Following his election, Donald Trump has expressed his intent to establish the United States as a global leader in the cryptocurrency space. His strategy involves establishing a national Bitcoin reserve, revitalizing domestic crypto mining activities, and easing regulations within the digital asset market.
Recently, Bitcoin reached a significant milestone, surpassing $108,000, fueled by expectations surrounding the incoming administration’s policies, resulting in a wave of optimism throughout the cryptocurrency community. Industry leaders are eager to collaborate with the new government to develop clear, workable guidelines rather than facing stringent enforcement measures.
The prospective appointment of Paul Atkins, a known supporter of cryptocurrencies, as Chairman of the Securities and Exchange Commission (SEC), is viewed as a potentially pivotal step towards achieving this vision.
Here’s what industry participants, legislators, and legal professionals should be watching as the new year unfolds.
Deregulation
While reducing regulatory burdens appears to be a key objective, some level of updated regulation is needed to help the industry mature.
Existing regulations are often based on traditional debt or equity models, failing to sufficiently address the unique characteristics of investment contracts. Clearer definitions are crucial, as certain cryptocurrencies and initial coin offerings (ICOs) might be classified as “investment contracts” according to the Howey test, subjecting them to SEC disclosure and registration requirements.
To ensure long-term stability, the crypto sector needs enduring regulatory frameworks that are independent of specific administrations. A temporary halt to SEC enforcement could be easily reversed by subsequent administrations, potentially leading to increased enforcement actions from state regulators and private entities.
Enforcement
The incoming SEC Chair will have considerable influence on the agency’s enforcement priorities. The key will be finding a balance between preventing fraudulent activities and fostering innovation. The industry hopes the SEC will focus enforcement on combating outright fraud and Ponzi schemes involving cryptocurrencies, rather than hindering legitimate businesses operating in uncharted territory.
Legal precedents already exist, establishing the criteria for determining when the initial sale of interchangeable, speculative crypto assets constitutes a securities transaction. The Trump team’s handling of its own token offerings suggests they also perceive it as a security at the time of sale.
While a new SEC chair cannot overturn existing case law, uncertainty remains regarding primary sales, such as whether airdrops to specific wallet addresses should be classified as primary sales, or whether tokens earned through gameplay should be deemed as primary sales purchases.
The treatment of secondary trading of crypto assets is a significant open question. If the SEC were to drop its appeals in relevant cases, rulings could allow US crypto exchanges to more effectively compete with their international counterparts.
For instance, in Judge Analisa Torres’ Ripple Labs ruling, programmatic trades on exchanges were determined not to be securities transactions under the Howey test. New SEC leadership could adopt a similar perspective, regulating initial sales by crypto issuers seeking capital as securities transactions, while exempting secondary market resales on exchanges.
Resolving the regulatory ambiguity surrounding secondary trading could incentivize crypto projects to remain in the United States. One challenge with blockchain adoption is the need for crypto asset transactions to occur rapidly, mirroring the speed of software.
Incorporating broker-dealers into every crypto transaction is impractical. While FTX’s collapse underscores the need for exchange regulation, consumer protection measures – characteristic of money transmission regulations – might be a more effective solution than stringent broker-dealer regulations.
Japanese consumers, for example, were largely spared from the FTX fallout because Japan’s financial authority regulates crypto as a form of money, not securities.
NFTs and More
Non-fungible tokens (NFTs), tokenized commodities, tokenized real-world assets, and stablecoins must be carefully structured and sold to avoid being classified as securities. Unlike fungible speculative crypto assets, these digital assets often fail to meet the requirements of the Howey test for an investment contract.
Of course, any asset sale can be deemed a security depending on the specific circumstances. Providing clearer guidance for crypto assets not intended as securities would greatly benefit innovators seeking regulatory clarity. The Trump campaign sold NFTs, and would benefit from that clarification.
Custodial Services
The new administration will also need to decide whether to rescind the SEC’s staff accounting bulletin, which requires publicly traded companies that act as custodians for crypto assets to record them as liabilities on their balance sheets.
This ruling has significantly restricted banks and other financial institutions from offering crypto custodial services. As the sector matures, access to these professional institutions is crucial for responsible growth. The SEC has granted waivers to select institutions, effectively controlling access to the crypto sector.
Congress passed bipartisan legislation to repeal this bulletin in May, but President Joe Biden vetoed the measure. This decision could be revisited this year.
New Era
With potential regulatory reforms, changes in enforcement strategies, and the possible removal of existing rules, the incoming administration could reshape the cryptocurrency landscape significantly.
There is also a possibility of Congress approving new laws. There are several proposals on the table, including a regulatory framework for crypto assets and a stablecoin bill, both of which may now have the required momentum to pass into law without a presidential veto.
While uncertainty persists, there is renewed optimism for the kind of constructive regulatory engagement and clarity that the industry has sought for over a decade.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Lowell Ness is partner at Perkins Coie and a founding member of the firm’s blockchain industry group.
Write for Us: Author Guidelines