Crypto can't go mainstream without clarity

U.S. regulators are determined to boost cryptoassets. That’s unsurprising when they owe their jobs to the memecoin billionaire (and U.S. President) Donald Trump. But after the Senate last week voted down the wide-ranging Clarity Act, any efforts by market watchdogs to codify rules for digital-asset markets risk being shot down by the next administration. And worse, the Supreme Court has already undercut agency rulemaking powers, anyway. 

Securities and Exchange Commission Chair Paul Atkins has pledged repeatedly to plow ahead and support digital markets with or without durable laws in place. The agency’s first step was giving a green light to trading digital versions of listed company shares on Thursday. The Commodity Futures Trading Commission, which would have had primary oversight of digital assets under the Clarity Act, sent a proposal to regulate crypto transactions and markets to the White House for review. Some have cheered the watchdogs taking the initiative, but this situation is a mess. The lack of clear Congressional support will discourage traditional investors and institutions from putting their money at risk.

Senators had been wrestling with the massive cryptocurrency bill for months. It finally seemed set to pass after Trump accepted ethics-focused amendments designed to stop those in power benefiting financially, though the guardrails eventually fell short of convincing Democrats and four Republicans. Trump made more than $1 billion from crypto-related activities last year alone.

The banking industry had also fought aspects of the act that could allow people to earn rewards from digital coins in a way that might threaten the stability of its deposits.

Atkins and Michael Selig, chairman of the CFTC, had repeatedly urged Senators to pass the bill so they had a solid foundation for writing crypto guidelines. One fear is that without legislation future anti-crypto heads of the SEC or CFTC could scrap whatever guidelines are written now.

"Passing Clarity is the surest way that we can prevent another Gary Gensler [the former SEC chairman] from running a rogue campaign of lawfare against the individuals and companies in this room," Selig told a crypto conference in August.

Regulators have also been weakened by a Supreme Court decision that diluted their power to interpret laws. Conservative campaigning led to the court overturning a historic precedent known as the Chevron Deference in 2024. For years, it had meant courts deferred to bodies like the SEC when it came to turning legislation into specific regulations.  

The end of Chevron means any crypto-related regime can be more easily challenged by banks, traditional exchanges, investors or anyone else unhappy with what regulators lay out. That risk has doubled with the failure of the Clarity Act, because the SEC and CFTC will have to base their work on laws written before digital assets were even imagined.

It’s ironic that people who slammed overly mighty agencies exceeding their authority during the previous administration are now happy for those same bodies to act without the backing of Congress, when it suits their interests.

"There is a real tension here," Nicholas Anthony, a research fellow at the Cato Institute, told me. Both Republicans and the cryptocurrency industry railed against the SEC restricting this market under the Biden administration, he said, yet they are now calling on regulators to lead the charge. "It is no slam dunk to simply call on the agencies to circumvent Congress."

Coinbase Global Inc.’s Chief Executive Officer Brian Armstrong has encouraged the agencies to get on with setting up frameworks for his industry. He sees the failure of the Senate bill as potentially a benefit to existing crypto platforms if it discourages traditional finance from entering the markets.

He’s not wrong. Sifma, the leading trade body for broker-dealers, said the SEC’s initial move on tokenized stocks raised questions about investor protection and market integrity. There are legitimate worries that putting company shares on the blockchain could fragment trading and hurt liquidity in stock markets, while also undermining efforts to prevent money laundering. 

The SEC and CFTC will likely focus, in the near term, on where to draw the line between what counts as a security and what’s considered a commodity. That will govern which agency oversees the trading and where dealers and other participants need to register. Even such apparently simple choices will be open to legal challenges.

A security traditionally involves investment in a common enterprise that expects to earn profits based on the work of others under the so-called Howey test, set decades ago in a Supreme Court judgment. In the world of crypto and tokenized assets, there is still a lot of debate about how different coins and tokens should be judged. The Clarity Act would have created a firmer basis.

For banks, the main concern with stablecoins and other cryptocurrencies has been whether they threaten the role of deposits in the economy. Cash in a bank can earn interest and be used to make payments: The fight over digital assets has been to ensure digital coins can’t also do both. Banks worry that a payment coin that also earns interest could drain deposits, particularly from smaller community banks. That may hurt lending in local economies and endanger financial stability more broadly.

The Office of the Comptroller of the Currency (OCC), one of the main banking watchdogs, has responsibility for turning the Genius Act, which governs stablecoins such as Tether, into the rules that matter most for traditional lenders. Those rules ought to be safer from a different OCC chairperson overturning them in future, but even here, the end of Chevron means banks or crypto firms can battle the agency in court if they think the other side got a better deal.

The backdrop for crypto remains highly uncertain. That’s good new for traditional finance, because it makes it more likely that digital upstarts stay penned into a niche world. It might, however, be bad news for investors and law enforcement, since it risks leaving this technology an underregulated, international haven for crooks and money launderers.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for The Wall Street Journal and the Financial Times.