2024: The Dawn of Regulatory Compromises in Crypto

• A Regulatory Onslaught on the Crypto Industry in 2022
• The Regulatory Dragnet
• Regulators' Stand on Cryptocurrency
• 2023: The Year of Regulation vs. Decentralization
• The Common Interest of Regulators and Crypto Industry Participants
• The Legal Challenges
• The Crypto Industry and Regulatory Compromises in 2023
• Crypto Industry Collaborations
• 2023: The Year of Crypto and Regulation

A Regulatory Onslaught on the Crypto Industry in 2022

In 2022, numerous crypto operations collapsed, leading to a surge in scrutiny by various administrative agencies. The industry was quickly labelled as a hotspot for fraud, scams, bankruptcies, and money laundering. Trying to address these issues, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) launched over 200 enforcement actions against crypto industry players throughout 2023.

The Regulatory Dragnet

Lawsuits were filed indiscriminately against both those who disregarded the law and those who sought to adhere to it. Entities caught up in this enforcement wave included a producer of uniquely-generated animated cat JPEGs, a decentralized autonomous organization, and multiple celebrity influencers such as Kim Kardashian, Paul Pierce, and Lindsay Lohan.

Regulators' Stand on Cryptocurrency

Regulators seemed to consider every participant in the industry to be in violation of Depression-era laws, whose relevance to crypto is debatable. They ignored calls for more in-depth rulemaking. However, by the end of the year, the SEC suffered defeats against Ripple and Grayscale in federal court, and the CFTC appeared to favor settling actions with crypto exchanges over prolonged litigation.

2023: The Year of Regulation vs. Decentralization

2023 has been characterized by the clash between regulation and decentralization. The following year might witness regulatory compromises. While comprehensive crypto legislation is unlikely during an election year, regulators might scale back their failing enforcement-centric strategy and collaborate with the industry to devise an interim regulatory framework using a combination of notice and comment rulemaking and no-action relief.

The Common Interest of Regulators and Crypto Industry Participants

Last year, both regulators and crypto industry participants were caught off guard by the collapse of FTX$3.28 -5.38% and should be keen on preventing a repeat of such disastrous events. Despite the improbability of an immediate legislative solution, agreements will have to be made in the forthcoming year.

The Legal Challenges

Grayscale's legal contest against the SEC's denial of its spot bitcoin exchange-traded fund (ETF) application led to a unanimous D.C. Circuit Court of Appeals panel ruling that the SEC's action was arbitrary and capricious. Similar legal challenges against administrative actions are expected to continue in the coming year, limiting regulators' actions.

The Crypto Industry and Regulatory Compromises in 2023

As a result of these legal challenges, the SEC recently permitted a futures-based ether ETF and is rumored to approve a spot bitcoin ETF in January. Though they have no plans to propose a comprehensive crypto regulatory framework, the SEC has suggested several new regulations that could affect crypto industry participants.

Crypto Industry Collaborations

With increasing institutional demand for crypto, industry players are likely to collaborate more with regulators to offer a wide array of products. For instance, the offer of tokenized real world assets (RWAs) falls under the SEC's jurisdiction and will require its approval. Crypto margin trading and perpetual futures within the U.S. will necessitate CFTC's approval, and prudentially-regulated financial institutions' desire to offer stablecoins and other crypto products will require consent from supervising regulators.

2023: The Year of Crypto and Regulation

Following a year full of legal battles, the upcoming year promises a warmer relationship between the crypto industry and regulators, which should benefit everyone involved.

Edited by Jonathan Stoker