Implications of the SEC Shake-up for Crypto Investors

With the SEC on the back foot, what is next for crypto regulation?

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The SEC has been, for years, waging an aggressive legal and regulatory campaign against players in the cryptoasset industry, which has won it few friends and recently led to several setbacks from a legalistic perspective. Following the collapse of FTX, including the crimes that Bankman-Fried has been convicted of, general sentiment turned against the cryptoasset sector in U.S. policy circles, seemingly vindicating the efforts made by Chairperson Gensler to regulate the sector via edict and lawsuit. More recently, however, the legal tide has seemed to turn as Ripple achieved a partial victory against the Commission in July 2023, enforcement efforts against Coinbase continue to grind ahead without clear wins, and Congressional hearings have targeted the SEC for overreach.

Dropping the lawsuit seeking to prove Ethereum
Ethereum
is a security is just the latest in a series of blows that have stalled the steamroller Chairperson Gensler has deployed to regulate crypto.

On top of conversation, however, this reversal of sentiment also has teeth. April of 2024 saw the resignation of two (2) lawyers for the SEC after a federal judge sanctioned the Commission for a gross abuse of power. Connecting directly to the efforts to regulate the cryptoasset space, these abuses were linked to enforcement efforts to secure a temporary restraining order against Debt Box, a Utah-based crypto organization. June 2024 saw further reductions in force for the SEC’s cryptoasset enforcement division, with David Hirsch – the chief of the cryptoasset unit in the enforcement division of the SEC – resigning. During this tenure the SEC focused especially on cracking down on bad actors in the DeFi space, with the former division head adding no commentary as to potential future roles.

Let’s take a look at a few items investors should keep in mind as the regulatory landscape continues to evolve.

The SEC Is Losing Prominence

After years of criticism and pushback from crypto-native organizations and advocates it finally seems like the SEC has lost some steam with its efforts to force itself as the regulator-by-default for cryptoassets. Setting aside the reality that tokenized instruments and blockchain technology operate at a fundamentally different level than many fiat and TradFi instruments, it was seen by many in the sector that the approach taken the Commission was inappropriate for the dynamic crypto industry. After multiple legal setbacks, punctuated by the resignation of the top crypto enforcer, it looks like this message is finally making progress.

While some might cheer these developments, and those celebrations are not without cause, those same investors should be aware of which regulators are seeking to assume leadership from a regulatory perspective. For example, the IRS has dominated the tax and compliance conversation for investors due to an unwavering and unmodified stance as to how cryptoassets should be taxed. The CFTC, put forward via several proposed pieces of legislation, is not without funding and staffing issues as well.

Regardless of what the regulatory looks like going forward investors will need to reset expectations and prepare for more debates.

Crypto Classification Is Coming

With the SEC losing prominence in the crypto regulation conversation, the reality is that crypto will be classified and regulated by some oversight agency within the near time. This is realistically not going to occur until after the Presidential election in November 2024, but the wheels toward greater scrutiny are already in motion. Both major political parties have pivoted significantly toward – if not positive positions on crypto – positions and stances that seem open to discussion around substantive issues.

Accounting standard setters have an important role to play in these future conversations, as a critical aspect of the ambiguity in crypto pertain to the difficulty with which firms can report and disclose crypto holdings crypto transactions on financial statements. While the FASB took an initial step in December 2023 with allowing firms to report cryptoasset holdings on a mark-to-market basis, that is just the first step toward more comprehensive reporting policies.

Volatility Will Return

For all of the certainty that improved regulation and reporting rules will bring, it is also worth pointing out that the decision-making process – including the uncertainty that this will bring – can reintroduce volatility to the wider marketplace. For example, with the recent ether case being dropped some market analysts might have expected a dramatic increase in price, but instead of that there was a muted price response. Investors, rather, seem to be awaiting further decisions and clarity around the ETF decision; cryptoassets are maturing and therefore becoming influenced by many of the same nuances of TradFi assets.

An important item that should be on the mind of investors and advocates should be that as the current – yet unsatisfactory – environment that had been created by the actions of the SEC changes, the uncertainty might generate short-term discomfort and volatility for investors. These advocates and investors need to recognize that as the regulatory outlook changes, short-term volatility might be the price paid for longer-term clarity.

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