Regulation
Bitcoin Halving Arrives in Troubled Legal and Regulatory Waters
With last weekend’s Bitcoin halving event in the rearview mirror, now is a good time to take stock of the legal and regulatory landscape surrounding digital assets in the United States.
But first, ask yourself, what is a Bitcoin halved?
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 issuance of new coins until the maximum supply of 21 million coins is reached (which is expected to occur by 2140. This feature of deliberate scarcity reflects the properties of precious metals, giving Bitcoin intrinsic value and fostering a sense of digital scarcity.
Over time, the halving has become affectionately known as a quadrennial marketing event for Bitcoin, marking milestones between perceived cycles for broader digital assets and the blockchain ecosystem.
The crypto landscape has undergone a paradigm shift in the four years since Bitcoin’s last halving, marked by triumphs and tribulations. Pandemic-era enthusiasm has seen crypto enter the mainstream, filled with NFTs, celebrity promoters and sports arena name deals to boot. But such fervor quickly gave way to the so-called crypto winter, where the industry made headlines for all the wrong reasons.
There was the collapse of a popular algorithmic stablecoin, Terra USD, bringing with it a number of crypto hedge funds and trading platforms. And market participants remain shaken by the shocking fall in FTXwith its prodigy founder now behind bars.
But the crypto tides are turning quickly. The January spot Bitcoin ETFs The approvals made the digital asset accessible to the general public via a familiar product structure, with unprecedented influxes of retail and institutional investors sparking optimism for the recently battered industry.
The entry of the familiar tra-fi titans into the space provided an air of credibility. And the broader crypto market has remained resilient: its Market capitalization of $2.4 trillion from April 2024 cannot be ignored.
Amid these encouraging trends, regulatory hurdles persist, threatening to overshadow the industry’s progress. The continuing lack of clarity regarding the classification of the most popular digital assets as “securities” leaves US market participants with more questions than answers.
Coinbase, the largest digital asset institution in the United States, finds itself involved in dispute with the Securities and Exchange Commission over allegations that much of its core business is illegal under U.S. securities laws.
Meanwhile, Uniswap, one of the most popular decentralized finance protocols, recently received a Well Noticesignaling that another high-stakes enforcement action may be coming.
And other recent investigations by the SEC have sparked speculation that the agency may claim that Ethereumsecond only to Bitcoin among digital assets in terms of market capitalization, is a security – a position at odds with both the Commodity Futures Trading Commission’s classification of the asset as a commodity and past statements by prominent members SEC staff.
So, as Bitcoin enthusiasts debate the narrative of this next post-halving cycle, the legal community’s main question is: who will write crypto’s next chapter?
Will the legislator succeed in having regulations adopted? The most recent attempt at bipartisanship stablecoin billintroduced last week by Senators Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.), has renewed hope that congressional guidance may not be far away.
But obstacles remain and passing comprehensive legislation for the industry would be an even more daunting task. The next election cycle adds another difficulty, with crypto regulation becoming an increasingly partisan issue.
Could a unified government pave the way for significant crypto legislation to pass, or will the status quo persist, potentially hindering any meaningful progress?
Or maybe the courts will take up the pen. On the heels of recent rulings in the SEC’s litigation against Ripple and Terraform LaboratoriesThe outcome of these and a number of other high-profile enforcement actions and litigation could shape the future of the industry in the United States.
Could the SEC take the rulemaking route, with the goal of reconciling our securities laws with the novel characteristics of this growing asset class, while protecting against systemic risks? A recognition by the commission that the unique characteristics of digital assets are inconsistent with much of the existing framework for regulating stocks and bonds would be a welcome recognition for legal practitioners. Or will enforcement actions remain the primary mechanism by which the agency regulates, casting a pall of uncertainty over the industry’s future trajectory?
The next few years represent a watershed moment in the evolution of the crypto industry. It remains to be seen whether it will emerge as a beacon of innovation or whether it will continue to be stifled by regulatory uncertainty. 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 views of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author information
Dan Gibbons is a capital markets partner at Davis Polk, with a focus on fintech and digital assets.
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