The SEC’s crypto war has ended overnight. What happens next?

Just over a month into President Donald Trump’s new term, we are already witnessing a shift in how federal regulators approach the cryptocurrency industry. The Securities and Exchange Commission (SEC) has dropped its high-profile lawsuit against Coinbase and is loosening its grip on other major crypto firms, including Consensys, Robinhood, and Gemini. 

For years, the SEC—led by former Chair Gary Gensler—aggressively opposed digital assets, claiming that most counted as unregistered securities. Innovators found themselves navigating a regulatory landscape riddled with ambiguity and politics. Now, federal enforcement seems to be stepping back.

Although this turn of events may look like a clear win for the industry, the deeper issue remains: If regulatory policy can swing in a new direction with each new administration, businesses and investors are left with perpetual uncertainty. America’s stance on crypto should not hinge on the whims of the White House. Instead, lawmakers must establish a clear and stable framework so businesses can plan with confidence and consumers receive consistent protection.

Under Gensler’s leadership, the SEC claimed that many cryptocurrencies qualified as “investment contracts” under the 1946 Howey test. According to this test, an asset qualifies as a security if it meets all of the following conditions:

1. Investment of money – A person or entity invests capital in the asset.
2. Common enterprise – The investment is tied to a shared business or project where multiple investors pool their funds.
3. Expectation of profits – The investor anticipates financial gains from the investment.
4. Efforts of others – The expected profits primarily rely on a third party’s managerial or entrepreneurial efforts.

Coinbase, like much of the crypto industry, argued that most digital assets do not meet these criteria. Coinbase contended that buying a crypto token is not necessarily an investment in a common enterprise, nor is profit always dependent on the managerial efforts of a third party. The SEC, however, had historically interpreted the test broadly, claiming that many tokens met these conditions and should, therefore, be regulated as securities. Despite ongoing attempts by crypto firms to align with often ambiguous regulations, Gensler’s SEC continued to press cases rapidly, ultimately pushing some innovations offshore. 

Worse, this aggressive approach failed to accomplish Gensler’s goals and prevent some major crypto collapses. TerraUSD, Celsius, Three Arrows Capital, and FTX all imploded anyway during Gensler’s watch, costing investors billions and demonstrating the limits of a heavy-handed yet ad hoc regime.

With the SEC stepping back from its aggressive enforcement approach and Paul Atkins nominated to lead the agency, cryptocurrency firms can feel more confident that innovation will be welcomed, at least temporarily. An innovation-friendly environment doesn’t require loopholes or favoritism; it simply needs well-defined rules that don’t lurch from one compliance philosophy to another.

This is why Congress should act. Multiple proposals are in the works, aimed at clarifying the roles of the SEC and Commodity Futures Trading Commission (CFTC) and providing a clearer regulatory framework for digital assets:

• The Financial Innovation and Technology for the 21st Century Act: This bill specifies how cryptocurrencies can gain recognized status under SEC oversight. It also clarifies the SEC’s responsibilities in governing digital assets. The bill was approved by the House of Representatives and received in the Senate in September 2024.
• The Digital Asset Market Structure and Investor Protection Act: This bill requires that digital assets be electronically created, maintain a secure transaction history, and be transferable through decentralized systems. Additionally, it includes measures to protect investors and promote market transparency. The bill remains in the early stages of the legislative process, undergoing review by multiple House committees.
• The Responsible Financial Innovation Act: This bill grants the SEC jurisdiction over digital assets tied to financial interests in a business, while the CFTC oversees other digital assets. The bill also allows digital asset exchanges to register with the CFTC and permits depository institutions to issue payment stablecoins, requiring 100% reserve backing and one-to-one redemption. Additionally, it introduces tax exemptions for small digital asset transactions and includes consumer protection measures, reports, and studies to ensure transparency and oversight.
• The Bridging Regulation and Innovation for Digital Global and Electronic (BRIDGE) Digital Assets Act: This bill establishes the Joint Advisory Committee on Digital Assets, co-led by the CFTC and SEC, to offer guidance on digital asset regulations and policies. Its goal is to align regulatory approaches between the two agencies. The committee will comprise at least 20 non-federal members, including digital asset issuers, registered entities, and industry participants. It would be required to convene at least twice a year to present its findings to both regulatory bodies.

Two high-profile stablecoin bills could establish firm guidelines for issuing digital dollars pegged to fiat currencies:

• The Clarity for Payment Stablecoins Act: This bill seeks to establish clear reporting requirements for issuers of fiat-backed stablecoins to enhance transparency and accountability. It mandates that issuers hold all reserves in specific assets, such as U.S. government securities, fully collateralized security repurchase agreements, U.S. dollars, or other non-digital currencies. Issuers must publish a monthly report on their website detailing reserve holdings, with these reports subject to third-party audits. In May 2024, the Committee on Financial Services amended the bill, and it is now on the calendar awaiting further consideration.
• The Lummis-Gillibrand Payment Stablecoins Act: This bill seeks to establish a regulatory framework for payment stablecoins, requiring them to be backed by one-to-one reserves to ensure stability. It explicitly prohibits unbacked, algorithmic stablecoins and includes provisions to safeguard consumers by mandating that issuers maintain sufficient reserves. Currently, the bill remains in the early stages of the legislative process.

Under President Joe Biden, banks were discouraged from serving crypto customers as a part of an enforcement scheme called “Operation Choke Point 2.0” by opponents, a sequel to a similar effort by President Barack Obama’s Department of Justice that critics alleged had targeted politically disfavored industries for debanking. This climate forced many legitimate crypto startups to seek banking services overseas. Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corporation (FDIC) officials now suggest that banks should be free to support crypto businesses that manage their risks responsibly, suggesting that enforcement will target individual bad actors rather than attacking a class of businesses. With the proper legislative framework, banks can confidently open their doors to innovative companies, spurring investment and job creation instead of pushing opportunity to friendlier jurisdictions like Switzerland, Singapore, or Hong Kong.

Although critics of a more open regulatory environment voice concerns about fraud and market manipulation, these issues call for clear, limited rules rather than vague threats against entire industries. Blockchain-based finance can significantly reduce transaction fees, enable cheaper cross-border payments, and bring financial services to communities that had previously lacked access to conventional banking. 

A transparent, consistent legal framework would provide stability and unleash the benefits of blockchain technology—reducing costs, updating outdated financial systems, and expanding economic opportunity. If the U.S. wants to remain a magnet for global talent, Congress must ensure that crypto isn’t subject to the impulses of individual regulators but governed by fair, openly debated laws that stand the test of time.

The post The SEC’s crypto war has ended overnight. What happens next? appeared first on Reason Foundation.

Source: https://reason.org/commentary/the-secs-crypto-war-has-ended-overnight-what-happens-next/