Source: tradingview, cnbc
Written by: Liz Napolitano
On August 1 of this year, the new chairman of the SEC, Paul S. Atkins, launched the "Project Crypto" initiative aimed at updating securities rules and regulations to enable on-chain capabilities in the U.S. financial markets. At the time, this was seen as a significant regulatory shift that brought rapid growth to the market. However, in the following three months, there were no further disclosures about the initiative, and the visible regulatory benefits transitioned from an initial "responsive" phase to a current "slow climb." Recently, Paul S. Atkins provided further details on this initiative in a new speech.
Addressing the contentious issue of the Howey test and token classification in cryptocurrency, Atkins emphasized that the commission is considering establishing a "token classification law," which is a structured framework based on legal principles to distinguish between securities and commodities.
He stressed the importance of adhering to the "limiting principle" in laws and regulations to ensure a consistent approach to the classification of crypto assets.
Atkins praised Commissioner Hester Peirce for her efforts, particularly her work in providing a transparent and economically reasonable approach to handling crypto assets under federal securities law.
In his speech, the chairman highlighted three key themes: the importance of clear token classification, the application of the Howey test in identifying the temporality of investment contracts, and the practical impact on innovators, intermediaries, and investors in the evolving cryptocurrency space.
Regarding the common issue of distinguishing between securities and non-securities in the cryptocurrency field, Atkins pointed out that while most tokens are not inherently securities, certain tokens may be sold as part of an investment contract during a securities offering.
However, he refuted the notion that every token involved in an investment contract would permanently retain its securities status, emphasizing the importance of contextual analysis and recognizing the dynamic nature of investment contracts.
On the other hand, Atkins also highlighted the challenges faced by developers, exchanges, custodians, and investors in exploring the crypto ecosystem, where tokens serve various functions beyond traditional securities.
He criticized the previous administration's approach of categorizing all tokens as securities, emphasizing the need for a more nuanced and pragmatic regulatory approach to prevent stifling innovation and pushing it overseas.
Atkins reiterated that in conjunction with ongoing legislative efforts, the SEC's goal is to complement rather than replace existing cryptocurrency legislative initiatives. He emphasized that the SEC is committed to vigorously combating fraud and establishing clearer regulatory guidelines to ensure the safety of U.S. investors.
Finally, Atkins underscored the importance of forward-looking regulatory practices, opposing a stagnant approach driven by fear of change. He reaffirmed the SEC's commitment to delineating clear boundaries and providing transparent guidance.
The statement concluded: This is the significance of Project Crypto and the goal that the SEC should pursue. It also pledged, "We will not let fear of the future trap us in the past; we will not forget that behind every token-related debate are real people—entrepreneurs striving to build solutions, workers investing for the future, and Americans working to share the prosperity of this nation. The role of the SEC is to serve these three groups."
In addition to the SEC chairman's positive commitments, there have also been new initiatives in the U.S. regarding more systematic regulatory legislation.
On November 11, the Senate Agriculture Committee released its highly anticipated draft of the Digital Asset Market Structure Act, which is a key step toward accelerating the adoption of cryptocurrencies by institutions and retail users.
This bipartisan discussion draft, jointly announced by Agriculture Committee Chairman John Boozman (R-AR) and Senator Cory Booker (D-NJ) of New Jersey, lays the groundwork for establishing a regulatory framework for the cryptocurrency industry in the U.S. It provides guidelines for institutions wishing to engage in digital asset business (from Bitcoin and Ethereum to tokenized financial instruments).
"This is the most important roadmap for how institutions can integrate digital assets into their businesses," said Cody Carbone, CEO of the Digital Chamber of Commerce. "It's like a best-practice step-by-step guide detailing the compliance rules that need to be followed to conduct cryptocurrency business." The draft primarily highlights five key points.
First, it grants a favorable regulatory status to certain cryptocurrencies. The draft classifies the largest digital assets (such as Bitcoin and Ethereum) as "digital commodities," placing them under the jurisdiction of the Commodity Futures Trading Commission (CFTC). Analysts at Bitwise, a cryptocurrency-focused asset management company, noted that this provision removes a major barrier for institutional trustees adopting digital assets.
Leon stated, "Compliance and risk departments can finally make decisions based on federal regulations. This will change the direction of internal discussions and provide the legal certainty needed for formal strategic allocation of assets." It will also create a "clearly polarized market" consisting of regulated tokens and unregulated tokens, with the former expected to see "a significant influx of institutional capital, ample liquidity, and a robust derivatives ecosystem."
Second, it requires cryptocurrency companies to segregate funds and manage conflicts of interest. The draft mandates that cryptocurrency companies "establish governance, personnel, and financial resource separation between affiliated entities performing different regulated functions." Leon from Bitwise interpreted this provision as a challenge to the common "integrated" business model of cryptocurrency exchanges, where exchanges, brokers, custodians, and proprietary trading platforms are all consolidated into one entity.
In other words, digital asset companies may need to manage their various businesses separately, similar to traditional financial companies, achieving separation and checks and balances. This change will become "the cornerstone of institutional adoption."
Third, it grants the CFTC greater authority to regulate digital assets. The draft empowers the CFTC to collaborate with the SEC to issue joint rules regarding cryptocurrency-related matters.
Carbone stated, "The CFTC has been granted greater power or authority to oversee the industry." Previously, the SEC had been the primary regulatory body for digital assets for years, having defeated the CFTC to gain regulatory authority over the industry.
Fourth, it allows the CFTC to collect fees. The draft requires regulated entities to pay fees to the CFTC. These fees will be used for registering digital commodity exchanges, brokers, and dealers, as well as for overseeing and conducting educational outreach for regulated entities.
Fifth, it establishes token listing standards. The draft requires cryptocurrency exchanges to only allow trading of "not easily manipulable" digital commodities. This provision aims to reduce the prevalence of "rug pulls" and other scams that are still common in certain areas of the cryptocurrency industry, with the goal of establishing standards and enhancing market confidence.
Of course, as it stands, the discussion draft is far from final, but it does provide important insights into the direction of U.S. efforts to pass favorable regulatory legislation for cryptocurrencies.
"This is not a final draft, and it is not complete, but it reflects well on the direction of Congress and what the final rules may be," Carbone said. He added that the committee may gather feedback on the draft in the coming weeks, which means "it is almost impossible to complete the final version of this part of the bill by the end of the year."
However, this period will allow lawmakers time to provide more specific guidance on several issues that are not finalized or are only bracketed in the discussion draft. These issues include anti-money laundering rules and specific provisions for decentralized finance participants.
According to Carbone, this discussion draft is just part of a broader legislative effort aimed at comprehensive reform of cryptocurrency industry regulation. Ultimately, this draft will be merged with the Senate Banking Committee's draft on digital asset market structure to form a comprehensive bill.
Craig Salm, Chief Legal Officer of Grayscale Investments, interpreted that although lawmakers are far from completing this process, cryptocurrency companies are seeking other ways to collaborate with regulators and other authorities to effectively advance their industry development. Salm stated, "Despite the lack of comprehensive legislation, we are still seeing significant progress in regulation." He also noted that the SEC, IRS, and Treasury Department have recently issued guidance on cryptocurrency exchange-traded products. "Even so, thoughtful legislation is crucial for solidifying the foundation of the U.S. digital asset industry and unlocking greater value for investors and consumers."
Overall, although the stimulus from regulatory benefits is gradually declining with the industry's downturn, more profound rule-making is still on the way. Whether through the SEC's plans or the bipartisan structural bill, they both indicate that the cryptocurrency market is maturing, and this maturity will inevitably mean a faster return of the cryptocurrency market to the embrace of traditional systems. However, whether this change is good or bad remains to be seen as time will provide the market with answers.
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