As 2020 comes to a close, it is a good time to review the regulatory landscape for crypto assets in the U.S. and provide suggestions to the Joe Biden administration that will be arriving in January 2021. Our advice would be to emphasize clarity, consistency and more collaboration across regulatory agencies.
The biggest impact on crypto policy in the U.S. during the next four years will come from federal agencies – and the regulators staffing them – that are responsible for overseeing our financial system. As with all administration transitions, key appointments to prominent roles in agencies such as the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are expected to be made in the upcoming months. The CFTC’s head, Heath Tarbert, last week that he is leaving early next year, for instance.
Crypto’s speed of innovation continues to outpace regulatory adoption and/or adaption. Hence, flexible, principles-based regulation, such as the approach taken by the CFTC, would create less friction at the intersection of innovation and technology. Regulators walk a tightrope between balancing the need to protect retail inventors as well as the integrity of markets while simultaneously trying to foster innovation and business growth, especially for startups.
Let’s summarize where regulation stands right now.
We have not received substantial additional clarity from the SEC following its publication of its (April 2019) which has left many unanswered questions and raised new ones. For example, we are not clear on who or what is, or is not, an “Active Participant,” and how one applies the to the decentralized protocols.
Many crypto lawyers have expressed concerns about the Howey Test prong of the “efforts of others” as applicable to decentralized finance (DeFi) protocols. This prong refers to a purchaser’s reasonable expectations of profits. Specific concerns relate to the cash flows (“dividends”) from staking and the voting rights of governance tokens, both characteristics that enhance the likelihood of turning the token into a security. The latter has made venture capitalists (VC) more reluctant to fully utilize their voting rights.