Four crypto developments to watch for in 2024

In February 2024, the Office of the Comptroller of the Currency is organizing a symposium focused on tokenization, a move expected to further elevate the ongoing public discourse surrounding the potential of tokenizing real-world assets. Positioned as a platform for exploring "responsible innovation," the event will showcase the kinds of use cases for blockchain technology to make real world asset settlement more efficient. Regulators have long made clear permissionless blockchains are nearly incompatible with a variety of bank regulations like anti-money laundering rules. However, one aspect of crypto that regulators are keen to explore: Tokenization  which is increasingly piquing even federal banking watchdogs' interest for its potential benefits in increasing settlement efficiency and speed.

Acting Comptroller Michael Hsu emphasized the widening acceptance gap between crypto and the tokenization of tangible assets and liabilities in recent remarks.

"Crypto remains driven by the promise of speculative gains, continues to be marked by rampant scams, fraud, and hacks, and struggles to comply with anti-money laundering rules," said Hsu. "By contrast, tokenization is driven by solving real-world settlement problems and can easily be developed in a safe and sound manner and fully compliant with anti-money laundering rules."

Major financial institutions are already embracing tokenization. JPMorgan Chase and Apollo Global Management, in collaboration with blockchain innovators like Axelar, Oasis Pro, and Provenance Blockchain, have begun testing the potential of tokenizing funds on the blockchain. Expect tokenization to be all the rave next year.

Bank policy experts agree the prospect of crypto and stablecoin legislation shepherded by House Financial Services Committee Chairman Patrick McHenry, face a rapidly decreasing  chance of becoming law in the new year.

"McHenry didn't succeed in getting his bills attached to the National Defense Authorization Act and now has to look to other legislative vehicles in 2024," noted Ian Katz of Capital Alpha Partners. "But he doesn't have enough support in the Democratic-led Senate, and the deeper we get into an election year the harder it will be to maneuver complex legislation through Congress."

The North Carolina Republican's plans to attach bills to spending or agriculture legislation are likely to face pushback from Senate Democratic banking leaders  like banking chairman Sherrod Brown of Ohio and Senator Elizabeth Warren of Massachusetts. Growing concerns about crypto as a funding method for entities like Hamas — which has spawned a rare bipartisan front — further steepen the legislative hill McHenry must ascend in order to get a law enacted.

"While McHenry's efforts have some support among Democrats, Brown still views the legislation as 'industry-written,'" Katz wrote. "Leading Democrats haven't shown much interest in the stablecoin bill, and some see it as giving too much authority to state regulators and not enough to federal agencies."

The regulatory landscape for crypto in 2024 will be marked by a tussle between the Securities and Exchange Commision and the  Commodity Futures Trading Commission, two agencies with increasingly divergent approaches towards overseeing the industry. The SEC, led by Chair Gary Gensler, recently rejected Coinbase's plea for new regulations, with Gensler doubling down on his nearly dogmatic belief in the applicability of existing securities laws to the crypto securities markets. 

Jaret Seiberg, policy analyst at TD Cowen said that  Gensler's actions and remarks suggest he'll continue to approach regulating crypto much like the Asset-Backed Securities markets — that is, using enforcement actions to clarify the SEC's approach and then only adopting a regulatory regime to codify such an approach. A comprehensive ABS regulatory framework took years to accomplish, and Seiberg thinks crypto advocates should appreciate a deliberate , if slow, process. Greater time allows for U.S. regulators to digest the lessons from other countries who are also rolling out regulations.

"We believe the crypto sector should not want to lock in a regulatory regime quite yet. This industry is still evolving. Delay gives the United States the ability to see what works best in other markets. It suggests the ultimate U.S. regime could be superior even if it takes longer," Seiberg said. 

Just days after the SEC's action in December the CFTC handed the industry a win when it approved a clearinghouse operation for  Bitnomial, which already operates a crypto exchange, a brokerage and a market-making trading firm. Experts like Ian Katz of Capital Alpha Partners said  the divergent decisions highlight the contrasting views within even the current Democratic administration and underscore the ongoing tug-of-war within regulatory agencies to establish a cohesive framework for the evolving crypto industry.

"[The Bitnomial decision is] probably the most crypto-friendly decision made by a federal regulator since the FTX fiasco, and perhaps in the Biden era," noted Katz. "It also highlights the differences between the SEC and CFTC on crypto – personified by Gensler and Behnam – and goes to show the variety of views toward the industry even within the Democratic Party."