It has been a great year for cryptocurrencies in general. Some of the bigger cryptocurrencies saw a lot of increase in value which made a lot of people earn profits. Because of how well crypto has been doing, there is a lot of attention surrounding it. Seeing that the results of the 2020 general elections in the US have been verified. The president-elect Joe Biden’s administration will have to take over the mantle of regulating this industry in the US.
Over the next couple of years, US federal agencies will be at the front line in creating policy and regulation in this arena. As with all the major appointments, heads of these agencies such as the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are expected to be announced in the coming months. This will give us an idea of what’s happening and what to expect. Innovation speed in the crypto space is continually outpacing regulation adaption and adoption. This is why a flexible, values-based regulation such as the one taken by the CFTC creates less friction between all parties involved. Also, it makes that much simpler to execute and create a balance between technology and innovation.
The Clarity in Securities Law
Last year, the SEC launched the Framework for Digital Assets which is supposed to be a sort of rule and guide book into the rules and regulations of dealing with digital assets such as cryptocurrency. Although a valiant effort, this framework has left many unanswered questions and raised new and valid ones. For instance, it’s not clear how the Howey Test will be applied in a decentralized network or who an “Active Participant” is. For instance, crypto lawyers have raised concerns when it comes to the Howey Test’s “efforts of others” appliance to decentralized finance (DeFi) protocols. This particular phrase refers to an investor’s expectations of profits which is not necessarily the case with all these protocols. Some of these are still under development and others won’t make it off the line. There are also many concerns about cash flows and voting rights. This particularly pertains to governing tokens which is very important for venture capitalists (VCs).
In this space, custody is also a big issue for both retail and institutional investors. For example, it’s very unclear how the existing rules of custody currently apply to digital assets such as altcoins and DeFi protocols. The recent letter from Rep. Tom Emmer (R-Minn.) to the SEC Chairman Jay Clayton was very adamant about clarifications on the matter from FINRA and the SEC.
The DeFi Market
DeFi has had one of the most incredible years so far. With a little under $3 billion in assets under management at the beginning of 2020, the industry now boasts close to $14 billion which is no small feat. This is according to recent data in the DeFi Pulse. However, there are several red flags in several agencies regarding how funds are being raised to support this DeFi boom. The method used was similar to the ICO bomb back in 2017. There are legal concerns concerning swaps, token launches, protocol hacks, bugs in smart contracts, and the application of proxy rules. These matters, for now, aren’t highlighted in existing laws. These leave loopholes for malicious people to take advantage of the situation. The issue of governance tokens is still quite raw. It follows the logic that the SEC should review these tokens as their rights begin to mirror those in CeFi (centralized finance).
If the United States is to be at the forefront of cryptocurrency innovation, it has to develop regulations that balance US values, foreign policy interests, and demand for adoption. This way, all the players in the industry feel protected and safe which will make the industry grow that much faster and attract more players.