Crypto Legislation Expected to Open Doors for Wall Street — Analysis

By Connor Hart

Crypto Week in Washington has the potential to overhaul domestic crypto policy, opening the floodgates for widespread adoption, investment and innovation.

The House is set to consider three bills, one of which passed in the Senate last month and could be signed into law by President Trump before the end of the week. Another aims to establish a clear regulatory framework for digital assets, offering long-sought certainty to an industry that poured millions of dollars into last year's election to rally support.

If passed, the bill--known as the Clarity Act--would likely spur the widespread adoption of digital assets by institutional investors such as asset managers, hedge funds and banks, Benchmark analyst Mark Palmer said. That is because the act aims to give institutions confidence in what digital assets they can trade and hold.

"It has been impossible for a lot of institutional investors to justify getting involved in the space when there was the potential for a regulatory rug pull," Palmer said. "Removing that scenario makes it much more palatable for institutions to flow into the space."

Bitcoin, the oldest and largest cryptocurrency, reached a record high of $123,153 on Monday, but it has since tempered and was recently trading at $117,155. Bitcoin has surged more than 87% in the past year.

The Clarity Act will set rules for when an asset is considered a security, to be overseen by the Securities and Exchange Commission, versus when it is considered a commodity that is overseen by the Commodity Futures Trading Commission.

The act is likely to pass the House this week, analysts said, citing bipartisan support and strong backing from super PACs. A path through the Senate, where the bill could be amended or recodified, is murkier.

"The hope in the industry is that this is passed by the end of September," Compass Point analyst Ed Engel said, adding that he thinks the timeline may prove too optimistic.

There is one factor that bodes well for the bill's timely passage, though: Trump's pro-crypto pivot. Once a skeptic, Trump embraced the industry last year, vowing to make the U.S. the "crypto capital of the planet" and to ease regulatory burdens on the industry. He has urged Congress to send the Clarity Act to his desk ahead of its August recess.

Meanwhile, Trump could sign the Genius Act into law as early as this week.

The bill sets up oversight of stablecoins, a popular crypto asset typically pegged to a government currency such as the U.S. dollar. That peg keeps their price steady, making them attractive to traders looking for a store of value while they buy and sell more volatile cryptocurrencies.

The stablecoin market, currently valued at around $240 billion, is projected to grow significantly in the coming years, analysts said. Major financial players such as Visa and Mastercard are entering the space, drawn in part by the potential for clearer regulations introduced by the new bill. Corporations such as Amazon.com and Walmart are also looking into stablecoin applications.

Passage of these crypto-focused bills are expected to provide a lift to the industry at large. Companies that provide comprehensive digital-asset trading, custody and staking services to institutional investors, such as Coinbase and Galaxy Digital, are especially well positioned, as are issuers and operators of U.S.-dollar-backed payment stablecoins, such as Circle, H.C. Wainwright analyst Mike Colonnese said.

Still, cryptocurrencies remain a risky investment.

Buying crypto has become a popular corporate move, with a growing number of companies--many far removed from the digital-asset space--adding digital assets to their balance sheets in hopes of boosting investor interest. This strategy could expose crypto, which has a long history of volatility, to new risks, amplifying selloffs in moments of turbulence, analysts said.

The House will additionally this week consider the Anti-CBDC Surveillance State Act, which would prevent the Federal Reserve from issuing a central-bank digital currency.

Write to Connor Hart at connor.hart@wsj.com