow, and the line between private and public markets will continue to blur as asset managers take a more holistic approach across asset classes. This dynamic will be both accelerated by—and also demand—better infrastructure for our private and public capital markets. That includes a technology infrastructure that enables accurate and timely data and information that empowers managers to better raise and allocate capital, support their investments, and report to their limited partners. It also includes a policy infrastructure that recognizes the evolution of our capital markets and seeks to modernize them around best practices that drive capital to this innovation growth engine of private markets while enabling more investors to participate in this economic journey. Carta is working on both. 

(Steps down from soap box)

Quick hits

• VC priorities expected in HFSC markup: Next week, the House Financial Services Committee is expected to consider a number of bills to help bolster and broaden the venture capital ecosystem, including provisions to expand qualifying VC investments to include investments in other VC funds and secondaries and increase the size and investor limits for qualifying venture capital funds. Carta has been leading the charge to advance these priorities—and to do so on a bipartisan basis. More to come next week!

• SEC drops landmark liquidity rule enforcement action. The action was the first-ever suit seeking to enforce the Liquidity Rule, which requires mutual funds and ETFs from investing more than 15% of their net assets in illiquid investments. Defendants moved to dismiss the charges on a number of grounds, including arguing that the SEC lacked statutory authority post Chevron, but the SEC’s dismissal is likely part of a broader trend to permit increased retail exposure to private (illiquid) assets, which could offer diversification opportunities and enhanced returns. 

HFSC hearing renews conversation around outbound investment restrictions in China, balancing national security risk with innovation and U.S. investment opportunities. HFSC Republicans criticized the Biden-era outbound investment rules for creating uncertainty and raising compliance costs for VC funds, preferring a restricted entity list versus sectoral-based outbound restrictions. This is an area where Republicans are divided, however, and we expect the outbound investment restrictions to stick around—and potentially strengthen—under Trump.

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