JPMorgan says crypto regulatory moves partly offset Clarity Act failure, but risks remain

JPMorgan analysts said recent actions by U.S. regulators are partly offsetting the negative impact from the Senate's failure to advance the Clarity Act, but political and legal risks remain without a crypto market structure law.

"Regulator-led measures can encourage institutional participation in the crypto ecosystem over the near term, but only legislation would make the framework more durable over the longer term," the JPMorgan analysts led by Nikolaos Panigirtzoglou said in a Wednesday report.

"...elevated political and legal risk premia are likely to persist until comprehensive market-structure legislation is eventually passed. For now, the crypto industry has to rely on a patchwork of regulatory actions that could be overturned in as soon as two years, if a Democrat wins the White House," the analysts added. 

The Senate failed to move the Clarity Act forward last month. The analysts said the Clarity Act is unlikely to pass this year and may return in 2027.

Crypto market sentiment has still remained "relatively constructive." For now, the focus is on steps the SEC, CFTC, and OCC can take to make it easier for institutions to enter crypto.

SEC's tokenization plan

The SEC released a five-year "Innovation Exemption" for tokenized stocks last month. The tokens would need to carry the same financial and voting rights as the original shares. Synthetic tokens would not qualify, and trading platforms would face limits, the analysts noted.

Companies could also choose not to have their shares tokenized. The analysts said more firms have recently chosen to do so, hurting sentiment for application tokens such as ether as ETF flows and futures positioning weakened.

"This contrasts with the initial period following the September 15th SEC announcement, when both ETF flows and our futures-position proxy had increased," the analysts said.

CFTC looks at leveraged crypto trading

The CFTC is looking at ways to allow leveraged crypto trading on regulated U.S. platforms. The plan is still at an early stage and is unlikely to move forward before 2027, the analysts said.

"Activity that migrates onshore can deepen liquidity, improve price formation, and eventually support the development of more liquid regulated venues that institutions are more likely to use," the analysts said.

OCC grants charters to stablecoin firms

The OCC has granted national trust charters to a growing number of stablecoin issuers and digital asset firms, placing activities such as custody, reserve management and issuance under federal oversight.

The Independent Community Bankers of America has sued the OCC over parts of the approvals.

"These charters are not immune from challenge, as community banks, through the ICBA, have sued the OCC over aspects of the approvals. Even so, once granted, charters tend to be difficult to unwind in practice," the analysts said.

FASB considers stablecoins as cash equivalents

Meanwhile, the Financial Accounting Standards Board is considering allowing companies to classify certain stablecoins as cash equivalents on their balance sheets. The proposal is open for comment until Nov. 19.

"Adoption would support broader use beyond crypto trading, toward payments and liquidity management for corporates and institutions," the analysts said.

They concluded that regulators can help the crypto market for now, but clear long-term rules will still require a law from Congress.

Last month also, the analysts said agency rules could give crypto companies more clarity and bring more capital into the sector. However, these rules would not be as durable as a law passed by Congress.