Bitcoin Halving Arrives in Murky Legal and Regulatory Waters

With this past 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 US.

But first, you ask, what is a Bitcoin halving?

At its core, the halving is a testament to the decentralized nature of Bitcoin and its ingenious economic design. Unlike traditional fiat currencies 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 Bitcoins is halved, ensuring a gradual reduction in the rate of new coin issuance until the maximum supply of 21 million coins is reached (which is expected to occur by 2140. This deliberate scarcity feature mirrors the properties of precious metals, imbuing Bitcoin with intrinsic value and fostering a sense of digital scarcity.

Over time, the halving has fondly become known as a quadrennial marketing event for Bitcoin, denoting milestones between perceived cycles for the broader digital assets and blockchain ecosystem.

The crypto landscape has undergone a paradigm shift in the four years since the last Bitcoin halving, marked by triumphs and tribulations. Pandemic-era enthusiasm saw crypto enter the mainstream, replete with NFTs, celebrity promoters, and sports arena naming deals to boot. But such fervor soon gave way to the so-called crypto winter, with the industry grabbing headlines for all the wrong reasons.

There was the collapse of a popular algorithmic stablecoin, TerraUSD, bringing down a number of crypto hedge funds and trading platforms along with it. And market participants remain rattled by the shocking downfall of FTX, with its wunderkind founder now behind bars.

But crypto tides turn quickly. January’s spot Bitcoin ETF approvals have made the digital asset available to the masses through a familiar product structure, with unprecedented inflows from retail and institutional investors alike sparking optimism for the recently battered industry.

The entrance to the space of familiar trad-fi titans has lent an air of credibility. And the broader crypto market has remained resilient—its $2.4 trillion market cap as of April 2024 cannot be ignored.

In the face of these encouraging trends, regulatory headwinds persist, threatening to overshadow the industry’s progress. A continued lack of clarity over classification of most popular digital assets as “securities” leaves US market participants with more questions than answers.

Coinbase, the largest digital assets institution in the US, finds itself embroiled in litigation with the Securities and Exchange Commission over allegations that much of its core business is illegal under US securities laws.

Meanwhile Uniswap, one of the most popular decentralized finance protocols, recently received a Wells notice, signaling that another high-stakes enforcement action may be forthcoming.

And other recent probes by the SEC sparked speculation that the agency may assert that Ethereum, second only to Bitcoin among digital assets in terms of market capitalization, is a security—a position at odds both with Commodity Futures Trading Commission classification of the asset as a commodity, and past statements by prominent SEC staff.

So as Bitcoin enthusiasts debate the narrative for this next cycle post-halving, the primary question from the legal community is: Who will write crypto’s next chapter?

Will the legislature successfully push through regulation? The most recent attempt at a bipartisan stablecoin bill, introduced last week by Sens. Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.), has reignited hopes that congressional guidance may not be far off.

But hurdles remain, and adopting comprehensive legislation for the industry would be an even taller task. The upcoming election cycle adds another wrinkle, with crypto regulation becoming an increasingly partisan issue.

Could a unified government spell the recipe for significant crypto legislation to pass, or will the status quo persist, potentially hindering any meaningful progress?

Or perhaps the courts will take the quill. On the heels of recent decisions in the SEC’s litigation against Ripple and Terraform Labs, the outcome of these and a number of other high-profile enforcement actions and litigation matters could shape the future of the industry in the US.

Might the SEC opt for a path of rulemaking, in an effort to reconcile our securities laws with the novel features of this burgeoning asset class, while safeguarding against systemic risks? An acknowledgment by the commission that the unique characteristics of digital assets are incompatible with much of the existing framework for regulating stocks and bonds would be a welcome reckoning for legal practitioners. 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 pivotal juncture in the evolution of the crypto industry. Whether it emerges as a beacon of innovation or continues to be stifled by regulatory uncertainty remains to be seen. But as we navigate the waters ahead, one thing is certain: The legal profession will play a central role in shaping the narrative of this unfolding saga.

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

Dan Gibbons is capital markets partner at Davis Polk, with focus on fintech and digital assets.

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