Indian Council of World Affairs

After the nomination of pro-crypto Paul Atkins to head the US Securities and Exchange Commission (SEC)[i] by President-elect Trump, cryptocurrency investors feel that the country is moving towards making cryptocurrencies part of the financial market in the future. Bitcoin, the largest and most popular cryptocurrency, has seen its value double over the past year, rising more than 50% in the four weeks following President-elect Trump's electoral victory, which also brought a number of pro-crypto lawmakers into the US Congress. 

President-elect Trump has expressed strong support for digital assets, promising to make the United States the global hub for cryptocurrencies. The nomination of Mr. Atkins, a former SEC commissioner who has been involved in crypto policy as co-chair of the Token Alliance and the Chamber of Digital Commerce,[ii] is viewed by pro-crypto investors as a step by the incoming administration to remove some of the stringent regulation that have been placed by Mr. Gary Gensler, the current SEC Chairman under the Biden Administration. This paper examines the expectations from the crypto markets under the Trump Administration and the challenges before the US policymakers as they build their understanding of this digital asset. 

What Are Cryptocurrencies? 

Crypto assets have existed for over a decade, but efforts to regulate them have become a priority for policymakers recently only. A primary reason for this is that in the past few years, crypto assets have moved from being niche products to having a more mainstream presence as speculative investments, hedges against weak currencies, and potential payment instruments.[iii]

Cryptocurrencies are digital tokens that allow people to transact directly through online systems. Unlike national currencies, cryptocurrencies have no legislated or intrinsic value; they are  worth only what people are willing to pay for them. National currencies get part of their value from being legislated as legal tender. There are a number of cryptocurrencies – the most well-known of these are Bitcoin and Ether.[iv] A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. Another feature of cryptocurrencies is that they are backed by cryptographic systems or encrypted algorithms that provide safety during transactions. They make use of blockchain technology in which each block contains a set of transactions and needs to be verified by all computers in the network that maintain a ledger before the transaction is confirmed. This ensures that it is near impossible to forge a transaction between two entities. 

While cryptocurrencies are not accepted as legal tenders, except in El Salvador, it is not illegal to invest/buy and/or trade them. Central banks in most countries have framed regulations to protect consumers. As cryptocurrencies gain prominence, countries are taking steps to understand the technology behind them and build policies to regulate their use and future integration into the financial systems. A number of countries and the EU have outlined their differing approaches to cryptocurrencies, but they all remain united in stopping the illicit use of these digital assets. With the world’s largest economy electing a president invested in cryptocurrency and taking steps to explore possibilities of them being part of the formal economic system, it will likely impact fiscal policies of countries worldwide. 

The United States and Cryptocurrencies 

Currently, the United States has no federal regulatory framework for digital assets. Federal agencies, such as the Department of Treasury, Securities and Exchange Commission (SEC), Internal Revenue Service (IRS), and Financial Crimes Enforcement Network (FinCEN) have differing views on their regulation. The Department of Treasury views cryptocurrency as an asset, while the SEC views it as stocks. The IRS considers it property and not currency, requiring declaration on federal tax returns and subjecting it to capital gain tax. Thus, all owners need to maintain record of all transactions. 

In July 2023, Rep Glenn Thompson (R-PA) introduced the Financial Innovation and Technology for the 21st Century Act bill to “…establish a regulatory framework for digital assets by the Commodity Futures Trading Commission and the Securities and Exchange Commission, and for other purposes.”[v] The bill classifies cryptocurrencies as commodities rather than securities, thereby reducing the SEC’s oversight and granting primary responsibility of oversight to the Commodities Futures Trading Commission (CFTC).[vi] For many within financial markets, this would alter the regulatory frameworks for the crypto industry, which has long complained that the SEC oversight and traditional disclosure regulations are burdensome for the industry. Passed by the House of Representative, the bill is under review by the US Senate Committee on Banking, Housing and Urban Affairs. It has faced opposition from the House Democrats, the majority of whom voted against it (71 Ayes-133 No), while it gained support from nearly all Republican House members (208 Ayes-3 No).[vii] It has also faced opposition from the SEC, with Chairman Mr. Gensler stating that it may “…create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk”.[viii] The bill would let companies self-certify that they’re issuing “digital commodities” and also gives the SEC 60 days to determine if those assets fit the bill’s definition of digital commodity. However, the Chairman pointed out that with more than 16,000 crypto assets that currently exist, given limited staff and resources and with no proposal for new resources in the bill, it will be difficult for the SEC to conduct oversight reviews and challenge the assertion of the companies, leading to the possibility of fraud. 

For the crypto industry, the bill is being viewed as the first step in building clear regulations to guide the market. They have long opposed the aggressive oversight policies of the SEC on cryptocurrency and have welcomed the incoming Trump Administration’s outlook for a more crypto-friendly SEC and other federal agencies. 

President-elect Trump and the Rise in Value of Cryptocurrency 

President-elect Trump’s campaign was one of the first major presidential candidates to accept cryptocurrency donations during his campaign. His campaign announced that the step demonstrated President-elect Trump’s stress on embracing innovation and emerging technologies that will make America great again. The statement released by his campaign stated that, “The effort to reduce the control of government on an American’s financial decision-making is part of a seismic shift toward freedom”.[ix] It has been estimated by various media outlets and campaign funding trackers that the crypto industries, leading super political action committees have donated close to $131 million to campaigns of various pro-crypto candidates to the US Congress, including the presidential campaign. This is apart from the millions that have been donated by individual investors to the presidential campaign, such as industrialist Elon Musk and David Bailey, CEO of media group BTC, and Chase Herro, one of the co-founders of the Trump family’s new crypto project, World Liberty Financial. 

Following the election of President-elect Trump, Bitcoin prices reached record high prices of close to $90,000. A similar surge was witnessed after the announcement of the nomination of Mr. Atkins as chairman of the SEC. While the surge was momentary and did not last, there has been relative growth in the crypto prices, and the industry is optimistic about its future growth. 

President-elect Trump has positioned himself as pro-cryptocurrency, changing his stance from earlier when he was sceptical of the digital asset. He is one of the founders of the World Liberty Financial – a platform that has been described as a decentralised bank where customers will be encouraged to borrow, lend, and invest in crypto. President-elect Trump has been critical of the US Federal Reserve, which has resonated with many crypto supporters as they feel a decentralised system is the need of the hour. He has stated that he would like to build a cryptocurrency stockpile and prevent the US government from selling its cryptocurrency holdings, and his administration will try to use cryptocurrency to address the surging national debt. It is being speculated that the incoming administration may also create a dedicated role within the White House for cryptocurrency. President-elect Trump has called for less government intervention in the crypto industry and pushed for rapid growth and innovation to make the US the cryptocurrency capital of the world. Such overt and vocal support is likely to attract more investors, which the industry feels will create a more favourable environment for innovation and growth of the digital assets. 

Challenges Before the Incoming Administration 

While it remains to be seen if the crypto industry witnesses growth as the second Trump presidency explores business-friendly policies, there are some challenges that policymakers would have to navigate. 

The decentralised nature of the asset, the volatile nature of the market, and the fact that there are various types of cryptocurrency are in themselves a challenge. Apart from this is the de-regularised nature of the asset. It is an ever-evolving asset, and applying existing regulatory frameworks to crypto assets, or developing new ones, remains a challenge. Regulators across nations are struggling to acquire the talent and learn the skills to keep pace with the emerging technology, given limited resources and many other priorities. The other drawback is that monitoring crypto markets is difficult because data are patchy, and regulators find it difficult to monitor the thousands of actors involved who are not subject to typical disclosure or reporting requirements as requisite in regularised financial systems.[x] As has been pointed out in this article, there are a number of US federal agencies that monitor and regulate these digital assets. These different agencies have differing objectives. While some agencies are focused on consumer protection, others focus on securities, and some prioritise financial integrity. Apart from this, the various actors who are part of the cryptocurrency network, such as miners, validators, and protocol developers, are not easily covered by the traditional regulatory frameworks. 

For the world’s largest economy, which is intrinsically linked to the global financial system, building regulations for cryptocurrency would also require it to start talking to its counterparts who have different policies on digital assets. The biggest challenge here is that the terminology to describe the various activities, products, and stakeholders is not globally recognised. The term crypto asset itself refers to a wide spectrum of digital products that are privately issued using similar technology (cryptography and often distributed ledgers) and that can be stored and traded using primarily digital wallets and exchanges.[xi] A popular crypto asset is non-fungible tokens, which record ownership of tangible or intangible object, such as songs, painting, etc. 

On the issue of a bitcoin reserve, policymakers would have to look at the critical aspects of trading and liquidity of cryptocurrency. It would also need to look at cryptocurrency exchanges. There are two types of exchanges: centralised and de-centralised. The centralised exchange is operated through a single entity and provides the consumers some degree of protection. The decentralised exchange operates on blockchain technology and offers peer-to-peer trading, reduction in transaction fees, and near-instant settlement of funds. They offer more anonymity, which is aligned with the original goal of cryptocurrencies such as Bitcoin. Deciding how the government plans to interact with these types of exchanges and potentially integrate a Bitcoin reserve, whether via an exchange or not, will be pivotal for the crypto industry moving forward.[xii] Lawmakers will need to address concerns around inflation, economic volatility, and the broader implications of such a reserve on the US financial system. Public scepticism about cryptocurrency, combined with regulatory uncertainty and active litigation, may slow progress, despite the seemingly crypto-friendly administration. 

Finally, in addition to the regulatory frameworks and policies, the incoming administration and the US Congress would also need to look at, one, the technology that is used to create crypto assets in terms of the security of data, and two, the environmental impact of the use of enormous amounts of energy for the mining of certain crypto assets and weigh it against other public policy needs and public sentiments. 

Conclusion 

The positive outlook of the crypto industry after the election of President-elect Trump is understandable. Since his campaign, he has spoken of his support for the digital asset, and his nomination points to the fact that he will take steps to not just regulate the crypto industry but also to integrate it with the broader financial systems. This vocal support is likely to benefit investors and spur more innovation, with the industry hoping for fewer regulations. However, the crypto-market remains inherently volatile, leading to fears that reduced regulation and oversight may make the crypto market even more susceptible to bubbles, crashes and overall financial instability. This may have an effect on global markets, as cryptocurrency is increasingly being seen as a hedge against currency market disruptions. 

Nevertheless, the increasing institutional and governmental interest in cryptocurrencies worldwide and not just in the US suggests they are being viewed as the currency that will be in use in the future. As the new administration takes charge in January, it will have to navigate the challenges that cryptocurrency presents, and along with the US Congress, it will play a role in shaping the future of the global crypto market and America’s lead role in it.

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*Dr. Stuti Banerjee is a Senior Research Fellow with ICWA.
Disclaimer: The views expressed are personal.

Endnotes

[i] The US Securities and Exchange Commission is an independent federal agency tasked with protecting investors and maintaining fair and efficient markets in the US. The SEC’s efforts are meant to protect shareholders (especially retail investors) against fraudulent and manipulative practices in the market and ensure that companies provide accurate and complete disclosures about significant financial events, including corporate takeovers.

[ii] It is a network that is working towards promoting the acceptance and use of digital assets and blockchain-based technologies.

[iii] Aditya Narain and Marina Moretti, “Regulating Crypto,” https://www.imf.org/en/Publications/fandd/issues/2022/09/Regulating-crypto-Narain-Moretti, Accessed on 11 December 2024.

[iv] The Reserve Bank of Australia, “Digital Currencies,” https://www.rba.gov.au/education/resources/explainers/cryptocurrencies.html, Accessed on 09 December 2024.

[v] The US Congress, House of Representative, 118^th Congress “H.R.4763 - Financial Innovation and Technology for the 21st Century Act,” https://www.congress.gov/bill/118th-congress/house-bill/4763/text, Accessed on 11 December 2024.

[vi] The US Commodities Futures Trading Commission (CFTC) is an independent government body that has oversight over US derivative markets through regulation. For more information visit https://www.cftc.gov/About/AboutTheCommission

[vii] Figures have been taken from the US House of Representative, Roll Call 226 | Bill Number: H. R. 4763 available at https://clerk.house.gov/Votes/2024226

[viii] The US Securities and Exchange Commission, “Statement on the Financial Innovation and Technology for the 21st Century Act (22 May 2024),” https://www.sec.gov/newsroom/speeches-statements/gensler-21st-century-act-05222024, Accessed on 11 December 2024.

[ix] Trump Vance 2024, “President Donald J. Trump Campaign Now Accepting Crypto, First Major Party Nominee To Do So,” https://www.donaldjtrump.com/news/bc422399-088b-49a0-a39b-c094fad4daf8, Accessed on 11 December 2024

[x] Op.Cit2, Aditya Narain and Marina Moretti, “Regulating Crypto,” https://www.imf.org/en/Publications/fandd/issues/2022/09/Regulating-crypto-Narain-Moretti, Accessed on 11 December 2024.

[xi] Ibid, Op.Cit2, Aditya Narain and Marina Moretti, “Regulating Crypto,” https://www.imf.org/en/Publications/fandd/issues/2022/09/Regulating-crypto-Narain-Moretti, Accessed on 11 December 2024.

[xii] https://www.lexology.com/library/detail.aspx?g=060ff2df-9d61-4bf6-8172-d05a7391e2d0