From confusion to clarity: How Trump's SEC will reshape cryptocurrency regulation

President-elect Donald Trump won the hearts of the crypto industry by promising to end the Biden administration’s anti-crypto campaign and “fire” SEC Chairman Gary Gensler on his first day.

Although Trump has yet to propose a replacement for Gensler and his ability to remove current SEC commissioners appears legally questionable, cryptocurrency participants are still ecstatic about the prospect that a new SEC chairman will soon ease one of the industry’s biggest regulatory pain points.

Commissioners Hester Peirce and Mark Uyeda may have dropped out of contention for the chairmanship, but they have been outspoken advocates for digital asset freedoms and regulatory restraint during their tenure at the SEC.

Today, we explore Peirce and Uyeda’s official statements in hopes of understanding what a hypothetical pro-cryptocurrency SEC under a Trump administration might look like.

Proposed Token Safe Harbor

Commissioner Peirce began thinking about digital assets the day before Gary Gensler was confirmed as SEC Chairman in April 2021.

Recognizing that the new SEC chairman will have a new agenda of enforcement priorities, Peirce sought to steer the conversation toward how securities regulations should be tailored to accommodate blockchain-based tokens by publishing an updated token safe harbor proposal via GitHub.

Peirce’s updated proposal seeks to provide a three-year exemption, or safe harbor, from federal securities registration for decentralized application developers. It incorporates significant revisions provided by the cryptocurrency community, securities lawyers and the public in response to feedback from her previous draft in February.

Under the Trump administration, the pro-crypto SEC is expected to prioritize providing cryptocurrency transparency while actively soliciting industry feedback to craft regulations that balance the needs of emerging decentralized applications with the agency’s imperative to protect the investing public.

Irreplaceable Stupidity

"Stoner Cats" is a collection of 10,320 NFTs minted in July 2021 for $8.2 million in ETH; proceeds from the sale will be used to finance the production of an animated series, also called "Stoner Cats," starring Hollywood stars such as Mila Kunis, Ashton Kutcher, and Chris Rock. In exchange for purchase, holders of the Stoner Cats NFT will receive exclusive access to the series, unspecified future entertainment content, and an online community.

Although the SEC ultimately settled with the entity behind Stoner Cats for conducting an unregistered securities offering, Commissioner Peirce and the lone Republican on the SEC's commission, Mark Uyeda, opposed the enforcement action.

Commissioners Peirce and Uyeda acknowledge that NFT creators should not get a free pass from securities regulation, but they believe that the SEC’s application of securities regulation in this case would only lead to legal ambiguity.

Under the Trump administration, the pro-crypto SEC is expected to develop comprehensive guidelines on how to apply security regulations to NFTs; to replace the uncertainty over the legal status of a hypothetical tokenized Pokémon card, there should be clarity on when digital assets can be exempt from securities regulation.

Token tensions

In its most recent ostensibly controversial enforcement action against a cryptocurrency company, the U.S. Securities and Exchange Commission (SEC) settled charges against cryptocurrency exchange ShapeShift in March for acting as an unregistered securities dealer in the operation of its online crypto asset trading platform.

Although ShapeShift became a peer-to-peer decentralized exchange in 2021, for more than six years ShapeShift has been acting as a brokerage intermediary, fulfilling inventory orders and acting as the counterparty to all cryptocurrency trades that occur on its platform.

While Commissioners Peirce and Uyeda did not dispute the assertion that ShapeShift operated as an unregistered securities dealer prior to 2021, in a separate joint dissent they expressed concern about the ambiguity created by the SEC’s enforcement action.

To qualify as an unregistered securities dealer, ShapeShift must facilitate the sale of securities. The SEC’s unwillingness (or inability) to identify the underlying securities or how the sale of those securities creates an investment contract has created an untenable environment for secondary trading of crypto assets.

Under the Trump administration, the crypto-friendly SEC is expected to clarify which tokens qualify as securities, eliminating the threat of murky misconduct faced by crypto-native exchanges such as Coinbase, while approving registered securities dealers to list such assets alongside existing products.

Looming Problem

Decades of precedent suggest that Chairman Gensler will resign and hand control of the SEC to a Trump appointee, but his term does not expire until 2026, and it is not at all clear that President Trump could forcibly remove Chairman Gensler before then without protracted litigation.

However, it’s worth noting that many within the crypto industry interpreted Gensler’s recent speech on Nov. 14 as an informal resignation notice, with the chairman stating that he was “honored to serve.”

As an independent regulator, the SEC enjoys significant autonomy from the executive branch, and despite Trump’s rhetorical promise to fire Chairman Gensler on Day 1, murky case law may support the view that SEC commissioners can only be removed “for cause” and not simply “at will.”

While the SEC chairman has discretion over the agency's budget and oversees its staff, they need a majority of the commission to appoint executive branch heads, and each commissioner has an equal say in agency procedural votes that guide how the SEC interprets and enforces securities legislation.

Commissioners are appointed by the President of the United States to five-year terms, but must be confirmed by a majority of the Senate. The end of terms is staggered to ensure that one member can be removed on June 5 each year, and while commissioners can serve for an additional 18 months after their term expires to prevent vacancies, no more than three of the five commissioners may belong to the same political party at any one time.

Although Commissioner Crenshaw’s term expired on June 5 of this year, she continues to serve at the SEC and has been renominated by President Biden to fill the resulting vacancy.

If this vacancy lasts until President Trump’s inauguration, he could easily fill the Republican Senate seat with a candidate of his choice to solidify a seemingly pro-crypto majority within the SEC. Unfortunately, the current Democratic-controlled Senate still has plenty of time to confirm Crenshaw for an additional 5-year term, and the Biden administration could always make a sneaky recess appointment after the Senate adjourns on December 20th.

Even in the event that Gensler does not resign and assuming Crenshaw’s reelection is confirmed, President Trump could still exert his power over the SEC by appointing the reluctant Peirce and Uyeda.

While no clarifying rulemaking activity will occur in this case, the Acting Chairman gains control over the SEC staff, giving them the authority to revoke controversial SEC Staff Accounting Bulletin 121, entertain requests for no-action letters, suspend or terminate ongoing enforcement investigations and proceedings, and solicit public feedback as a first step in future cryptocurrency rulemaking proceedings.