Regulation
The year of regulatory compromises
Following the implosion of several crypto operators in 2022, a phalanx of administrative agencies has descended on the industry, declaring it “is plagued by fraud, scams, bankruptcies and money laundering.” In an effort to address these perceived flaws, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have collectively brought in more than 200 enforcement Actions against crypto industry players during 2023.
This article is part of CoinDesk “Crypto2024” prediction package.
Regulators deemed everyone in the industry to be breaking Depression-era laws with questionable applicability to crypto and rejected petitions for more comprehensive regulations. But, as the year draws to a close, the SEC is nursing two black eyes from losses against Ripple And Shades of grey in federal court and the CFTC now seems more interested in regulation actions with crypto exchanges rather than engaging in protracted litigation with them.
If 2023 was the year of regulation versus decentralization (as I predicted last December), next year could very well be one of regulatory compromise. Congress is unlikely to pass comprehensive crypto legislation in an election year, but regulators could choose to scale back a faltering enforcement-by-app regulation strategy and work collaboratively with the industry to develop a regulatory framework provisional by a combination of opinions and comments. establishment of rules and relief without action.
Crypto industry players and regulators have a common interest. Both were caught in the same situation late last year (following the implosion of FTX) and should want to prevent bad actors from crippling the good ones again despite the unlikelihood of a legislative solution immediate.
Although SEC Chairman Gary Gensler is unlikely to abandon his crusade against perceived “widespread non-compliance” within the industry, the SEC and other crypto regulation hopefuls will have to compromise next year. Shades of grey legal challenge The SEC’s rejection of its application for a spot Bitcoin exchange-traded fund (ETF) resulted in a unanimous three-judge panel of the DC Circuit Court of Appeals. holding that the SEC’s action was “arbitrary and capricious.” The U.S. Court of Appeals for the Third Circuit also asked the SEC to respond to a petition for the development of rules on crypto asset securities.
This uprising against administrative agency overreach extends far beyond the crypto industry. In a lawsuit filed by the Chamber of Commerce against the SEC, the Fifth Circuit Court of Appeals governed Last month, the SEC acted arbitrarily and capriciously by failing to consider industry feedback and failing to conduct a proper cost-benefit analysis with respect to regulatory disclosure of repurchases. ‘actions.
And the SEC must defend itself against a trial brought by six industry groups alleging that the agency exceeded its statutory powers by adopting new regulations on private fund advisers. Additionally, the Fifth Circuit Court of Appeals recently said the CFTC that the agency abused its discretion by withdrawing a no-action letter without providing supporting rationale and that an exchange registered with the CFTC is pursue the agency for having arbitrarily and capriciously rejected its proposal to list new event contracts on its platform.
These types of legal challenges to administrative actions will likely continue to circumscribe and force the hands of regulators next year. Following the Grayscale decision, the SEC recently allowed an ether ETF based on futures contracts and it is rumor that the agency will approve a spot bitcoin ETF as early as January.
After the U.S. Court of Appeals for the Third Circuit ordered the SEC to respond to an industry request petition for rulemaking, the SEC chose to deny the petition. But the public accompanying President Gensler Remarks were far from his previous statement that “probably only a few” crypto assets “might not be” securities. “Of course, . . . not all crypto assets are necessarily offered and sold as collateral. . . [and] I look forward to working with crypto projects and intermediaries who want to comply with the law,” he says now.
Although the SEC has no plans to propose a comprehensive regulatory framework for crypto, the agency has proposed a handful of new regulations, expected to be finalized next year and which would impact crypto players. crypto industry. SEC proposals for redefine defining an “exchange” to include “communications protocol systems” and requiring investment advisors jail crypto assets with a qualified custodian, if adopted in their current form, are likely to result in similar administrative law challenges. Several industry groups And crypto companies claim that the SEC violated the so-called “major issues doctrine” by proposing these regulations without clear congressional authorization, among other complaints. The fact that these regulations could be delayed by legal battles and then abandoned in the event of a change in administration could prompt the SEC to make significant concessions.
Crypto industry participants will also have reason to expand their interactions with agency personnel beyond those constrained by a subpoena next year. As institutional demand for crypto continues to rise, industry players are looking to offer a wide range of products that will require collaboration with regulators.
For example, many types of tokenized real-world assets (RWA) fall very clearly within the jurisdiction of the SEC and will require buy-in from SEC staff. Exchanges hoping to offer crypto margin trading and perpetual futures in the United States will need approval from the CFTC. And prudentially regulated financial institutions seeking to offer stablecoins and other crypto products will not be able to do so without permission from their supervisory regulators.
After a long year of legal battles, we can expect the crypto industry and regulators to move closer together (even slightly) in the new year, which will be a net positive for all.