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While 2020 will almost certainly not be remembered as the year
in which cryptocurrency and digital assets made their long-promised
arrival as a mainstay of financial transactions —
overshadowed as they were by domestic politics and a global
pandemic — the past 11 months marked another significant step
in that ongoing journey.

According to a recent Fidelity survey, 27% of institutional
investors in the U.S. hold crypto assets and 60% of investors
across the U.S. and Europe “believe digital assets have a
place in their investment portfolio.”1

The trend toward acceptance of digital assets as an asset class
is particularly notable given the continued uncertainty in a
regulatory landscape in which the U.S. Securities and Exchange
Commission and Commodity Futures Trading Commission, with an assist
from the U.S. Department of Justice, have primarily adopted an ad
hoc regulation-through-enforcement approach in lieu of clear and
binding rules to guide market participants.2

And despite several pending legislative proposals, Congress has
not stepped in to fill the gap by statute. Against this backdrop,
the change in administration — and the ensuing impact on law,
policy and regulatory activity — presents a crossroads of
sorts for the treatment and perception of digital assets in the

This article discusses some of the factors that may influence
the direction of this burgeoning industry as the country
transitions toward a new administration.

Regulatory Environment

Since announcing that digital assets may in certain
circumstances be securities subject to its
jurisdiction,3 the SEC has established itself as
perhaps the primary regulator of this space. In 2020 alone, the
agency brought almost 20 enforcement actions involving sales of
digital assets.4 A number of these involved no
indicia of fraud and imposed steep monetary penalties predicated
solely on the failure to register the sale as a securities offering
under Section 5 of the Securities Exchange Act, a move that some
commentators — including SEC Commissioner Hester Peirce
— perceived to be unduly aggressive and stifling to

Indeed, in a rare public dissent in one such case, Peirce noted
that the analysis of whether a digital asset is properly classified
as a security is “idiosyncratic by its very nature” and
“does not produce clear guideposts for entrepreneurs and
others to follow,” thus resulting in a Hobson’s choice for
market participants whereby they must either expend “their
limited capital on costly legal consultation and compliance or
[forgo] their pursuit of innovation due to fear of becoming subject
to an enforcement action.”5

The SEC’s lack of formal binding guidance regarding the
treatment of digital assets — and the ensuing dilemma Peirce
alluded to in her dissent — has been construed by some
commentators as an extension of SEC Chairman Jay Clayton’s
perceived skepticism toward the industry.

Under his watch, the SEC has rejected every single proposal
aimed at launching an exchange-traded fund, or ETF, based on
bitcoin,6 cleared only one full registration
statement for a public offering of digital
assets,7 and otherwise advanced a cautious approach
that focused more on the challenges of price discovery and custody
services for digital assets than their potential to revolutionize
modern day financial systems.

In this context, Clayton’s anticipated departure from the
agency in December8 presents an opportunity to
recalibrate the agency’s approach toward digital assets and
create a more hospitable environment for innovators and, by
extension, institutional investors.

Depending on who fills his seat, Clayton’s departure may
increase the influence of Peirce, the so-called “crypto
mom,” who was recently confirmed to a second term running
through June 2025 and will remain in her post under the new
administration,9 or at least open the door for some
of her favored policy adjustments to broaden market assess to
digital assets.

Peirce has been a vocal advocate for a three-year regulatory
safe harbor that would allow market participants to work on
developing a functional or decentralized network for digital assets
and testing any novel ideas along the way without registering with
the SEC and subjecting their nascent business endeavors to
regulatory scrutiny, as long as certain conditions are

Broadly speaking, the proposed safe harbor would exempt (1) the
offer and sale of tokens from the provisions of the Securities Act
of 1933, other than the antifraud provisions, (2) the tokens from
registration under the Securities Exchange Act of 1934, and (3)
persons engaged in certain token transactions from the definitions
of “exchange,” “broker,” and “dealer”
under the 1934 Act.11

The concept for the safe harbor is driven by Peirce’s
recognition that “[i]t is important to write rules that
well-intentioned people can follow”12 and is
animated by the same principles that led her to speak out against
the agency’s enforcement of Unikrn.13 Not
surprisingly, Peirce’s proposal has broad support outside the
SEC and could be a game changer for the industry if it gains
traction within the agency.

Clayton’s departure may also accelerate the SEC’s
timetable for approving bitcoin ETFs, which has stalled in part due
to his view that even the most stable tokens will need to be better
regulated before receiving approval to be traded on a major
exchange. In particular, the SEC has expressed concerns about how
funds with significant digital asset positions could satisfy the
requirements of the Investment Company Act, questioning their
ability to determine a daily net asset value, ensure adequate
liquidity, maintain holdings with qualified custodians, and limit
arbitrage opportunities.14

As the market continues to explore these important questions,
Peirce’s influence may be instrumental in changing the
regulatory landscape to enable broader investment opportunities
relating to digital assets.

In another notable public dissent earlier this year, she
denounced the SEC’s repeated disapprovals of proposed rule
changes that would allow access to exchange-traded products by
noting that the agency’s approach “interfered with the
continued institutionalization of the market and thus delayed
improvements in market structure and investor protections” and
threatened to drive innovation away from the United States to more
receptive jurisdictions.15

Thus, irrespective of Clayton’s accomplishments at the SEC,
it is perhaps not surprising that proponents of digital assets are
hopeful that the opportunities for investment and engagement with
this asset class will increase under different leadership. Indeed,
given the open admiration that CFTC Chairman Heath Tarbert has
expressed for digital asset initiatives,16 a
changing of the guard at the SEC may well herald a new regulatory
regime that is more conducive to experimentation and innovation
while continuing to call out fraud across the board.

Legislative Review

When the 116th Congress adjourns just after the New Year, it
will do so having concluded the most active legislative session for
digital assets and blockchain issues in the branch’s history,
highlighted by the introduction of more than 40 pieces of
legislation on the topic.17

While a number of those bills focused on nefarious uses of
digital assets — including terrorism, money laundering and
human or sex trafficking — many sought to clarify the
regulatory and tax treatment of cryptocurrencies, to encourage or
study the use of blockchain technology by U.S. government agencies,
and to consider the potential adoption of a digital dollar,
antithetical as that may be to proponents of decentralized
cryptocurrencies.18 These developments are
encouraging for the continued incorporation of digital assets into
mainstream finance.

Of particular note, the bipartisan Virtual Currency Tax Fairness
Act, introduced in January, could markedly improve the chances for
widespread adoption of cryptocurrency. Although it has subsequently
stalled following referral to the House Committee on Ways and
Means, the bill would exempt virtual currency transactions of $200
or less from the calculation of capital
gains,19 thereby allowing users to spend or
exchange virtual coins for everyday transactions without
maintaining records of those gains in a market that often sees wild

It would also put cryptocurrency on more equal footing with
transactions involving foreign fiat currencies, which currently
benefit from a similar exception to capital gains calculations.
Given the extent to which Congress’ overall makeup remains
unchanged, the success of this effort and others like it may well
turn on the extent to which the incoming administration is willing
to take a lead on this issue.

From this perspective, several of the individuals
President-elect Joe Biden has appointed to his transition team or
floated as permanent members of his administration have generated
cautious optimism that a Biden administration will be more
receptive to digital assets than that of his predecessor, who once
famously declared himself “not a fan of Bitcoin and other

For example, Biden has tapped Gary Gensler — CFTC chairman
under President Barack Obama, a U.S. Department of the Treasury
official under President Bill Clinton and a Wall Street veteran
— to lead the agency review team for the Federal Reserve as
well as banking and securities regulators.21

Gensler is currently a professor of blockchain, digital
currency, financial technology and public policy at the
Massachusetts Institute of Technology, and senior adviser to the
influential Digital Currency Initiative of the MIT Media

Although his public comments have been a mixed bag, including
criticism and defenses of various developments in the digital asset
space, he is by virtually all accounts an expert in the area and
has the appropriate experience and knowledge to make informed
policy judgments.23

As another example, Biden is said to have seriously considered
Lael Brainard for the post of Treasury secretary before settling on
former Federal Reserve Chair Janet Yellen.24 In her
current role on the Federal Reserve Board of Governors, Brainard
has spearheaded the Fed’s efforts into research and
experimentation related to distributed ledger technologies and use
cases, including the potential for a central bank digital

With the addition or promotion of these and other like-minded
individuals in a Biden administration, the potential for regulators
to drive innovation in this area, and to push Congress to act by
developing proofs of concept, is perhaps for the first time a real


In short, the outlook for a number of digital assets and
blockchain technologies, including the proliferation of
decentralized tokens, the creation and acceptance of platforms on
which to trade those assets, and a tax and regulatory structure
that would make all of that possible, has never been brighter.

As a new administration brings increased expertise to a
regulatory regime that has already taken a lead in setting the
rules of the game, institutional investors, traders and other
adopters of digital assets should prepare to engage in continued
advocacy to ensure a fair and open market for all participants.


1 Olga Kharif, Fidelity Says a Third of Big Institutions
Own Crypto Assets, Bloomberg.Com (June 9, 2020),

2 See, e.g., U.S. Dep’t of Justice, Report of the
Attorney General’s Cyber Digital Task Force, Cryptocurrency:
Enforcement Framework (Oct. 2020),

3 See, e.g., U.S. Securities and Exchange Commission,
Report of Investigation Pursuant to Section 21(a) of the Securities
Exchange Act of 1934: The DAO (July 25, 2017),

4 U.S. Securities and Exchange Commission, Cyber
Enforcement Actions (last visited Nov. 30, 2020),

5 U.S. Securities and Exchange Commissioner Hester M.
Peirce, Statement on SEC Settlement Charging Token Issuer with
Violation of Registration Provisions of the Securities Act of 1933
(Sept. 15, 2020),

6 Kevin Helms, Jay Clayton Leaves SEC: Crypto Industry
Hopeful for Bitcoin ETF Approval, Bitcoin.Com (June 21,

7 INX Limited, INX Limited Announces Effectiveness of
Security Token IPO (Aug, 24, 2020),

8 U.S. Securities and Exchange Commission, SEC Chairman
Jay Clayton Confirms Plans to Conclude Tenure at Year End (Nov. 16,

9 Jason Brett, U.S. Senate Votes in “Crypto
Mom” Hester Peirce at SEC through 2025, Forbes.Com (Aug. 2,

10 U.S. Securities and Exchange Commissioner Hester
Peirce, Running on Empty: A Proposal to Fill the Gap Between
Regulation and Decentralization (Feb. 6, 2020),

11 Id.

12 Id.

13 See supra note 5.

14 See U.S. Securities and Exchange Commission Chairman
Jay Clayton, Testimony Before the Committee on Banking, Housing,
and Urban Affairs, United States Senate (Feb. 6, 2018),;
see also U.S. Securities and Exchange Commission, Division of
Investment Management, Staff Letter: Engaging on Fund Innovation
and Cryptocurrency-related Holdings (Jan. 18, 2018),

15 U.S. Securities and Exchange Commissioner Hester
Peirce, Dissenting Statement in Response to Release No. 34-88284
(Feb. 26, 2020),

16 See, e.g., Nikhilesh De, CFTC Chairman Heath Tarbert
Talks Ethereum, DeFi and the Next BitMEX, CoinDesk.Com (Oct. 14,

17 Jason Brett, In 2019-2020, Congress Introduced 40
Crypto And Blockchain Bills, Forbes.Com (Oct. 17, 2020),

18 Id.

19 H. Res.5635, Virtual Currency Tax Fairness Act of 2020
(Introduced Jan. 16, 2020),

20 See, e.g., Brett Molina, Trump on Bitcoin, other
cryptocurrencies: “I am not a fan,” USAToday.Com (July
12, 2019),

21 Jaspreet Kalra and Nikhilesh De, Biden Confirms
Crypto-Savvy Gary Gensler Will Lead Financial Policy Transition
Team, Nasdaq.Com (Nov. 10, 2020),

22 Gary Gensler, Faculty Bio, MIT Management Sloan School
(last visited Nov. 20, 2020),

23 See Kalra and De, supra note 21.

24 See, e.g., Shalini Nagarajan, What Janet Yellen’s
Appointment as US Treasury Secretary Would Mean for Markets,
BusinessInsider.Com (Nov. 28, 2020),

25 Daniel Palmer, Fed Reserve Governor Brainard Said to
Be Biden’s Choice for Treasury Secretary, CoinDesk.Com (Sept.
25, 2020),

Originally Published by Law360

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

(Excerpt) Read more Here | 2020-12-23 02:31:27
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