Regulation
The Bitcoin halving lands in murky waters from a legal and regulatory perspective
With last weekend’s Bitcoin halving event in the rearview mirror, it’s a good time to take stock of the legal and regulatory landscape surrounding digital assets in the United States.
But first ask: what is a Bitcoin halving?
Fundamentally, the halving is a testament to Bitcoin’s decentralized nature and its ingenious economic design. Unlike traditional fiat currencies that are subject to inflationary pressures, or the whims and fancies of central banks and governments, Bitcoin operates on a fixed supply schedule.
Every four years, the reward for mining new Bitcoin is halved, ensuring a gradual reduction in the rate of issuance of new coins until the maximum supply of 21 million coins is reached (which is expected to occur by 2140. This feature of Deliberate scarcity mirrors the properties of precious metals, giving Bitcoin intrinsic value and fostering a sense of digital scarcity.
Over time, the halving has become affectionately known as a quadrennial marketing event for Bitcoin, denoting milestones between perceived cycles for the broader digital assets and blockchain ecosystem.
The cryptocurrency landscape has undergone a paradigm shift in the four years since Bitcoin’s last halving, marked by triumphs and tribulations. The pandemic-era hype has seen cryptocurrencies enter the mainstream, filled with NFTs, celebrity endorsers and sports arena naming deals. But that fervor soon gave way to the so-called cryptocurrency winter, with the sector grabbing headlines for all the wrong reasons.
There was a collapse of a popular algorithmic stablecoin, LandUSD, taking down a number of crypto hedge funds and trading platforms along with it. And market participants are left shaken by the shocking fall of the FTXwith its founding prodigy now behind bars.
But crypto tides change quickly. The January commercial Bitcoin ETF The approvals have made the digital asset available to the masses through a familiar product structure, with unprecedented inflows from retail and institutional investors sparking optimism for the recently battered sector.
The entry of mainstream titans into the space has lent an air of credibility. And the cryptocurrency market in general has remained resilient – that’s the way it is Market capitalization of $2.4 trillion as of April 2024 cannot be ignored.
Despite these encouraging trends, regulatory hurdles persist that threaten to overshadow the industry’s progress. The continued lack of clarity on the classification of the most popular digital assets as “securities” leaves U.S. market participants with more questions than answers.
Coinbase, the largest digital asset institution in the United States, finds itself involved in litigation with the Securities and Exchange Commission over allegations that much of its principal business is illegal under U.S. securities laws.
Meanwhile, Uniswap, one of the most popular decentralized finance protocols, recently received a Wells Noticesignaling that another high-risk enforcement action may be imminent.
And other recent SEC investigations have sparked speculation that the agency might say so Ethereumsecond only to Bitcoin among digital assets in terms of market capitalization, it is a stock, a position at odds with both the Commodity Futures Trading Commission’s classification of the asset as a commodity and past statements by key staff members of the SEC.
So while Bitcoin enthusiasts debate the narrative for the next post-halving cycle, the legal community’s main question is: who will write the next chapter of cryptocurrencies?
Will the legislature be able to successfully move the regulation forward? The latest attempt at bipartisanship stablecoin invoicepresented last week by Senators Kirsten Gillibrand (DN.Y.) and Cynthia Lummis (R-Wyo.), revived hopes that congressional leadership may not be far away.
But obstacles remain and adopting comprehensive legislation for the sector would be an even more difficult task. The upcoming election cycle adds another wrinkle, with cryptocurrency regulation becoming an increasingly partisan issue.
Could a unified government write the recipe for passing meaningful cryptocurrency legislation, or will the status quo persist, potentially hindering any meaningful progress?
Or maybe the courts will take the pen. In the wake of recent decisions in the SEC’s litigation against Ripple and Terraforming laboratoriesThe outcome of these and a number of other high-profile executive actions and litigation could shape the future of the industry in the United States.
Could the SEC opt for a regulatory path, in an attempt to reconcile our securities laws with the new characteristics of this thriving asset class, while protecting itself from systemic risks? A recognition by the Commission that the unique characteristics of digital assets are incompatible with much of the existing framework for stock and bond regulation would be a positive reckoning for legal traders. Or will enforcement actions remain the primary mechanism through which the agency regulates, casting a pall of uncertainty over the industry’s future trajectory?
The next few years represent a crucial time in the evolution of the cryptocurrency industry. Whether it will emerge as a beacon of innovation or continue to be stifled by regulatory uncertainty remains to be seen. But as we navigate future waters, one thing is certain: the legal profession will play a central role in shaping the narrative of this ongoing saga.
This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
About the author
Dan Gibbons is a capital markets partner at Davis Polk, with a focus on fintech and digital assets.
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