How to View Cryptocurrency Issues During a Change of Government

Cryptocurrency policy issues can be roughly divided into two categories: regulatory issues (tax reporting, BSA/AML, sanctions) and investor protection issues

Cryptocurrency policy issues can be roughly divided into two categories: regulatory issues (tax reporting, BSA/AML, sanctions) and investor protection issues (SEC, CFTC, banking). Good policy in one category does not necessarily lead to good policy in the other. The motivations behind these two policy categories are different (protecting investors vs. identifying and blocking illicit financial flows), and the political incentives and opportunities for joint action by lawmakers in each area are also different.

Similarly, the cryptocurrency ecosystem can be divided into two categories: centralized businesses (custodial wallet providers, centralized exchanges, trusted issuers) and developers and users of decentralized infrastructure (protocol developers, non-custodial wallet and application developers, and disintermediation users who use these protocols and applications). Coin Center wants to promote good policy in all dimensions, but our core mission is to defend the rights of developers and users of decentralized and peer-to-peer tools. Any overly aggressive regulatory regime in the investor protection or regulatory arena could threaten developers and users. However, the threat from the regulatory arena has become more profound in recent years.

Here is a graphic of past and potential future policy actions to help you understand this framework:

You may notice that the box in the lower right corner is particularly heavy compared to the others. This may reflect our focus. Coin Center’s mission focuses on the rights of decentralized infrastructure developers to publish code (which involves the First Amendment) and oppose unreasonable regulatory requirements (which involves the Fourth Amendment). This box is the battlefield where these two issues intersect. Even with some bias, this area has indeed been more controversial than any other in the past four years. There are many explanations for this, such as from the perspective of public opinion and the news cycle, some politicians have mistakenly or opportunistically linked global and foreign policy tragedies to cryptocurrencies (such as Hamas financing and Russian oligarchs trying to circumvent sanctions). In addition, in political coalition building, the left and the right, although rarely consistent, sometimes find common ground on national security and regulatory issues.

What is the biggest threat? The freedoms of individual cryptocurrency users and developers have faced serious threats over the past few years. We have seen increasing overreach by the SEC, with its exchange-defined rule revisions increasingly directly involving individual developers and users, as well as its enforcement actions against wallet providers such as ConsenSys’ Metamask and Coinbase Wallet. At the same time, regulatory issues have also become more prominent, including 6050I reporting obligations, Tornado Cash sanctions, broker reporting obligations, and unlicensed funds transmission prosecutions against non-custodial developers. Meanwhile, in Congress, we have been fighting legislation like CANSEE and DAMLA, which seek to impose regulatory obligations on non-custodial developers that cannot be reasonably explained.

Still a tough nut to crack There are three major threats of particular concern: (1) 6050I, (2) Tornado Cash sanctions, and (3) unlicensed money transmission prosecutions. First, in the context of 6050I, we already have ongoing litigation arguing that the IRS’s mandatory reporting of personal information of recipients of over $10,000 in cryptocurrency violates the constitutional requirement for disclosure without a warrant. Second, in the context of Tornado Cash sanctions, we also have ongoing litigation arguing that the sanctions law does not give the Treasury Department the power to prohibit U.S. persons (who are neither foreign persons nor their property) from using immutable smart contracts. Third, we are alarmed by the unlicensed money transmission prosecutions filed by the Southern District of New York against developers of non-custodial software tools such as Tornado Cash and Samurai Wallet, and will support defendants in these cases to the extent possible. While the Department of Justice may be changing under the Trump Administration, it is likely that its political independence will not lead to its abandonment of these prosecutions in response to a change in administration.

Reasons for optimism Without going into too much detail, it seems plausible that the new administration will be friendlier to centralized businesses in the U.S., especially as it relates to investor protection. This is good news, as disintermediation and efficient capital formation are critical to broadening the appeal of cryptocurrencies, especially to less technologically savvy audiences. However, what about the impact on developers and users of truly decentralized tools and services, Coin Center’s core focus?

On an institutional level, President Trump’s generally supportive stance toward cryptocurrencies and his choice of appointees to the SEC and Treasury Department could mean that some controversial rulemaking will be frozen or even abandoned. This is a consistent positive sign for us, as the SEC’s exchange redefinition rule and the IRS’s broker rule for non-custodial developers are always two swords hanging over our heads.

The new administration’s willingness to roll back overly aggressive sanctions and anti-money laundering policies is uncertain. Still, we hope that some progress can be made if it becomes clear that even under a friend