During the 2024 campaign, President-elect Donald Trump took significant steps to embrace digital assets and the industry that has developed around them, positioning himself as a champion of crypto. In a speech delivered at the annual Bitcoin Conference in Nashville, Tennessee, the Republican nominee promised to suspend sales of U.S. government bitcoin holdings and to fire current Securities and Exchange Commission (SEC) Chairman Gary Gensler on day one of his administration.
The promise to remove Gensler as chairman of the SEC is notable because during the Biden administration, enforcement actions carried out by the commission have presented perhaps the largest regulatory burden faced by the digital asset industry. Since the SEC brought its first enforcement action related to digital assets in 2015, the commission has pursued over 170 legal actions in the space. Over half of those enforcement actions have been carried out since Gensler was sworn in as chairman. Changes to the SEC’s approach to enforcement around digital assets are likely to be the first meaningful steps the Trump administration will carry out in this space. Over the long-term, the SEC will also likely consider carrying out a formal rulemaking to provide more lasting regulatory clarity for market participants to address current legal gray areas, such as defining criteria to determine whether or not a particular token would be deemed a security by the commission. However, current efforts in Congress to pass legislation intended to provide legal clarity on these and other questions surrounding digital assets are also likely to determine how rapidly the SEC and other agencies pursue formal rulemakings.
In addition to the SEC, the Commodities Futures Trading Commission (CFTC), Treasury Department and prudential regulators, the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC) and Federal Reserve will all play a meaningful role in further establishing the federal regulatory framework for digital assets.
SEC Regulatory Reforms
With respect to digital assets, Chairman Gensler’s SEC took the position that most digital tokens are securities under the Howey test, and thus must be registered under the Securities Act of 1933. The now infamous Howey test, named for the 70-year-old case SEC v. W. J. Howey Co., has been the SEC’s main source of regulatory authority. In that case, the U.S. Supreme Court held that an investment contract is a “security” if it involves “an investment of money in a common enterprise with profits to come solely from the efforts of others.” This approach led to a “regulation by enforcement” approach to digital assets, yielding the agency significant legal victories and fines against crypto and stablecoin issuers.
Trump’s SEC is likely to reverse course on this approach; as described by Republican Commissioner Mark Uyeda, “the commission’s war on crypto must end, including crypto enforcement actions solely based on a failure to register with no allegation of fraud or harm.” Uyeda added that “President Trump and the American electorate have sent a clear message. Starting in 2025, the SEC’s role is to carry out that mandate.” Alongside the change in enforcement posture, the SEC may promulgate new regulations to clarify the definition of digital assets as it relates to existing laws or by issuing no-action letters in the absence of congressional action. While there is a range of competing views as to how the SEC should approach regulation of the digital assets ecosystem without stifling innovation, a proposal advanced by Republican SEC Commissioner Hester Peirce has garnered the most attention and interest from crypto market participants.
First put forward by Commissioner Peirce in a speech in February 2020, and later amended and rereleased in 2021, Peirce’s “Token Safe Harbor Proposal 2.0” would generally provide crypto project developers with a three-year safe harbor to be able to engage in sales of their tokens to the public without the risk of facing SEC penalties associated with conducting an unregistered securities offering. In the initial 2020 speech in which Peirce outlined this proposal, she indicates that this safe harbor could be established either through a formal rulemaking or SEC guidance in the form of a no-action letter(s). This is notable because, unlike a formal rulemaking, which can take months or even years to finalize, the commission could issue no-action guidance relatively quickly.
Peirce is also one of two Republican commissioners, along with Commissioner Uyeda, who could be appointed as acting SEC chairperson when Gensler steps down from the post, which is the longstanding practice following a change in administration. While the initial steps that the commission takes towards creating a more permissive regulatory structure for digital assets may differ from the Peirce proposal, it will likely serve as an initial framework for the agency to work from.
In addition to the broader effort that the commission is likely to pursue to provide regulatory relief for the crypto industry, there are also a number of more narrow regulatory challenges stemming from Gensler-era policy decisions that Trump appointees will likely seek to address.
- Staff Accounting Bulletin no. 121: On March 31, 2022, the SEC’s Office of the Chief Accountant issued Staff Accounting Bulletin (SAB) no. 121, which provided interpretive guidance from SEC staff for the accounting treatment of digital assets held in custody by a company on behalf of its customers. Specifically, SAB 121 directed these firms to record these assets on their balance sheets at fair value as a liability, as well as a corresponding asset. Since taking effect, SAB 121 has created major challenges for banks and other publicly traded depository institutions seeking to provide crypto-related services. The standard approach to accounting generally treats custodied assets held by banks as off-balance sheet assets. As a result, the balance sheet impact of holding customer crypto assets now has the effect of significantly increasing the regulatory capital and liquidity requirements these institutions must meet, making it prohibitively expensive in many cases.
Over the past two years, repealing SAB 121 has become a top priority for the digital assets industry. In May, the House and Senate passed a resolution of disapproval (H.J.Res. 109) seeking to overturn SAB 121 under the Congressional Review Act (CRA). The effort received near universal support among Republicans and a significant margin from Democrats in both chambers but was ultimately vetoed by President Biden. Being that SAB 121 is guidance and not a formal rule, Republicans at the commission should be expected to move to revoke the bulletin almost immediately after gaining control of the agency.
- Dealer Rule: On Feb. 6, 2024, the SEC voted 3-2 to adopt final rules to expand the regulatory definition of a securities “dealer” under the Securities Exchange Act of 1934. Under the rule, any person who engages in securities trading activity in a way that provides significant liquidity to the market, and therefore must be legally registered to operate as a dealer. This rule has been met with strong opposition from crypto proponents who have raised concerns that the criteria for determining whether a person qualifies as a dealer are overly broad and introduce new regulatory uncertainty for project developers. Specifically, this rule creates potentially insurmountable compliance challenges for blockchain-based decentralized finance (DeFi) automated market-making programs. In general, DeFi platforms are organized to operate independently of any corporate structure of control, making it difficult, if not impossible, for many of these platforms to complete the requisite registration process.
A month after this rule was finalized, the Blockchain Association (BA) and the Crypto Freedom Alliance of Texas (CFAT) filed a lawsuit against the SEC challenging the legality of the regulation. While it is unclear how the commission will approach this lawsuit once Republicans gain control of the agency, it is likely that Trump appointees at the SEC will move to issue some form of no-action guidance for DeFi platforms at risk of being impacted by this rule. This is evidenced, in part, by the fact that both Commissioners Peirce and Uyeda cited regulatory uncertainty for crypto projects in their decisions to vote against the final rule.
Legislative Outlook in the Lame Duck and 2025
Over the last two years, the House Financial Services Committee has made significant progress on advancing legislation that would help establish a U.S. regulatory framework for digital assets. These efforts are largely represented by two bills, the Financial Innovation and Technology for the 21st Century (FIT 21) Act (H.R.4763) and the Clarity for Payment Stablecoins Act of 2023 (H.R.4766).
At a high level, the FIT 21 Act measure seeks to establish a clearer division of jurisdiction between the CFTC and the SEC with regard to oversight of the digital assets ecosystem, establishing the first framework for regulating the digital asset markets. Brownstein’s summary is available here. While this bill was able to clear the House in May in a surprisingly bipartisan vote (279-136), continued opposition from key Senate Democrats makes further progress unlikely. However, it currently represents the greatest consensus among lawmakers and market participants and will serve as the starting point for legislative efforts in the new Congress. Notably, this legislation includes a number of directed rulemakings for both the SEC and CFTC, as well as authority for the CFTC to regulate crypto spot markets, which the agency currently lacks.
House Financial Services Committee Chairman Patrick McHenry (R-NC) maintains that there is an opportunity for his stablecoin legislation to move in lame duck, but there does not appear to be a clear path to it becoming law in the current Congress. Stablecoin legislation has been the subject of lengthy negotiations between Chairman McHenry and Ranking Member Maxine Waters (D-CA), who publicly voiced her support for a “grand bargain” during a Financial Services Committee hearing in late September, though a compromise agreement remains elusive. These negotiations have centered around moving the stablecoin bill in tandem with the Secure And Fair Enforcement Regulation Banking Act (SAFER) Banking Act (S.2860), a longstanding priority for Democrats, and attaching both bills to a must-pass vehicle, such as the annual National Defense Authorization Act. However, outgoing Senate Banking Committee Chair Sherrod Brown (D-OH) has shown little interest in engaging in these negotiations and it does not appear likely that efforts to achieve this grand bargain will be successful before year-end.
