State of Crypto: Unpacking the Trump Presidency’s Crypto Legacy

Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De.

A number of crypto issues are on deck as Joe Biden enters the second week of his presidency. This week’s edition of SoC looks at what now-former President Donald Trump left behind.

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Where we’re at

Key narrative

Crypto grew rapidly over the four years Trump was in office – despite his own public admission that he is “not a fan” of bitcoin. While he wasn’t directly responsible for this growth, the regulators he appointed and some of the policies his administration pursued undeniably boosted the crypto industry. After four years, here’s what his administration left behind. 

Why it matters 

The Trump administration was largely friendly toward the industry (with a few notable exceptions), and ushered in a wave of regulations and products that were welcomed by the crypto community. The Trump administration stopped short of actually setting a policy direction, however. Almost all of the crypto-friendly actions were conducted by the regulators he nominated to various posts, and no significant legislation on the crypto space was passed or signed into law. 

Breaking it down

SEC: Light on the guidance

The Securities and Exchange Commission (SEC) hasn’t published a ton of guidance, Commissioner Hester Peirce’s attempts notwithstanding. Mostly it came down to: initial coin offerings (ICO) and cryptocurrencies may violate securities laws, hit up the SEC if you have questions. Also, the SEC rejected like a gazillion bitcoin exchange-traded fund (ETF) applications, though there’s some renewed hope one will be approved in 2021. Here are some other memorable moments from the Trump era:

• An SEC staffer asked the general public to “please stop asking” about bitcoin ahead of a decision on whether it will approve a bitcoin ETF in March 2017 (the SEC later rejected the ETF application).
• The SEC published the DAO Report, arguably its most consequential guidance as far as the crypto industry is concerned. The report, which examines the DAO, an Ethereum-based funding vehicle, concluded federal securities laws might apply to certain cryptocurrencies and sales involving crypto. 
• The SEC spun up a new cyber unit to focus on crimes committed using cryptocurrencies and the dark web in September 2017.
• The SEC announced in November 2017 that celebrity endorsements of ICOs might violate the law if the celebrities don’t disclose they’re being paid for their endorsements. In a stunning turn of events, it later filed charges against celebrities who didn’t disclose they were being paid for their ICO endorsements.
• In January 2018, several companies withdrew their bitcoin ETF applications at the SEC’s request.
• Dalia Blass, the SEC’s director of Investment Management, says valuation, liquidity, custody, arbitrage and market manipulation concerns all need to be addressed before the agency will approve a bitcoin ETF.
• Also in January 2018, the SEC shared that it’s taking a look at companies that announced blockchain pivots. In an entirely predictable sequence of events, it later suspended trading in three companies that made such announcements.
• The SEC appointed Valerie Sczcepanik, the previous head of its distributed ledger working group, as its senior adviser for digital assets and innovation in June 2018.
• SEC Director of Corporation Finance William Hinman says that, in his view, ether doesn’t look like a security. While this isn’t formal guidance, SEC Chair Jay Clayton later endorsed Hinman’s view, opening the door for Commodity Futures Trading Commission Chair Heath Tarbert to invite and approve companies looking to create an ether futures product. 
• In August 2018 the SEC rejected nine bitcoin ETF applications at once before announcing it was reviewing those rejections. Despite asking for public input on the applications in October, nothing more was said about them.
• The SEC created FinHub, a division specifically focused on distributed ledger technology and other financial technology products. Valerie Sczcepanik was tapped to lead it.
• The SEC charged decentralized trading platform EtherDelta’s founder Zachary Coburn with operating an unregistered securities platform, showing that decentralized exchanges (DEX) aren’t necessarily beyond the agency’s reach.
• In April 2019, the SEC published a token framework explaining when a cryptocurrency might be a security in its view. Industry participants say it leaves many questions unanswered.
• Also in April, the SEC published its first no-action letter allowing a company to legally sell tokens.
• The SEC sued Kik over its 2017 kin token sale in June 2019. A judge ruled the sale violated U.S. law, and Kik later settled, paying a $5 million fine.
• The SEC also sued Telegram over a $1.7 billion gram token pre-sale (it later won this case).
• The SEC said some stablecoins may not be securities, but issuers should work with the federal regulator to ensure it isn’t in violation of any U.S. laws in September 2020.

In short, almost all of the SEC’s actionable guidance came via enforcement actions and informal warnings. What is clear is a) token sales may violate securities laws and b) the SEC will go after entities if it thinks there’s a violation.

CFTC: Light-touch guidance

During the Trump era, the Commodity Futures Trading Commission approved the entrance of crypto derivatives products in the U.S., creating a regulated trading market in which institutions could participate. Here are the key points:

• Cash-settled bitcoin futures (where traders receive the fiat equivalent to the contract’s value when it settles) launched in December 2017 (under the oversight of former Chair Chris Giancarlo).
• CFTC General Counsel Daniel Davis authorized agency staff to hold and trade cryptocurrencies in February 2018.
• A federal judge ruled bitcoin is a commodity and therefore subject to the CFTC’s enforcement supervision in a case brought by the agency against an alleged crypto scammer.
• Physically settled bitcoin futures (where traders receive bitcoin when the contract settles) launched in September 2019 (under the oversight of former Chair Heath Tarbert).
• The CFTC defined “actual delivery” for cryptocurrency contracts in March 2020, answering a long-running question about what it means for a customer to receive bitcoin earned through margin trading (the definition is later cited as Coinbase’s reason for ending margin contracts).
• Physically settled ether futures launched in May 2020 (Tarbert).

Giancarlo, who was widely referred to as “Crypto Dad” during his time in office because of his advocacy for a light-touch regulatory framework, told CoinDesk in 2019 the approval and introduction of a bitcoin futures market helped pop the 2017 crypto bubble. Bitcoin’s price rose to nearly $20,000, what would have been an all-time-high at the time, but the price fell shortly after the first futures contracts were introduced to the U.S. market.

The former regulator now spends his time advocating for a U.S.-issued central bank digital currency (CBDC) as part of the Digital Dollar Foundation. His successor, Tarbert, gave the industry a shot of hope by explicitly calling ether a commodity, opening the door for derivatives products around the cryptocurrency.

OCC: Light-speed guidance

The Office of the Comptroller of the Currency wasn’t hugely involved in the crypto space for most of Trump’s term, outside of a legal fight over a fintech charter. It wasn’t until Brian Brooks got to the agency by way of an appointment by Treasury Secretary Steven Mnuchin that the OCC really began making public moves relevant to the industry.

• As First Deputy Comptroller, Brooks raised the idea of a nationwide charter for fintech firms, allowing them to bypass individual states’ money transmitter license requirements.
• In July 2020, the OCC made waves by publishing an interpretative letter saying banks can provide custody services for cryptocurrencies. 
• The OCC published stablecoin guidance for banks, giving them cover to work with stablecoin issuers in a legally-compliant fashion in September 2020. 
• Fintech lender SoFi, which has a digital assets wing, received a conditional charter from the OCC in October 2020.
• Brooks said banks may be looking to partner with or acquire custodians to enter the crypto market in October 2020.
• The OCC began a rulemaking process to prohibit banks from not serving certain industries, including the cryptocurrency industry in November 2020 (this rule was finalized in January 2021). 
• The OCC published additional guidance in the form of an interpretative letter saying banks can use stablecoins for payments, as well as operate nodes on public blockchains at the beginning of January 2021.
• Anchorage, a South Dakota-based crypto custodian, became the first federal crypto bank after the OCC granted it a conditional trust charter in January 2021.

The OCC moved so quickly under Brooks that several members of Congress felt the need to ask him to focus on other issues such as the coronavirus pandemic. Rep. Maxine Waters (D-Calif.) also included all of the OCC interpretive guidance in a letter to incoming President Joe Biden listing Trump administration actions Biden should undo. Trump nominated Brooks to a full term running the OCC.

Biden’s rule

Looking ahead, here’s what the regulator landscape looks like as of right now. Most of President Biden’s nominees still need confirmation hearings and votes, so a lot of these departments have acting heads, particularly after several Trump-nominated heads stepped down. Fed Reserve Chair Jerome Powell’s term doesn’t expire until next year. A few of the smaller Treasury Department agencies, including the Office of Foreign Assets Control (OFAC) and the lFinancial Crimes Enforcement Network (FinCEN), seem set to continue with their incumbent directors. Janet Yellen was confirmed yesterday as Treasury Secretarty and sworn in late last night.

Changing of the guard

Elsewhere: 

• Janet Yellen Says Cryptocurrencies Are a ‘Concern’ in Terrorist Financing: Yellen’s comments raised a stir last week, with much of the industry indignantly pointing out that not a lot of crime is conducted using crypto and only a tiny fraction of crypto is used to conduct crime. Yellen’s written remarks, published two days later, showed a bit more nuance. Honestly, I don’t think we can draw any conclusions from her remarks last week because they were her first crypto comments in over two years. On the plus side: She has said she’ll review the FinCEN rulemaking Mnuchin tried to rush through.
• Japan Rallies Behind XRP as Ripple Faces US Litigation: An interesting conflict inherent in crypto is that it’s supposed to be borderless and stateless, but it exists in a world that still has borders and states. We’re seeing what that actually means now, with the SEC suing Ripple on allegations it sold XRP in unregistered securities transactions. While the SEC might believe XRP is a security, that doesn’t mean other nations do. My colleague Sandali Handagama found that investors in Japan are (understandably) still fairly confident in XRP, particularly after an endorsement by local financial services giant SBI. 
• The Relationship Between US Government Debt and Bitcoin, Explained: So one of the tenets of the crypto twitterati is that inflation is bad, money printing is bad, sound money is good and deflationary currencies like bitcoin are very good. As it turns out, inflation in the U.S. has been pretty low. My colleague Nathan DiCamillo spoke to some economists, and while it’s entirely possible that inflation will rise in future “we’re not seeing it yet,” at least one told him. Nate’s conclusion: Bitcoin’s role as a hedge might not be imminent. 

Outside crypto:

• SEC Chair nominee Gary Gensler is likely to take the regulator in a sharply different direction than predecessor Jay Clayton did on a number of issues, including a rule on prohibiting conflict of interest for investment advisors and climate change, Politico reports. 

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik.de@coindesk.com or find me on Twitter @nikhileshde. 

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See ya’ll next week!