Will 2022 Be The Landmark Year For Crypto Regulation? We Offer Seven Predictions and Explain Why You Should Be Cautiously Optimistic
2021 WAS CERTAINLY A BUSY YEAR FOR CRYPTO REGULATION.
- The U.S. Congress passed the 2021 Infrastructure Bill that imposed many new tax reporting challenges for crypto investors, exchanges, and other players in the blockchain ecosystem.
- The U.S. Securities and Exchange Commission (“SEC”) and Commodities Futures Trading Commission (“CFTC”) cracked down on centralized and decentralized digital asset exchanges with several prominent enforcement actions.
- The SEC and CFTC battled over which agency has the authority to regulate digital asset spot markets.
- The SEC brought an enforcement action against Uniswap Labs, one of the largest Decentralized Finance (“DeFi”) companies in the world.
- Federal and state regulators cracked down on crypto lending programs from BlockFi to Coinbase.
- In an increasingly hostile federal environment, states continued to innovate in crypto regulation such as Wyoming’s landmark law recognizing decentralized autonomous organizations (“DAO”).
- Bitcoin futures ETFs finally secured approval from U.S. regulators.
- The Financial Action Task Force (“FATF”) released its long-awaited guidance on digital assets that will influence the crypto regulatory debate worldwide.
In the wake of these important developments, we predict future trends for 2022 and explain why you should be cautiously optimistic.
GREATER REGULATION FOR STABLECOINS.
Stablecoins are likely to be a major focus for legislators and regulators in 2022. Stablecoins play a vital role in the crypto ecosystem because they do not experience the strong price volatility that characterizes other tokens and therefore act as a safe haven for traders that would otherwise have to convert back to fiat. Several U.S. senators have criticized stablecoins, with one arguing that “they’re propping up one of the shadiest parts of the crypto world; DeFi.” Regulators and lawmakers are concerned about how these coins are backed and whether they maintain sufficient reserves to support a run on a coin. However, there are reasons to be optimistic about the future of stablecoins in the U.S.
We expect that productive regulation of stablecoins will help to legitimize their use among consumers and institutional investors, ensuring that the marketplace can take advantage of their substantial benefits. This regulatory clarity will also safeguard U.S. leadership in the stablecoin market amidst increasing international competition.
CYNTHIA LUMMIS’S CRYPTO BILL WILL BLAZE A TRAIL FOR MORE PRODUCTIVE REGULATION.
Wyoming Senator Cynthia Lummis, an enthusiastic advocate of the crypto industry, is set to propose a sweeping bill for U.S. blockchain regulation. The Bill will propose a comprehensive set of new rules for stablecoins, consumer protection, and taxation guidance. The most ambitious of Lummis’ proposals will be a new self-regulatory organization for the industry, which will be overseen by the SEC and CFTC. Self-regulatory organizations already play a central role in the U.S. financial system and, while past attempts to create such an organization have stalled, the Bill will pave the way for future work toward this important objective.
More generally, while the Bill will likely face substantial opposition in the U.S. Senate – whose current membership is divided on the approach to digital asset regulation – Lummis’ proposal will be one of the first comprehensive, legislative proposals to create broad rules governing the blockchain ecosystem. The Bill also demonstrates the substantial progress that members of Congress have made in understanding crypto and engaging with the industry.
THE SEC WILL PROBABLY NOT APPROVE A BITCOIN SPOT ETF.
Now that the SEC has approved several Bitcoin futures ETFs, many market observers anticipate that the SEC will approve a Bitcoin spot ETF at some point in 2022. However, the SEC recently decided to delay its decision on whether to approve the NYDIG Bitcoin ETF and has rejected at least two other applications. The main reason for this different approach is that futures ETFs are fundamentally distinct from spot ETFs because futures ETFs are overseen by the CFTC and investors do not need to custody crypto, removing many potential risks for investors.
In line with this rationale, the SEC has argued that exchanges on which Bitcoin spot ETFs would be traded have not met the burden of “prevent[ing] fraudulent and manipulative acts and practices” or “protect[ing] investors and the public interest.” However, we expect that, as the interest in crypto spot ETFs continues to grow, the market will gain greater insight into the SEC’s thinking and Congress may act to provide regulatory clarity.
THE SEC WILL CONTINUE TO CRACK DOWN ON CENTRALIZED AND DECENTRALIZED CRYPTO PROJECTS THAT IT BELIEVES TO ENCOURAGE FRAUD OR VIOLATE THE SECURITIES LAWS.
SEC Chairman Gary Gensler will continue to argue that the crypto industry is a “Wild West” that needs to be reined in with strong action. Small concessions such as the approval of Bitcoin futures ETFs do not undermine this aggressive posture. At the center of Gensler’s thinking is what he and the SEC consider to be “true decentralization.” For example, the SEC has not focused its efforts as strongly on projects such as Bitcoin and Ethereum that it appears to consider as more decentralized than others. Sufficient decentralization partially alleviates the need for strong regulatory intervention to ensure consumer protections.
Despite frequent requests for clarification, the SEC has released little guidance on what it considers to be sufficient decentralization or what projects should do to ensure that they are adequately decentralized. However, we expect that this will change in 2022. An resolution of the SEC’s investigation with Uniswap will provide significant guidance to the market regarding the SEC’s views on “decentralization.”
BIPARTISAN REGULATION OF CRYPTO IS MORE LIKELY THAN EVER.
Early last year, crypto appeared to be a partisan issue with progressives aligning themselves against the industry. While some progressives will continue to rail against the industry, moderate Democrats are likely to join with Republicans to propose more sensible regulation. Congressional groups such as the Blockchain Caucus and advocacy organizations such as the Blockchain Association have identified the key issue moving forward is education. As legislators learn more about the crypto industry, they increasingly recognize that they can enact sensible regulations without sacrificing U.S. leadership by driving innovators offshore.
REGULATORS WILL CONTINUE TO GRAPPLE WITH THE RISE OF DEFI.
Given its incredible rise in 2021, DeFi will continue to be a popular choice for new crypto projects and investors. However, government regulators in the U.S. and abroad have challenged many DeFi projects’ claims of decentralization, countering that they are not “truly decentralized.” These regulators have argued that they do not want wildcat projects to use DeFi as an escape valve for fraud and evasion of consumer protection laws.
In their pursuit of sufficient decentralization, many companies will likely continue to experiment with new DeFi technologies and governance models such as DAOs. It is yet to be seen whether DeFi projects will be able to attain the elusive “decentralization” that regulators seem to demand. However, these competitive pressures will facilitate greater innovation in DeFi and, as the Uniswap investigation concludes, we expect that the market will receive vital information on how it should move forward.
NON-FUNGIBLE TOKENS (“NFT”) MAY FACE HEIGHTENED REGULATION.
In 2022, NFTs are likely to continue their explosive growth, particularly with their expanding role into the nascent metaverse. While NFTs have not attracted particular scrutiny from regulators, the explosion of the NFT marketplace means that regulators may step up to provide guardrails. In particular, NFTs potentially impact consumer protection, the integrity of capital markets, and the stability of financial institutions.
Similar to the Blockchain Association’s efforts to educate policymakers, NFT marketplaces have already initiated their own education campaigns for members of Congress. In fact, we are already seeing members of Congress minting and selling NFTs as part of their campaign fundraising initiatives. Thus, if regulation is coming, then lawmakers will be well positioned to establish informed regulations that ensure consumer protections while fostering valuable opportunities for artists, consumers, and investors.
WILL 2022 BE THE LANDMARK YEAR FOR CRYPTO REGULATION?
As our predictions show, 2022 will likely be a landmark year for crypto regulation in the U.S. As the crypto market matures, the desire for greater regulation and consumer transparency has naturally grown. While 2021 was distinguished by market confusion and broad, unproductive attacks on the crypto industry as a whole, 2022 promises to be the year where productive, bipartisan crypto regulation will truly come into its own. Even as other countries challenge American leadership in blockchain innovation and regulation, it is our position that they should not count the U.S. out just yet.