Regulation
From Anti-Crypto to Degen in 1 month
In May, the crypto industry saw significant events related to regulatory clarity in the United States. President Joe The Biden administration has dramatically changed its stance on crypto in a month. Initially resistant to crypto, the administration has recently taken several steps in favor of crypto, signaling a significant policy shift.
This article explores the events and motivations behind this surprising transition, including political pressures and legislative developments.
Passage of crypto-focused bills
On May 16, the US Senate voted to adopt HJ Res 109, a resolution to rescind the Securities and Exchange Commission’s (SEC) controversial Staff Accounting Bulletin No. 121 (SAB 121). Introduced in March 2022, SAB 121 requires financial institutions to list customers’ digital assets on their balance sheets.
Critics say this mandate creates significant operational and financial burdens for companies managing cryptocurrencies. This also potentially exposes customer assets to risk in the event of bankruptcy.
Although Congress passed the resolution, it did not receive enough votes to be veto-proof. Before passage, Biden vowed to veto it. His administration argues that rescinding SAB 121 would weaken the SEC’s ability to protect investors and the financial system from crypto-related risks.
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On May 22, the US House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT21). Introduced in July 2023, the bill aims to define the roles of the SEC and Commodity Futures contracts Trading Commission (CFTC) to oversee cryptocurrencies.
It also establishes guidelines for various aspects of the crypto market, including the issuance, trading and custody of tokens. The invoice was approved with bipartisan support in a vote of 279-136, with 71 Democrats joining 208 Republicans in favor.
The White House again opposed the bill, citing consumer and investor protection concerns. Although the administration recognizes the need for a regulatory framework for digital assets, it believes that FIT21 requires additional safeguards. However, President Joe Biden’s statement did not mention a veto threat, unlike his response to HJ Res. 109.
SEC Chairman Gary Gensler also said his opposition to FIT21. Gensler argues that the bill undermines the classification of crypto assets as investment contracts. This change removes these assets from SEC oversight, which would make it more difficult to protect investors.
Following the passage of HJ Res. 109 and FIT21, the crypto industry saw the United States House of Representatives pass the CBDC Anti-Surveillance State Act on May 23. This bill seeks to amend the Federal Reserve Act to prevent central bank digital currency (CBDC) from being used for monetary policy purposes or direct consumer services.
The debate on the bill saw low participation. Republican supporters highlighted the risk of misuse of CBDCs, while Democrats focused on innovation, the global position of the dollar and the bill’s drafting flaws.
During the intervention, President Patrick McHenry highlighted instances where governments, such as the Chinese Communist Party (CCP), have used CBDCs to monitor citizens’ spending behaviors. This surveillance implements a social credit system that rewards or penalizes individuals based on their actions. McHenry said this form of financial surveillance is unacceptable in the United States.
Majority Whip Tom Emmer introduced the 2023 bill, which gained 165 Republican cosponsors and passed by a vote of 216 to 192. Now in the Senate, the passage marks the third time the House of Representatives has United States passes crypto-focused bills in May.
A 180 Spot Ethereum ETF
Against the legislative backdrop, the crypto industry has seen a notable shift in focus towards exchange-traded funds (ETFs), particularly with Ethereum (ETH) at the center of attention.
Shades of grey withdrew its 19b-4 filings for its Ethereum futures ETF on May 7. The sudden withdrawal sparked speculation among industry experts and the crypto community. James Seyffart, an ETF analyst at Bloomberg Intelligence, suggested the filing could have been a strategic move.
At that time, Seyffart and his fellow ETF analyst, Eric Balchunas, there were still very low chances of Ethereum ETF spot approval by the SEC. They continued to reduce their chances until they became “none at minimum”.
However, on May 20, they increased their chances of Ethereum ETF spot approval from 25% to 75%. This follows the SEC’s request for asset managers wishing to list Ethereum spot ETFs to update 19b-4 filings before the deadline. Balchunas admitted to hearing talk that the SEC might do a 180, but they maintained a cautious approach by capping the odds at 75% until they saw updates to the filing.
Following the increase in probabilities, potential Ethereum spot ETFs have gradually amended their 19b-4 filings with the SEC. All of these asset managers have excluded staking provisions by explicitly stating that “neither the Trust, nor the Sponsor, nor the Custodian, nor any other person associated with the Trust will engage, directly or indirectly,” in any related activities. to staking.
Additionally, three Republican senators and two Democrats wrote a letter to Gensler, urging the approval of Ethereum spot ETFs. Finally, on May 23, the SEC approved revised 19b-4 filings from nine asset managers.
Following this preliminary approval, some asset managers, including BlackRock and VanEck, updated their S-1 filings to remove the staking aspects. These measures have reinforced analysts’ confidence that these ETFs could be launched soonprobably during July.
Political pressures and elections
In early May, Trump held an exclusive event with the NFT community, publicly stating he would accept donations from the crypto campaign for the first time. He also promised a more welcoming approach towards the crypto industry, calling current US regulatory measures “hostility”. Additionally, he urged those who are pro-crypto to vote for him.
Trump has has repeatedly expressed comfort with crypto and reportedly explored the use case for Bitcoin to help resolve the $35 trillion US national debt. He also promised to pardon Ross Ulbricht, the operator of the Silk Road darknet market, if he is re-elected.
“If you vote for me, on day one, I will commute Ross Ulbricht’s sentence to time served. He has already served 11 years in prison and we are going to bring him home,” Trump promised.
Trump also pledged to “support the self-custody rights of the nation’s 50 million crypto holders.” This statement is particularly interesting because the Biden administration has been impose measures against self-guarding and privacy-focused platforms. These include MetaMaskSamurai Walletand Tornado Cash.
On May 29, Treasury Secretary for Terrorism and Financial Intelligence Brian Nelson addressed the 2023 Financial Crimes Enforcement Network (FinCEN) proposal. This proposal seeks to classify mixers as a “primary money laundering concern” and requires virtual asset service providers (VASPs) to report any crypto transactions involving mixing to the agency. He said the ministry was not trying to ban crypto mixing services.
“At the end of the day, this is not a ban on blenders. This is a proposed rule designed to promote transparency,” Nelson said.
While Nelson expressed sympathy for crypto users’ desire for financial privacy, he suggested that most mixers are not created to improve privacy. Instead, they are designed to circumvent anti-money laundering (AML) and know-your-customer (KYC) reporting requirements. This makes them “very attractive” to bad actors.
Trump’s bold moves came at a strategic time when the Biden administration had long been known for its tough approach towards the crypto industry. Additionally, key industry figures have said they would support a candidate favoring crypto.
Given this outlook, it is understandable that the Biden campaign attempted to gain votes in the crypto sector. Last week, Biden reportedly started engaging with crypto industry players as part of his re-election campaign. More than two weeks ago, the re-election team reached out to several crypto experts, including those previously distanced from Biden.
Trump’s chances have increased significantly in recent months following a series of pro-crypto actions and statements. Data from crypto prediction platform Polymarket shows that Trump has a 54% chance of winning the upcoming election. This percentage contrasts sharply with that of Biden, who has only a 38% chance.
Learn more: How does regulation impact crypto marketing? A complete guide
Chances of presidential candidates winning the 2024 elections. Source: Polymarket
On a broader scale, according to an NPR/PBS/Marist report survey, Biden is losing support from some key demographic groups. Young voters under 45 prefer Biden over Trump by just four points.
In a head-to-head matchup, Biden leads by six points among Gen Z/Millennials. However, Trump’s votes among both groups, by six points among Gen Z/Millennials and among voters under 45, with third-party candidates in the mix, have an eight-point advantage.
This sea change within the Biden administration reflects a complex interplay of regulatory, legislative, and policy factors. As the administration navigates this evolving environment, the coming months will be crucial in shaping the future of crypto regulation in the United States.
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