Ch-ch-ch-ch-changes
Turn and face the strange
Ch-ch-changes
Changes, by David Bowie
Here comes the Black Queen poking in the pile
Fi fo the Black Queen marching single file
Take this take that bring them down to size
March of the Black Queen, by Queen
Elections, as they say, have consequences. That bit of political wisdom certainly will be true again this time around—our president-elect has been announcing appointees for cabinet positions that are bound to bring about significant changes, and much ink has been spilled about the possibilities heralded by these appointments. We at SKrypto have been focused in particular on how the change in administration AND the legislature will affect our corner of the world, i.e., crypto. Here are few of our thoughts of things possibly to come:
Changes at the SEC? In the last several years, particular under outgoing SEC chair Gary Gensler, the SEC has been a vigorous regulator of the crypto markets and often has faced substantial criticism from the industry. Chair Gensler has been particularly aggressive in expressing his view that almost every form of a crypto asset is a “security” and consequently is subject to SEC oversight and regulation. Not only does this conclusion impact crypto assets themselves, but it also has a cascading effect on any other intermediary dealing in such assets which consequently the SEC also asserts are subject to its jurisdiction. The categories of such organizations over which the SEC has asserted jurisdiction on the basis of their dealing in crypto assets, which assets the SEC considers to be securities, is long and includes brokers, dealers, stock exchanges and other trading systems, investment advisers and investment funds and even entities such as custodians and transfer agents.
Since Donald Trump (“DJT”) became the president-elect, two commissioners on the five-person commission have announced their resignation, Chair Gensler and Commissioner Lizarraga, both democrats. Consequently, DJT will immediately have the opportunity to replace 40% of the commissioners and make an immediate impact. We assume he will appoint candidates who are far more deregulatory than their predecessors and likely much more lenient in terns or regulating, and asserting SEC jurisdiction over, crypto assets. For example, there is speculation that Cryptomom (aka Commissioner Hester Peirce, a republican appointee form DJT’s first term in office) may become the new Chair of the SEC. DJT also has reportedly met with Brian Armstrong of Coinbase, and the CLO of Robinhood also has been rumored to be in line to become the next Chairman of the SEC. Any such candidates are likely to have a much more passive view of the crypto industry and be less likely to assert SEC jurisdiction over it. Surely that type of deregulatory change can only mean positive things for the industry. Our very own Philip Moustakis muses about changes at the SEC here.
Tariffs and Sanctions and OFAC, oh my: China is both a major producer of crypto mining hardware and the potential “recipient” of tariffs. And although the United States remains the world’s largest economy, China is the other 900 pound gorilla in the room, resulting in a complex relationship with a number of competing policy impulses.
In respect of sanctions policy, although the incoming administration may be marked by a certain degree of unpredictability, it is expected that there will be a continued focus on traditional national security foes, including Iran and Russia. And in the crypto space, Russia has begun to ramp up efforts to boost its digital assets in order to evade US sanctions on much of its financial services sector. China could be an indirect target of future Russian sanctions insofar as they provide material or financial support or services to Russian companies that are determined to be supporting the Russian war effort in Ukraine.
Tariff policy is likely to be even more aggressive, based on statements by the incoming administration. And the US government has broad authority in certain arenas to impose tariffs, including under Section 232 of the Trade Expansion Act of 1962, which allows the President to impose import restrictions based on an investigation and affirmative determination by the Department of Commerce (Commerce) that certain imports threaten to impair U.S. national security, or more controversially, under provisions of the International Emergency Economic Powers Act of 1977 (IEEPA).
As just one example, the prior Trump administration threatened to impose broad-based tariffs on imports from Mexico to address illegal border crossings, using IEEPA’s authority that permits the president to declare a national emergency in order to deal with any “unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.” Although IEEPA was not used in that manner, it contains broad discretionary authorities granted to the Executive Branch and already underlies many of the more than three dozen sanctions programs administered by the Treasury Department’s Office of Foreign Assets Control. It is not hard to imagine the incoming administration employing IEEPA in this manner, which does not require the executive branch to conduct an investigation or issue a report prior to taking action.
More broadly, there are other significant initiatives taking effect at Treasury involving enhanced scrutiny of both inbound and outbound investment regulation which are already scheduled to go into effect, and which portend increasing economic competition with China. One of these initiatives is a final rule establishing an “outbound investment security” program effective January 2, 2025. The final rule imposes new diligence requirements on US persons that make outbound investment transactions with a “covered foreign person” in a “country of concern,” currently defined as China, including Hong Kong and Macau. This program prohibits or requires notification of certain kinds of investments in the semiconductors and microelectronics, quantum information technologies or artificial intelligence sectors, subject to exceptions; but which are of likely relevance for the crypto-mining industry. These new requirements, which could change or expand over time, could result in serious regulatory exposures if not well understood or navigated. Parties should pay particular attention to, and update as necessary, their policies and procedures to ensure their corporate compliance programs adequately address the final rule.
CFTC. As with other government agencies, the president appoints the chairman of the CFTC and its other commissioners. According to reports, DJT is considering current Commissioners Mersinger and Pham for the appointment as chairman. Commissioner Mersinger in particular is considered to be positively disposed to crypto.
Federal Tax. Although there is talk about completely eliminating capital gains on crypto trading activity, this is unlikely to be incorporated into US federal income tax policy. We do know that there will be early effort in the “first 100 days” to pass a tax package that will renew or extend various tax cuts that are scheduled to expire at the end of 2025. None of these provisions are directly related to cryptocurrency and digital assets, but there are several aspects worth mentioning.
First, we expect to see 100% expensing treatment of certain business property be renewed. This is a valuable tax break for many businesses and would benefit miners, node operators and many crypto firms. Second, there may be a restoration of a higher interest deductibility limitation, which is a benefit to any traders that utilize certain leverage. Third, there may be a removal or increase to the limitation on the deduction for state and local taxes, which could benefit individuals in high tax states, such as New York, New Jersey and California.
Apart from renewing certain provisions of the Tax Cuts and Jobs Act of 2017, there are other tax developments we are closely monitoring.
- We know that electric vehicle tax credits are likely to be rolled back. However, does this mean that other clean energy related tax credits will also be removed? It is unclear. This may ultimately increase the net cost of energy to mining operations.
- In the first Trump administration, there was an effort to review and scale back certain regulations that were administratively burdensome. Under this effort various tax provisions were reviewed. We should expect to see a similar effort and it would not be surprising if the recent broker reporting rules are delayed or watered down.
- Finally, reduced IRS funding means that there will be less audit activity than previously expected. The Inflation Reduction Act of 2022 provided an addition $80 million in funding to the IRS. This was reduced to $60 million. Any unspent amounts may ultimately be clawed back to help fund the tax cuts discussed above.
Of course, there may be other changes that could affect different taxpayers in different ways. As new tax developments occur, we will cover these in a future SKrypto Blog post.
Banking regulators. Michael Hsu, Acting Comptroller of the Currency, Martin Gruenberg, Chair of the FDIC, and Rohit Chopra, CFPB Director, all will be replaced. Jerome Powell, Chair of the Federal Reserve Board, will not be replaced. With some very important caveats, these personnel replacements/non-replacements could cause a reversion of the crypto banking regulatory environment to the late stages of Trump’s first administration, which was notably crypto friendly. Seward & Kissel will publish a fulsome analysis of potential bank regulatory changes later this year.
SAB 121 repeal? In 2022, amidst much controversy the staff of the SEC adopted Staff Accounting Bulletin No. 121 (“SAB121”) . SAB 121 was controversial because it enhances the rules for accounting for obligations to safeguard crypto assets an entity holds for its users thus adding another regulatory burden to the crypto industry. Congress passed a bill repealing SAB 121 that did not become law because out-going President Biden vetoed it. Will Congress pick the thread back up under the assumption that this time DJT would not veto it -- presumably since he would be in favor of removing this additional layer or regulation? Possibly yes, but Congress may be busy with other priorities for a while such as assisting in putting DJT’s proposed programs into place.
Recess appointments. The President fills cabinet level and many other senior government agency positions by appointments with the advice and consent of the Senate, which in the past has meant that anyone who the president appoints to such a position the Senate vets and then is subject to a confirmation vote by the Senate unless the Senate is in recess, in which case the President can appoint someone to serve in an acting capacity until the end of that session of Congress or, in a permanent capacity, once an the Senate confirms the appointee in the usual way, a so-called “recess appointment.” DJT has made it clear that he expects the Senate to approve his nominees promptly; alternatively, he wants to be able to use recess appointments, which means that the Senate would have to be in recess for at least ten days. Why is this important? Some of the persons DJT has named as appointees are controversial even for members of his own party, and it is not inconceivable that some of them may face an uphill battle getting confirmed, even in a Senate which his party controls. Would DJT be able to force through recess appointments, or, if there is a risk that the Senate will not approve his appointees, would he have to make more moderate appointments?
Legal Tokens. No concrete legal points—the above is as close to pure speculation as we dare to engage in, here at SKrypto (at least in print). But we are in for an interesting set of changes. Stay tuned.
