Title: Coin Center's Analysis of the Crypto Policy Landscape Followin' the Elections
Author: Peter Van Valkenburgh
Translator: Mensh, ChainCatcher
Cryptocurrency has received a lot of attention in the recent elections, and many are wondering how friendly the new government and Congress will be. In short, we expect some areas to improve, while others will continue to face challenges. We anticipate that in the areas of securities and banking regulation, the implementation of good policies may become easier, and there may be clearer rules to govern centralized secondary markets and centralized stablecoin issuers.
However, the prospects in the areas of anti-money laundering, tax reporting, and sanctions are less certain. Coin Center will continue to focus on protecting the rights of developers of self-custodial and privacy software, as well as the rights of ordinary Americans who wish to use these tools. Here are our thoughts on these issues and our preliminary analysis of the opportunities and challenges ahead.
How to Think About Crypto Issues Durin' a Government Transition
The policy issues around cryptocurrency can be roughly divided into two categories: surveillance issues (tax reporting, BSA, AML, sanctions) and investor protection issues (SEC, CFTC, banking). Achieving good policy in one category does not guarantee similar positive results in the other. The rationales behind each policy area are different (protecting investors vs. identifying and stopping illicit fund flows), and the political motivations and coalition-building opportunities for lawmakers focusing on one area may differ.
Similarly, the cryptocurrency ecosystem can be divided into two categories: centralized enterprises (custodial wallet providers, centralized exchanges, trusted issuers) and decentralized infrastructure developers and users (protocol developers, non-custodial wallet and application developers, and non-intermediated users of these protocols and applications).
Coin Center hopes to achieve good policies across all areas, but our core mission is to defend the rights of decentralized and peer-to-peer tool developers and users. Overregulation in the areas of investor protection or surveillance could threaten developers and users. However, the threats from the surveillance domain have been more acute in recent times.
Here is a chart on past and potential future policy actions to help you understand this framework:
You may notice that the bottom right box appears quite crowded. This may be our bias. Coin Center's mission focuses on the rights of decentralized infrastructure developers to publish code (First Amendment issues) and to prevent undue surveillance obligations (Fourth Amendment issues), and the fourth quadrant is the intersection of these two themes. While we may have a bias, this area of concern does seem to have been more aggressive in the past four years. There are many explanations for this, including the political halo and news cycle arguments, politicians mistakenly or opportunistically linking global and foreign policy tragedies to cryptocurrency (e.g., Hamas funding, Russian oligarchs trying to evade sanctions), and the building of political coalitions, where left and right, though rarely agreeing on much, sometimes find common ground on the perceived issues of national security and surveillance.
What Are the Biggest Threats?
In recent years, there have been serious threats to the freedoms of individual cryptocurrency users and developers. We have seen the SEC being overly aggressive in its redefinition of transactions and in enforcement actions against wallet providers like MetaMask and Coinbase Wallet. Surveillance issues have also started to emerge:
6050I (Note: The 6050I law requires all digital asset transactions over $10,000 to be reported to tax authorities, effective January 1, 2024)
Tornado Cash Sanctions (Note: On August 8, 2022, the U.S. Treasury Department's OFAC (Office of Foreign Assets Control) added Tornado Cash to its sanctions list, accusing the open application of assisting in billions of dollars of money laundering activities)
Broker Reporting Rules (Note: In August 2023, the Treasury Department issued a proposed regulation aimed at defining, for tax purposes, when a crypto-related person is considered a "broker" and must collect personal information from their crypto tool users and report it to the IRS)
And Prosecutions of Non-Custodial Developers for Unlicensed Money Transmission (Note: On April 24, 2024, the indictment against Samourai Wallet was unsealed. On the same day, in the Tornado Cash case, the DOJ opposed Roman Storm's motion to dismiss and exclude evidence. The prosecutors have expanded the definition of fund transfers, which could impact the legal status of crypto wallet providers.) Meanwhile, in Congress, we are opposing legislation, such as the CANSEE (Crypto Asset National Security Enhancement Act) and DAMLA (Digital Asset Market Structure and Regulatory Accountability Act), that would impose unreasonable surveillance obligations on non-custodial developers.
This Is a Long-Term Battle
Three main threats stand out: (1) 6050I, (2) Tornado Cash sanctions, and (3) prosecutions for unlicensed money transmission. First, we have ongoing litigation in the context of 6050I; we argue that the warrantless reporting of personal information, including receiving over $10,000 in cryptocurrency, to the IRS is unconstitutional. Second, on the Tornado Cash sanctions, we argue that the sanctions law does not empower the Treasury Department to prohibit Americans from using tools like smart contracts, as they are not the property of foreign persons. Third, we are alarmed to see the Southern District of New York prosecuting the developers of non-custodial software tools (Tornado Cash and Samourai Wallet) for unlicensed money transmission, and we will continue to do our best to assist the defendants in these cases. While the DOJ may change under a new administration, it maintains its political independence, so it is unlikely to abandon these prosecutions due to a change in government.
Can We Still Be Optimistic?
In short, the new administration will likely be favorable to U.S.-based centralized enterprises, especially on investor protection issues. This is because intermediary services and effective capital formation are crucial to increasing the appeal of cryptocurrency among less technologically savvy audiences. However, what about the key areas that Coin Center focuses on, which impact the developers and users of truly decentralized tools and services?
At the institutional level, there is reason to believe that the controversial rulemaking currently underway may be frozen or even abandoned, due to President TRON's overall support for cryptocurrency and his potential appointments at the SEC and Treasury Department. This would be a positive outcome, as the SEC's redefinition of transactions and the IRS's broker rules for non-custodial developers have been like a sword hanging over our heads.
Whether the new administration will be interested in scaling back the overly aggressive sanctions and anti-money laundering policies, which are at the core of the fourth quadrant, is less certain. However, we still hope that even under a more friendly SEC, the harsh surveillance and control policies will continue to drive innovators away from the U.S., stifle development, and deprive ordinary Americans of the benefits of these technologies (while not effectively preventing criminals and terrorists from using them).
We are also optimistic that Congress may play a greater role in opposing surveillance issues. Members have sent letters criticizing the implementation of 6050I, the Tornado Cash sanctions, and the prosecutions for unlicensed money transmission. Legislation like the Blockchain Regulatory Certainty Act will provide a legislative solution for the prosecutions of unlicensed money transmission, and we are prepared to find a bipartisan path forward to push for its passage.
We look forward to working with the new administration on this topic, and if we can make a persuasive case, they will give it a fair hearing. In the long arc of history, the constitutional rights of Americans, particularly our respect for free speech and our vigilance against warrantless searches and seizures, should ensure that this is the best place to build and use cryptocurrency and open blockchain networks. "Supporting crypto" means not just choosing more friendly institutional leaders or implementing business-friendly regulations, but a deeper American spirit: standing up for privacy and speech, especially in the most difficult times, when national security interests, crime, and terrorism briefly obscure our freedoms, privacy, and openness.
