With the new Trump administration promising to eliminate any barriers that could dampen broad adoption of cryptocurrencies, some industry observers see the potential for trouble ahead, particularly when it comes to integrating crypto with banking and other mainstream financial systems. Since the U.S. election in November, interest has surged among institutions, traditional managers and hedge funds, and retail investors.
Georgetown University finance professor James Angel warned of the dangers of integrating cryptocurrency into traditional public markets before enacting rules to prevent fraud and ensure transparency.
“If we don’t regulate crypto in the right way … now we have an industry with a history of flouting regulation mixing in with traditional financial services,” Angel said before adding: “What could go wrong?”
In a separate interview, Tyler Schipper, associate professor of economics at the University of St. Thomas, shared Angel’s concerns about mixing the asset with mainstream markets, noting that crypto advocates have long been feuding with the SEC over how much the government agency can regulate crypto and its related exchanges and funds like other assets.
Former SEC Chair Gary Gensler was aggressive in his oversight of crypto, describing the asset class as “rife with fraud, scams, and abuse.” Under Gensler’s oversight, the agency took a “regulation by enforcement” approach to go after some of the biggest players in the space, including cryptocurrency exchange Coinbase.
In addition to Coinbase, the agency brought about 100 enforcement actions against crypto firms, including fining BlockFi $100 million for failing to register its retail crypto lending product, suing Binance for unregistered securities trading, and charging stablecoin operator Tera with fraud following the collapse of FTX and the conviction of its founder Sam Bankman-Fried.
While regulators under Gensler relied on enforcement and kept restrictive custody rules in place, crypto enthusiasts pushed for clearer guidelines and wider institutional access, arguing that crypto was distinct from traditional assets and beyond the commission’s jurisdiction.
Before stepping down on Jan. 20, Gensler recently said that crypto is “rife with bad actors” before adding that he’s “never seen a field that’s so much wrapped up in sentiment and not so much about fundamentals.” Despite Gensler’s adversarial stance, the SEC in January 2024 approved the first 11 ETFs in the U.S. that track the spot price of bitcoin, giving investors easier access to the cryptocurrency without the cost and other constraints required to buy it directly.
“It’ll be interesting to see what form of deregulation” will be applied to crypto, Schipper said. Nevertheless, “I think that could present problems in terms of future crises.”
Speculative or not, with managers like BlackRock offering crypto-backed funds, the asset has become mainstream. And with crypto advocate Paul Atkins nominated to be the next chair of the SEC, investors expect less scrutiny from the commission. (Mark Uyeda was named acting chair until the Senate confirms Atkins.)
With deregulation a presumed priority for a possible Atkins-chaired SEC, Perkins Coie partner Lowell Ness noted that advancing the sector would still require some new rules for how certain cryptocurrencies may qualify as investment contracts.
“Clarification is important as certain cryptocurrencies and initial coin offerings may meet the definition of an ‘investment contract’ … and would be subject to additional disclosure and registration requirements from the SEC,” Ness said.
Crypto-backed loans could also cause heightened risks for banks to face serious losses if used as collateral due to the volatility of their collateral’s value, issues with storage, and potential connections to illegal activities. Schipper explained that such loans appear to be uncommon — and possibly prohibited — at most traditional banks, in part because they need additional regulation.
But Schipper expects the Trump Administration to pressure regulators to tamp down their scrutiny of this lending — which could lead to bank losses. “Greater lending in this area, collateralized with a volatile asset class that is reaching an all-time high, seems like a recipe for banking instability,” Schipper said.
Speaking about deregulation broadly, Schipper added, “it’s easy to applaud as pro-growth … until something falls apart.”
