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Crypto has had a stellar year, but regulatory uncertainty may lurk beneath the surface through 2024

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There are many reasons it seems like bitcoin may be about to rocket higher, but the industry is still stuck in a regulatory gray area that could hold prices back through next year. Bitcoin is up 150% for the year, according to Coin Metrics. After the collapse of FTX a year ago and now the Binance settlement with the Justice Department, crypto’s Wild West is getting an overdue cleanup. In the new year, it’s likely the U.S. will get its first spot bitcoin ETF (or several) ahead of the halving, which is expected to take place in the spring. Plus, the Fed could start cutting interest rates. Still, the market is crawling with uncertainty. Despite bitcoin’s price performance, this year in crypto is marred by a regulatory crackdown on businesses and the continued lack of clear rules in the space — which many expected would become clearer in a post-FTX world after so many investors got hurt. The drumbeat for regulation has been getting louder, but crypto may not get it in the new year, and that could pressure markets. “Regulation is all about certainty for markets,” said Michael Rinko, a research analyst at Delphi Digital. “Right now, the lack of crypto regulation creates an uncertain environment for market participants because, quite literally, no one knows the rules.” BTC.CM= YTD mountain Big gains for BTC With rules, it’s more likely that investors will be more comfortable deploying capital into crypto, Rinko said, although adverse regulation could hurt markets. To that extent, the approval of a bitcoin ETF would provide some clarity on how to treat bitcoin investments. However, it’s not exactly an indicator that the SEC has changed its long-hostile stance on crypto. “The SEC’s hand is forced by a federal court,” Milan Dalal, founder and managing partner of the crypto lobbying firm Tiger Hill Partners, told CNBC. “And so the engagement that you’re seeing right now – the public reporting related to pending [ETF] applications and the back and forth with the agency – is due to a unique circumstance in response to the federal court.” The U.S. Court of Appeals for the D.C. Circuit in August ruled that the Securities and Exchange Commission was wrong to deny crypto investment giant Grayscale permission to convert its popular bitcoin trust into an ETF. Market experts are quick to point out that’s especially so after the agency has greenlit several bitcoin derivatives-based investment products, like the various bitcoin futures ETFs. A month earlier, a judge in the Southern District of New York handed a partial victory to Ripple when it ruled that its XRP token is “not necessarily a security on its face,” after the SEC sued the company in 2020 for breaching U.S. securities laws. “We’re going to see continued aggression and an aggressive outlook from a handful of regulatory agencies” in 2024, Dalal said. “Ultimately, we’re going to have federal judges deciding the path forward.” Georgetown University associate professor Jim Angel agreed, saying that although the bitcoin ETF feels like a point of progress, the SEC’s attitude may not change next year. “I see the needle moving but not towards clarity, it’s moving towards regulation by enforcement – more of that,” he said. Legislative efforts While the SEC is losing court cases and bringing enforcement actions against crypto companies – it’s brought 26 this year alone – Congress is working diligently on creating rules. Ultimately, even if the SEC and Commodity Futures Trading Commission provided more guidance, crypto really needs the kind of clarity that comes with new legislation. This year two big bills moved out of House committees to a full floor vote that market watchers hope will take place in the new year: one focused on market structure, and one on stablecoins. “I’m pretty optimistic about some progress on stablecoins” in 2024, said Reena Aggarwal, professor of finance at Georgetown’s University’s McDonough School of Business. “But the biggest piece we need – and it’s going to be more complicated – is [the bill addressing] what authority does the CFTC have versus what authority does the SEC have, what is the commodity and what is the security?” Others agree there’s more urgency to regulate stablecoins and that is one area in crypto that could attract significant bipartisan support. Stablecoins play an important role bridging traditional and digital currencies and giving market participants access to crypto trading and protocols. For many, that makes them a proxy for the amount of fiat money entering and leaving crypto. The market structure bill could be a steeper climb. “The problem with the market structure proposal is there’s a lot there, and quite frankly, it’s going to be hard to get anything through Congress in the next year,” Angel said. “It’s an election year, and unless it’s an absolutely must-pass thing, chances are Congress will take the time.” January’s mad dash The House may be preoccupied in the beginning of the new year with uncertainty around government funding, which was extended to early 2024 earlier this month to help avoid a government shutdown. Action on the two crypto bills and most others could be delayed until after Congress resolves these issues. Brett Quick, head of government affairs for the Crypto Council for Innovation, said there’ll be “a lot of traction” at the beginning of the year — but that it might need to piggyback onto bigger and more pressing packages. “We expect it will be early in 2024, and they’re going to be looking for a must pass vehicle where they could potentially take a ride,” she said. For instance, Rep. Patrick McHenry, who chairs the Financial Services Committee, is pushing to attach his big crypto market structure bill to the National Defense Authorization Act. This is one of the few pieces of legislation that Congress addresses “in an overwhelmingly bipartisan way on an annual basis,” according to Dalal, and a “natural legislative vehicle to try to attach other legislative priorities.” If that isn’t a viable vehicle for crypto legislation, McHenry could make a big push in January to get his legislation on the House floor if it doesn’t happen by the end of this year, Quick said. “We’re going to see a huge run up to the expiration of government funding January 19 and then again in February,” she added. “There’s a lot of discussion about possibly stablecoin legislation or maybe even market structure being on the table in one of those [bigger] efforts … that’s going to be the first mad dash in January.”

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