Regulation
From anti-cryptocurrency to degeneration in 1 month
In May, the cryptocurrency sector saw significant events related to regulatory clarity in the United States. President Joe The Biden administration has dramatically changed its stance on the crypto sector in the space of a month. Initially resistant to cryptocurrencies, the administration has recently taken several pro-crypto actions, signaling a significant policy shift.
This article explores the events and motivations behind this surprising transition, including political pressures and legislative developments.
Cryptocurrency-focused bills passed
On May 16 the US Senate voted to pass HJ Res 109, a resolution aimed at overturning the controversial Staff Accounting Bulletin No. 121 (SAB 121) of the Securities and Exchange Commission (SEC). Introduced in March 2022, SAB 121 requires financial institutions to list customers’ digital assets on their balance sheets.
Critics argue that this mandate creates significant operational and financial burdens for companies that handle cryptocurrencies. It also potentially exposes client assets to risk in bankruptcy situations.
Although Congress passed the resolution, it did not gain enough votes to be veto-proof. Before passage, Biden promised to veto it. His administration argues that overturning SAB 121 would weaken the SEC’s ability to protect investors and the financial system from cryptocurrency-related risks.
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On May 22, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT21). Introduced in July 2023, the bill aims to define the roles of the SEC and Commodity Futures Trading Commission (CFTC) in the supervision of cryptocurrencies.
It also establishes guidelines for various aspects of the cryptocurrency market, including token issuance, trading, and custody. The bill was passed with bipartisan support by a vote of 279-136, with 71 Democrats joining 208 Republicans in favor.
The White House again opposed the bill, citing consumer and investor protection concerns. While recognizing the need for a regulatory framework for digital assets, the Administration believes that FIT21 requires additional safeguards. However, President Joe Biden’s statement does not mention a veto threat, unlike his response to HJ Res. 109.
SEC Chairman Gary Gensler also said this his opposition to FIT21. Gensler argues that the bill undermines the classification of cryptocurrencies as investment contracts. This change would remove these assets from SEC oversight, making it more difficult to protect investors.
Following the passage of the Res. HJ. 109 and FIT21, the cryptocurrency industry saw the US House of Representatives pass the CBDC Anti-Surveillance State Act on May 23. This bill aims to amend the Federal Reserve Act to prevent central bank digital currency (CBDC) is used for monetary policy or direct-to-consumer services.
The debate on the bill saw little participation. Republican supporters highlighted the risk of misuse of the CBDC, while Democrats focused on innovation, the global position of the dollar and flaws in the drafting of the bill.
During the speech, President Patrick McHenry highlighted instances where governments, such as the Chinese Communist Party (CCP), have used CBDCs to monitor citizens’ spending behaviors. This surveillance implements a social credit system that rewards or penalizes individuals based on their actions. McHenry said this form of financial surveillance is unacceptable in the United States.
Majority Leader Tom Emmer introduced the bill in 2023, which gained 165 Republican cosponsors and passed by a vote of 216-192. Now headed to the Senate, this passage marks the third time the U.S. House has passed cryptocurrency-focused bills in May.
At 180 in Spot ETFs on Ethereum
In the legislative context, the cryptocurrency industry has seen a notable shift in focus towards Exchange Traded Funds (ETFs), particularly with Ethereum (ETH) taking center stage.
Greyscale has withdrawn 19b-4 filings for its Ethereum futures ETF on May 7. The sudden withdrawal has raised speculation among industry experts and the crypto community. James Seyffart, ETF analyst at Bloomberg Intelligence, suggested the filing may have been a strategic move.
At the time, Seyffart and his fellow ETF analyst, Eric Balchunas, still had very low odds of getting Ethereum spot ETF approved by the SEC. They continued to reduce their odds until they became “none to minimal.”
However, on May 20th, suddenly have increased their odds of spot ETF approval on Ethereum from 25% to 75%. This followed the SEC’s requirement that asset managers wishing to list spot ETFs on Ethereum to update their 19b-4 filings before the deadline. Balchunas admitted that he had heard rumors that the SEC might do a 180, but maintained a cautious approach by limiting the odds to 75% until he saw the filing updates.
Following the increase in odds, potential Ethereum spot ETFs have gradually amended their 19b-4 filings with the SEC. All of these asset managers have excluded staking provisions by explicitly stating that “neither the Trust, nor the Sponsor, nor the Custodian, nor any other person associated with the Trust will engage, directly or indirectly” in staking-related activities.
Additionally, three Republican and two Democratic senators wrote a letter to Gensler, urging the approval of Ethereum spot ETFs. Finally, on May 23, the SEC approved the review of the 19b-4 filings of nine asset managers.
Following this preliminary approval, some asset managers, including BlackRock and VanEck, have updated their S-1 filings to remove staking aspects. These moves have fueled confidence among analysts these ETFs could launch soonprobably in July.
Political pressures and elections
In early May, Trump held an exclusive event with the NFT community, declaring publicly would accept donations for crypto campaigns for the first time. He also promised a more welcoming approach towards the cryptocurrency sector, criticizing current US regulatory measures as “hostile”. Furthermore, he called on those who are pro-cryptocurrency to vote for him.
Trump did it he has expressed his comfort with cryptocurrencies several times and reportedly explored the use case for Bitcoin to help address the $35 trillion U.S. national debt. He has also promised to pardon Ross Ulbricht, the operator of the Silk Road darknet marketplace, if re-elected.
“If you vote for me, I will commute Ross Ulbricht’s sentence to time served on day one. He has already served 11 years and we will bring him home,” Trump promised.
Trump also pledged to “support the right to self-custody of the nation’s 50 million cryptocurrency holders.” This statement is particularly interesting because the Biden administration has been execution of actions against self-custody and privacy-focused platforms. These include MetaMaskSamurai Walletand Tornado Cash.
On May 29, Treasury Department Secretary of Terrorism and Financial Intelligence Brian Nelson addressed the Financial Crimes Enforcement Network (FinCEN) 2023 proposal. This proposal seeks to classify mixers as a “primary money laundering concern” and requires virtual asset service providers (VASPs) to report any crypto transactions involving mixing to the agency. He said the department is not attempting to ban cryptocurrency mixing services.
“At the end of the day, this is not a ban on mixers. This is a proposed rule intended to promote transparency,” Nelson said.
While Nelson expressed sympathy for cryptocurrency users’ desire for financial privacy, he suggested that most mixers are not created to enhance privacy. Instead, they are built to evade anti-money laundering (AML) and know-your-customer (KYC) reporting requirements. This makes them “very attractive” to bad actors.
Trump’s bold moves came at a strategic moment when the Biden administration has long been known for its tough approach towards the cryptocurrency industry. Additionally, key industry figures have said they will support a cryptocurrency-friendly candidate.
Considering these prospects, it is understandable that the Biden campaign sought to gain votes from the cryptocurrency industry. Last week, Biden reportedly has started collaborating with operators in the cryptocurrency sector as part of his re-election campaign. Starting more than two weeks ago, the reelection team reached out to several cryptocurrency experts, including those previously distanced from Biden.
Trump’s chances have increased significantly in recent months following a series of pro-cryptocurrency actions and statements. Data from cryptocurrency-based prediction platform Polymarket shows that Trump has a 54% chance of winning the next election. The percentage contrasts sharply with Biden’s, who has only a 38% chance.
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Presidential candidates’ chances of winning the 2024 elections. Source: Polymarket
On a larger scale, according to NPR/PBS/Marist survey, Biden is losing support among key demographics. Young voters under 45 prefer Biden to Trump by just four points.
In a head-to-head matchup, Biden leads by six points among Gen Z/Millennials. However, the swing votes in Trump’s favor between the two groups, by six points among Gen Z/Millennials and among voters under 45, with third-party candidates in the mix, have an eight-point advantage.
This dramatic shift within the Biden administration reflects a complex interplay of regulatory, legislative, and political factors. As the administration navigates this evolving environment, the next few months will be crucial in shaping the future of cryptocurrency regulation in the United States.
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