Regulation
What the SEC shakeup means for cryptocurrency investors
With the SEC on the sidelines, what’s next for cryptocurrency regulation?
© 2024 Bloomberg Finance LP
The SEC has been waging an aggressive legal and regulatory campaign against cryptocurrency operators for years, which has won it few friends and recently led to several legalistic setbacks. Following the collapse of FTX, including the crimes for which Bankman-Fried was convicted, general sentiment has turned against the cryptocurrency industry in US political circles, seemingly vindication of President Gensler’s efforts to regulate the industry through edicts and lawsuits. More recently, however, the legal situation has appeared to change Ripple achieved a partial victory against the Commission in July 2023, despite enforcement efforts Coinbase they continue to move forward with no clear victories, and congressional hearings have targeted the SEC exaggerate.
Fall the lawsuit that seeks to prove Ethereum
Ethereum
This security is just the latest in a series of blows that have stalled the steamroller that President Gensler has deployed to regulate cryptocurrencies.
Beyond conversation, however, this inversion of sentiment also has its teeth. April 2024 saw the resignation of two (2) lawyers for the SEC after a federal judge sanctioned the Commission for a serious abuse of power. Tying directly into efforts to regulate the cryptocurrency space, these abuses were linked to enforcement efforts to obtain a temporary restraining order against Debt Box, a Utah-based crypto organization. June 2024 saw further reductions in effect for the SEC’s Cryptocurrency Enforcement Division David Hirsch – the head of the cryptoasset unit in the SEC’s enforcement division – resigned. During this tenure the SEC has largely focused on cracking down on bad actors in the DeFi space, with the former head of the division adding no comment on potential future roles.
Let’s take a look at some things investors should keep in mind as the regulatory landscape continues to evolve.
The SEC is losing relevance
After years of criticism and pushback from cryptocurrency organizations and advocates, it finally appears that the SEC has lost some momentum in its efforts to establish itself as the default regulator for cryptoassets. Putting aside the reality that tokenized instruments and blockchain technology operate at a fundamentally different level than many fiat and TradFi instruments, many in the industry felt that the approach taken by the Commission was inappropriate for the dynamic cryptocurrency sector. After several legal snags, punctuated by the resignation of the cryptocurrency’s main enforcer, it appears this message is finally making progress.
While some may rejoice at these developments, and these celebrations are not without reason, investors themselves should be aware of which regulators are seeking to take the lead on the regulatory side. For example, the IRS has dominated the debate on taxes and compliance for investors thanks to a firm and unchanged position on how to tax cryptoassets. The CFTC, advanced through several proposed pieces of legislation, is not free from funding and staffing problems.
Regardless of the regulatory aspect, investors will need to redefine expectations and prepare for further debates going forward.
Cryptocurrency classification is coming
With the SEC losing importance in the cryptocurrency regulation debate, the reality is that cryptocurrencies will be classified and regulated by some oversight agency in the coming time. This realistically won’t happen until after the November 2024 presidential election, but the wheels toward greater scrutiny are already in motion. Both major political parties have significantly shifted towards, if not positive, positions on cryptocurrencies, which appear open to discussion on substantive issues.
Accounting standard setters have an important role to play in these future conversations, as a critical aspect of ambiguity in the cryptocurrency world concerns how difficult it is for companies to report and disclose crypto transactions in financial statements. While the FASB took a first step in December 2023 by allowing companies to report cryptoasset holdings by market value, this is only the first step toward more comprehensive reporting policies.
Volatility will return
For all the certainty that improved regulation and reporting standards will bring, it is also worth highlighting that decision-making – including the uncertainty this will entail – can reintroduce volatility to the broader market. For example, as the recent ether case dropped, some market analysts might have expected a dramatic price increase, but instead there was a muted price response. Investors, rather, appear to be awaiting further decisions and clarity on the ETF’s decision; Cryptoassets are maturing and therefore are influenced by many of the same nuances as TradFi assets.
An important element that investors and advocates should keep in mind is that as the current – but unsatisfactory – environment created by the SEC’s actions changes, the uncertainty could generate near-term distress and volatility for investors. These advocates and investors must recognize that as regulatory outlooks change, short-term volatility may be the price paid for long-term clarity.