Is U.S. crypto regulation turning the tide?

Regulation in the U.S. has the potential to lift the crypto market higher—or plunge it into the depths.

Regulation in the U.S. could lift the crypto market higher—or plunge it into the depths. A snapshot of the current situation.

The regulatory noose is tightening around the crypto market. In the U.S., lawmakers calling for tighter oversight of Bitcoin, Ethereum, and the rest have grown louder in recent days and weeks. Beyond macroeconomic headwinds, unclear rulings from regulators also weigh on sentiment.

But the glass can be seen as half full. When it comes to innovation-friendly laws in the U.S., there’s hope for freer development of new tech. With the right rules, cryptocurrencies could become a legitimate and large-scale investment for institutional investors.

There are currently a few foreground events in the United States that could leave a lasting impact on crypto prices. A positive outcome of the regulatory fight could spark the next crypto bull market.

Ripple vs. SEC: positive court ruling in sight?

Especially the financial watchdog SEC has consistently stirred up headlines with its pretty vague classification of certain cryptocurrencies as securities. With its case against payments firm Ripple, the U.S. Securities and Exchange Commission is essentially waiting for a precedent on whether a cryptocurrency violates securities laws. a SEC victory could clear the path for a flood of further lawsuits against other crypto projects. Even Ethereum, the second-largest cryptocurrency, might not escape.

A ruling in Ripple v. SEC is expected soon. The San Francisco-based company has, so far, fought bravely and keeps racking up small wins. Crypto influencer "BitBoy" is even convinced the SEC has given up the fight against Ripple.

Ripple, which is increasingly seen in crypto circles as a branch of the TradFi sector (Traditional Finance), unexpectedly shines a light in the bear market. While awaiting a potential Ripple win, the XRP price has risen substantially in recent weeks, defying the broader market trend.

Assuming the SEC fails to classify a relatively centralized blockchain company (and leaving out the third-largest crypto project, stablecoins) as a security, the agency would have little basis for pursuing further lawsuits. That would be a huge relief for other, much more decentralized crypto projects. And more certainty for institutional investors.

Regulation through enforcement

Because, so far, only Bitcoin is under discussion as a general corporate investment in crypto for companies and institutions. The sector’s unsettled regulation seems vague to many. In the U.S., it currently looks like a patchwork. Authorities still lean toward enforcement-driven rules rather than innovation-friendly “rules-based regulation.”

In February, President Joe Biden signed an executive order on crypto regulation. A September 16 fact sheet outlined a holistic view. It still sounds fairly restrictive, though.

There’s talk of the “responsible development of digital assets.” One thing is clear: the sector’s poor reputation continues to shape lawmakers’ views. The SEC, CFTC, and a long list of other agencies are mandated to “vigorously investigate and enforce against unlawful practices in the digital asset sector.”

And they’re acting: the SEC has stepped on the sector’s toes for a while. The agency head, Gary Gensler, views many cryptocurrencies as illegally issued securities and is pushing for stricter action on digital assets.

But for some in the crypto space, the charges against Ooki DAO by the Commodity Futures Trading Commission (CFTC) feel like a kick in the shin. So far, the agency has been fairly moderate in its approach to the sector. With the latest ruling, it’s going on the offensive against any DAO member.

It’s accused of offering illegal leverage and margin trading. The decentralized and autonomous organization isn’t recognized as such. And again, there wasn’t a crypto-specific regulatory framework to base the case on.

Good regulation, bad regulation

U.S. lawmakers still seem to lack a full understanding of the new tech in many ways. This shows up in the Senate’s ban on algorithmic stablecoins. The Terra collapse happened in May. The first bill, however, says it would take two years to “study how algorithmic stablecoins work.”

But there are bright spots. The White House factsheet also backs “responsible innovation.” Coinbase CEO Brian Armstrong believes that, as with the internet’s birthplace in Silicon Valley, the U.S. will feel compelled to grant this freedom for economic competitiveness.

Some pro-crypto senators have taken a first swing with the "Responsible Financial Innovation Act" to holistically bring cryptocurrencies into existing law while accounting for the risks.

The proposal aims to answer open questions around crypto taxes, securities, and consumer protection in a way that fuels innovation. The clarity this could bring might catapult the crypto sector.

Cardano founder Charles Hoskinson agrees. In a recent interview with Cheeky Crypto, Hoskinson predicts a “mega bull market” if the Responsible Financial Innovation Act becomes law in the U.S. Clear rules, he says, would pave the way for a new wave of institutional investors to enter the sector. Even a small portfolio allocation to crypto could unleash a huge money flow.