Forward the Original Title: Potential Stablecoin & Crypto Policy Changes in the Year Ahead

As a builder in the space since 2017, it is an understatement to say that we have gone through several cycles of sentiment! I often say that one of the challenges of running a crypto and stablecoin business is managing your emotional bounds to build a long term, generationally defining business. With this backdrop, the goal of this blog is to focus on the tangible potential policy changes for stablecoins and crypto in the year ahead versus the short form narratives online.

I take an expansive view of potential upcoming policy changes as Zero Hash focuses on cryptography as a technology versus an asset class, which extends to a wide range of applications. For example, we power tokenization payment rails for BUIDL (through Securitize) and Franklin Templeton; trading products for tastytrade and Interactive Brokers; payment products for Stripe and Shift4; account funding for Kalshi; and, cross border remittances for Felix Pago.

Regulation by enforcement certainly has attracted a lot of attention, but I would argue that there has been a more complex dynamic, to also include (terms that I have coined):

• Regulation by Implication: public statements and private communications that make clear that certain activities would incur substantial scrutiny, which would trigger a burden so great, it effectively dissuaded certain activity that is not prohibited by law.
• Regulation by Attrition: includes expansive voluntary requests that incur substantial cost, resources and time, fundamentally altering the cost- benefit analysis of operations.

0. WHAT MARKET SENTIMENT IS TELLING US

Markets tell the story of change, and the days after an election are no different. On Election Day, November 5th, Bitcoin surged from $68,299 at midnight to $74,467 by day’s end — a 9% jump. By November 13th, Bitcoin climbed to $93,434 — a 36.8% gain since Election Day. As of writing (November 21st), BTC is teetering at just under $100,000. Another interesting data point is that following the election, the top five finance apps on the iOS store — Coinbase, Robinhood, Cash App, PayPal, and Crypto.com — all offer crypto and stablecoin products.

1. LEADERSHIP OF THE REGULATORY AGENCIES

There are questions about the extent of the President’s powers to replace regulatory agencies heads.

Securities and Exchange Commission: it is widely accepted that the President has the authority to remove an SEC Commissioner “for cause”, but it is far less clear whether they can remove a Commissioner for other reasons. Many legal experts do believe however that the President can remove a person as Chair of the Commission, while leaving them to serve as a rank and file Commissioner. This is because the President appears to have sole discretion to name the Chair (subject to Senate confirmation).

Gensler announced his resignation today, November 21st. Had he not, it seems likely that his Chair responsibilities would have been removed and one of the two Republican-chosen Commissioners, Hester Peirce or Mark Uyeda becoming Acting Chair. Given the resignation, both will likely be considered, perhaps with other names, as permanent Chair.

New SEC Chairs often have different enforcement priorities than their predecessors. New Chairs typically appoint new senior staff to lead divisions and have the authority to reallocate staff and financial resources into different areas of focus. Further, changes in leadership can lead to differing interpretations of laws and regulations, the issuance of no-action letters, and the imposition of civil monetary penalties.

Most recently, the change from Chair Jay Clayton to Chair Gary Gensler demonstrated how different leaders bring different approaches to enforcement and rulemaking. Specifically, Clayton focused more on improved disclosures, investor protection and facilitating investor protection, while Gensler’s actions were more expansive, including enforcement in the areas of digital assets, implementing new securities rules such as the Consolidated Audit Trail, and imposing significant new regulatory disclosures such as for publicly-traded companies climate emissions.

Commodity Futures Trading Commission: Similar to the SEC, it is unclear whether the Chair of the CFTC can be removed other than for cause. However, one of the existing CFTC Commissioners, Summer Messinger or Caroline Pham could be named Acting Chair.

Federal Reserve: Michael Barr’s term as Vice Chair of the Federal Reserve expires in July 2026 and, at that time, he is expected to be replaced by a person more open to supervised banks’ engagement in crypto activities. There is a swell of interest given the expected winddown of “Operation Chokepoint 2.0”. Fed Chair Powell, whose term as Chair expires in May 2026, recently remarked that the President does not have the authority to remove him or Vice Chair Barr. However, as with the SEC Chair, it may be permissible to remove one or the other from their leadership position.

Other Bank Regulators: Similar to the Fed and SEC, it is unclear whether the head of the Federal Deposit Insurance Corporation (FDIC) can be removed by the President for reasons other than for cause. However, because of the reported high-profile scandals at the FDIC, it is possible that the President could decide to remove the Chair of that agency. In 2020, the Supreme Court ruled that the head of the Consumer Financial Protection Bureau can be fired by the President. By statute the CFPB Director also sits on the Board of the FDIC, creating an additional opening on the Board. The Office of the Comptroller of the Currency does not currently have a Senate-confirmed Comptroller, so the Acting Comptroller can be removed and replaced.

2. KEY POLICY ISSUES FOR STABLECOINS AND CRYPTO

2.1 Legislation

The 118th Congress (2023–2024) was the first Congress to devote significant time and effort to digital asset regulation. While none of the legislation is likely to be reintroduced or adopted without changes, several efforts may serve as the basis for Congressional action in 2025–2026.

“Market Structure” Legislation: House Financial Services Committee Chair Patrick McHenry (R-NC) and House Agriculture Chair Glenn Thompson (R-PA) introduced the Financial Technology and Innovation Act for the 21st Century Act (HR 4763) that passed the House. Although the specifics received mixed responses, the goal of the legislation was to provide for clear jurisdiction of the Securities and Exchange Commission. Legislation with a similar intent, the Responsible Financial Innovation Act (S 2281) was introduced by Senate Banking Committee member Cynthia Lummis (R-WY) and Senate Agriculture Member Kirsten Gillibrand (D-NY).

Stablecoin Legislation: Chair McHenry also moved the Clarity for Payment Stablecoins Act (HR 4766) through Committee. The bill provided for a federal and state framework for regulation of stablecoin issuers as well as providing requirements for stablecoin reserves. The bill applies the Bank Secrecy Act and similar provisions to stablecoin payment operators. Similar legislation has been proposed by Senators Gillibrand and Lummis and another by Senator Bill Hagerty (R-TN).

2.2 Staff Accounting Bulletin 121

On March 21, 2022, the SEC issued Staff Accounting Bulletin 121 that de facto required publicly traded, and other SEC-registered, companies to recognize digital assets held in custody on their balance sheet. Due to capital rules, deposit insurance assessments, and other regulatory requirements, the bulletin has the practical effect of limiting U.S. banks from offering meaningful digital assets custody services.

The House of Representatives and Senate both passed a Congressional Review Act resolution in the Summer of 2024 (HJ Res 109) to repeal SAB 121 with bipartisan support, but it was vetoed by President Biden. Additionally, several other bipartisan pieces of legislation would have also repealed SAB 121. This includes FIT 21 Act (section 411), the Flood-Torres Uniform Treatment of Custodial Assets Act (HR 5741), and S. 4155, the Lummis-Gillibrand Payment Stablecoin Act (Section 14). Given these actions, it’s clear there is a strong bipartisan consensus in favor of the Bulletin’s repeal.

In 2025, the likely outcome is that a new SEC Chair will repeal the Bulletin. Because SAB-121 is not a “rule” but rather staff guidance, it does not have to go through a traditional rulemaking and can be accomplished with a “stroke of a pen”. Should the incoming Chair take no action, legislation to solve this problem seems feasible in 2025.

2.3 Federal Reserve

On August 16, 2022, the Board of Governors of the Federal Reserve System issued SR 22–6/CA 22–6 addressing Crypto-Asset Related Activities by Federal Reserve Supervised Organizations. The Supervisory and Regulatory Letter/Consumer Affairs Letter provides guidelines for Federal Reserve Bank supervisors as part of their novel activities’ supervision of certain banks. The letter requires covered banks to provide written notification of numerous risk management areas the bank is addressing as part of a digital asset offering or activity. These areas include technology and operations, anti-money laundering, consumer protection, compliance and financial stability.

While not necessarily problematic in theory, these requirements and the perspective of bank regulators who often have skepticism of digital assets as inappropriately risky, has effectively limited covered banks (including bank holding companies like Schwab) an ability to engage in these activities. Given today’s comments by Rick Wurster, Schwab’s President, signaling an interest in spot crypto, there appears to be clear shifts here given Schwab’s brokerage business is subject to the same constraints as a bank given it is a bank holding company, under the supervision of the Fed.

3. POTENTIAL RULINGS FROM THE COURTS

There remain several enforcement actions initiated by the SEC making their way through the federal court system. While awaiting clear rulemaking and broader federal crypto and stablecoin legislation, the industry will continue to monitor these cases for guidance on the treatment of certain activities, including:

3.1 The Howey Test: Crypto Asset Issuances and Secondary Trading Markets

While the SEC has consistently made clear that Bitcoin and ETH are not securities under the agency’s oversight, the SEC and courts have applied the “Howey Test” to a host of other crypto asset offerings and sales since 2017. The Howey Test is derived from an 80-year old Supreme Court case that defines certain transactions as “investment contracts” (aka “securities”).

In December of 2020, the SEC launched action against Ripple for offering its XRP token arguing that RIpple’s sales of XRP were sales of “securities”. In July 2023, the Southern District of New York found that “tokens” themselves are not securities. In examining the facts and circumstances of a crypto transaction, the court also ruled that secondary sales did not constitute “securities” under the Howey Test. However, a fine in excess of $100 million was assessed in 2024 for other direct sales of XRP.

Under Gary Gensler’s leadership, the SEC has brought increasingly aggressive enforcement actions posturing broad applications of the Howey Test to crypto assets and the platforms that support them. This includes actions against Coinbase and Binance, both platforms that offer a secondary market for crypto assets, claiming that each was acting as an unregistered broker-dealer. The courts in each of these cases seem reluctant to the Ripple court’s exclusion of secondary markets from the Howey Test definition of securities, and the resolution of each case could further the industries understanding of permissible activities, at least under a judicial interpretation of the issue.

3.2 Staking Services

Multiple courts are examining the treatment of staking services in the context of securities regulations. While some crypto services providers have settled on this issue with the SEC, Coinbase continues its fight with the SEC. As noted above, industry experts are closely watching the SEC’s case against Coinbase for a final judicial interpretation of this issue.

3.3 DeFi and Web3 Applications

On June 28, 2024, the SEC filed one of its most recent enforcement actions against Consensys claiming unregistered offerings and secondary sales of securities through its MetaMask platform. Notably, MetaMask is a technology layer that allows individuals to directly custody and manage their crypto assets in a self-hosted wallet. These wallets can interact with various protocols that allow for trading, swapping, and staking. This case is once to watch for those seeking further clarity on self-hosted wallets services and the interaction between those wallets and DeFi and Web3 applications.

4. LOOKING FORWARD

As the U.S. takes steps to redefine its approach to digital asset regulation, the impact will be global. Other countries are closely watching the U.S. stance, and a measured, innovation-friendly framework could encourage a more standardized, cohesive global approach to cryptographic technology.

My view is that we need to view cryptography as a technology. Rather than seeking to regulate a technology, we should apply existing frameworks to its applications which are far ranging and include tokenization, NFTs and stablecoins. A point I often make to regulators is that spot gold contracts are not regulated (note that this does not mean it is a “wild west” as the CFTC and DOJ have oversight over things like market manipulation). It appears inconsistent to argue that gold that is tokenized should be regulated over that which is traded electronically. Akin to when markets moved to electronified trading vs. paper, we did not seek to regulate the act of electronic trading. Of course, new technologies bring new opportunities as well as nuances, which need to be handled, but I feel this lens of technology as the fundamental starting point is critical.

APPENDIX: SUMMARY ANALYSIS

Disclaimer:

1. This article is reprinted from [Edward Woodford]. Forward the Original Title: Potential Stablecoin & Crypto Policy Changes in the Year Ahead. All copyrights belong to the original author [Edward Woodford]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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