In the past few weeks there has been a sea change in crypto regulation:
1. Bitcoin ETFs are being approved–reluctantly, after a 3-judge Federal Appeals court unanimously ruled that the SEC acted capriciously and unreasonably–yet opening up Bitcoin holdings to institutional investors. For example, the State of Wisconsin bought Bitcoin ETFs for its pension fund.
2. In an unusual move, SAB 121, was rejected by the House and, more surprisingly, rejected by the Senate with the votes of most Democrats. SAB 121 it’s an accounting bulletin of the SEC staff (not a law but a guideline) that says for banks if you hold crypto for your clients, i.e. a custodial service, you have to account for it yours balance sheet. This directive does not apply to the storage of any other property. Actually, SAB 121 was successful which is prohibited for banks to provide crypto-currency storage services because that service will affect all types of risks and property laws in the bank. With the exception of crypto, the SEC is not a bank regulator so this was seen as a regulatory overreach.
President Biden said he would vote but that is no longer certain. It was not just lobbying for crypto in SAB 121 but traditional banks. Banks are pointing to the approval of the Bitcoin ETF saying, logically, why can’t we store these ETFs the way we do every other ETF? Senate Majority Leader Chuck Schumer, DN.Y., sometimes called a Wall Street man in Washington, voted to repeal SAB 121. Schumer can read the room.
3. The House voted to block the Fed from establishing a Central Bank Digital Currency (CBDC).
4. The House approved a comprehensive bill (finally!) to establish regulations for digital asset markets. The vote was 279-136 in favor with many Democrats crossing party lines to support it.
5. After months of silence, usually a bad sign, the SEC has approved Ethereum spot ETFs. On the surface, this may seem inevitable given the approval of Bitcoin spot ETFs but many people thought that the SEC would do everything it could to find the light of day between Bitcoin and ETH. Instead, it implicitly acknowledged that ETH is a commodity and not a security.
Why is this happening? I see three key factors at play. First, crypto is integrated with traditional finance. As the big banks get involved, the politics surrounding crypto is changing. Second, crypto is becoming mainstream. Ironically, the prosecution of Sam Bankman-Fried, Changpeng Zhao and manipulators like Avraham Eisenberg may have convinced some US regulators that crypto should not be destroyed, it can be replaced. Nakamoto might not be happy but this was really the only option going forward. Ultimately, everyone wants to pay off their loan. Thirdly, Trump’s strong support for crypto has alarmed the Biden administration. Many political issues are strictly divided along party lines, but crypto is still an open issue. Since there are millions of crypto owners in the United States, a significant number are highly motivated to vote their wallets. Biden doesn’t want to give Trump the crypto issue.
None of this means we’re entering crypto Nirvana but in terms of regulation a lot has changed in just a matter of weeks.
Full Disclosure: I am a consultant for several firms in the crypto space including MultiversX, Bluechip and 0L.
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