Other than climate change (see our related newsletter on the subject), no topic attracted more regulatory attention this past year than the regulation of digital assets. Below, you'll find our discussion of news stories from the year past and our predictions for the year ahead.
Any discussion of digital assets should begin with the recognition that they are not a single type of asset; rather, they have multiple purposes, as well as multiple regulators. There are digital currencies that are entirely based on trust (such as Bitcoin), and stablecoins that may be backed by dollars or another sovereign currency held at a bank, and other coins that are backed by a managed pool of assets. There is the possibility of central bank digital currencies ("CBDCs"), including in the United States. There are digital assets that are clearly securities, others that are clearly utilitarian, and still others that mix elements of the two (from a regulatory standpoint, the last is the most difficult product to determine how to regulate). Thus, there is no one storyline to be told.
The difficulty of determining how digital assets should be regulated is also complicated by two opposing policy concerns: (i) will potential overregulation of digital assets result in a stifling of innovation in the United States; and (ii) will popular enthusiasm over digital assets result in a speculative bubble doomed to burst, bringing great harm to retail investors and to the financial system more broadly?
Against that background, we are cheating a little with our year-in-review by including SEC Commissioner Hester M. Peirce 's proposal to create a limited safe harbor from securities regulation for digital tokens that may have both a use value and investment value. (The proposal was first made in February of last year and then updated in April 2021.) While Commissioner Peirce's concerns are primarily focused on innovation (as well as on investor choice), current SEC Chair Gary Gensler is equally and oppositely (or maybe more than oppositely, since he is the chair) focused on investor protection concerns. Specifically, Chair Gensler said "every ICO [he has] seen is a security."
There are of course other regulators and legislators who share Chair Gensler's concerns, including the New York Attorney General Letitia James and Senator Elizabeth Warren. And we continue to follow various actions being brought by a number of state attorneys general against those involved in crypto-related activities. The one arguably positive move that the SEC made as to digital assets in the last 365 days was to request comment as to the potential creation of a special purpose broker-dealer that would be permitted to custody digital assets, but that suggestion was largely rejected by the industry as overly limiting.
For the SEC, there is no reason to expect a material change in policy going forward. Deregulation is not a priority under Chair Gensler. We expect the SEC to maintain the position that every ICO is at least potentially a security, not to take any notice of Commissioner Peirce's proposed safe harbor, and thus to preserve the agency's maximum flexibility to bring enforcement actions. Perhaps the SEC could approve a Bitcoin fund to trade on a U.S. exchange, but even that seems less than a 50% probability in light of Senator Warren's skepticism of cryptocurrencies. The SEC's proposal as to the custody of digital securities is unlikely to gain any momentum, in its current form, given the conditions attached to the proposal and the uncertainty as to which digital assets are actually "securities" that could be custodied under the proposal.
The real wild card at the SEC is enforcement actions, particularly the developments as to Ripple. Whatever the outcome of that case, the industry use of blockchain technologies will continue as it is driven by the desire to implement faster and more efficient settlement (is T+0 doable?).
In contrast to the SEC, the CFTC was moderately supportive of trading in digital assets and in issuing legal guidance as to the regulatory treatment of digital assets. The CFTC should remain open to the possibility of further listed derivatives on cryptocurrencies, but outside of a few such currencies, there really is not a strong or liquid enough "cash" market to justify the approval of trading on futures by retail customers.
To the extent that there were genuinely intriguing regulatory developments, or at least potential developments, they were in banking law. The OCC issued an interpretive letter as to permissible banking activity involving crypto assets; most importantly the custody of crypto. Other statements reflected the bank regulators divergent concerns: on the one hand, a desire to encourage (at least moderately) innovation and, on the other, a concern that the whole thing might end badly absent more vigorous regulation. While CBDCs will continue to be a topic of consideration, we don't expect material action this year.
Finally, no regulatory discussion of crypto can be remotely complete without at least a passing mention of AML concerns.
Below is a selection of our news stories on crypto over the last year (or so). To see all of our news stories on crypto, click here. To subscribe to our daily newsletter, click here and add your email address to the field at the top of the page. To obtain a year's free subscription to the Cabinet regulatory library, email us at Cabinet.Subscriptions@cwt.com. To see our "topic page" on the crypto documents of the various regulators, click here. (You must have a password to the library; subscriptions are free through 2022.)
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