Over the past couple of weeks, the U.S. Securities and Exchange Commission (SEC) has been proactive, suggesting a promising future for blockchain businesses.

P.S: I will be part of the American Banker Payment Forum happening in San Francisco next week. Don’t hesitate to come and say hi.

Welcome to the State of Crypto, our CoinDesk newsletter that focuses on the convergence of digital currency and government policies. Do well to subscribe for future editions.

The narrative:

The first month of President Donald Trump’s second term witnessed several victories for the cryptocurrency industry. The SEC revealed its plans to discontinue or conclude multiple ongoing investigations and cases. It also requested courts to halt two more.

Why it matters:

The 2024 elections were significantly beneficial for the cryptocurrency industry, and the effects are just starting to materialize. The question of how the industry should be regulated is currently a hot topic.

Breaking it down:

In recent days, the SEC has filed to withdraw its case against Coinbase, halt its cases against Binance and Tron, and informed ConsenSys, OpenSea, Robinhood, Uniswap, and Gemini of its decision to close its cases or investigations into these platforms.

These developments followed SEC Commissioner Hester Peirce’s announcement of leading a new crypto task force at the regulatory agency and publishing several open questions to the public about how securities law might apply to different types of cryptocurrencies and defining how the SEC would oversee this industry. The SEC also withdrew staff accounting bulletin 121, an accounting standard which was largely disliked by the industry.

While several investigations or cases remain unresolved, it’s evident that the SEC is taking a markedly different approach under Acting Chair Mark Uyeda than when former Chair Gary Gensler led the agency.

Commissioner Hester Peirce said the SEC is now working to develop more policy that would guide the Division of Enforcement’s future actions, rather than have these enforcement actions “write regulatory policy.”

“We’re really trying to get back to using our enforcement division for its intended purpose, and letting the regulatory divisions do the hard work of figuring out how to craft rules, guidance [and] interpretations,” she told CoinDesk in an interview. “And then enforcement has a role after that, of course, to enforce the rules that are on the books. But this has just been an area where we’ve kind of gone about it backwards, and we’re trying to right the ship here.”

The industry has been taking a victory lap with the withdrawals and dropped cases (and to be clear, it’s not just the SEC withdrawing enforcement actions and investigations).

Amanda Tuminelli, the chief legal officer at DeFi Education Fund, a decentralized finance-focused lobbying group, said any groups in the crypto sector should be more confident they would not be sued “for a mere registration violation.”

“I don’t think that we’ve won. I won’t think that we have won until there are clear final rules on the books that make it clear, that are durable wins that make it clear that the industry is going to be able to innovate and exist for years in the future,” she said in an interview.

On the other side of this argument, the SEC — and Congress — are “actively welcoming” chaos from the crypto sector to the broader financial system, said Corey Frayer, the director of Investor Protection for the Consumer Federation of America and a former SEC senior adviser to Gensler.

“The SEC is not just abandoning enforcement actions, it’s actively building an unregulated market for crypto assets,” he said in an interview.

This could create risk for contagion, he said, referencing FTX and Silicon Valley Bank’s collapses. FTX had an issue with leverage (and the various FTX-affiliated tokens, which were used as collateral but lost their value following the exchange’s collapse).

“As we’ve learned from prior financial crises, ramping up leverage risks that any single bad bet or any significant move in the value of one asset or intermediary will crash the entire crypto sector,” Frayer said.

Congress’s efforts may take some time. Earlier this week, lawmakers with the Senate Banking Committee’s new digital assets subcommittee convened its first hearing focused on future legislation.

Lewis Cohen, an attorney who’s long been active in the crypto sector and a witness at the hearing, said developers had “raced ahead of the legal and policy frameworks designed decades ago.”

“Perhaps most critically, this uncertain regulatory environment has left consumers and users of digital assets at risk,” he said. “A clear, practical and flexible federal statutory regime is urgently needed to address activity involving digital assets in both the primary and the secondary markets.”

Former Commodity Futures Trading Commission Chair Timothy Massad suggested Congress should focus on stablecoins and hold off on any kind of market structure legislation, at least until his former agency and the SEC have had a chance to work on rulemakings and guidance first.

Tuminelli said she was worried that some builders might take these recent signs to mean “it’s just open season,” even though she expects law enforcement agencies to continue cracking down on outright criminal activity. Other recent incidents, like Bybit’s $1.5 billion hack, are also poor signs for the industry.

“We have things like Bybit to worry about, and we do have to worry about national security concerns and things like that,” she said. “So there are still going to be compliance issues that people need to pay attention to, even as there is a much greater runway in front of us.”

Outside of enforcement actions, the crypto industry is looking to the SEC for another purpose: Approving a broad swath of new exchange-traded products backed by, or tracking the prices of digital assets that weren’t under significant discussion a year ago.

In recent weeks, companies like Canary, Grayscale, and WisdomTree have filed the initial paperwork for ETPs tracking the prices of cardano (ADA), solana (SOL), XRP (XRP), litecoin (LTC), hedera (HBAR), and polkadot (DOT).

Unlike in previous years, where there was uncertainty about how far an application might go (during the race to launch a spot bitcoin (BTC) and later ether (ETH) ETF), the expectation now seems to be that retail and institutional traders will soon be able to gain exposure to these digital assets through this type of regulated investment product.

If you have any thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at [email protected] or find me on Bluesky @nikhileshde.bsky.social.

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See you all next week!