This post is not a reflection on my feelings about the election from a societal POV, rather just a note on the implications specific to crypto.

Crypto prices have been soaring in the days since the election. What's going on here?

On a very simple level, it's just a reaction to the reality that the prior administration was quite hostile to crypto (particularly the SEC), and this one will not try to forcefully shut the industry down.

Here are some tweets that have come across my feed over the last week.

/sub

What's happening this week is that crypto assets are repricing to account for not just the removal of regulatory risk for the industry but also that we are very likely to see meaningful effort to integrate the traditional financial system with crypto.

This is not just a typical 'Trump is good for stocks so the market runs' rise, this is a repricing of the asset class.

That does not mean the price will just keep going up, however. Institutions move slowly, and when speculators try to front-run too far ahead of something that will happen in the future, the short-term market dynamic becomes unhealthy and prices need to move downward to flush out overleveraged speculators. I'll write a future post about why even though things are different this time, at some point the market will get too far ahead of its skis (study business cycles).

Not only has the main risk for most folks (regulatory!) been removed, but it is likely that there will be positive, new regulations put in place.

Yes, the Republican candidate and Congress will put new regulations in for crypto, and that's a good thing. Wait, what?

It's worth emphasizing just how hostile the environment has been for crypto in the US over the last four years, primarily due to a 'regulation by enforcement' strategy of the SEC.

Regulation by enforcement means that instead of proposing new rules to regulate crypto companies, the SEC instead chose to not make any new rules at all and instead sued small crypto companies for being in violation of the 1933 Securities Act, which would classify crypto assets essentially under the same regulatory structure as stocks and require all crypto companies to register with the SEC.

The problem for the SEC under the Biden admin, and the reason they kept losing in court, is that almost all of our financial regulations in the US are about the regulation of intermediaries - entities like banks, broker-dealers, and other financial institutions that act in the middle of people and their money and investments. Intermediaries are what get regulated.

Crypto, however, does not have intermediaries the same way that TradFi does. I can swap crypto assets, use DeFi protocols, and buy NFTs without going through a single intermediary. It is all done through smart-contract code.

The SEC tried many times over the last four years to say "well actually, you are a broker-dealer, you do fit the definition," but the courts have consistently said no. Crypto assets simply do not fit the rules as written.

The SEC desired a world where the creator of every crypto asset had to register with them, but the current rules didn't apply, and any guidance they gave would likely receive pushback from the industry (computer code is considered free speech if you weren't aware). Really, Congress needs to decide how to regulate this asset class.

The lack of regulation, or any clear guidance, has led to a massive chilling of crypto business in the US. Banks do not want to work with crypto companies. Crypto apps frequently block US users. Companies have to pay millions of dollars a year in legal fees to consultants to try and set up their operations in a maximally compliant way.

One particularly awful part about this is that the SEC has created a system where if your coin is useless or a meme, it is allowed to exist, but if it provides utility or generates fees to token holders, it is an illegal security and at risk of being sued.

Under the current SEC, DOGE and WIF are perfectly legal crypto commodities, but cashflow-generating DeFi tokens like AAVE are borderline illegal. And the SEC says that its mandate is to protect investors, eh?

Even worse, the SEC only attacks US-based companies, who are often the ones doing their best work to be compliant. This is incredibly counterintuitive.

The SEC decided to sue Coinbase - who has led the charge for new regulations for years - because they're in the US, while Binance escapes their scrutiny. The same is true of stablecoins. The SEC attacks USDC, domiciled in the US, and lets Tether and USDT act without inquiry.

Consistently, the SEC has put investors in harm's way by attacking the US companies trying to be compliant, pushing investors onto less secure international platforms.

Because of this regulatory limbo, most of traditional finance, which is highly regulated in what they can and cannot do, is not allowed to touch crypto in any way. For example, banks are not allowed to custody crypto on behalf of their users.

Wouldn't it be nice if you could simply hold Bitcoin in your Chase account? That is the kind of thing that is going to change over the next four years, and it's an example of exactly how regulation can help push the industry forward.

Provide guidance, rules, and regulations for the entities that control and custody users' funds. That is how you prevent the next FTX, and those kinds of rules were simply not possible under the Gary Gensler SEC.

All of the above is to say, we are moving from a hostile regulatory environment for crypto to one that is at the very least neutral, and is currently openly incredibly supportive.

The US may seriously create a strategic Bitcoin reserve, something even the most optimistic Bitcoiner would not have considered possible in the mid-2020s.

That is the repricing that we're seeing now. Crypto is not something that will be looked down on for much of the financial world for much longer.

It will be fun to watch.