“I think it’s hugely positive because it takes the conversation from will crypto assets be normalized to how they will be normalized,” said John Sarson, CEO of Sarson Funds, a crypto asset manager and education service. “It removes all doubt that crypto assets will be normalized, and it even gives a timeline for doing so: 180 days. In the next 180 days, we’ll have a framework for crypto normalization.”
A generally positive industry reaction
Ryan Louvar, legal officer and head of business and legal affairs at asset manager WisdomTree, also praised the aim and tone of the order.
“It didn’t really provide particular clarity, but it did at least start to leave a groundwork for those agencies to work together for a clear digital asset regulation,” Louvar said. “It demonstrates that the U.S. government views digital assets and blockchain each as a significant part of the global economy, which I thought was notable, and it directed a number of government agencies and interagency cooperation in an extensive way.”
The order asked federal agencies to consider crypto as it intersects seven issues: consumer and investor protection, U.S. and global financial stability, illicit finance and national security risks, U.S. leadership in technology and economic competitiveness, access to affordable financial services and supporting responsible technological development.
The good and bad
The executive order may be less important for the content that the agencies are being asked to review, than for how they will conduct their reviews, said Adam Blumberg, co-founder of PlannerDAO and Interaxis, a firm that teaches financial advisors about crypto.
“I like this idea of a coordinated government response and effort among different government agencies, the idea that they need to wrap their arms around these assets and figure out what they are and how they affect all these different aspects of the financial system and how to make them safe for everyone,” Blumberg said. “They need to regulate across different entities and agencies, yes, but they also need to try to do so in a way that is consistent so we don’t have the [U.S. Securities and Exchange Commission] going one way and the [Commodity Futures Trading Commission] going another.”
The U.S. now regulates cryptocurrencies in a mostly uncoordinated approach that overlaps several agencies, each with their own definition and treatment of the asset class, all of which lie on top of inconsistent state regulations, Blumberg said.
Although Blumberg is happy to see a presidential order acknowledging the economic importance of digital assets, he also sounded a cautionary tone. Federal agencies are staffed by career civil servants and political appointee, and so the outcome of an agency’s research will likely be bent toward some type of political aim and biased to grant more power to an agency.
“Part of the idea of crypto and DeFi (decentralized finance) is taking some of the financial power out of the hands of government. Why would we expect anyone in the government to be saying, 'Yes, we’ve been overdoing it for some time and we need to give up some trust to computer code that can process transactions for us?' ” said Blumberg. “It’s not in the interest of the government or the people employed by the government to do that.”
For advisors and traditional investors, Blumberg sees the executive order as a win, because it should deliver some of the clarity they are looking for. But for some investors deeply invested in the culture around digital assets, decentralization and pseudo-anonymity are popular concepts, and new regulations are likely to be intimidating.
A path to a bitcoin ETF?
“One thing we’ve heard quite frequently is that clients are approaching and investing in this space away from the advisory relationship, which undermines advisors’ ability to deliver cohesive holistic advice for their clients,” Louvar said. “One way they’re looking to bridge the gap is through regulated products to provide access, like a spot bitcoin ETF, which we’ve seen in foreign markets, but not in the U.S. I’m not sure whether this framework will speed up approval for a spot bitcoin ETF, but hopefully it will help.”
According to consumer advocacy group Public Citizen, the cryptocurrency industry quadrupled its spending on lobbyists from $2.2 million in 2018 to $9 million in 2021, with the number of lobbyists representing the industry nearly tripling during that same period from 115 to 320.
Of course, that’s a very small fraction of what the traditional finance industry spends on lobbyists, but it speaks to an accelerating engagement effort from a corner of the financial universe not known for wanting to embrace traditional institutions or power structures.
So what comes next?
What the end result of the review will be is as yet unclear. The general consensus seems to be that some form of new regulations will come from the effort, with some industry participants believing that a new government agency dedicated to the asset class will be established.
“I think we probably need an agency dedicated to crypto; this is a new asset class that is not really a commodity, not an equity and not a currency – it shouldn’t be regulated by the CFTC, the SEC or FinCEN,” Sarson said, referring to the Treasury Department's Financial Crimes Enforcement Network.
“It would make sense that it will take a few years and a few iterations before we get there, but it took a long time from 1929 to set up the Adviser Act of 1933 and then the Adviser Act of 1940,” he said.
All told, it’s a sign of a maturing asset class, said Ben Cruikshank, CEO of Flourish, a crypto-for-advisors asset management platform.
“The result will be that crypto increasingly looks like and is treated like other assets, from anti-money laundering and know-your-client to consumer and investor protections,” Cruikshank said. “This applies to advisors trying to take a compliant approach to crypto and making sure vendors are in the regulation-first side of the spectrum. That’s not a deterrent to bringing more advisors into the crypto fold, it’s confirmation that the industry is continuing to mature.”
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