2024: The year of regulatory compromise

Author: Michael Selig, coindesk Translator: Shan Oppa, Golden Finance

Following the ongoing conflicts between crypto companies and regulators such as the SEC and CFTC in 2023, Michael Selig of Willkie Farr & Gallagher predicts thatwe will see more in 2024 Multi-regulatory conversations and developments.

As multiple crypto operators collapsed in 2022, regulators swarmed in, declaring the industry "riddled with fraud, scams, Bankruptcy and money laundering". To address these perceived shortcomings, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) teamed up to initiate more than 200 enforcement actions against crypto industry participants during 2023.

Like an autoimmune response that cannot tell the difference between good and bad, regulators prosecuted both those who skirted the law and those who tried to comply. Caught in the regulator's enforcement net include a publisher of uniquely generated JPEG images of animated cats, a decentralized autonomous organization and numerous celebrity "influencers" including Kim Kardashian, Paul Pierce and Lindsay Lohan.

From fierce battle to compromise: a new chapter in encryption regulation?

Conflicts between the encryption industry and regulatory agencies will continue to escalate in 2023, and Michael Selig predicts that there may be more dialogue and compromise at the regulatory level in 2024.

Regulators have launched an aggressive enforcement campaign, targeting nearly all industry players, accusing them of violating old regulations of questionable applicability while refusing to set clearer rules. However, by the end of the year, regulators also suffered setbacks: the SEC lost successive cases with Ripple and Grayscale, and the CFTC began to favor settlements with crypto exchanges rather than protracted litigation.

As I predicted at the end of last year, 2023 will be the year of "regulation and decentralization". As 2024 is an election year, Congress is unlikely to pass comprehensive encryption legislation, but regulators may adjust their failed "regulatory enforcement" strategies and shift to working with industry to establish a temporary regulatory framework through consultation on rulemaking and exemption licensing.

Crypto industry players and regulators have a common interest: both were hit hard by last year’s FTX crash and are eager to prevent bad actors from disrupting the entire industry again . While a legislative solution is unlikely in the short term, SEC Chairman Gary Gensler's hardline stance on cracking down on "widespread non-compliance" in the industry may be softened and other regulators will need to compromise.

Grayscale's legal challenge to the SEC's rejection of its Bitcoin ETF application won a unanimous ruling from three judges on the D.C. Circuit Court of Appeals, finding the SEC's actions "arbitrary." capricious". The U.S. Court of Appeals for the Third Circuit also asked the SEC to respond to a rulemaking petition regarding cryptoasset securities.

Fighting regulatory overreach: Not just a fight for the crypto industry

Fighting regulatory overreach The revolt is not limited to the crypto industry. Last month, in a lawsuit filed by the U.S. Chamber of Commerce against the U.S. Securities and Exchange Commission (SEC), the Fifth Circuit Court of Appeals ruled that the SEC failed to adequately consider industry input and conduct a proper cost-benefit analysis when it developed stock buyback disclosures Rules of conduct are arbitrary and capricious.

The SEC also faces a lawsuit from six industry groups alleging that the agency exceeded its statutory authority in crafting new regulations governing private equity advisers. In addition, the Fifth Circuit Court of Appeals recently stated that the U.S. Commodity Futures Trading Commission (CFTC) abused its power by providing no supporting rationale when withdrawing its exemption letter, and a CFTC-registered exchange also arbitrarily and capriciously rejected its new event contract. The platform applied for listing and took it to court.

This type of legal action challenging executive actions is likely to continue to limit and constrain the actions of regulators next year. Influenced by the Grayscale case decision, the SEC recently approved a futures-based Ethereum ETF, and according to rumors, the agency will approve a spot Bitcoin ETF as soon as January next year.

SEC’s turnaround and new opportunities for the industry

With the U.S. Court of Appeals for the Third Circuit The Securities and Exchange Commission (SEC) was asked to respond to an industry petition for rulemaking, but the SEC chose to deny the petition. However, Chairman Gary Gensler’s public comments this time are a sharp departure from his previous hardline stance that “probably only a small number” of crypto assets “are not” securities. He said: "Of course, not all crypto assets are necessarily offered and sold as securities... I look forward to working with crypto projects and intermediaries who want to comply with the law."

Although the SEC has no intention of formulating a comprehensive regulatory framework for the encryption industry, the agency will still introduce some new regulations in the coming year that will have an impact on industry participants. These include proposals to redefine an “exchange” to include a “communications protocol system” and require investment advisers to place crypto assets in the custody of a qualified custodian. If both proposals are adopted in their current form, similar administrative legal challenges are likely to follow. Many industry groups and crypto companies have complained that the SEC violated the “significant issues doctrine” by proposing the regulations without clear congressional authority. That could prompt significant concessions from the SEC, given that the rules could be delayed by legal battles or even repealed after a future change of administration.

In addition to being forced to cooperate with subpoenas, crypto industry players will have reason to expand their interactions with regulator staff next year. As institutional demand for crypto-assets continues to grow, industry players will look to offer a range of products that require cooperation with regulators.

For example, many types of "tokenization of real world assets (RWA)" products clearly fall within the SEC's regulatory purview and require SEC staff approval. Exchanges looking to offer crypto margin trading and perpetual contracts in the United States will need CFTC approval. Financial institutions subject to prudential regulation also need to obtain authorization from their regulators if they want to offer stablecoins and other crypto products.

After a long year of legal battles, we can expect a slight thaw (if only a little bit) between the crypto industry and regulators in the new year. ), which will benefit both parties.