How Crypto Regulation Could Change Under Trump and the New SEC

President-elect Donald Trump has pledged to make the US “the crypto capital of the planet.” He envisions creating a Bitcoin strategic reserve, restoring crypto mining, and deregulating the sector.

Last month, Bitcoin reached a new milestone and soared to over $108,000, sparking optimism for the future of cryptocurrency. Crypto leaders hope the new administration will work with the industry on rules rather than pursue regulation by enforcement.

The intended nomination of cryptocurrency advocate Paul Atkins to chair the Securities and Exchange Commission could go a long way towards making this vision a reality.

Here are some key changes industry players, policymakers, and attorneys should keep top of mind as they head into the new year.

Deregulation

While deregulation appears to be a priority, advancing the sector does require some new rules.

Current regulations generally apply to either debt or equity securities and tend to overlook those related to investment contracts. Clarification is important as certain cryptocurrencies and initial coin offerings may meet the definition of an “investment contract” under the Howey test and would be subject to additional disclosure and registration requirements from the SEC.

New rules are also needed to support the crypto industry beyond the current administration. If the SEC merely took a break from regulation by enforcement, the next administration could go right back to that strategy. State securities regulators and private plaintiffs would likely step up on enforcement.

Enforcement

The new SEC chair will also be in a position to redirect the agency’s enforcement strategy. The challenge will be getting the balance right to keep fraudsters from ruining the industry. The industry would like to see SEC enforcement directed at clear instances of fraud and Ponzi schemes involving crypto, rather than target legitimate players attempting to navigate novel territory.

There are already numerous cases establishing the facts and circumstances necessary to conclude that primary sales of fungible speculative crypto assets are securities transactions. The Trump team appears to be treating its own token as a security in its primary sale.

While a new SEC chair can’t rewrite case law already established by predecessors, several key open questions remain about primary sales, such as whether airdrops funneling to specific wallet addresses should be treated as primary sales, and whether tokens earned while playing a game should be treated as purchased in primary sales.

One of the biggest open questions is how to handle secondary trading of crypto assets. If the SEC were to abandon its appeals, there are several cases where rulings would allow US crypto exchanges to continue to compete with non-US exchanges.

In Judge Analisa Torres’ Ripple Labs order, for example, the judge takes the position that programmatic trades on exchanges aren’t securities transactions under the Howey test. New leadership at the SEC might follow Torres’ example and conclude that an appropriate balance is struck if primary sales transactions by the crypto asset issuer in capital raising with investors are regulated as securities transactions, while secondary resales on crypto exchanges aren’t securities transactions.

Just solving the secondary trading problem for crypto would go a long way to help keep crypto projects in the US. One of the more problematic areas for the adoption of blockchain technology is the fact that, to be useful, crypto assets need to transact and move value at the speed of software.

It’s not practical to interject a broker-dealer into every crypto transaction. FTX showed the need for regulation of exchanges, but some would argue broker-dealer regulation wasn’t needed so much as the consumer protection that is the hallmark of money transmission regulations.

Japanese consumers, for example, largely avoided the FTX debacle because of their monetary authority’s rules applied to FTX (Japan regulates crypto as a form of money, not securities).

NFTs and More

Non-fungible tokens, tokenized commodities, tokenized real-world assets, and stablecoins must be structured and sold to avoid security status. Unlike fungible speculative crypto assets, these digital assets often don’t meet the Howey test for an investment contract.

Of course, the sale of just about anything can turn into the sale of a security depending on the facts and circumstances of the transaction. More specific guidance for crypto assets not intended to be securities would be very helpful to innovators looking for regulatory predictability. The Trump campaign sold NFTs and stands to benefit from this clarification.

Custodial Services

Another important choice will be whether to repeal the SEC’s staff accounting bulletin requiring public companies holding crypto assets as a custodian to report them as liabilities on their balance sheets.

This ruling has severely limited the ability of banks and other financial institutions from providing custodial services for crypto assets. The sector has matured enough that it needs these professional institutions for further responsible growth. The SEC has granted waivers of these rules to select institutions and inserted itself as the arbiter of who can participate in the crypto sector.

Congress passed bipartisan legislation to repeal this bulletin last May, but President Joe Biden vetoed the repeal. This could change this year.

New Era

With potential new rules, changes to enforcement strategy, and repeal of some existing rules, the Trump administration could have a dramatic impact on the crypto sector.

Congress appears poised to enact new laws and several proposals, including a framework for regulating crypto and a stablecoin bill that could now get the traction needed to pass into law without threat of veto.

Though much remains to be seen, there’s new hope for the type of regulatory engagement and clarity the industry has sought for over a decade.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lowell Ness is partner at Perkins Coie and a founding member of the firm’s blockchain industry group.

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