President Biden’s financial regulators, led by SEC Chairman Gary Gensler, have worked hard over the last four years to isolate and slow the uptake and integration of digital assets into the U.S. financial ecosystem. The results have been predictably bad for America, as growth and innovation in digital asset technologies and markets has already moved offshore.
Former President Trump has embraced the digital asset industry; in a July 2024 speech, he promised to transform the U.S. into a “crypto capital” and stated that “the rules will be written by people who love your industry, not hate your industry.”
Relief cannot come soon enough. As a result of the Biden Administration’s hostile approach, the U.S. has quickly fallen behind on digital asset innovation. Simply put, we must stop ceding ground to Europe and Asia. This means departing from Chairman Gensler’s failed “regulation by enforcement” approach and finally adopting reasonable, tailored rules that will allow digital asset innovation and consumer choice to flourish right here in America. Several changes must be made during the next administration – Republican or Democrat – to accomplish this outcome.
First, the SEC should take steps to provide a realistic path to registration for digital asset market participants, including digital asset sponsors and trading platforms, which can be done through appropriate safe harbors, exemptive and “no action” relief, and formal rulemaking. The SEC’s current disclosure and registration regime requires information that is often inapplicable to or inappropriate for digital assets. Similarly, trading platforms cannot register under the SEC’s existing broker-dealer, exchange, and clearing rules. While the SEC is working on providing this path to registration, it should concurrently review all SEC litigation alleging that digital asset platforms are acting as unregistered exchanges, broker-dealers, or clearing firms.
In addition, instead of simply referring to the Supreme Court’s 1946 decision in SEC v. W.J. Howey Co., the SEC should work with the CFTC to provide guidance as to which types of assets they would view as securities and which types of assets they would view as commodities. Regulators should also prioritize working with Congress on a comprehensive regulatory framework for stablecoins.
Along with providing a path to registration, the SEC staff should withdraw its misguided Staff Accounting Bulletin (SAB) 121, which requires entities undertaking certain digital asset custodial activities to record these assets on their balance sheets – a stark departure from how financial institutions typically treat custodied assets. In May 2024, the House of Representatives and the Senate each passed a resolution on a bipartisan basis providing for congressional disapproval of SAB 121, but this resolution was subsequently vetoed by President Biden. Also, the “no action” relief provided by Gensler’s SEC as to the custody of digital assets by broker-dealers has in practice proven of little value. New SEC rules need to be passed making it feasible for banks and broker-dealers to custody digital assets, regardless of whether they are packaged as securities.
Finally, the SEC should repropose and fix its controversial dealer rules. The rules were adopted in February 2024 and contain an overly broad definition of “dealer,” which would sweep in participants in decentralized finance activities. Trade associations challenging the rules in federal court have argued that they “threaten to bulldoze … much of the burgeoning digital asset industry.”
These regulatory reforms would represent a sea change from the digital asset policies of the current Biden administration, and they can and should be implemented without sacrificing important consumer and investor protections.
