Crypto Won't Get Long-Awaited U.S. Rules in 2024, But the Courts May Steer Its Future

Crypto's volatile relationship with the U.S. government will likely see some significant resolutions in 2024, from the arrival of a few consequential regulations to decisions in key court cases that will define how regulators treat digital assets. But the long-awaited rules of the road are likely to remain largely unwritten.

This post is part of CoinDesk's "Crypto 2024" predictions package.

Every year seems like the absolute tipping point in crypto's relationship with its U.S. government watchdogs, yet that moment always seems to stay just out of reach. The industry remains desperate for the U.S. to catch up to Europe and other jurisdictions (particularly in Southeast Asia) in putting formal crypto regulations on the books.

The sector's chief problem is a divided Congress that has even struggled to keep the federal government's doors open. While lawmakers from both parties in the House of Representatives have suggested they may be able to keep moving forward on crypto bills – especially one to regulate U.S. stablecoin issuers – Senate Democrats have largely shaken their fists at crypto problems without stepping forward to act. There's no immediate reason to think they'll see 2024 – a presidential election year when political sniping reaches its peak – as the ideal runway for taking chances on potentially controversial legislation.

"Expectations should be kept in check," Jaret Seiberg, a policy analyst with TD Cowen, warned in a recent client note. He said crypto legislation's best bet is as part of "a broad package" of other financial initiatives, such as the cannabis banking bill.

The near-term future for crypto legislation is further complicated by the pending exit of the most effective crypto advocate in Congress, Rep. Patrick McHenry (R-N.C.), the chairman of the House Financial Services Committee. He recently decided to leave at the end of next year, raising questions about what happens to the bills he's been pushing.

As they await new laws, industry leaders' best guess is that they'll get spot bitcoin exchange traded funds (ETFs) in early 2024. A tremendous amount of hope rides on that development from the U.S. Securities and Exchange Commission (SEC), which would establish highly liquid, regulated funds on exchanges. The sector is counting on that – a very frictionless way to get a stake in crypto – as a way to bring investors off the sidelines.

Even while the SEC may finally grant this boon, the agency and its cousin, the Commodity Futures Trading Commission (CFTC), are likely to continue their crypto enforcement agenda with high-profile cases. However, the biggest players, like Coinbase and Kraken, are already embroiled in the most relevant accusations, and those are now being worked out in court. That leaves the U.S. regulators in the same boat as the digital assets companies they've been targeting: Everybody is just waiting for the courts to decide who is more right. The longstanding dispute between the SEC and Ripple – which has largely gone against the agency – will probably reach an initial conclusion, at which point the SEC can appeal the earlier court ruling that it partially overreached in interpreting the so-called Howey test to label XRP a security. If the SEC appeals, the judiciary's response to this fundamental legal fight could go on for many more months.

Read more: Marc Hochstein - What Prediction Markets Are Forecasting for Crypto in 2024

But the legal war over the soul of crypto has many fronts. The SEC's cases against Coinbase, Binance and – more recently – Kraken as illegal, unregistered exchanges should make significant progress in 2024. As in the Ripple clash, at the heart of these disputes is whether the tokens being traded on these platforms are securities. Ripple General Counsel Stu Alderoty predicted the regulator will keep losing in court, "setting the table for a showdown in the Supreme Court."

"So long as there continues to be no clear legal answer to which tokens are securities or commodities, and which may be both, it is safe to expect SEC Chair Gary Gensler to continue pursuing his regulation-by-enforcement agenda," Washington D.C.-based Beacon Policy Advisors said in a research note.

Federal judges won't be hurried into ruling on the weighty questions of defining tokens as securities. And if the commission led by crypto adversary Gensler chooses to make everything last as long as possible, delay costs the industry more than it costs the SEC's legal team. In the meantime, the SEC and the Internal Revenue Service each have proposed rules awaiting finalization that could rock the industry. The SEC just released an updated rulemaking agenda, and it's currently targeting April 2024 for finalizing a rule that would require investment advisors to keep customers' crypto assets with "qualified custodians," which Gensler argued doesn't include today's crypto exchanges, and the agency is aiming for the same month to finish a separate rule to expand the definition of regulated exchanges to rope in crypto entities, including decentralized finance (DeFi) projects. The big IRS rule to establish a system for taxing crypto also threatens to capture DeFi. On the political stage, the outcome of the U.S. presidential and congressional elections could determine whether a new administration will be swapping regulators. It could also decide whether Republicans lose their grip on the House and if the Democrats get similarly sidelined in the Senate – both outcomes are a very real possibility that could keep Congress divided – though the actual results of the elections won't develop until the following year.

Bottom line: A politically tumultuous 2024 could set up an action-packed 2025 for crypto.