After Trump was elected, the U.S. encryption policy has changed. What are the hard nuts to crack?

Author|Coin Center

Compiled | GaryMa Wu talks about blockchain

Cryptocurrencies have received a lot of attention during the recent elections, with many speculating on whether the new administration and Congress will be crypto-friendly. In short, we expect that policy may improve in some areas, while challenges remain in other areas. We believe it is possible to achieve clearer rules in the areas of securities and banking regulation, such as for centralized secondary markets and centralized stablecoin issuers.

When it comes to anti-money laundering, tax reporting and sanctions, the outlook is less clear. Below are our thoughts on these issues and a preliminary analysis of future opportunities and challenges.

How to view cryptocurrency-related issues during a change of government

Cryptocurrency policy issues can broadly be divided into two broad categories: regulatory issues (tax reporting, BSA/AML, sanctions) and investor protection issues (SEC, CFTC, banking). Achieving good policies in one category does not mean that the same results can be achieved in another category. The motivations behind these two types of policies differ (protecting investors vs. identifying and deterring illicit financial flows), as do the political incentives and opportunities for joint action among legislators in each area.

Likewise, the cryptocurrency ecosystem can be divided into two broad categories: centralized businesses (custodial wallet providers, centralized exchanges, trusted issuers) and developers and users of decentralized infrastructure (protocol developers, non-trusted issuers). Hosted wallet and application developers, as well as those disintermediated users of these protocols and applications).

Coin Center wants to promote good policy across all dimensions, but our core mission is to defend the rights of developers and users of decentralized and peer-to-peer tools. In the field of investor protection or supervision, any overly aggressive regulatory system may threaten developers and users. However, the threat from the regulatory realm has become more profound in recent years.

Here is a chart of past and potential future policy actions to help you understand this framework:

You may notice that the box in the lower right corner looks particularly heavy compared to the rest of it. This may reflect our focus. Coin Center’s mission focuses on the rights of decentralized infrastructure developers to publish code (first amendment) and to fight against unreasonable regulatory requirements (fourth amendment). This box is where these two issues converge. Even if there is some bias, this area has certainly been more controversial than any other over the past four years. There can be multiple explanations for this, such as from a public perspective and news cycle perspective, some politicians mistakenly or take advantage of opportunities to link global and foreign policy tragedies to cryptocurrencies (such as Hamas funding, Russian oligarchs’ attempts circumvent sanctions). Moreover, in political coalition-building, left and right, while rarely aligned, sometimes find common ground on national security and regulatory issues.

What's the biggest threat?

The past few years have seen serious threats to the freedom of individual cryptocurrency users and developers. We are seeing increasing overreach from the SEC, with its rule revisions to exchange definitions increasingly directly involving individual developers and users, as well as its enforcement actions against wallet providers such as ConsenSys’ Metamask and Coinbase Wallet. At the same time, regulatory issues are becoming increasingly prominent, including 6050I reporting obligations, Tornado Cash sanctions, broker reporting obligations, and prosecutions of unlicensed fund transfers against non-custodial developers. Meanwhile, in Congress, we have been fighting legislation like CANSEE and DAMLA, which seek to impose unreasonable regulatory obligations on unmanaged developers.

Still a tough nut to crack

There are three major threats of particular concern: (1) 6050I, (2) Tornado Cash sanctions, and (3) prosecution for unauthorized fund transfers. First, in the 6050I context, we already have ongoing litigation in which we argue that the IRS's requirement to mandate reporting of personal information of recipients exceeding $10,000 in cryptocurrency violates the constitutional provision of disclosure without a warrant. Second, on the Tornado Cash sanctions front, we also have ongoing litigation arguing that the sanctions law does not give the Treasury Department the authority to prohibit the use of immutable smart contracts by U.S. persons who are neither foreign persons nor their property. Third, we are alarmed by the unlicensed fund transmission prosecutions filed in the Southern District of New York Court against the developers of non-custodial software tools such as Tornado Cash and Samurai Wallet, and will support the defendants in these cases whenever possible. While the Justice Department may see changes under the Trump administration, due to its political independence, it may not drop these prosecutions due to a change of administration.

Reasons for optimism

Although there is no in-depth discussion, it seems credible that the new administration will be more friendly to centralized businesses in the United States, especially issues related to investor protection. This is good news, as intermediation services and efficient capital formation are critical to broadening the appeal of cryptocurrencies, especially to less tech-savvy audiences. However, what about Coin Center’s core focus, the impact on developers and users of truly decentralized tools and services?

From an agency level, President Trump’s generally supportive stance on cryptocurrencies and his selection of SEC and Treasury appointments could mean that some controversial rulemaking will be frozen or even scrapped. This is a unanimously positive sign for us, as the SEC's exchange redefinition rules and the IRS's brokerage rules for non-custodial developers are always two swords hanging over our heads.

The incoming administration’s willingness to curtail overly aggressive sanctions and anti-money laundering policies remains uncertain. Still, we're hopeful that if it becomes clear that even under a friendlier SEC, heavy-handed regulatory policies will drive innovators out of the United States, hinder development, and deprive ordinary Americans of the benefits of these technologies, some progress may be made. . These policies have had little actual effect on deterring criminals and terrorists.

We are also optimistic that Congress may play a greater role in advancing these regulatory issues. Significant work has already taken place, including critical letters from MPs regarding 6050I implementation, Tornado Cash sanctions and prosecutions for unauthorized fund transfers. Bills like the Blockchain Regulatory Certainty Act will provide legislative solutions to prosecutions of unauthorized money transmissions, and we are prepared to find a bipartisan path to their passage.

We look forward to working with the new administration on this topic and are cautiously optimistic that if our arguments are persuasive enough, we will receive a fair hearing. Over the course of history, America’s constitutional rights, particularly respect for free speech and vigilance against warrantless searches and seizures, should have ensured that this was the best place to build and use cryptocurrencies and open blockchain networks. Let’s be clear, “supporting crypto” doesn’t just mean choosing friendlier agency heads or enacting more business-friendly regulations, it also means something deeply rooted in American culture: that in the most difficult of times, when Defending privacy and free speech at a time when the national security situation is dire and the shadow of crime and terrorism temporarily overshadows our enduring pursuit of freedom, privacy, and openness. Now is the time to act and fight for strong legal precedent to protect these technologies and engrave the benefits they may bring into the nation’s future.