President-elect Donald Trump has pledged to make the United States “the crypto capital of the planet.” He plans to create a strategic Bitcoin reserve, restore crypto mining and deregulate the sector.
Last month, Bitcoin hit another milestone and soared to over $108,000, sparking optimism about the future of the cryptocurrency. Crypto executives hope the new administration will work with the industry on rules rather than pursuing regulation through enforcement.
The planned nomination of cryptocurrency advocate Paul Atkins to chair the Securities and Exchange Commission could go a long way toward making this vision a reality.
Here are some key changes that industry players, policymakers, and advocates should keep in mind as we approach the new year.
Deregulation
Even if deregulation seems to be a priority, the development of the sector requires new rules.
Current regulations generally apply to either debt securities or equity securities and tend to neglect those related to investment contracts. Clarification is important because certain cryptocurrencies and initial coin offerings may meet the definition of an “investment contract” under the Howey Test and would be subject to additional disclosure and registration requirements by the SEC.
New rules are also needed to support the crypto industry beyond the current administration. If the SEC were simply to break away from regulation by enforcing it, the next administration could return directly to this strategy. State securities regulators and private plaintiffs would likely step up their enforcement efforts.
Application
The new SEC chairman will also be able to reorient the agency’s enforcement strategy. The challenge will be to find the right balance to prevent fraudsters from ruining the sector. The industry would like SEC enforcement to go after obvious cases of fraud and Ponzi schemes involving crypto, rather than targeting legitimate players trying to navigate new territory.
There are already numerous cases establishing the facts and circumstances necessary to conclude that primary sales of fungible speculative crypto assets are securities transactions. The Trump team appears to be treating its own token as a security during its primary sale.
Although a new SEC chair cannot rewrite the case law already established by his predecessors, several key questions remain open regarding primary sales, such as whether airdrops routed to specific wallet addresses should be treated as primary sales. and whether tokens earned from playing a game should do so. be treated as purchased in primary sales.
One of the biggest outstanding questions is how to handle secondary trading of crypto assets. If the SEC were to drop its appeals, there are several cases where rulings would allow U.S. crypto exchanges to continue competing with non-U.S. exchanges.
In that of Judge Analisa Torres Ripple Labs In this order, for example, the judge considers that programmatic exchange transactions are not securities transactions under the Howey test. New SEC leaders could follow Torres’ lead and conclude that an appropriate balance is achieved if primary sale transactions by the issuer of crypto assets as part of raising capital from investors are regulated as securities transactions, while secondary resales on crypto exchanges are not securities transactions.
Simply solving the problem of secondary cryptocurrency trading would go a long way in keeping crypto projects in the United States. One of the most problematic areas for the adoption of blockchain technology is the fact that, to be useful, crypto assets must transact and move value at the speed of software.
It is not practical to involve a broker in every crypto transaction. FTX showed the need for regulation of exchanges, but some would argue that regulation of brokers was not so much necessary as the consumer protection that is the hallmark of money transmission regulation.
Japanese consumers, for example, largely avoided the FTX debacle thanks to their monetary authority’s rules applied to FTX (Japan regulates crypto as a form of money, not securities).
NFTs and more
Non-fungible tokens, tokenized products, real-world tokenized assets, and stablecoins must be structured and sold to avoid security status. Unlike fungible speculative crypto assets, these digital assets often do not meet the Howey test for an investment contract.
Of course, the sale of just about anything can turn into the sale of a security depending on the facts and circumstances of the transaction. More specific guidance for crypto assets that are not intended to be securities would be very helpful to innovators seeking regulatory predictability. The Trump campaign has sold NFTs and should benefit from this clarification.
Child care
Another important choice will be whether or not to repeal the SEC Staff Accounting Bulletin requiring public companies holding crypto assets as a custodian to report them on the liabilities side of their balance sheet.
This decision significantly limited the ability of banks and other financial institutions to provide crypto asset custody services. The sector has matured enough to need these professional institutions to continue its responsible growth. The SEC has granted waivers to these rules to certain institutions and established itself as the arbiter of participation in the crypto sector.
Congress passed bipartisan legislation to repeal the bulletin last May, but President Joe Biden vetoed the repeal. That could change this year.
New era
With potential new rules, changes in enforcement strategy, and the repeal of some existing rules, the Trump administration could have a huge impact on the crypto industry.
Congress appears poised to enact new laws and several proposals, including a crypto regulatory framework and a stablecoin bill that could now gain the support needed to pass without the threat of a veto.
While much remains to be seen, new hope is emerging for the type of regulatory engagement and clarity the industry has sought for more than a decade.
This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author information
Lowell Ness is a partner at Perkins Coie and a founding member of the firm’s blockchain industry group.
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