"CRYPTO THESES 2024" on U.S. Policy and Regulations

Next, we will summarize "Messari CRYPTO THESES 2024." The previous sections include:

Today, I'll discuss the U.S. policies and regulations on Crypto. This section is a bit challenging for me because I'm not very familiar with U.S. government institutions and the legal system. Therefore, it seems a bit confusing to read.

1. Politics is downstream of culture.

After the SBF incident, we face four challenges:

Bear Market Blues;
National Security;
Our Size is Not Size;
Pitching the Gerontocracy and the NoCoiners.

Although Congress can use emerging AI tools like ChatGPT, they typically cannot or are unwilling to own cryptocurrencies due to potential conflicts of interest.

Of course, along with the challenges, there are also opportunities:

Distrust in the Bureaucracy: At least one party (the Republican Party) believes that many of our institutions in Washington, D.C., have been weaponized for political purposes.
The Constitution and the Courts: Cryptocurrency has the potential to protect civil liberties, which resonates with some members of the Republican Party in Congress.
The Return of the Bull: When both individual investors and institutions (especially traditional financial institutions, TradFi) are making profits, it will be more difficult to politically attack cryptocurrency.

2. How to Turn a Cryptocurrency Bill into Law

A cryptocurrency bill needs to go through the following ten steps to become law:

Review the educational content of Schoolhouse Rock;
Introduction of the bill;
Committee jurisdiction;
Committee review;
Committee amendments;
Parliamentary debate and vote;
Conference committee negotiations;
Omnibus Hell;
Bill passage and presidential signature;
Implementation.

Until this year, cryptocurrency has largely only experienced step 10 (the creation of new rules and legal challenges) and steps 8-9 (the inclusion of the disastrous "crypto broker reporting" requirement in the 2021 infrastructure bill).

By 2024, will we be able to achieve some substantive results through the Congressional "sausage-making process" (steps 1-7)?

The chances are small, but not zero.

3. The Congressional "Sausage-Making" Process

【Major Legislation】

"FIT 21" (House) and "Lummis-Gillibrand" (Senate), also known as the market structure bills - both of these bills clarify the regulatory framework for cryptocurrency spot markets, custodial exchanges, and asset issuers, and aim to address the jurisdictional issues between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). The likelihood of passage is less than 5%.
"Payment Stablecoin Clarity Act" (House) and "Lummis-Gillibrand" (Senate) - Both bills require dollar stablecoin issuers to back "payment stablecoins" with high-liquidity reserves at a 1:1 ratio and comply with disclosure, redemption, and capital requirements. The likelihood of passage is 25%.
DAAML and CANSEE (similar Senate bills) - Both DAAML and CANSEE would impose anti-money laundering and sanctions legal requirements on open-source software contributors and non-custodial peer-to-peer networks, which could effectively end decentralized finance (DeFi) in the United States. There is a 40% chance of passing a "watered-down" version of the bill.
"Crypto Broker Tax Reporting Review" - Back in 2021, the Congressional Budget Office claimed that if crypto brokers reported taxes to the IRS like traditional financial institutions, it could generate billions of dollars in incremental tax revenue. The bill was passed in 2021, and the first round of rulemaking was proposed in August 2023.

【Minor Legislation】

Some smaller legislative amendments may be introduced next year, although they seem too minor to pass through Congress as standalone measures, especially in an election year. The most meaningful and promising "quick fix" legislation includes the bipartisan PROOF Act, which requires digital asset custodians to obtain attestations from independent audit firms to ensure their customer deposits are always fully backed, and the bipartisan "Uniform Treatment of Custodied Assets Act," which would overturn the guidance in Staff Accounting Bulletin 121 (SAB 121) requiring banks and other public companies to treat crypto assets held on behalf of customers as liabilities on their balance sheets.

4. Ongoing Hostility from Monetary Regulators

The federal government has three main levers over cryptocurrency market participants: (1) control over access to banking services, (2) setting tax reporting rules, and (3) enforcing anti-money laundering (AML) laws.

【Crypto Banks】

“Awful nice bank you’ve got here, be a shame if something happened to it.”

-FDIC Chair Marty Gruenberg (probably)

Current senators are directly blocking new entrants from accessing Federal Reserve master accounts and national trust bank charters, citing risks created by the government itself.

The federal government can exert tax pressure on U.S. cryptocurrency companies and their users in various ways.

They arrested CZ for violating AML laws and held a national press conference to announce a $4 billion fine.

5. Ongoing Hostility from Protectors

Under SEC Chair Gary Gensler's leadership:

Undermining the SEC's mission: It is necessary to remind people, including SEC staff, that the agency's mission is to promote capital formation, protect investors, and ensure that U.S. capital markets are fair, efficient, and competitive. However, it seems that Gary Gensler is not doing so.
Incompetent policing: His oversight committee has instead pursued high-profile, low-impact cases while ignoring every major crypto issue on the table.
Self-aggrandizement: From his first day at the SEC, Gensler seems to have focused on one thing: climbing the political ladder in Washington.
Dishonest actor: Gensler lied about the "registration process" for cryptocurrency companies.

The Commodity Futures Trading Commission (CFTC) is also a significant financial regulator. The author does not believe that transferring cryptocurrency regulation to the CFTC is a panacea.

The CFTC previously blocked innovation in U.S. prediction markets. Their enforcement action against Ooki DAO has severely disrupted innovation within the U.S. DAO ecosystem. We still do not have onshore Perps, and it seems unlikely to appear anytime soon, as the CME still dominates our futures market, and DeFi projects are being driven overseas or shut down through enforcement.

6. The Courts Are Sometimes Our Friends

The regulatory landscape is so unfavorable to us that fighting in court has become an attractive option. However, this strategy is both expensive and high-risk, and few teams can afford such a long and costly battle.

Ripple claims to have spent over $100 million in its first round of litigation with the SEC, which was (mostly) resolved in its favor after 2.5 years, but it still faces an appeal from the SEC.
Grayscale successfully sued the SEC for denying its application to convert its spot ETF, but the delay caused by the SEC paralyzed dozens of Grayscale's counterparties, including its sister company Genesis and parent company Digital Currency Group (more on this in the next chapter). Despite the SEC missing another deadline, Grayscale's procedural victory did not result in an actual ETF conversion!
Coinbase is in a bind: The damage from the SEC's Wells notice is unknown, but historically, delaying new listings and products has not helped when global competitors are eroding your market share.

7. The Lobbying Battle in the Senate

Most of the pressure on Representative Waters to oppose the FIT 21 bill comes from the White House, through Warren's proxies. Meanwhile, the Lummis-Gillibrand market structure bill is stuck in the Senate Banking Committee, and as long as Warren and her anti-crypto colleagues, Committee Chair Sherrod Brown, are in power, this bill will never be considered.

To be clear, if the Biden administration continues and the Senate is led by Warren, the possibility of the U.S. cryptocurrency industry facing extinction by 2028 is very high.

8. Supporting Cryptocurrency: Engagement, Not Surrender

The default (largely libertarian) stance of the cryptocurrency industry is that we should only regulate those crypto financial service businesses that handle other people's funds (private keys) and build open-source technology that anyone can use without hindrance.

Given the reputational setbacks we have suffered over the past year, a certain degree of political appeasement is necessary for survival and growth. Opting out of these discussions entirely—when our national institutions are steered by gerontocrats with limited technological capabilities—would be suicidal, even though participating in these discussions is tedious.

9. We Need to Set Higher Standards

While engaging in regulatory, political, and legal battles, we should strive to raise standards and commit to self-repair, such as:

Proof-of-Reserves;
Affiliate Entity Disclosures;
Token Disclosures;
User Education Instead of "Certification";
Front-End Heuristics.

10. MiCA and TFR: Europe's "Leadership"

MiCA (Markets in Crypto-Assets Regulation) and TFR (Transfer of Funds Regulation) are two important regulations adopted by the European Union to regulate the crypto-asset sector:

Category	Advantages	Disadvantages
Comprehensive	The EU's first legislation targeting crypto-asset service providers and token issuers, recognizing utility tokens as a unique asset class, and setting operational vulnerabilities and token disclosure responsibilities for CASPs.	Once final rules and clarifications are included, the regulation will exceed 1,000 pages and will not include future proposals like "MiCA 2.0" for DeFi and NFTs.
Travel Rule Implementation	No information disclosure requirements for peer-to-peer transfers, but information sharing is required between CASPs.	TFR information sharing with no transaction minimum, and CASP information requirements for self-custody wallets.
Stablecoins	Provides clear guidance for issuers, helping to create the long-awaited euro stablecoin.	EU CASPs may be prohibited from offering stablecoin yields, face issuance caps, and unauthorized issuers cannot trade on EU exchanges.
DeFi Coming Soon	Clear regulatory and tax rules could put Europe ahead in "embedded regulation."	DeFi developers may be held accountable for regulation, and Europe lacks "code as speech" protection.
Other	Strict market restrictions for non-EU companies serving EU users, but with a "reverse solicitation" exemption, benefiting global leaders like Binance.	Undisclosed social media comments on crypto assets may be considered market manipulation.

Conclusion

While regulators around the world may not completely end cryptocurrency (or AI, social media, biotechnology, etc.), their rules and policies may make our lives challenging and troublesome for quite some time.

It is important to remember: politics is often a product of culture. Politicians implement policies through the selection of talent, and these policies often have long-term effects. Therefore, winning the cultural information war will be key to winning the entire battle.