If you saw the returns of my crypto portfolio this year, you would override my predictions for the direction of the cryptocurrency market. So I will stick with what I know and share some regulatory predictions for the crypto industry.
Few legislative changes
A few minor victories will incorporate small legislative fixes into “must-have” bills like defense authorization or omnibus spending bills. The best candidate would be de minimis exemption for small crypto transactions to exempt users from capital gains tax every time they buy a coffee with crypto. Protection for non-custodial crypto providers in Republican Representative Tom Emmer’s bill could also be incorporated. Outside, a bipartisan stablecoin bill may be possible, though Senate Democrats are still on the rise. But don’t expect major bills — such as Lummis-Gillibrand or Boozman-Stabenow — to pass in the next Congress.
Crypto advocates in Washington have made a plot progress this year. No one could have predicted in 2018 or even 2020 that two US senators – Democratic Senator Kirsten Gillibrand and Republican Senator Cynthia Lummis – would show up at several crypto conferences in 2022 touting a bill they drafted to clarify the regulations.
Bills like Lummis-Gillibrand and Boozman-Stabenow are good conversation starters, but moderate expectations are warranted because neither bill will pass the next Congress. Consider the slim history of recent comprehensive financial services legislation in the United States. Since the Dodd-Frank Act of 2010 — a bill that included ideas from Democratic lawmakers that was launched as early as the 1990s — no major financial services legislation has passed Congress.
Crypto advocates are expected to continue their work, but assume hardly any legislation will pass through Overton’s thin window between Democratic Ohio Sen. Sherrod Brown, who flirts with banning crypto, and the new House. Majority Whip Emmer, who articulates the case for decentralized finance (DeFi) like a true crypto native.
The Securities and Exchange Commission could win some litigation
Although I remain hopeful that Ripple will ultimately win its lawsuit against the Securities and Exchange Commission, the odds are stacked against it in the district court. The precedent of the test the SEC uses against Ripple, the Howey Test for Investment Contracts, is flexible. Historically, the SEC has never brought cases under the Howey test against investment opportunities it actually wanted to register, but instead used it as a stick against genuine fraud – and appellate judges have therefore gave the SEC the benefit of the doubt.
If Ripple goes all the way to the Supreme Court, and if the justices are as eager in their case to take away administrative agency discretion as they were in a recent Privacy Agency defeat. environment under the ‘Major Issues Doctrine’, Ripple has a shot at changing the game and ultimately winning its epic fight against the SEC.
2023 is the year crypto users wake up to the need for privacy
A Cambrian explosion is coming in crypto privacy as government surveillance efforts gain momentum.
Crypto privacy in the United States is under sustained assault. We may have dodged the bullet of Know Your Customer (KYC) laws applied to private wallets for now, but we still face massive privacy threats. For example, the Treasury Department this year sanctioned the only functional tool on Ethereum for full privacy – Tornado Cash.
CoinJoin and Samourai Wallet do a good job of hiding transaction history for sophisticated Bitcoin (BTC) user. Major crypto coins like Zcash (ZEC) and Monero (XMR) offer different approaches to the privacy/convenience trade-off today. (Zcash offers top privacy in asset and transaction protection and works on historical usability challenges, while Monero is more vulnerable to statistical tracking but has achieved wider adoption.)
Privacy is nevertheless still treated as a niche idea in crypto. Millions of users of Bitcoin, Ethereum and other chains blithely ignore possible surveillance on their transactions.
Those who sold the top in 2021 but didn’t go through the tedious process of clearing capital gains owed will soon learn of the thousands of new Internal Revenue Service officers trained in the use of simple block explorers and more sophisticated chain analysis tools.
Between the United States and the European Union, both can lose
The European Union’s approach to new token launches appears to be more reasonable than the United States’, with a light disclosure approach based on a white paper. Yet, its aggressive approach to monitoring private wallets threatens user privacy as exchanges are constrained to KYC personal wallets.
The US has a chance to compete with Europe on crypto development if it can better streamline the rules of centralized crypto entities – while leaving real DeFi alone – that are workable and ignore voices such as the Democratic Senator Elizabeth Warren, who would use KYC rules to effectively destroy crypto.
It’s too early to predict which direction this will go, but I can predict it’s going to be an exciting year for crypto regulation!
JW Verret is an associate professor at the Antonin Scalia Law School at George Mason University. He is a crypto-forensic CPA and also practices securities law at Lawrence Law LLC. He is a member of the advisory board of the Financial Accounting Standards Board, a member of the board of directors of the Zcash Foundation and a former member of the SEC’s Investor Advisory Committee. He also leads the Crypto Freedom Lab, a think tank fighting for policy change to preserve the freedom and privacy of crypto developers and users.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.