Digital asset aficionados are cheering the election of Donald Trump as US president, as well as Republican control of both houses of Congress. The president-elect has promised to end what he called the ‘anti-crypto crusade’, proposed to establish a ‘strategic bitcoin stockpile’ and promised an advisory committee on crypto. Republican control of Congress also improves the odds of enacting meaningful legislation.
With entrepreneurs Elon Musk and Vivek Ramaswamy designated to co-head a new Department of Government Efficiency, significant policy changes are expected. In anticipation, cryptocurrency prices have increased sharply since the election. Bitcoin has jumped by 30%, reaching an all-time high.
Under President Joe Biden, banking regulators have effectively precluded digital asset integration into the banking system and the Securities and Exchange Commission has applied a ‘regulation through enforcement’ strategy to blockchain-related enterprises – two approaches the new administration may curtail or reverse. However, while regulation by enforcement may come to an abrupt halt, regulatory uncertainty will persist in the short term.
Digital asset legislation
Gridlock around the Biden administration’s approach to digital assets has impeded responsible innovation. First, SEC Chair Gary Gensler declined to pursue rulemaking necessary to enable the industry to register digital asset securities, trading platforms and other intermediaries, and comply with disclosure and other relevant laws, focusing instead on enforcement. Second, the SEC’s insistence on subjecting virtually every digital asset transaction to federal securities laws has compounded uncertainty and stifled innovation.
In response, during the current congressional term, Republicans and some Democrats drafted legislation to expand the jurisdiction of the Commodity Futures Trading Commission to include regulation of crypto commodity spot markets and distinguish between digital asset securities regulated by the SEC and non-security digital assets regulated by the CFTC.
In May, the House of Representatives passed the Financial Innovation and Technology for the 21st Century Act with bipartisan support. This bill languished in the Senate alongside bipartisan proposals introduced by Senators Cynthia Lummis (Republican, Wyoming) and Kirsten Gillibrand (Democrat, New York) and several other bills.
Although Republicans typically oppose increasing regulatory oversight, the proposed bills would expand CFTC jurisdiction to the spot market for the first time in recognition that this multi-trillion-dollar marketplace needs at least some federal supervision. It remains to be seen if Musk’s new mandate and his general strong desire to curtail new regulations will short-circuit Republican proposals to expand the CFTC’s jurisdiction or otherwise impede the establishment of clear, workable ground rules for the crypto industry.
Personnel changes, regulation and enforcement
The current SEC and CFTC chairs are expected to resign on or before 20 January 2025, the day Trump will be inaugurated, and interim leaders will be appointed until the Senate confirms new chairs. If these changes leave either agency with an equal number of Democrat and Republican commissioners, they may be deadlocked until all seats are filled.
Meanwhile, an interim SEC chair could reconsider recent proposals and actions. For example, Commissioner Hester Peirce, a possible interim chair of the SEC, could pursue her 2021 ‘safe harbor’ proposal, withdraw staff-promulgated crypto-related directives –such as Staff Accounting Bulletin No. 121 and the Framework for ‘Investment Contract’ Analysis of Digital Assets – and remove certain proposals from the rulemaking agenda, with some hope of near-term success. At the least, expect a flurry of SEC roundtables with industry participants.
Even once a Trump-appointed SEC chair is confirmed, the process of federal rulemaking will be slow. Expect regulatory changes to take place over a year or more, not months.
Finally, an incoming SEC chair will have to decide how to handle ongoing enforcement actions. Although a Trump-appointed chair might seek outright dismissal of actions applying the Commission’s broad interpretation of securities laws to almost all crypto transactions, it seems more likely that cases will be settled on more favourable terms than the Gensler-led SEC would offer.
Private sector responses
While these regulatory changes are apt to take time and the details of new legislation are difficult to predict, industry can anticipate the direction of digital asset regulation.
Republican-led policy is likely to be principles- and disclosure-based. In addition, enforcement resources will probably be focused on high-risk areas such as fraud, misconduct and national security (illicit finance) threats. Finally, a path to regulatory clarity will almost certainly involve registration of exchanges, intermediaries and digital assets securities, and implementation of more extensive disclosure standards as well as formal compliance with agency-prescribed principles.
In the meantime, digital asset enterprises can gain competitive advantage by anticipating and pre-emptively complying with applicable principles in the proposed legislation and the CFTC’s existing regulatory framework. Businesses should ensure they establish, implement and appropriately document robust internal control and compliance programmes. As agencies begin to implement regulations, enterprises can tweak their control frameworks accordingly. In this way, being ready to submit registration applications on day one should facilitate timely approval and first-mover advantage in the redefined marketplace.
Dorothy DeWitt is Founder and Chief Executive Officer of Tölt Strategies LLC. She was Director, Market Oversight, US Commodity Futures Trading Commission (2019-21).
Read OMFIF’s Digital assets 2024 report.
