Darren Kleine

A “Cambrian explosion” in crypto might just about be ready to begin, says Ryan Zurrer.



“We&#8217;re on the cusp of both bitcoin and ether ETFs being readily available within the next six months. I would argue that we&#8217;re probably a year out from coherent regulation in the US.”



On the Empire podcast (<a href="https://open.spotify.com/episode/1dVmyWBxADLGgTsYtCx20r">Spotify</a>/<a href="https://podcasts.apple.com/us/podcast/empire-debates-l2-wars-friendtech-crypto-regs-digital/id1554930038?i=1000626396749">Apple</a>), the founder of Vine Ventures and Dialectic AG tells Blockworks that he anticipates “a lot of demand side pressure” with the impending possibility of <a href="https://blockworks.co/news/sec-bitcoin-etf-grayscale">a spot bitcoin ETF</a>.



“A lot of institutions that would like to hold one or two percent for treasury management in mature crypto like bitcoin [<a href="https://blockworks.co/price/btc">BTC</a>] and ether [<a href="https://blockworks.co/price/eth">ETH</a>] can do so — and do so very easily and at a low cost level.”



<h2 class="wp-block-heading">Months away from acceptance?</h2>



Citing a recent podcast discussion with Hal Press, Delphi Digital co-founder Tommy Shaughnessy says ETFs “change the aura of acceptance in crypto.”



“When everybody is able to buy it, it ushers in this acceptance and everybody&#8217;s okay working for a crypto company, everybody&#8217;s okay pushing for new regulations, everyone&#8217;s okay holding the tokens.”



Zurrer reiterates, “we are months, not years away from coherent regulation around widespread participation in crypto.”&nbsp;



“Gensler&#8217;s gone next November because Trump is clearly taking the White House and <a href="https://blockworks.co/tag/gary-gensler">Gensler</a>&#8216;s [in the] Democrat pocket,” Zurrer says. He expects Trump’s attitude toward crypto to be more positive than it has been in the past. “Since Trump made so much money on his NFTs, I assume he&#8217;s got a little bit better perception of crypto at this point,” he says.



Angel investor Santiago R. Santos expresses pleasant surprise at the current sentiment in America regarding crypto, despite all the failures in recent memory. With the amount of value destruction across Celsius, FTX, Voyager, and Terra, Santos expected the industry to be set back “a decade,” but to his surprise, he says, “that&#8217;s not the case.”&nbsp;



He expects <a href="https://blockworks.co/tag/etfs">crypto ETFs</a> to follow a similar trajectory as gold ETFs did years ago, having first been approved in Europe and later being ushered into America.&nbsp;&nbsp;



“Markets are highly efficient,” Santos says. “As soon as you see that — and the amount of opportunity that&#8217;s being left on the table — it will push the US to adopt a more coherent regulation.”



“It&#8217;s just going to take this coming election cycle to run its course. And after that, I think we&#8217;re going to have clear visibility.”



<h2 class="wp-block-heading">Money talks, especially in politics</h2>



In the meantime, politicians may push on anti-crypto proposals to create “inflammatory headline-grabbing stuff,” Santos says, “but it is important to track the developments <a href="https://blockworks.co/news/grayscale-sec-decision-bitcoin-etf">that are happening in the courts</a>,” he says. “The courts are ultimately the ones that tell you the interpretation and how these things are going to be adopted.”



An ETF would solidify the industry as “an asset class that is here to stay,” Santos says. “Whether you like it or not, we don&#8217;t care. There&#8217;s money here, there&#8217;s innovation, and that&#8217;s going to happen.”



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Zurrer replies, “I have faith in the decentralization of wealth and power that crypto has caused.”



“<a href="https://blockworks.co/tag/ethereum">Ethereum</a> spawned somewhere in the tens of thousands of millionaires,” he says, “and those people are writing checks to politicians and telling them that they are single-issue voters that care about this matter.”



When it comes to policy in America, Zurrer says, “<a href="https://blockworks.co/news/mchenry-support-grayscale-sec">money talks, especially in politics</a>.”



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Coherent crypto regulation in the US is ‘months, not years away’ says Zurrer

Sebastian Sinclair

Hong Kong’s High Court has deemed crypto to be property, marking the first time such a decision regarding digital assets has been made in the city-state.



The landmark ruling was handed down in a legal matter involving Gatecoin Limited, a crypto exchange that operated domestically from January 2015 until its demise four years later.



Gatecoin (not to be confused with Gate.io) had been instructed to cease operations and undergo liquidation after failing to retrieve funds lost in a disagreement with a payment services provider.



Following its closure in March 2019, Gatecoin&#8217;s liquidators sought court guidance on whether the crypto still held by Gatecoin belonged to customers “on trust” or could be made available to general creditors.



On trust refers to crypto held for the benefit of specific customers in the event of liquidation. In Gatecoin&#8217;s case, the crypto would be in a fiduciary capacity where the exchange is responsible for the custody and management before being returned.



While Justice Linda Chan determined that creditors’ funds on the exchange weren’t held on trust, her ruling found that crypto inherently has all the qualities of property, per domestic law firm <a href="https://www.engage.hoganlovells.com/knowledgeservices/viewContent.action?key=Ec8teaJ9Vaqcuih%2B%2B7SlXF7eOOGbnAEFKCLORG72fHz0%2BNbpi2jDfaB8lgiEyY1JAvAvaah9lF3dzoxprWhI6w%3D%3D&amp;nav=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQ0qFfoEM4UR4%3D&amp;emailtofriendview=true&amp;freeviewlink=true" target="_blank" rel="noreferrer noopener">Hogan Lovells</a>.



Chan’s ruling also means crypto is legally capable of being held on trust, Hogan Lovells added.



Hong Kong&#8217;s definition of “property” is inclusive and intended to have a wide meaning, Chan reportedly said following the handing down of her ruling.



“The confirmation that holdings of cryptocurrencies constitute ‘property’ that is on a par with other intangible assets such as stocks and shares, brings Hong Kong into line with other common law jurisdictions,” Hogan Lovells said.



The US Internal Revenue Service also considers crypto to be property, although other regulatory agencies classify it <a href="https://blogs.law.ox.ac.uk/business-law-blog/blog/2018/12/us-law-crypto-money-property-commodity-and-security-all-same-time" target="_blank" rel="noreferrer noopener">differently</a> according to their purview (the Securities and Exchange Commission considers <a href="https://blockworks.co/news/gensler-house-financial-services-committee" target="_blank" rel="noreferrer noopener">many to be securities</a> while the Financial Crimes Enforcement Network instead <a href="https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering" target="_blank" rel="noreferrer noopener">treats</a> companies handling digital assets as “money transmitters&#8221;).



Hong Kong’s property ruling, meanwhile, comes as the city-state aims to <a href="https://blockworks.co/news/hong-kong-crypto-testing-ground" target="_blank" rel="noreferrer noopener">revive its image</a> as a <a href="https://blockworks.co/news/hong-kong-za-bank-crypto" target="_blank" rel="noreferrer noopener">digital assets hub</a>.



Clara Chan, Hong Kong central bank executive director, <a href="https://bullish.com/news/insights/web3-festival-hong-kong-2023/" target="_blank" rel="noreferrer noopener">said</a> during the region’s recent Web3 Festival conference: “We don’t want to stifle financial innovation but level the playing field among participants to unlock the potential for the industry. We look forward to harnessing Web3 for the force of good.”



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Hong Kong Court Recognizes Crypto as Property

Casey Wagner

As 2022 comes to a close, lawmakers around the world are lining up their 2023 agendas — and, for many politicians, crypto is expected to be near the top of them.&nbsp;



A plethora of new <a href="https://blockworks.co/news/new-crypto-friendly-politicians-are-headed-to-washington" target="_blank" rel="noreferrer noopener">politicians sympathetic to crypto causes</a> won office this year in the US and abroad. Here’s a look at some of those rising digital asset supporters set to set the tone for policy in the new year. 



<h3 class="wp-block-heading">Rishi Sunak: United Kingdom, Prime Minister</h3>



<a href="https://blockworks.co/news/incoming-uk-prime-minister-is-pro-crypto%ef%bf%bc" target="_blank" rel="noreferrer noopener">Sunak</a>, the European country’s former Chancellor of the Exchequer, took over following the resignation of Liz Truss, who served for just 45 days.&nbsp;



During his time in office under former Prime Minister Boris Johnson, Sunak made his interest in cryptocurrencies and blockchain technology known. He pushed for <a href="https://www.gov.uk/government/news/government-sets-out-plan-to-make-uk-a-global-cryptoasset-technology-hub" target="_blank" rel="noreferrer noopener">plans</a> to make the UK a hub for blockchain-based technology and related investments.&nbsp;



“It’s my ambition to make the UK a global hub for cryptoasset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country,” Sunak <a href="https://www.gov.uk/government/news/government-sets-out-plan-to-make-uk-a-global-cryptoasset-technology-hub" target="_blank" rel="noreferrer noopener">said in a statement</a>. “This is part of our plan to ensure the UK financial services industry is always at the forefront of technology and innovation.”



<h3 class="wp-block-heading">Sitiveni Rabuka: Fiji, Prime Minister&nbsp;</h3>



Rabuka took office on Dec. 24, after holding the same position previously for four years in the 1990s. Rabuka is expected to pursue making bitcoin legal tender in the country, in line with Tonga and other South Pacific jurisdictions.



While such formal policies have yet to be introduced, Lord Fusitu, a former member of Tongan’s parliament, said Rabuka has met with him to discuss how to roll out bitcoin as legal tender. If all goes well, Fusitu’a added, Fiji may also become a bitcoin mining hub in the near future — although the island nation does have an initiative in place requiring all energy to be powered by renewable resources by 2030.&nbsp;



<h3 class="wp-block-heading">Pierre Poilievre: Canada, leader of the “Official Opposition”</h3>



Poilievre, a former member of the North American country’s parliament, won the top Conservative party’s position in September and is expected to go up against incumbent Justin Trudeau for prime minister in 2025. 



The Conservative leader has declared an ownership stake in a bitcoin ETF and a Canadian spot fund, as well as disclosing that he holds additional cryptoassets. Earlier in the year, he expressed interest in allowing Canadians to use bitcoin as a means of payment.&nbsp;



<h3 class="wp-block-heading">Yoon Suk Yeol: South Korea, President</h3>



Politically conservative opposition candidate<a href="https://blockworks.co/news/yoon-suk-yeol-wins-south-koreas-presidential-election" target="_blank" rel="noreferrer noopener"> Yoon</a> won South Korea’s presidential election in March following a narrow victory over political rival Lee Jae-myung. The election marked the start of a potential boon for the crypto scene in South Korea as both candidates ran on promises to deregulate the digital asset industry. 



Yoon promised to increase the capital gains tax threshold for <a href="https://blockworks.co/south-korean-lawmakers-vote-to-postpone-crypto-tax" target="_blank" rel="noreferrer noopener">crypto transactions</a> set to be taxed by 20% next year. The move has been viewed as a means to attract younger voters now staring down rising house prices, mounting income inequality and soaring personal debt.



<h3 class="wp-block-heading">J.D. Vance: US, Senator-elect&nbsp;</h3>



Incoming Sen. Vance, (R-Ohio), won a seat up for grabs after Sen. Rob Portman announced his retirement. Vance, a venture capitalist with tech interests and a published author, reported owning $250,000 in bitcoin holdings. 



Vance was a vocal opponent of President Biden’s infrastructure bill and the accompanying reporting requirements for crypto companies and miners. In February, he <a href="https://twitter.com/JDVance1/status/1493575391457517568?s=20&amp;t=SjlephWyPNxzP4C-z4DPCA" target="_blank" rel="noreferrer noopener">tweeted</a> that crypto was “taking off,” because people are increasingly concerned about government interference in their finances.&nbsp;



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Crypto’s New Political Vanguard to Watch in 2023 

Brian Nibley

<div id="highlights-block_62bdbf2c4696b" class="highlights">
 <ul>
 <li>The Responsible Financial Innovation Act could provide the regulatory clarity that investors have been looking for</li>
 <li>Under the current proposal, bitcoin and ether would likely be labeled as commodities, while most altcoins would be considered securities</li>
 </ul>
 
</div>



By and large, blue-chip institutions have been forced to wait on the sidelines when it comes to entering crypto markets. There’s no global consensus on a regulatory framework or rules of the game that provide the necessary clarity for a large institution to deploy capital.



Fortunately, we are seeing signs that this appears to be changing.



US Sens. Lummis and Gillibrand have introduced a bill that would provide much of the needed regulatory clarity that investors have been hoping for. The Responsible Financial Innovation Act would define many crypto-related terms such as smart contract, digital asset, and virtual currency. Most importantly, the bill would classify some cryptocurrencies as commodities and others as securities.&nbsp;



Under the current proposal, bitcoin and ether — which account for the majority of crypto’s market capitalization — would likely be labeled as commodities, while many other coins would be considered securities. Because regulators across the globe have differing opinions on the question of classification, this bill could be instrumental in settling the debate. Once this framework has been established, it would provide a basic foundation for regulators, making it easier for other nations to replicate rather than starting with a blank canvas.



<h3 class="wp-block-heading">Global crypto regulatory landscape</h3>



Looking around the globe, there’s no clear agreement on how to regulate crypto. Nations span the spectrum — from making bitcoin legal tender to attempting to ban crypto outright and everything in between.



Central America’s El Salvador declared bitcoin to be legal tender in September 2021, with the Central African Republic following suit less than a year later. By embracing bitcoin, these nations hope to spur innovation, boost tourism and empower their largely unbanked or underbanked populations.



In the US, the muddy waters of regulation are gradually becoming clearer. The IRS classified crypto as property in 2014, with relatively minor regulations coming in since then. Some of these include the Financial Crimes Enforcement Unit, or FINCEN, <a href="https://complyadvantage.com/insights/cryptocurrency-regulations-around-world/" target="_blank" rel="noreferrer noopener">imposing</a> new data collection rules on exchanges. Biden’s infrastructure bill also included a provision to <a href="https://cms.blockworks.co/infrastructure-bill-advances-in-senate-crypto-amendments-await-vote/" target="_blank" rel="noreferrer noopener">classify exchanges as brokers</a>, making them subject to anti-money laundering and combatting the financing of terrorism (AML/CFT) reporting and record-keeping.



The state of New York recently instituted a partial ban on proof-of-work mining, while states including Wyoming, Florida and Texas have become more lenient, with Texas now hosting approximately <a href="https://www.cnbc.com/2021/10/09/war-to-attract-bitcoin-miners-pits-texas-against-new-york-kentucky.html" target="_blank" rel="noreferrer noopener">14% of America’s total bitcoin hash rate</a>.



And now, with new legislation on the horizon, some long-awaited regulatory clarity could be within reach.&nbsp;



<h3 class="wp-block-heading">The Lummis-Gillibrand and CFTC solution</h3>



As mentioned, the Commodity Futures Trading Commission, or CFTC, will likely gain regulatory authority over the majority of crypto’s market capitalization if the Responsible Financial Innovation Act passes. For further insight on the implications of this, we spoke with David Mercer, CEO of <a href="https://bit.ly/3I1cIJq" target="_blank" rel="noreferrer noopener">LMAX Group</a>, the operator of <a href="https://bit.ly/3NJHQ1z" target="_blank" rel="noreferrer noopener">LMAX Digital</a>, the leading institutional crypto currency exchange:



“The fact this is a bipartisan proposal is a positive and important step forward for the entire global crypto community. A well-considered framework from a renowned regulator will support the institutionalization and growth of the crypto market which is currently stymied by the offshore nature of trading and regulation. It is a demonstration that policy makers are taking crypto seriously.”



As far as the CFTC vs. SEC debate is concerned, LMAX Group is decidedly agnostic:&nbsp;



“Whilst we have no strong view on the particular regulator, it is good news that globally respected ‘non-island’ regulators are considering their approach to regulating this nascent asset class.”



<h3 class="wp-block-heading">Is crypto a commodity, security or currency?</h3>



Law makers behind the Lummis-Gillibrand bill classify bitcoin as a commodity because its supply and network have no central governing body or team behind them. The profit potential for bitcoin isn’t tied to “the efforts of others,” meaning it could fail the <a href="https://www.investopedia.com/terms/h/howey-test.asp" target="_blank" rel="noreferrer noopener">Howey Test</a>, ruling it out as a security. It’s much harder to make a similar case for other coins.&nbsp;



Classifying bitcoin as a commodity would provide some much-needed regulatory clarity. Still, some claim that the CFTC doesn’t hold the same regulatory oversight powers as the SEC, making it more difficult for regulators to clamp down on fraud and scams.



The vast majority of altcoins would likely be classified as securities, given that most of them pass the Howey Test, which the SEC uses to determine whether or not something is a security. The Howey Test has four key metrics:



<ul><li>An investment of money</li><li>In a common enterprise</li><li>People buy it with the expectation of profit</li><li>The profit potential is derived from the efforts of others</li></ul>



In contrast, Mercer said the LMAX Group views bitcoin differently.



“BTC is a currency whilst Ethereum and other layer-1 blockchains such as Litecoin could well fall under a securities or commodities umbrellas; the tokenized, or DeFi economy including staking would appear to be securities but they are also diverse in nature so some may differ in the rights and returns they demonstrate.”



<h3 class="wp-block-heading">What nations need to reach regulatory consensus</h3>



If North American and European nations could all reach similar agreements on crypto regulation, that could be the catalyst for significant amounts of capital to enter the space. Other large economies, such as the BRICS nations and others in South America, Asia, and Africa, could then easily follow.&nbsp;



Or, as an alternative, it’s possible that an increasing number of nations could adopt bitcoin as legal tender, sidestepping the need for regulation altogether, at least when it comes to the world’s largest cryptocurrency.&nbsp;&nbsp;



David Mercer had the following to say on the matter:



“Ultimately our view is that the CFTC, or other renowned global regulators, would be excellent stewards and supervisors of this new asset class and bring greater stability and integrity to&nbsp; crypto market structure. We do not believe there is a need for any new regulatory body and all products and participants can be accommodated broadly within existing frameworks.



A well-considered initial framework from renowned regulators will lend credibility to crypto and only aid the institutionalization of the market.



Crypto and DeFi cross a wide cross section of traditional finance, and it’s likely that all regulators, SEC, CFTC and the Fed will have to create a framework in the long term.”



This content is sponsored by <a href="https://bit.ly/3I1cIJq" target="_blank" rel="noreferrer noopener">LMAX</a>.



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