The Maturation of Crypto Is Still Inhibited by Regulatory Uncertainty

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Crypto and digital assets have roared back into the spotlight this year, fueled by the recent approval of bitcoin and ether ETFs. Some of the largest financial institutions have made significant investments in crypto, and the digital assets audience now ranges  from high-profile investors to senior financial services executives, legislators, and crypto philosophers.

As James Wester, Director of Cryptocurrency at Javelin Strategy & Research, noted in his recent report, Reaching Consensus: The Consensus 2024 Conference, the prevailing sentiment among the crypto community is that digital assets have matured.

However, in his takeaways from CoinDesk’s annual Consensus conference, Wester also noted that there is still a sense of unease within the community. That pervading uncertainty is driven by the lack of a clear regulatory framework around crypto, which has fueled speculation about the future of the industry.

Regulatory Advances

Prior to the May conference, which has long been considered one of the most important gatherings of the crypto community, U.S. legislators and regulators advanced several key initiatives regarding crypto. Congress passed a measure to reverse SAB 121, an SEC regulation that prevented financial institutions from holding cryptocurrency. However, the regulation’s reversal was subsequently vetoed.

The House then passed the pro-crypto Financial Innovation and Technology for the 21st Century Act (FIT21). It was significant that both legislative measures had widespread support from both parties, and the general mood at the conference was that strong bipartisan support was a positive indication of more crypto-friendly legislation to come.

“The most important aspect of FIT21 is it creates a coherent framework for how existing regulatory agencies divide the digital asset and crypto world,” said Wester. “Under the bill, the framework is based on how tokens are being used rather than on hard-to-define regulatory interpretations or opinions.”

At this point, FIT21 has only passed the House of Representatives. There are significant barriers to the bill passing the Senate, and if it does pass it could be altered considerably in the process.

Crypto Law is Inevitable

Though FIT21 has hurdles to overcome, the crypto community secured a key win with the approval of spot ether exchange-traded funds. After the much-anticipated launch of bitcoin ETFs, there were some concerns that the U.S. Securities and Exchange Commission wouldn’t be quick to give ether ETFs their blessing. However, the new funds were approved and five ether ETFs have since launched.

Despite that victory, the sentiment at the Consensus conference was that crypto regulation still has a way to go. Many of the lawmakers in attendance raised ongoing concerns about crypto’s volatility. For that reason, regulators earmarked stablecoins and blockchain as the DeFi technologies with the most potential for use in conventional financial applications.

Stablecoins, which track a fiat currency like the U.S. dollar, can be a more efficient and secure payment solution, especially in cross-border applications. That’s why stablecoins have been adopted by some of the largest payment companies in the world, including PayPal.

“It’s a pretty big deal for a company like PayPal—a well-regulated, locked-down, risk-averse financial services provider—to use their own stablecoin for cross-border payments,” Wester said. “Given their reach and scale, this could be a very big deal, especially in areas where low-cost remittance alternatives don’t exist.”

There are still regulatory questions surrounding the emerging technology. At the Consensus conference, Rep. Patrick McHenry (R- NC) said that additional crypto legislation would be on the way in the next year to bring further clarity to stablecoins and the digital assets sector. According to McHenry: “Crypto policy is inevitable, and crypto law is inevitable.”

Points of Contention

A main point of contention between crypto platforms and regulators is how cryptocurrency itself is defined. The SEC has acted against Coinbase, Robinhood, and many of the other major crypto exchanges, asserting that digital tokens are securities, not commodities. According to the SEC, these exchanges have been operating as unauthorized securities brokers.

The Internal Revenue Service recently released regulations requiring crypto platforms to report their transactions in the same way brokerage firms report stock and bond transactions. The IRS instituted the rules to identify when digital assets are used to hide taxable income.

Even though the tax law could be viewed as another affirmation that crypto is a security operating more like a stock than a currency, the new guidelines could be beneficial for digital assets in the long run. A more firmly established regulatory framework is likely to make crypto more appealing to institutional and mainstream retail investors.

Betting on Crypto

Some of the biggest names in the financial industry were present at Consensus 2024, including representatives from financial institutions, payments providers, professional services companies, and banking sector vendors were there, reaffirming digital assets and crypto as an important asset class.

Still, some financial institution executives, especially from the wealth management and capital markets, acknowledged that their companies’ internal capabilities and institutional understanding of cryptocurrencies, digital assets, and stablecoins aren’t where they should be.

That mindset is beginning to change, however, as there were senior executives from Citi, JPMorgan Chase, BNY Mellon, Bank of Canada, and PayPal who gave presentations at Consensus 2024.

As Wester wrote: “The message from those financial services executives was clear: their companies are betting on crypto and blockchain.”

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