Crypto 2.0: What’s Next in the US?

Voiceover : Welcome to Fintech Focus, Skadden's podcast for fintech industry professionals. The global regulatory and legal updates you need start now. Joe Kamyar : Hello, and welcome back to another episode of Fintech Focus with me, Joe Kamyar. And joining us today is Alex Drylewski, who co-heads Skadden's Web3 and Digital Assets Practice.

So, Alex, welcome to the podcast. Alexander Drylewski : Hey, Joe, thanks for having me. Good to be here. Joe Kamyar : I think it's probably fair to say there's a bit going on over on your side of the pond, but today, our focus is very much on digital assets and clearly lots of hype around what a Trump administration means for digital assets policy in the US and doors potentially opening to crypto providers and investors famously with Trump having promised to make the US the crypto capital of the planet.

So if it works for you, Alex, maybe we'll start by looking at what's actually happening within the first few months or so of Trump's inauguration, and then maybe we can touch on some of your predictions for 2025 and beyond. Alexander Drylewski : Yeah, sounds good. I'm happy to chat with you about that stuff. Look, crypto capital of the planet, who knows if that's hyperbole or not, but what I can tell you is it's certainly an exciting time right now for all of our crypto clients.

And just a quick disclaimer up front before we start. Given the pace of new developments in this area, which are coming fast and furious, there is a reasonable likelihood that everything I'm about to say today may be obsolete by next week. Joe Kamyar : Fair enough. Well, why don't you start by giving us the overview of where things stand.

Alexander Drylewski : Yeah, happy to do that. Before I get started with all that, let me take a step back and just discuss where we've been over the past couple of years, few years really, because it'll help inform where we are now and why people are so excited about what's to come. For years, crypto participants have been raising concerns about the lack of regulatory clarity in the US on a number of fronts, including perhaps most notably in the area that I spend the majority of my time, that's the US federal securities laws.

Now, the SEC has been criticized for engaging in what many call regulation by enforcement. And what that means is instead of engaging in rulemaking or offering formal guidance to the industry, market participants have basically been left to decipher what guidance they can through litigations that the SEC has chosen to pursue and the positions that the agency has taken in those litigations. : And what's interesting about this criticism is it's not just a criticism that comes from crypto participants, it's also come from many lawmakers, it's come from political candidates, it's come from some courts, and it's even come from some of the SEC's own commissioners.

And for many in this space, this SEC pro-enforcement approach has led to confusion, it's led to frustration with the state of affairs, and it's led to some skepticism, particularly around this refrain that many have heard from the SEC over the past several years, which is, "Come in and register." A lot of participants in the space have viewed that with skepticism, or in some cases, hostility because quite simply, many participants believe there is no clear and viable framework as we currently sit here through which projects can, quote-unquote, register with the SEC.

So what this did, the end result, is that we've seen many take their efforts offshore, they've attempted to cut out the US markets altogether, and that is a result that at the end of the day is suboptimal for innovators, consumers, and the US more generally. : But here's where the clouds part in the skies and we see rays of sunlight, things do seem to be changing. And, Joe, you mentioned President Trump's campaign, but even more broadly than that, political efforts on behalf of crypto were well-organized and they were well-funded this last political cycle.

And crypto super PACs poured record amounts into political races, focusing heavily on Republican but also key democratic candidates with the goal of seeding more lawmakers that are expected to support digital assets. And those efforts, by all accounts, appear to have paid off. What we're seeing from reports is that nearly 300 pro-crypto candidates from both sides of the aisle have been elected to the House and the Senate in the US and many players in the space, both, quote-unquote, crypto native and also more traditional companies are showing signs of optimism about what this political shift means.

And we're already seeing that translate into increased market activity. Joe Kamyar : I guess on the topic of activity, we've seen what an excess of 50 executive orders from the White House in the past month or so, and in particularly issued the executive order that's called Strengthening American Leadership in Digital Financial Technology. So could you maybe walk us through that one? Alexander Drylewski : Yeah, happy to do that.

So this executive order was issued on January 23rd, I think, and it's the first by this administration focused on crypto. And what it does is it establishes a framework for fostering the growth of digital financial technology. And while it doesn't do much heavy lifting when it comes to specific policy changes, what it does do is it marks a philosophical shift away from the prior administration's approach to these issues. And just in broad strokes, let me tell you a little bit about what this order does.

: Number one, it revokes the prior administration's digital assets executive order, along with any policies, directives, and guidance issued pursuant to that order. And while the prior executive order had focused really strongly on the perceived risks attended to digital assets, this new executive order switches that focus and it really emphasizes the goals of protecting and promoting innovation, regulatory clarity, and providing access to these technologies. So that's number one.

: Number two, the executive order establishes a president's working group on digital assets. That group is going to coordinate federal efforts on digital financial technology, it's going to be chaired by David Sacks, who's been named special advisor for AI and crypto, and it's going to include the heads of 11 different federal agencies. Number three, the order creates a prohibition on central bank digital currencies in the US, or CBDCs. Again, this is another departure from Biden-era policies.

: Number four, the executive order directs the working group to propose a regulatory framework for stable coins that is designed to foster broader acceptance and institutionalization of them. And finally, the executive order directs the working group to evaluate whether the federal government should create a national digital asset reserve. So while this order leaves a lot of questions and details unanswered at the moment, it's generally been viewed as a very positive first step in fostering a more innovative pro-crypto environment for digital asset and blockchain-related builders in the US.

Joe Kamyar : So in terms of a future securities regulatory framework for the US, is there a sense of what that could look like? Are people expecting a kind of a full-fat MECA-style framework, a lighter-touch approach, or is it just too early to call? Alexander Drylewski : It's a bit too early to tell at this point, but some of the signs that we're seeing are pointing towards an approach that, one, emphasizes prevention of fraud, and second, at the same time, it allows for a clearer path for well-meaning projects to comply with regulatory requirements.

So take, for example, the SEC again. The acting chair of the SEC, Mark Uyeda, announced recently the formation of a new crypto task force that is going to be dedicated to developing a comprehensive regulatory framework for crypto assets. And the press release for that task force, here's how it put it, it said that the task force's focus will be to help the SEC, quote, draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.

: This task force, it's going to be led by SEC Commissioner Hester Peirce, who you may know has been a vocal critic of the SEC's enforcement activity in the crypto space, and had previously proposed a safe harbor framework for crypto projects that involved tailored disclosure obligations and other regulatory requirements that are more appropriately reflecting the realities of these new technologies. And just last week, the SEC established a new Cyber and Emerging Technologies Unit to protect retail investors, the point of which it will complement the work of the task force and focus on a number of priority areas, including, as it says, quote, fraud involving blockchain technology and crypto assets.

: Last thing I want to note on the SEC front is that on January 23rd, the SEC also issued staff accounting bulletin 122. That SAB 122, it rescinds interpretive guidance from the wildly unpopular SAB 121. SAB 121 had required financial institutions that perform custodial duties for crypto assets to recognize a safeguarding liability on their balance sheets. This new SAB 122 is going to allow financial institutions now to hold crypto assets on behalf of their customers without incurring the balance sheet and capital impacts mandated by SAB 121, which were prohibitive for many traditional financial institutions, banks, and broker dealers.

So that is a very important step in the right direction in the eyes of many. Joe Kamyar : Got it. So looking beyond the SEC, what's happening more broadly in Washington? Alexander Drylewski : Yeah, so David Sacks recently led a joint press conference on digital assets and he was joined by House and Senate lawmakers.

And during that press conference, he outlined a proposed roadmap for digital asset legislation in line with the executive order. And these proposed actions are planned to take place within the administration's first 100 days. : So whether or not Congress can achieve that goal is uncertain, but what is clear here is that congressional leaders are making digital asset legislation a priority. Again, all in all, these early efforts are a strong signal that the US government's approach to crypto is going to very likely provide a lighter and more flexible compliance framework while at the same time continuing to place appropriate focus on preventing fraud and fraudulent practices, especially those that could be targeting retail customers.

Joe Kamyar : And how do you think crypto participants are actually viewing these developments? Alexander Drylewski : Well, obviously these are all very welcome signs to the industry. That said, I do want to note that many in the space have expressed wariness of there being too much of a pendulation away from regulatory oversight, which, in the long term, may actually not be good for the industry. I've seen that many outside observers conflate the concept of pro-crypto regulation with no crypto regulation or with a Wild West environment, and that couldn't be further from the truth.

The reality is that pro-crypto players in the space want the prevention of fraud. : They want incentives for participants to act responsibly and they want accountability for bad behavior because at the end of the day, those are the things that will bolster the legitimacy of the space overall. So, for years, what I've heard from many in the space is that they simply want a workable regulatory framework, clear rules of the road, and an environment in which they can innovate and build responsibly with emerging technologies.

And given everything that we've seen since the beginning of January, I'm hopeful that we can get there. Joe Kamyar : Okay. So back to regulators, we've obviously touched on the SEC already. Are you seeing much movement among the likes of the CFTC, the FDIC and so on?

Alexander Drylewski : It's a good question because with so much focus on the SEC and news related to that agency, I think many can be forgiven for forgetting all of the other federal agencies out there that are or could be involved. Let's start with the CFTC. Brian Quintenz was recently tapped to be the chair of that agency. He was formerly a CFTC commissioner, and he is widely expected to be a major advocate for the industry as a whole.

Now, it remains to be seen whether this translates into specific CFTC action, but during his previous stint, Quintenz repeatedly called for the crypto industry to create its own self-regulatory organization in order to make enforceable rules to bolster the credibility of the marketplace. : So it'll be interesting to see what role the CFTC will play going forward, particularly if Congress passes a market structure bill that gives oversight authority to the CFTC, including authority over spot markets where digital assets are typically traded.

There's other agencies that could play a consumer protection role in the crypto space, and that could include the Federal Trade Commission, for example. Another agency that's worth noting is the FDIC. Last month, Travis Hill was named the acting chair and announced that that agency is going to focus on adopting a more open-minded approach to fintech partnerships, digital assets, and tokenization. So these are all signs that US agencies may begin rowing in the same direction towards a more favorable environment for crypto overall.

Joe Kamyar : Okay. So we've covered the supervising approach and the approach to enforcement action, but to what extent is that trend being mirrored by levels of crypto-related private litigation? Alexander Drylewski : With so much focus on the regulatory environment and enforcement activity by regulators, this is one area that probably gets less attention than it should, and that's private litigation. Specifically I'm talking about class-action litigation in the states.

That has been a trending topic, an area of law for several years running, and two things have primarily fueled that activity. : One, the lack of regulatory clarity around when specific crypto assets may be offered and sold in securities transactions, and second, asset price volatility, which can provide the type of financial necessary to bring a suit and the incentive for private plaintiff's firms to bring such suits. We, at Skadden, have been defending against a number of these actions around the country, and I don't expect to see any of this slow down in the near term.

: If anything, there could be an increase in private litigation, particularly if those two ingredients remain at play. One, if it takes time for regulatory clarity to emerge, which it may, and second, if asset prices show volatility, which they certainly may. Joe Kamyar : Got it. So thank you.

Alex, any final predictions for crypto over 2025? Alexander Drylewski : Over the next year, I think we'll see a renewed push for comprehensive crypto legislation along with an increase in banking and capital markets activity. In fact, we're already seeing a significant rise in strategic corporate transactions and a push for public listings, and we'll see a deeper institutional engagement by more traditional non-crypto native players. In addition, I think we're going to see a recalibrated regulatory approach with an emphasis on clear rules of the road and prevention of fraud, particularly on US retail consumers, as well as probably an increase in private litigation, at least in the short term.

Joe Kamyar : Very good. We'll perhaps reconvene in a year to test some of your predictions. Alexander Drylewski : I think we'll probably need to do that sooner than that, given the pace of developments, but happy to chat anytime. Joe Kamyar : Thanks again.

Alexander Drylewski : Thank you. Voiceover : Thank you for joining us on Fintech Focus. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found at skadden.

com.