Regulatory Outlook to 2024: A Look at the US Regulatory Landscape

Over the past few years, the United States has presented a challenging environment for crypto firms and financial institutions seeking certainty in the direction of regulation and policymaking.

Aggressive position on the implementation of regulations, overlapping jurisdictions between federal and state agenciesand legislative deadlock created an environment in which the number of observers is increasing warning that the US risks falling behind tEU, UAE and other jurisdictions when it comes to taking advantage of crypto- and blockchain-related innovations if it cannot offer clearer regulatory guidance within a more comprehensive legal framework.

However, 2023 and early 2024 saw some developments in the US that offered a glimmer of hope to industry participants. One of these was judgment of July 2023 in a case involving the Securities and Exchange Commission (SEC) and Ripple, in which a federal judge rejected many of the SEC’s arguments for why Ripple should be considered a violation of US securities laws — offering an indication that courts may offer scrutiny to the agency’s actions.

In January 2024, following a separate court appeal, the SEC finally approved applications of numerous Spot Bitcoin Exchange Traded Funds (EFT) – providing an opening for institutions to increase their exposure to crypto trading markets.

So what does the rest of 2024 have in store for the evolution of US crypto regulation and policy? In this latest installment of our regulatory outlook series we look at what lies ahead.

Regulatory and legislative turbulence will continue

Despite some recent glimmers of hope, the crypto industry will continue to find the US a highly uncertain regulatory and political environment throughout 2024.

Several structural factors underpin this dynamic.

First, regulators will continue to rely on a difficult-to-enforce stance. Despite some recent court rulings in the industry’s favor, US regulatory agencies have shown no signs of abandoning their aggressive approach to enforcement in the crypto space, and indeed, their comments suggest that they remain convinced that large fines and fines for contempt remain the best way to deter bad behaviour.

Even if the courts continue to give the industry some victories against over-enforcement, that court process is often very slow and unlikely to provide the industry with the unequivocal regulatory clarity it seeks in one fell swoop.

Second, where US regulators do make progress in implementing rules and regulations around cryptocurrencies, it may come in forms that the industry finds challenging to implement. For example, the US Treasury proposed rules on how firms should manage mixer risks could prove very difficult to implement in practice – something in the industry pointed out in responses withdrawing the Treasury’s proposed rules. Similarly, the SEC’s newly adopted definition of securities broker could present a number of challenges for participants in the DeFi space.

Third, legislative efforts to establish new legal and regulatory frameworks are unlikely to advance in a divided US Congress in an election year. Although numerous legislative proposals that have been floating around for the past few years that seek to clarify challenging issues in the crypto space, none of them have managed to garner bipartisan support.

With presidential and congressional elections looming in November, it’s even less likely that comprehensive cryptocurrency legislation will pass this year — meaning the industry will have to wait until at least 2025, if not longer, for any congressional intervention which could provide greater legal and regulatory clarity.

Any hope for stablecoins?

Despite these factors, some observers remain hopeful that legislative and political efforts in the US could lead to progress this year on one specific front: stablecoins.

For more than two years, various legislative proposals have been submitted that would seek to create a federal regulatory framework for stablecoin issuers. In general, they aim to ensure that stablecoin arrangements are backed by sufficient reserves and that their issuers take steps to protect the redemption rights of holders – requirements broadly aligned with the stablecoin measures recently adopted in EU, Singapore and other jurisdictions.

Recently, members of both the Democratic and Republican parties have done so expressed optimism that they believe that Congress could pass stablecoin legislation this year. However, some observers suggest that this is mostly political spin and that in 2024 the US is unlikely to enact any significant stablecoin legislative framework.

If Congress does not act on stablecoins this year, there is a real possibility that US regulators will feel compelled to take matters into their own hands. Some observers have warned that the Financial Stability Oversight Council (FSOC), which is made up of senior US regulatory officials and has previously argued that Congress should pass legislation to address the financial stability risks of stablecoins, could decide that they should designate issuers of stablecoins as systemically important financial institutions – a step that would impose rigorous compliance requirements with issuers.

Such a harsh policy tool would likely only deter innovators from engaging in stablecoin activities in the US and would deal a blow to efforts to promote innovation in the financial sector through stablecoins.

Institutions as initiators of (slow) changes

If the landscape in the US appears fraught, there is a potential catalyst for change: the major institutional players in the US are likely to be the source of important, if slow, progress in the effort to achieve greater regulatory clarity.

Despite numerous regulatory and legal challenges in the US, institutional players will make gradual but important progress in opening up the US financial sector to greater innovation related to cryptocurrencies. The SEC’s approval of Bitcoin ETFs is, after all, the result of numerous crypto firms and financial institutions pushing hard to go public. There are already similar plans to launch Ethereum ETFs – which would only expand institutional exposure to the crypto space. Indeed, Black Rock’s CEO has already said the firm intends to go full steam ahead with the Ethereum ETF.

Through these and other efforts, such as plans to monitor stablecoins or asset tokenization projects, heavily regulated financial institutions are likely to serve as the primary drivers of regulatory progress in the US.

While this may be far from the great regulatory and legislative certainty that the crypto industry desires – these efforts will nevertheless prove crucial in pushing the US towards a more fertile position for crypto innovation in the long term.

Navigating the rough sea ahead

Needless to say, the US is likely to remain a complex regulatory environment for some time to come. In the midst of such a challenging landscape, it is important to work with partners who understand those challenges.

Contact us to learn more about how Elliptic can help your business navigate US regulation.