Crypto got a lot of attention in the recent election, and many are wondering how friendly the new administration and Congress will be. In a nutshell, we expect things to improve in some areas, while others will remain challenging. We anticipate good policy may be easier to achieve in the areas of securities and banking regulation, with the potential for clearer rules governing centralized secondary markets and centralized stablecoin issuers.
The outlook is less certain in the anti-money laundering, tax-reporting, and sanctions arenas. Coin Center will remain focused on protecting the rights of developers who are working on software for self custody and privacy as well as the rights of ordinary Americans who want to use those tools. Here is how we are thinking about these issues and our preliminary analysis of the opportunities and the challenges ahead.
How to think about crypto issues during a change in administration.
One can roughly divide policy issues for crypto into two super-categories: surveillance issues (tax-reporting, BSA/AML, sanctions) and investor protection issues (SEC, CFTC, Banking). Achieving good policy in one super-category does not guarantee similar positive outcomes in the other. The rationales behind each policy area differ (protecting investors vs. identifying and stopping illicit flows of funds), as do the political motivations and coalition-building opportunities of legislators focused on one area or the other.
Similarly, one can divide the crypto ecosystem into two super-categories: centralized businesses (custodial wallet providers, centralized exchanges, trusted issuers) and decentralized infrastructure developers and users (protocol developers, non-custodial wallet and app developers, and non-intermediated users of those protocols and applications).
Coin Center wants good policy on all dimensions, but our core mission is to defend the rights of the developers and users of decentralized and peer-to-peer tools. An overzealous regulatory regime in either the investor protection space or the surveillance space could threaten developers and users. However, the threats from the surveillance arena have lately been more profound.
Here’s a chart of past and potential future policy actions to help you understand this framework:
You might notice that the lower right box is overloaded by comparison. Some of that could be our bias. Coin Center’s mission is focused on decentralized infrastructure developers’ right to publish code (First Amendment issues) and on stopping unwarranted surveillance obligations (Fourth Amendment issues), and that fourth quadrant box is the overlapping battleground for both topics. Even if we are biased however; there does appear to be more aggression in that issue area than any other over the last four years. There are any number of explanations for that from optics and news cycle arguments, wherein politicians wrongly or opportunistically identify global and foreign policy tragedies with crypto (Hamas funding, Russian oligarchs attempting to circumvent sanctions), to political coalition-building wherein the left and the right rarely agree but sometimes find common cause on perceived issues of national security and surveillance.
What have been the biggest threats?
The last few years have been replete with grave threats to the freedoms of individual cryptocurrency users and developers. We have watched an overzealous SEC venture closer and closer to directly regulating individual developers and users in their exchange redefinition rulemaking, and their enforcement actions against wallet providers like Consensys’ Metamask and Coinbase Wallet. We have also seen surveillance issues come to the fore: 6050I reporting obligations, Tornado Cash sanctions, broker reporting obligations, and unlicensed money transmission prosecutions for non-custodial developers. Meanwhile, in Congress we have fought against legislation that would impose unjustifiable surveillance obligations on non-custodial developers in bills like CANSEE and DAMLA.
Where the hard work will definitely continue.
Three top threats come to mind: (1) 6050I, (2) Tornado Cash sanctions, and (3) unlicensed money transmission prosecutions. First, we already have ongoing litigation in the 6050I context; we are arguing that mandated warrantless reports to the IRS, which include personal information for those receiving $10,000 or more in crypto, are unconstitutional. Second, we also have ongoing litigation in the Tornado Cash sanctions context; we are arguing that sanctions laws do not give the Treasury the power to ban Americans from using tools, like immutable smart contracts, that are neither foreign persons nor their property. Third, we have watched with alarm as the Southern District of New York has brought unlicensed money transmission prosecutions against the developers of non-custodial software tools (Tornado Cash and Samurai Wallet), and we will continue to aid the defendants in those cases as best as we can. The DOJ may change under a Trump administration, but it rightly guards its political independence and may therefore be unlikely to abandon these prosecutions because of a change in administration.
Cause for optimism.
Without going into depth, claims that the new administration will be good for US-based centralized businesses and especially good with respect to investor-protection issues seem credible. That’s good news, as intermediated services and efficient capital formation are essential to growing crypto’s appeal to less technologically sophisticated audiences. What, however, about Coin Center’s key areas of focus, the issues impacting developers and users of truly decentralized tools and services?
At the agency level there’s reason to believe that controversial ongoing rulemakings will be frozen or even abandoned due to President Trump’s generally pro-crypto stance and his likely choices for appointees at the SEC and Treasury. That would be uniformly positive as the SEC’s exchange redefinition and the IRS’s broker rule for non-custodial developers are swords hanging over our heads.
Less certain is whether the new administration will be interested in scaling back overzealous sanctions and AML policies, the heart of that fourth quadrant. We’re nonetheless hopeful that there can be progress here if it becomes increasingly clear that even with a friendlier SEC, draconian surveillance and control policies will continue to drive innovators away from the US, chill development, and deny ordinary Americans the benefits of these technologies (all the while doing very little to actually prevent criminals and terrorists from using them).
We are also optimistic that Congress may be primed to take on a bigger role in pushing back on these surveillance issues. Much work has already been done as members have sent letters criticizing 6050I implementation, the Tornado Cash sanctions, and the unlicensed money transmission prosecutions. Bills like the Blockchain Regulatory Certainty Act would offer a legislative solution to the unlicensed money transmission prosecutions and we’re ready to find a bipartisan path forward for its passage.
We look forward to working with the new administration on this topic and are cautiously optimistic that if we make our arguments convincingly they’ll get a fair hearing. In the long arc of history, America’s constitutional rights, in particular our reverence for free speech and our wariness of warrantless search and seizure, should guarantee that there is no better place to build and use cryptocurrencies and open blockchain networks. It’s up to us to make it clear that being “pro-crypto” doesn’t just mean choosing friendlier agency heads or implementing pro-business regulations, it also means something deeply American: standing up for privacy and speech when it’s hardest to do so, when the national security stakes are high and the specters of crime and terrorism ever so briefly appear to eclipse our lasting virtues of liberty, privacy, and openness. Now is the time to make that stand and win robust precedents that will protect these technologies and enshrine the good that they can do far into our nation’s future.