US regulators come to cryptocurrency.  What will the future look like?

US regulators come to cryptocurrency. What will the future look like?

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  • Several recently proposed bills and ongoing enforcement cases could determine the future of the US crypto industry
  • If the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) win an ongoing lawsuit over cryptocurrency, they could set a shocking precedent for decentralized finance and the broader industry.
  • However, if the regulators lose, cryptocurrencies can enjoy a renaissance.

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The US government’s approach to regulating cryptocurrency will determine whether the industry evolves to thrive or falter in obscurity.

The Regulatory Landscape of Cryptocurrency in the US

Cryptocurrency regulation is coming to the US – and it’s‘s It is likely to have a significant impact on the future of the industry.

The first major distinction to consider when analyzing the current state of the crypto-regulatory landscape in the United States is the difference between the legislative and executive government approaches. This is like comparing what the government says with what it does in practice, which is important because the difference between the two approaches provides insight into the government’s true intentions with regard to the industry and the asset class.

On the legislative front, there has been a significant increase in crypto-related bill proposals over the past year, including Senators Cynthia Loomis and Kirsten Gillibrand. Responsible Financial Innovation ActRepresentative Josh Gotheimer The Stable Coin Protection and Protection Act of 2022Senator Pat Tommy Stablecoin TRUST Law of 2022Senators Debbie Stabeno and John Bozeman The Digital Goods Consumer Protection Act of 2022. If these bills are passed as suggested, the regulatory and industry landscape for cryptocurrency will see significant changes, which most industry stakeholders have viewed as positive.

Perhaps most importantly, the CFTC will take precedence away from the Securities and Exchange Commission in becoming the primary regulator of the asset class by gaining power over the cryptocurrency and derivatives markets. Until recently, this was seen as a very welcome change of pace among industry stakeholders who were tired of the SEC’s aggressive “regulation by enforcement” approach.

Another major change that will follow if these bills are passed will be the introduction of stricter rules for issuing and managing stablecoins. This could lead to an implicit ban of unsupported, algorithmic or “internally secured” stablecoins and a 100% reserve requirement for stablecoin issuers. Stablecoin issuers will likely be required to have bank covenants, which are difficult to obtain or register directly with the Federal Reserve. This would significantly reduce the risk of decoupling in the cryptocurrency market. However, the economy could also focus on the chain if the space becomes too dependent on regulated stablecoin providers.

However, perhaps the most significant development on the legislative front is the White House’s recent comprehensive framework for regulating the digital asset space. The framework was published on September 16 after President Biden signed an executive order on “Ensure responsible development of digital assetsIn March. It consists of the opinions and recommendations of the Securities and Exchange Commission, the Treasury Department, and several other government agencies on how to regulate crypto assets.

The Domain It provides the clearest overview yet of how the Biden administration plans to deal with crypto, including plans to ramp up enforcement action against illegal practices, push users away from cryptocurrencies and toward centralized government-issued payment solutions and oversight such as FedNow and CBDCs, and adjust The Banking Secrecy Act to apply it explicitly to digital assets, and to take advantage of the state’s standing in international organizations to promote greater cross-border cooperation on cryptocurrency regulation and enforcement.

If the administration begins to implement its plans, the US cryptocurrency industry will begin to look more like a fintech than a grassroots movement seeking to create an alternative financial system as planned. By imposing overly stringent regulatory requirements on the industry, stakeholders could begin to leave the United States for more crypto-friendly jurisdictions, leading to an exodus of Web3 talent and ultimately the submission of America to the global crypto landscape.

Regulation through enforcement

On the enforcement front, there are several critical cases going on which – depending on their outcome – could reshape the cryptocurrency landscape in the country. The most widely documented of these cases is SEC vs RippleThe blockchain company is being sued by a securities agency for allegedly making an illegal security offering by publicly selling XRP tokens. Based on the latest developments in the case, it is likely that the matter will be settled out of court, which would be a huge win for both Ripple and the US cryptocurrency industry. For the securities agency, losing a case or an out-of-court settlement will make it very difficult to pursue other crypto firms with the same charges, giving cryptocurrency issuers and exchanges much-needed breathing space.

The second critical case is SEC vs. Wahi, where a securities agency sues a former Coinbase employee and two conspirators for insider trading fees. In a stark example of “regulation through enforcement,” the SEC argues that “at least” nine of the cryptocurrencies listed on the exchange were securities. If accepted by the court, this claim could have broad implications for the industry by making it easier for the agency to pursue crypto exchanges for illegally offering unregistered securities.

In another ongoing case highlighting the SEC’s “regulation by enforcement” approach, the agency is trying to establish control over the industry by making widespread claims that could have serious asset class implications. and she is in SEC vs. Ian Ballina In this case, the agency argued that Ethereum transactions should be considered as “occurring” within the US since there are more Ethereum nodes in the US than in any other country. For this reason, the Securities and Exchange Commission says, Ethereum should come under its jurisdiction. If the court accepts this argument, the Securities and Exchange Commission (SEC) may then attempt to establish jurisdiction over all Ethereum transactions involving tokens it considers securities, regardless of the location of the counterparties in the transaction.

In another disappointing development for the crypto community, the CFTC – following in the footsteps of the SEC –sues decentralized independent organization and holders of its tokens accused of operating an illegal derivatives trading venue. A victory for the CFTC in this landmark case would set a shocking precedent for DeFi protocols and token holders by ensuring that they can be held responsible for various crimes as “unregistered associations.” This will effectively destroy DeFi, making it impossible for protocols and DAOs to operate without risking prosecution.

Finally, the Treasury Department’s move to penalize the Tornado Cash decentralized privacy protocol stands out as one of the best enforcement measures that has already had a significant impact on the industry. The move marks the first time that a government agency has sanctioned a smart contract — an immutable token that lives on the blockchain — and several major blockchain infrastructure providers, such as Alchemy and Infura, have already complied with the sanctions.

Several legal experts in the crypto field, including the US-based Coin Center, view the move as unconstitutional and beyond jurisdiction and likely to be challenged in court. However, if the Treasury wins any tough lawsuit, the entire crypto economy could suffer, casting doubt on its ability to uphold its core principles such as decentralization, trusted neutrality, and resistance to censorship.

I look ahead

Depending on whether recently proposed cryptocurrency regulations come into force, and how enforcement issues go, the crypto landscape in the US could look very different two years from now. The optimistic view is that both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are losing out on all the lawsuits that could set the industry back as lawmakers pass more favorable proposed laws that provide clarity when it comes to regulation. If that becomes the case – and the chances are fairly high – the US could become the world’s leading crypto-friendly jurisdiction, supporting the entire global industry with it.

On the other hand, the worst case scenario is that lawmakers take too long to pass favorable crypto regulations while the Securities and Exchange Commission (CFTC) slowly regulates the space through enforcement. This would severely hamper the remarkable growth of the US cryptocurrency industry and any technological innovation that comes out of it. Given the enormous international political and economic influence of the United States, such a scenario would also bode ill for the global cryptocurrency industry. One possible consequence of a harsh regulatory environment is the hashing of DeFi into “RegFi,” which consists exclusively of regulatory compliant protocols, and DarkFi, which is made up of truly decentralized, incompatible, and censorship-resistant protocols.

Disclosure: At the time of writing, the author of this feature owns ETH and several other cryptocurrencies.

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