A Flood of Innovation on Blockchain Technology

With every new administration, it’s natural to have policy changes.

Every new administration wants policy aligned with its economic, fiscal, and geopolitical policy plans.

Depending on what those policies look like, some industries are impacted more than others.

Generally, these changes don’t get in the way of business getting done…

The affected industry adjusts to the change… and gets on with it.

Next week, following the inauguration, will be a very different case.

An Illogical, Ideological Problem

There has never been a more radical policy shift concerning a single industry – from one administration to another – than what we’re about to experience next week.

That industry is the blockchain industry, digital assets, and cryptocurrencies.

In my lifetime, I’ve never seen a technological advancement be stifled by the government than what I’ve seen in the last four years. Regulation by enforcement was the “rule” of the current Securities Exchange Commission (SEC), as opposed to thoughtful regulatory clarity and guidelines that incorporate the unique attributes of digital assets.

A few years ago, I remember attending a small group dinner at a prominent D.C. law firm, at which the then-Chair of the SEC spoke about this very topic. The message given during that speech was that the Howey Test would be used on a “case-by-case” basis to determine if an asset was a security (i.e. an investment contract), and thus should be regulated as one.

The “problem” was that the Howey Test was developed by the Supreme Court in 1946 in the case SEC vs. W.J. Howey Company, a time almost 80 years ago when the world didn’t even have computers let alone blockchain technology or cryptocurrencies.

It’s no surprise that such a test developed in 1946 might not be completely relevant for technology and digital assets developed in the 21st century. But that was the position of the SEC.

Adding even more confusion has been a power struggle between the SEC and the CFTC – both positioning for regulatory oversight over cryptocurrencies.

Are they securities? Or commodities? Or, for that matter, money?

Last October, I had the pleasure of speaking with Jay Clayton, the former Chair of the SEC from May 2017-December 2020. During our discussion, I asked him whether or not the current antagonistic government policies towards digital assets was at all being influenced by legacy financial institutions. I wanted to know if the big investment banks were trying to stifle the industry and protect their way of financial transactions.

His response confirmed what I had believed to be true:

“Very little if at all. The problem is ideological.”

He was referring to the current administration’s stance on digital assets. It’s that third attribute – money – that has been seen as the problem for the current administration.

As we learned yesterday in The Bleeding Edge – The Bitcoin Act of 2024, the Federal Reserve firmly believes that “money” is The Fed’s business in the U.S. Decentralized networks that can transmit digital assets that have value and can be converted to U.S. dollars is perceived to encroach on the Fed’s pillars of power.

Making the topic even more sensitive is that the current U.S. government has no way of controlling those transactions that occur on various blockchain networks.

These issues aren’t about the technology. They’re about control and power.

That’s why the difficulties imposed upon the blockchain and digital assets industry have been illogical, because the issue is ideological.

A Simple Truth Over Centuries

A simple truth learned over centuries of human development is that innovation cannot thrive under heavy-handed regulations.

This is especially true in the 21st century, when the best talent can easily move from one jurisdiction to another and can work remotely from anywhere.

Just imagine what would have happened to the U.S. economy had the U.S. government kept an extremely tight leash on internet technology in the 80s, 90s, and 2000s. It would be a completely different world right now.

Investment capital flows to where it is best treated, as does human capital. And periods of intense investment always lead to major breakthroughs.

Blockchain technology is the next generation of internet technology. It is also the next generation of technology for financial services. Blockchain technology removes unnecessary friction and costs, and improves transparency, efficiency, and productivity in both internet and financial services applications.

That’s why it’s so important to have a light regulatory touch, and why the rules and regulations need to incorporate the uniqueness of this technology, rather than defaulting to a framework developed in 1946.

And next week is when the industry turns the page, leaning into a pro-blockchain, pro-crypto, pro-innovation policy environment – starting off with President Trump’s Day One executive orders, which will immediately follow the inauguration through the end of next week.

We might be wondering, what’s going to happen next week? What will those Day One executive orders look like?

Well, we won’t have to wait long to find out.

Jeff’s Predictions for Day One

Here’s what I’m thinking are the most likely topics that will be addressed in those executive orders next week:

• The 208,000 bitcoin that has been confiscated by the Department of Justice and the U.S. Marshals Service will be moved onto the U.S. Treasury’s balance sheet, thus making bitcoin a reserve asset of the U.S. government.
• An end to Operation Choke Point, which was a structured government operation designed to stifle and inhibit innovation in the blockchain industry will be announced. It has recently become public that the FDIC sent “pause” letters to more than 20 banks instructing them to refrain from “all crypto-related activity”. Making matters worse, both companies and individuals working in the digital assets industry were systematically debanked by the U.S. government, depriving them of financial services. For those interested in learning more about this topic, I highly recommend reading a recent speech by FDIC Vice Chairman Travis Hill, which can be found here.
• SEC action SAB 121 will be repealed. SAB 121 requires that digital asset custodians must hold any digital assets on their own balance sheet. This action is completely contradictory to bank custody rules, which provides that all bank custodial assets are held off-balance sheet. This action kept most of the banking system out of digital assets as a result, which intentionally stifled innovation. The damage caused by SAB 121 was widely agreed upon, as the U.S. Congress passed bi-partisan legislation to repeal SAB 121 in May 2024, which was subsequently vetoed by President Biden.
• A withdrawal of proposed amendments to Rule 3b-16, which expands the definition of an exchange to decentralized exchanges – the Decentralized Finance (DeFi) market – and potentially goes as far as including protocols related to decentralized finance. The goal of these amendments was to expand the definition of exchanges so that these decentralized projects and protocols would be considered exchanges and regulated as such. This would make it impossible for these DeFi exchanges to exist or for these new internet protocols to thrive.
• The announcement of a new crypto council with a wide range of industry members that will be tasked with establishing a new regulatory framework for digital assets, with regards to securities regulations.
• And there’s more. This is exactly why, in just a few hours, I’m going to be airing a special presentation from D.C. – to make sure the weight of what’s about to occur will be fully understood by my readers. In case you haven’t yet signed up to attend tonight’s event, please do so here. It will begin promptly at 8 pm ET.

Just this morning we learned that Representative Tom Emmer has been appointed as the vice-chair of the House Subcommittee on Digital Assets, Financial Technology, and AI. I’ve met with Rep. Emmer a couple of times over the last several years. He has consistently been one of the strongest advocates for blockchain technology and digital assets in Congress. He has been a great champion for the industry.

No matter how we look at these changes, they are ridiculously bullish.

And they’re going to happen quickly. It’s easy to see that the wheels are already turning.

Next week is Day One for blockchain and cryptocurrencies. We’re about to leap into an investment and innovation cycle like we’ve never seen before.

And it’s all happening at the same time we’re witnessing the same kind of developments in artificial intelligence. That’s why I find the cross-section between the two so incredibly exciting.

I’m ready. I hope you are, too.

Jeff

P.S. If you haven’t yet grabbed your free bonus for signing up to attend tonight’s event, you can still do so here. Grab it while you can, it’s only available until the event starts.