What kind of measures the U.S., which has the world’s largest economy, will take regarding cryptocurrencies is a topic that has been followed with curiosity for years. Undoubtedly, the decisions to be made by the U.S. will play a role in forming a global standard. Therefore, it is very likely that global adaptation will develop rapidly following the U.S’s infrastructure standards.
Last month, the Infrastructure Act, which has the potential to harm cryptocurrencies, created a negative atmosphere in the market but then turned positive again with positive statements from both politicians and the leaders of FED and SEC. It would be wrong to focus on a single issue to examine the current situation in the U.S. Therefore; we will discuss the subtexts of recent FED and SEC statements, legislative proposals, lobbying activities, and policy changes in this article.
In recent years, SEC Commissioner Hester Pierce proposed a proposal to the SEC called Safe Harbor For Digital Tokens to take a positive step in regulating cryptocurrencies, but the proposal was not accepted.
Patrick McHenry, a member of the House of Representatives Financial Services Committee, announced on October 5, 2021, that the same proposal had been adapted to the Securities Act of 1933. The name of the new regulation, which is expected to be proposed legislation, has also been changed to the Clarity for Digital Tokens Act of 2021. The Blockchain Association, Coin Center, and the Association for Digital Asset Markets were lobbying organizations that expressed support for the law. The mechanisms offered by the regulation can be described as quite interesting for the traditional world, as the regulation in question recommends compliance with the “principles established by the cryptocurrency market.”
Under the regulation, which is expected to be proposed legislation, cryptocurrency developers will be permitted to sell tokens to the public without full registration with the SEC. If certain conditions and criteria are met, the law protects such cryptocurrencies from SEC investigation for three years. At the top of the requirements is that the cryptocurrency remains decentralized for 3 years and that all types of technical and financial data related to the cryptocurrency are shared publicly. Given the demand for transparency and decentralization, it should come as no surprise that lobbyists support the law.
The logic on which the law is based is quite similar to the pragmatic approach on which decentralized networks, especially Bitcoin, are based. Because the network is decentralized, change suggestions that might benefit a single person or group are refused. It is known that in decentralized networks, there are no cases where investors are victims of fraud because the community is united and therefore, offers are approved that benefit everyone. It can be said that the law has given a legal infrastructure to the regulation created by cryptocurrencies themselves. All financial data, particularly technical details of the cryptocurrency, are needed to control decentralization. The industry, which is currently working with open source code, will not be surprised by mandatory public disclosure of this information.
In short, not only will investors be protected as the likelihood of fraudulent activity will be very low after certain standards are set in terms of transparency and decentralization, but cryptocurrencies that do not meet the standards will be deemed illegal, and the industry will reach a certain level.
Politicians and Lobbying
Hester Pierce’s proposal to SEC alone, which politicians now support, summarizes very nicely the point at which the crypto market has reached. Apart from vote concerns, the mechanism that encourages politicians to be crypto-friendly is financial support from lobbying activities. Almost everyone knows how important lobbying is in the U.S. We may claim that the sector has increased lobbying efforts as more and more large financial giants are starting to join the players in the crypto sector.
The Blockchain Association, which has announced its support for the proposal, includes almost all the major players in the crypto industry. Coin Center and the Association for Digital Asset Markets stand out as lobbying organizations supported by companies of various sizes.
Lobbying organizations should not be regarded merely as contribution structures to fund various initiatives. These organizations also ensure that politicians are informed about cryptocurrencies and try to prevent common and wrong decisions like in the Infrastructure Law. The statement by Galaxy Digital CEO Mike Novogratz, “Our industry did a terrible job educating Washington,” is also significant in terms of demonstrating how ignorant U.S. lawmakers are about the industry.
Let’s look at the part of the voting process. We can say that the high demand and interest in cryptocurrencies in society, especially among the young people, the so-called Generation Z, make the senators in the U.S. adopt crypto-friendly policies regarding the fear of voting. The especially year 2021 is important to show that there is a great interest not only among young people but in all parts of society. Because the vast majority of large institutions such as banks, investment institutions, payment services, which are the building blocks of traditional finance, started offering services related to cryptocurrencies in 2021. Organizations did not become crypto-friendly overnight in 2021. Because of the high demand from the community, they had no choice but to act. The high demand for crypto services noticed by traditional financial organizations has been highly appealing since it indicates the number of votes senators will receive at election time.
The Bitcoin ETF is one of the issues that the SEC has been waiting to approve for years. The positive conversion described above has naturally raised hopes for ETF approval. In a statement, late last September, the chairman of SEC, Gensler, gave a signal of sorts to companies that want to issue an ETF product. He said most of the proposals up for approval are consistent with 1930s laws, while BTC ETF proposals based on the Securities Act of 1940 would be more appropriate. He also stated that ETFs on the BTC product should be indexed on the CME exchange.
Before we get into why the Bitcoin ETF is important, let us summarize the ETF product: ETF, short for Exchange Traded Fund, is a product type commonly used on regulated exchanges. An ETF can contain one or more assets. The X ETF product may contain, for example, 4 company shares. Instead of buying one stock at a time, the investor purchases an X ETF product and invests in a basket of 4 companies. The purpose of the ETF to be issued for Bitcoin is so that investors who do not want to buy BTC directly because Bitcoin has no legal infrastructure can invest in BTC indirectly by buying ETFs. Because, rather than purchasing Bitcoin directly, an investor purchasing a Bitcoin ETF purchases a financial product that symbolizes Bitcoin and does not go out of the legal infrastructure. In short, the risk factor created by the legal infrastructure is assumed by the firm holding the ETF, not by the investors.
Returning to Gensler’s statements on the ETF, the CME Exchange seems to be highlighted. As the world’s largest derivatives exchange, the CME offers numerous products. Gensler points to the CME because of a general problem with such traditional products where crypto-indexed issuance is desired. The current prices of cryptocurrencies in the products must be obtained from an exchange. However, because most cryptocurrency exchanges are not regulated, it was unclear where to obtain the index. However, it can be said that this problem has now been solved, as in addition to the CME, the S&P and Nasdaq also publish the Bitcoin index.
The second issue Gensler points out is compliance with the 1940 Act.. Earlier laws used for securities in the U.S. were 1933, 1934, and 1940 laws. The reason for the law is the stock market crash of 1929. After the collapse that plunged the country into crisis, laws were enacted that established the basic principles. Let us take a quick look at these laws and see what Gensler means:
The law requires companies that want to sell securities to the public to share transparent information to regulate the market, for which there was no standard before. Although investors are required to be informed of developments and information regarding the security, SEC provides a form of insurance to cover the loss if the investor suffers a loss due to misinformation.
In addition to the disclosure requirement, this law, enacted just a year later, requires companies that sell to the public to make periodic and yearly reports to the SEC.
The law refers specifically to investment funds and requires these funds to detail their activities. Many details, such as the investment strategy of the funds, where the money obtained from the sale of the invested product will be spent, and the balance managed by the fund, must be open to the public, according to the law.
In light of the three laws cited above, Gensler states that ETF applications comply with the basic disclosure requirements of the 1933 and 34 Acts. Gensler can be said to have led the ETFs toward greater transparency by referring to the 1940 Act, which requires detailed information.
The former chairman of the CFTC (Commodity Futures Trading Commission) and head of the Digital Dollar Project, Christopher Giancarlo, stated that when he was president of the CFTC (2014–2019), he was pressured by higher authorities to reject applications for Bitcoin futures, but that there is now a suitable environment for approving products like the Bitcoin ETF. Although the statements point to a positive agenda, Giancarlo said he does not expect the ETF to be approved before 2023. It is critical that a person who has led the Digital Dollar Project with the FED and the private sector and chairing the CFTC points to 2023. The reason could be the presidential elections in the U.S. in 2024. In an environment where cryptocurrency lobbies were not yet developed, Coinbase did not IPO, and most bitcoin miners were based in China; cryptocurrency exchange FTX was the company that made the second-largest donation to Biden’s presidential campaign. In 2024, we will be facing a presidential election with major Wall Street firms/names like Morgan Stanley and George Soros investing in cryptocurrencies, Bitcoin miners based in the U.S., crypto-friendly senators, and heavy lobbying. In addition, there are campaigns in almost every country to attract Generation Z. Crypto-friendly policies can also be a good way to get votes from the younger generation. For this reason, it is fair to say that crypto-friendly policies are likely to gain weight ahead of the presidential race.
Stablecoins complicate the applicability of monetary policy because they take a sector in the opposite direction of monetary policy from FED. The FED has continuously provided liquidity to the market for over a year to keep the markets crashing due to Covid-19 afloat. As the liquidity provided was realized in the form of the purchase of products such as shares and securities by FED, many assets accumulated on FED’s balance sheet. As a result of the economic indicators that were to return to normal with the spread of the vaccine, the FED began to make plans to recover the liquidity it had provided to the market by selling its assets. This process, known as tapering, can have a negative impact on financial markets by allowing the USD to be evaluated.
While discussions about when tapering will take place continued at a heated pace, eyes turned to stablecoins. It is now known that both the Senate and Biden’s team are speeding things up to regulate stablecoins specifically. The reason for this is evident from SEC Chairman Gensler’s statements. According to Gensler’s statement, the DeFi platforms serve U.S. citizens via VPN, and the use of the stablecoins on these platforms can cause some problems, such as money laundering, tax evasion, and sanctions, and the process has become a national security threat. Although the definition of “national security” seems to be somewhat difficult, it can be said that the stablecoins do indeed prevent the FED from pursuing a monetary policy. Although the size represented by stablecoins is not even close to a level that would scare the FED, the sector’s continuous growth is already forcing the FED to take precautions. Because if you look at the low-interest-rate environment, the broad-based liquidity policy, and the high-interest rate component given through stablecoins together, you can see that they lead to an economic development opposite to what the FED wanted. Seen in this light, one can understand why various authorities such as the SEC are trying to pressure their institutions that currently pay interest on stablecoins aggressively. Here are several examples:
In short, all authorities have joined forces to block such interest-bearing institutions on stablecoins. Since the DeFi platforms cannot be interfered with directly, it is an indisputable fact that the existence of these platforms disturbs FED. It can be said that the priority of the U.S. is to prevent such organizations and to prevent access to decentralized platforms that it cannot prevent because if the U.S. directly approves the Bitcoin ETF and regulates stablecoins without such intervention in the sector, it means that the FED is approving a sector that is the exact opposite of its policy. Following these efforts, the first regulation of the sector could come on stablecoins.
In addition to various important factors that FED considers, such as inflation, unemployment, tensions between China and Taiwan, Covid-19, it can be said that the crypto industry is increasingly taking its place among these factors as a secondary factor. Given the sector’s rapid development, it is quite possible that the crypto sector will cease to be a minor factor and become a key factor in the coming years. Although regulators are trying to suppress the market in the short term, it is positive that crypto sector players are increasingly made up of larger players, that these players are lobbying harder, that politicians are starting to become crypto-friendly, and that the sector is manageable in the long term.
Written By: Berkay Aybey
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