2024 will be a year of regulatory compromise | CoinDesk JAPAN

After multiple crypto asset (virtual currency) businesses went bankrupt at the end of last year, many government agencies labeled the industry as “pervasive in fraud, fraud, bankruptcy, and money laundering.”

A year of conflict between regulators and industry

To rectify these issues, the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have collectively implemented more than 200 enforcement actions against participants in the cryptocurrency industry in 2023. Like an autoimmune reaction that can’t tell the difference between what’s good for you and what’s bad, regulators filed lawsuits against both those who tried to circumvent the law and those who tried to comply.

Among those caught in the crackdown are cat-themed NFT sellers, decentralized autonomous organizations (DAOs), and a number of famous “influencers” including Kim Kardashian, Paul Pierce, and Lindsay Lohan. It is included.

Regulators have deemed nearly all industry participants in violation of Depression-era laws whose application to crypto assets has been questioned, and have issued a petition for more detailed rulemaking. Rejected.

However, the SEC suffered two losses in 2023 when it lost a lawsuit against Ripple and Grayscale. It also appears that the CFTC is currently more interested in settlements with crypto exchanges than engaging in protracted litigation.

If last year was a year of regulation versus decentralization, 2024 may be the year of regulatory compromise.

Although it is unlikely that Congress will pass comprehensive crypto-asset legislation in a presidential election year, regulators are likely to scale back on their unsuccessful enforcement enforcement strategy and instead move forward with notice-and-comment regulation (i.e., passing proposed rules in the federal A provisional regulatory framework will be formulated by combining the system of posting in the official gazette and accepting public comments) and no-action letters (a system that allows private companies to confirm the legality of new business activities in advance in writing). may choose to work with industry to do so.

Participants in the crypto-asset industry and regulators have common interests. Both companies are similarly stuck at the end of 2022 (after the collapse of FTX), and while it is unlikely that any immediate legislative solutions will be resolved, they should want to prevent bad companies from crushing good companies again.

SEC Chairman Gary Gensler is unlikely to let up on his crusade against what he calls “widespread compliance violations” within the industry, but the SEC and other regulators will have to compromise this year. .

Rebellion against excess

Grayscale’s challenge to the SEC’s denial of its Bitcoin exchange-traded fund application resulted in a unanimous three-judge decision that the SEC’s action was “arbitrary and arbitrary.” The court also required the SEC to respond to a petition to develop regulations regarding crypto assets.

This backlash against government overreach is not limited to the crypto asset industry. In a lawsuit brought by the Chamber of Commerce against the SEC, the court found that the SEC failed to address industry comments and conduct an adequate cost-benefit analysis regarding rulemaking related to stock repurchase disclosures. The court ruled that it had acted arbitrarily and arbitrarily.

The SEC was also sued by six industry groups, alleging that the SEC overstepped its legal authority in enacting new private fund advisor regulations. Furthermore, the court recently pointed out to the CFTC that the CFTC exceeded its discretion by withdrawing the no-action letter without providing any basis. Additionally, a CFTC-registered exchange is suing the CFTC for arbitrarily and arbitrarily rejecting bids to list new event contracts on its platform.

Challenges to administrative actions are likely to continue to constrain regulators and force them to act in 2024. As a result of the Grayscale ruling, the SEC approves futures-based Ethereum (ETH) ETFs. Rumor has it that it will soon approve a Bitcoin spot ETF.

After the court required the SEC to respond to industry petitions to develop regulations, the SEC chose to deny the petitions.

Will it be a year of dialogue and cooperation?

However, Chairman Gensler’s subsequent public statements were a far cry from his previous statement that only “probably a small number” of crypto assets “might not” be securities. “Of course…not all crypto assets are necessarily offered or sold as securities…and we look forward to working with crypto projects and intermediaries who wish to comply with the law.” It was.

Although the SEC does not intend to propose a comprehensive regulatory framework for cryptoassets, it has proposed several new regulations that will impact participants in the cryptoassets industry.

If adopted as is, the proposal to redefine the definition of “exchange” to include “communication protocol system” and the proposal to require investment advisors to store crypto assets with qualified custodians would be subject to similar administrative laws. This is likely to develop into a problem.

Several industry groups and crypto-asset companies have argued that the SEC proposed these regulations without explicit approval from Congress under the so-called “major issues doctrine.” The lawsuit alleges that the law violates the principle that a clear mandate from Congress is required to take action. The reality that these regulations may be held up through legal battles and potentially waived by a change of administration may prompt the SEC to make significant concessions.

Participants in the crypto industry will also have reason to expand their interactions with regulators in 2024, beyond those forced by subpoena. As institutional demand for crypto assets continues to grow, industry participants are seeking to offer a wide range of products that will require cooperation with regulators.

For example, many tokenized real-world assets (RWA) are clearly within the jurisdiction of the SEC and would require SEC buy-in. Exchanges wishing to offer cryptocurrency margin trading or perpetual futures in the United States will need approval from the CFTC. Additionally, carefully regulated financial institutions seeking to offer crypto-asset products such as stablecoins cannot do so without supervisory regulatory approval.

After a long year of legal battles, 2024 is expected to see the crypto industry and regulators come to terms (albeit only slightly) with each other. This would be a plus for everyone.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original text: 2024: The Year of Regulatory Compromises