How New Rules Will Define the Next Phase of Crypto’s Growth

Feb 28, 2023

What is crypto—security, commodity or currency? The answer may determine which federal agency should oversee regulations.

Key Takeaways

  • New U.S. cryptocurrency rules could be on the horizon before the 2024 elections.

  • Legislators are likely to focus new laws on stablecoins.

  • Regulatory clarity could bring new participants and products. 

To say the future of the cryptocurrency industry in the U.S. is uncertain would be an understatement.  


Recent meltdowns of several high-profile crypto players have raised concerns for lawmakers and underscored the need for government oversight to protect investors, the economy and the government itself from risk. While legislators from both sides of the aisle see the need for regulation, there's been little bipartisan consensus on exactly how and where to establish federal guidelines around the various digital currencies. 


Still, with a significant percentage of American households holding cryptocurrency in some form, Morgan Stanley Research sees “a viable path to fresh crypto regulations” before the next U.S. presidential and congressional elections, and likely in the current Congressional term.  


“Legislators are likely to get serious about stablecoin regulations first, as conversations have been underway for some time,” says policy strategist Ariana Salvatore. Stablecoins are digital assets with a value often tied to a more traditional asset such as U.S. dollars or gold.  


Finding Common Ground on Crypto  

At the moment, it's not clear how cryptocurrencies should be categorized under U.S. law and, by extension, what federal agency should oversee the coming regulation of digital currencies. Designating that power lies with Congress.  


“Lawmakers and regulators are asking themselves, ‘Is cryptocurrency a security, commodity, currency or something else?’” says Sheena Shah, Morgan Stanley’s lead cryptocurrency strategist. “Significant regulatory implications depend on the answer.” 


The distinction will determine, for example, if the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission or another body leads the effort. 


With no consensus between Democrats and Republicans on the path forward, previous attempts at regulating crypto have failed. Because of this, Salvatore and Shah think legislators in the near term will take measured approach, focusing on stablecoins rather than the full scope of the crypto space as stablecoins are viewed as an area where bipartisan consensus appears more achievable.  


“This could involve requiring issuers to be defined like banks and therefore maintain adequate reserves and possibly be FDIC-insured says Shah.  “In addition, stablecoin issuers may be subject to a set of rules and restrictions on commercial entity affiliation, as well as federal risk-management standards.”  


Another possibility would put the Federal Reserve in charge of developing standards to promote robust risk management and the safety and soundness of assets; reduce systemic risks; and support the stability of the broader financial system.  


Other, less likely eventual policy scenarios include maintaining the status quo—and the patchwork of agencies overseeing the crypto assets—or a broad-based set of guidelines for all cryptocurrencies. 


Many lawmakers have expressed concerns that regulation is overdue. Last March, President Joe Biden issued an executive order directing a "whole-of-government" approach to crypto regulation, meaning it is unlikely that legislators will opt to do nothing.   


“At the same time, the split Congress almost guarantees a lighter touch on regulation, all but ruling out a comprehensive crypto rulebook,” says Salvatore.  

Lawmakers and regulators are asking themselves, ‘Is cryptocurrency a security, commodity, currency or something else?’ Significant regulatory implications depend on the answer.

Expanding the Crypto Ecosystem

Some industry players fear regulation will limit profits—and that may be the case, especially if less leverage can be created in the crypto ecosystem. However, there's a strong case that more products will come online once there's more clarity around cryptocurrency. Traditional players in the finance industry are also likely to want to participate once there are guidelines in place. 


Of course, whatever happens on Capitol Hill will have broad implications throughout the financial sector, affecting everything from asset managers to overseas payments. 


For example:


  • Regulatory clarity could continue to promote product expansion as traditional asset managers increase their offerings, including private trusts offering direct exposure and cryptocurrency ETPs. 

  • Cross-border payments could see relatively rapid change enabled by faster clearing, which could lower transaction costs and potentially bring meaningful deposit growth of stablecoins. Meanwhile, building out new systems based on stablecoins could be the primary entry point into the broader payment ecosystem.

  • Alternative asset managers may further expand their fund offerings and even create bespoke products as regulatory clarity on crypto mitigates risks. 


“Though the industry is still quite nascent and there’s lot of room to grow, Congressional action and the regulatory path will likely influence how—and where on a state and national level—growth and innovation occur,” says Salvatore. 

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