MoFo's Financial Markets & Innovation

FRB Governor Lisa Cook Talks Tokenization Benefits and Concerns

At a digital assets conference in Senegal in West Africa, Federal Reserve Governor Lisa Cook spoke about the effects of tokenization and financial innovation on financial markets. First, she discussed the benefits of financial markets implementing tokenization, including increased efficiency, flexibility, and transparency. She sees the most benefit from and use in “improvements to collateral mobility and liquidity management processes” through faster transaction times and streamlined recordkeeping, but she also sees the potential of expanding market access and competition. As chair of the Federal Reserve Board’s Committee on Financial Stability, however, she also expressed concerns that accelerated transaction speeds could exacerbate the pace of potential runs and introduce additional security risks.

Senate Banking Committee Releases Updated CLARITY Act Text

In the lead-up to the May 14 Executive Session on the CLARITY Act, the Senate Banking Committee majority released an updated bill text. The bill would place restrictions on the SEC classifying digital assets as securities and requires the SEC and CFTC to update rules on digital assets. Critically, the bill bans digital asset service providers from paying “deposit-like interest or yield on payment stablecoin balances, while allowing bona fide activity or transaction-based rewards,” subject to rules by the SEC, CFTC, and Treasury Department. The bill also provides protections for software developers and prevents blockchain developers from being classified as money transmitters. While the crypto industry is generally supportive of the bill, the banking industry has criticized the stablecoin yield compromise, and committee Democrats have raised concerns regarding the lack of ethics provisions applicable to political officials.

CFTC Files Amicus Brief to Support Exclusive Jurisdiction over Prediction Markets

On May 12, the CFTC filed an amicus brief to defend exclusive jurisdiction over prediction markets in KalshiEx LLC v. Matthew T. Schuler, et al. in the U.S. Court of Appeals for the Sixth Circuit. In a statement regarding the brief, CFTC Chairman Michael Selig stated that the “federal district court in Ohio took an improperly narrow view” of the CFTC’s “longstanding authority” over prediction markets. The amicus brief represents the CFTC’s latest attempt to prevent state governments from regulating prediction markets under state gambling laws. The agency has previously filed suits against Arizona, Connecticut, Illinois, New York, and Wisconsin, and has also filed amicus briefs in the U.S. Court of Appeals for the Ninth Circuit and the Supreme Court of Massachusetts.

Democratic House Members Request Subpoenas and an Investigation into Prediction Markets

In light of the recent arrest of a U.S. Army solder for insider trading on prediction markets (see our client alert), a group of seven Democratic members of Congress sent a letter to House Oversight and Government Reform Committee Chairman James Comer (R-KY) requesting subpoenas and committee investigations of insider trading in prediction markets. The letter calls out trades made on offshore markets without ID verification and highlights potential noncompliance with U.S. federal securities laws, specifically those trades involving classified national security information.