New Industry-Friendly Crypto Regulations May Be on the Way | Paul Hastings LLP

Congress and federal agencies have continued to back more industry-friendly crypto regulations and appear to be looking for paths forward for new legislation. Under new leadership, the agencies have indicated a willingness to end some active litigation against crypto firms and provide clear regulatory guidelines. In this update, we highlight recent updates and take a deeper look at the potential impacts of recent executive orders.

Senate Banking, Housing and Urban Affairs Subcommittee on Digital Assets Holds Hearing Entitled ‘Exploring Bipartisan Legislative Frameworks for Digital Assets’

• The hearing focused on regulatory clarity surrounding digital asset legislation, highlighting legislation like FIT 21, the GENIUS Act and the BITCOIN Act. However, some lawmakers from different parties disagreed on the appropriate approach. Republican and some Democrat subcommittee members highlighted the need for regulatory clarity while preserving innovation. Other Democratic subcommittee members expressed concerns about anti-money laundering and Know Your Customer programs, consumer protection, insolvency procedures and financial stability. The full hearing is linked here.

House and Senate Release Resolutions to Remove IRS DeFi Broker Rule

• The House Ways and Means Committee advanced a joint resolution (H.J. Res. 25) in a 26-16 vote to repeal the IRS’ DeFi (decentralized finance) Broker Rule, which expanded the definition of the term “broker” to include software that allowed users to access DeFi protocols, resulting in such technology infrastructure being classified as a regulated intermediary. Sen. Ted Cruz (R-TX) introduced the Senate version of the joint resolution (S.J. Res. 3). Both resolutions would repeal the IRS DeFi Broker Rule using the Congressional Review Act, which only requires a majority vote in the House and Senate before being sent to the president for signature. If the rule is reversed, it cannot be reintroduced. The resolution passed the Senate on Tuesday by a vote of 70-27. H.J. Res. 25 now awaits a full vote by the House. The White House has signaled that the president will sign the legislation into law if it successfully passes both House and Senate.

Crypto-Friendly Lawmakers in the House Announce the Congressional Crypto Caucus

SEC Replaces Crypto Enforcement Unit

• On February 20, the Securities and Exchange Commission (SEC) announced the creation of the Cyber and Emerging Technologies Unit (CETU) to replace the Crypto Assets and Cyber Unit, which was previously tasked with combatting cyber-related misconduct and protecting retail investors from bad actors in the emerging technology space. The CETU will be led by Laura D’ Allaird, who took over as co-chief of the SEC’s crypto unit and previously served as counsel to former SEC Commissioner Jaime Lizárraga. SEC Acting Chair Mark Uyeda said the CETU will “not only protect investors but will also facilitate capital formation and market efficiency by clearing the way for innovation to grow.” The SEC statement is linked here.

SEC Announces Crypto Task Force Staff

• SEC Commissioner Hester Peirce, head of the Crypto Task Force, announced its staff. The Crypto Task Force seeks to provide regulatory clarity on the application of the federal securities laws to the crypto asset market. The task force is comprised of staff from the acting chairman’s office and other SEC divisions with a “deep expertise and an enthusiastic commitment to identifying workable solutions to difficult crypto regulatory problems.” SEC statement linked here. The SEC also announced it would be holding its first roundtable on March 21, which will focus on defining the security status of digital assets. See the SEC announcement here.

House Financial Services Committee Chair French Hill (R-AR) Provides FDIC With Recommendations to Help Clarify Digital Asset Regulations and Prevent Debanking

• House Financial Services Committee Chair French Hill, along with Chair of the Subcommittee on Oversight and Investigations Dan Meuser (R-PA), Chair of the Subcommittee on Financial Institutions Andy Barr (R-KY) and Chair of the Subcommittee on Digital Assets, Financial Technology, and Artificial Intelligence Bryan Steil (R-WI), sent a letter to FDIC Acting Chair Travis Hill outlining five recommendations to clarify banking regulations surrounding digital assets. The recommendations include:
  • Formal Public Guidance – Regulators should issue written public guidance rather than relying on informal, verbal-only directives.
  • Transparency in Account Closures – Financial institutions should be required to provide clear, concrete rationales when closing customer accounts to ensure fairness and accountability.
  • Reforming Supervisory Metrics – The use of “reputational risk” as a supervisory factor should be prohibited, and the assessment of “management” under the CAMELS bank-rating system (based on capital adequacy, asset quality, management, earnings and liquidity) should be clarified and reformed.
  • Periodic External Reviews – All supervisory guidance should be subject to regular, independent reviews to enhance transparency and accountability.
  • Equal Application of Rules – Supervisory guidance and rules should apply equally to all institutions, preventing both preferential treatment and punitive enforcement on a case-by-case basis.
• Press release linked here.

Sen. Dick Durbin (D-IL) Introduces Crypto ATM Fraud Prevention Act

• On February 25, Sen. Dick Durbin introduced the Crypto ATM Fraud Prevention Act to help prevent cryptocurrency ATM-related scams. The bill would require ATM operators to warn consumers about potential scams and take reasonable steps to prevent fraud. Additionally, it would set protective measures, like limiting new customers transactions to $2000 a day (and $10,000 total for the first 14 days), and requiring live verbal confirmations for transactions over $500. Press release linked here.

President Trump Announces Crypto Reserve

• On March 3, President Donald Trump announced plans for a “Crypto Strategic Reserve” on Truth Social. The reserve will hold five cryptocurrencies: Bitcoin, Ethereum, Ripple, Solana and Cardano. The president referred to his crypto executive order from January 23. President Trump’s announcement is linked here and the executive order is linked here.

SEC Says Meme Coins Are Not Securities

• On February 27, SEC staff announced that the issuance of meme coins, a volatile type of cryptocurrency often created for entertainment purposes, do not constitute the offer and sale of securities under the federal securities laws. The agency added that individuals or firms that sell meme coins do not need to register the transaction with the SEC and that meme coin purchasers and holders are not protected under federal securities laws. The SEC statement is linked here.

Potential Impacts of Recent Executive Orders

President Trump recently issued two executive orders (“EO”) — “Ensuring Accountability for All Agencies” and “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’” — which collectively exercise the executive branch’s oversight over independent agencies, including the federal banking agencies (the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and supervisory and regulatory activities of the Board of Governors of the Federal Reserve System, collectively the FBAs), the SEC and the Commodity Futures Trading Commission (CFTC). The EOs likely will, at least initially, slow down the flow of new regulatory burdens and new interpretations of existing law. Beyond those initial effects, the EOs could result in dramatic changes to the current regulatory and supervisory framework that applies to covered institutions, including with respect to their digital asset activities.

The Ensuring Accountability for All Agencies EO requires that all independent agencies submit strategic plans and proposed and final “significant regulatory actions” to the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) to review prior to publication. The EO states that it applies to the FBAs; however, with the respect to the Federal Reserve, only its regulation and supervision activities are covered.

Under the EO, the OMB will establish performance benchmarks for independent agency heads and periodically report to the president on the performance of the agency heads. The OMB director, in consultation with each independent agency heads, may adjust an agency’s previously Congressionally apportioned activity, function, project or object. Revised OMB decisions related to apportionments could prohibit an agency from expending appropriations on previously approved activities, functions, projects or objects, and a White House liaison position will be established within each agency. Moreover, the EO sets out that power for legal interpretations resides in the president and the U.S. Attorney General, and that no interpretation of federal law may be advanced if it contravenes the president’s or AG’s opinion on the matter, including but not limited to the issuance of regulations, guidance and positions advanced in litigation, unless authorized to do so.

The second EO — “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’”— requires all independent agencies, including the FBAs, to collaborate with their designated Department of Government Efficiency (DOGE) team leads and the attorney general to, within 60 days of the EO’s issuance, identify regulations that are potentially unlawful, harm national interests, impose burdens on small business and impede private enterprise, impose significant costs that are not outweighed by public benefits or are not based on the “best reading of the underlying statutory authority or prohibition.” Following the compilation of this list, OIRA and the agency heads will develop an agenda to rescind or modify the identified regulations to comply with law. With respect to enforcement proceedings, the EO requires the agencies to deprioritize enforcement of regulations not based on the “best reading” of the statute or otherwise unconstitutional, and to terminate current enforcement proceedings that do not comply with the U.S. Constitution, laws or administration policy. For new regulations, agencies must consult with their DOGE team leads and OIRA.

The increased oversight by the executive branch over the activities of the FBAs, SEC and the CFTC will lead to a more accommodative approach to digital assets at the federal level. For example, it can be expected that the FBAs will revisit their approach on digital assets activities by viewing existing or contemplated regulations, guidance or interpretations through the EO’s lens of eliminating burdens on small business and impeding private enterprise, imposing significant costs that are not outweighed by public benefits or are not based on the “best reading” of the underlying statutory authority or prohibition. Moreover, as has already occurred at the Consumer Financial Protection Board and SEC, thresholds before an enforcement action is brought will be raised, although enforcement actions will continue to be brought.

Another interesting area to monitor is whether the Fed’s approach to master account access is deemed to be covered by the EOs. Direct access to a master account has long been an aspiration of digital assets companies. Most digital asset companies that could be eligible for a master account are state banks or trust companies without FDIC insurance, which, under the Fed’s Guidelines for Evaluating Account and Service Requests (the Guidelines), are subject to the highest level of scrutiny by the relevant Fed bank reviewing their application for a Fed master account. On the one hand, because master accounts have a relationship to the implementation of the Fed’s monetary policy, the Guidelines and master account application process could fall outside of the scope of the EOs. On the other hand, because access to a Fed master account relates to its supervision and regulation of financial institutions (as evidenced, in part, by the fact that the regulatory status of the applicant determines the stringency of the review it will undergo as part of the application review process), there are good arguments that the Guidelines should be in scope and will be reviewed to determine if they are consistent with the best reading of the Federal Reserve Act’s authority to issue master accounts. There are likely to be other areas that raise similar questions.

In addition, in the shadow of the U.S. Supreme Court taking aim at the administrative state (please see our prior client alert on these changes), the mere exercise of identifying regulations, guidance or interpretations that are susceptible to legal challenge will provide the industry with a roadmap of which agency actions to challenge. Moreover, this exercise need not to be limited to recently adopted regulations. Because of the holding in Corner Post, Inc. v. Board of Governors of the Federal Reserve System, longstanding regulations are as susceptible to legal challenge by the private sector as newly adopted ones.