If you saw the returns in my crypto portfolio this year, you would take a pass on my predictions for the direction of the cryptocurrency market. So, I will stick to what I know and share some regulatory predictions for the crypto industry.
Few legislative changes
A few minor victories will logroll small legislative fixes into “must pass” bills like the defense authorization or omnibus spending bills. The top candidate would be a de minimis exemption for smaller crypto transactions to exempt users from capital gains tax liability every time they purchase a coffee with crypto. The protection for noncustodial crypto providers in Republican Representative Tom Emmer’s bill might make it in as well. On the outside, a bipartisan stablecoin bill may be possible, though Senate Democrats are still a steep climb. But do not expect major bills — such as Lummis-Gillibrand or Boozman-Stabenow — to pass during the next Congress.
Crypto advocates in Washington have made a lot of progress this year. No one could have predicted in 2018 or even 2020 that two United States senators — Democratic Senator Kirsten Gillibrand and Republican Senator Cynthia Lummis — would appear at multiple crypto conferences in 2022 touting a bill they wrote to provide regulatory clarity.
Related: Sen. Lummis: My proposal with Sen. Gillibrand empowers the SEC to protect consumers
Bills like Lummis-Gillibrand and Boozman-Stabenow are a great start to the conversation, but tempered expectations are warranted, as neither bill will pass the next Congress. Consider the thin history of recent comprehensive financial services legislation in the United States. Since the Dodd-Frank Act of 2010 — a bill that included ideas from Democratic lawmakers floated as far back as the 1990s — no major financial services legislation has passed Congress.
Crypto advocates should continue their work but assume that barely any legislation will fit through the thin Overton window between Democratic Ohio Senator Sherrod Brown, who is flirting with banning crypto, and incoming House Majority Whip Emmer, who articulates the case for decentralized finance (DeFi) like a true crypto native.
The Securities and Exchange Commission may win some litigation
While I remain hopeful that Ripple will ultimately win its case against the Securities and Exchange Commission, the odds are against it in district court. The precedent for the test the SEC is using against Ripple, the Howey test for investment contracts, is flexible. Historically, the SEC never brought cases under the Howey test against investment opportunities it actually wanted to register but instead used it as a cudgel against real frauds — and so appellate judges gave the SEC the benefit of the doubt.
If Ripple goes all the way to the Supreme Court, and if the justices are as eager in their case to peel back administrative agency discretion as they were in a recent defeat for the Environmental Protection Agency under the “major questions doctrine,” Ripple has a shot at changing the game and ultimately winning its epic fight against the SEC.
2023 is the year that crypto users wake up to the need for privacy
A Cambrian explosion is coming in crypto privacy as the government’s surveillance efforts pick up steam.
Crypto privacy in the United States is under sustained assault. We may have dodged the bullet of Know Your Customer (KYC) laws applied to private wallets for now, but we still face massive threats to privacy. For example, the Treasury Department this year sanctioned the only functional tool on Ethereum for complete privacy — Tornado Cash.
CoinJoin and Samourai Wallet do a good job of masking transaction history for the sophisticated Bitcoin (BTC) user. Leading crypto privacy coins like Zcash (ZEC) and Monero (XMR) offer different approaches to the tradeoff of privacy/convenience right now. (Zcash offers optimal privacy in asset and transaction shielding and is working on historical challenges to ease of use, while Monero is more vulnerable to statistical tracing but has achieved wider adoption.)
Related: The Federal Reserve’s pursuit of a ‘reverse wealth effect’ is undermining crypto
Privacy is still, nevertheless, treated as a niche idea in crypto. Millions of users of Bitcoin, Ethereum and other chains are blithely unaware of the surveillance possible on their transactions.
Those who sold the top in 2021 but didn’t go through the painstaking process of netting the capital gains owed will soon learn about the thousands of new Internal Revenue Service agents being trained in how to use simple block explorers and more sophisticated Chainalysis tools.
Between the United States and European Union, both may lose
The European Union’s approach to new token launches appears to be more reasonable than that of the United States, with a light whitepaper-based disclosure approach. Yet its aggressive approach to private wallet surveillance threatens user privacy as exchanges are forced to KYC personal wallets.
The U.S. has a chance to compete with Europe on crypto development if it can better rationalize rules for centralized crypto entities — while leaving true DeFi alone — that are workable and ignore voices such as Democratic Senator Elizabeth Warren, who would use KYC rules to effectively destroy crypto.
It’s too soon to predict which way that will go, but I can predict it will be an exciting year for crypto regulation!
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.