Four crypto developments to watch for in 2024

After the spectacular collapse of the FTX crypto exchange at the end of 2022 and the legal and financial fallout that resulted, one might reasonably conclude that crypto's time was over. But despite ongoing reservations by regulators and lawmakers about the safety and utility of crypto assets, blockchain technology and its adherents are not going away. While Bitcoin's value has not yet returned to its 2021 record highs of over $69,000, the flagship cryptocurrency more than doubled its value in 2023, and expectations that the Fed will forgo further interest rate hikes in the near term could draw investors toward the riskier asset in 2024.

But while crypto may have moved past the FTX era, the Treasury Department's recent record fine against Binance is a sign crypto continues to struggle to shake its association with fraud. The industry continues to petition regulators for written rules of the road, but in a divided government that's barely able to keep the lights on, legislative clarity remains out of reach. A bipartisan agreement on crypto assets has a shrinking likelihood of passing as lawmakers enter an election year. Further complicating matters, House Financial Services Committee chair Patrick McHenry, R-N.C. — one of Congress' chief crypto bill architects — is exiting Congress, leaving his crypto legislative drafts with an uncertain future.

Absent legislation, enforcement by market regulators the SEC and CFTC will continue to focus on regulating major crypto players. Where judges side in the ongoing legal battle between the SEC and Ripple, along with ongoing cases against Coinbase, Binance, and more recently Kraken, may provide the industry some certainty as to the legality of tokens and whether they qualify as securities or commodities. But regardless of the outcome of those cases, the crypto market will remain largely in suspense regarding its regulatory future into next year.

Meanwhile, Regulators are interested in using blockchain technology to make traditional financial asset settlement more fast and efficient, known as tokenization, which could be transformative for financial institutions. Here's what to watch in the cryptosphere in 2024.

A push for rules around tokenization

In February 2024, the Office of the Comptroller of the Currency is organizing a symposium focused on tokenization, a move expected to further elevate the ongoing public discourse surrounding the potential of tokenizing real-world assets. Positioned as a platform for exploring "responsible innovation," the event will showcase the kinds of use cases for blockchain technology to make real world asset settlement more efficient. Regulators have long made clear permissionless blockchains are nearly incompatible with a variety of bank regulations like anti-money laundering rules. However, one aspect of crypto that regulators are keen to explore: Tokenization which is increasingly piquing even federal banking watchdogs' interest for its potential benefits in increasing settlement efficiency and speed.

Acting Comptroller Michael Hsu emphasized the widening acceptance gap between crypto and the tokenization of tangible assets and liabilities in recent remarks.

"Crypto remains driven by the promise of speculative gains, continues to be marked by rampant scams, fraud, and hacks, and struggles to comply with anti-money laundering rules," said Hsu. "By contrast, tokenization is driven by solving real-world settlement problems and can easily be developed in a safe and sound manner and fully compliant with anti-money laundering rules."

Major financial institutions are already embracing tokenization. JPMorgan Chase and Apollo Global Management, in collaboration with blockchain innovators like Axelar, Oasis Pro, and Provenance Blockchain, have begun testing the potential of tokenizing funds on the blockchain. Expect tokenization to be all the rave next year.

Crypto legislation will remain in limbo

Bank policy experts agree the prospect of crypto and stablecoin legislation shepherded by House Financial Services Committee Chairman Patrick McHenry, face a rapidly decreasing chance of becoming law in the new year.

"McHenry didn't succeed in getting his bills attached to the National Defense Authorization Act and now has to look to other legislative vehicles in 2024," noted Ian Katz of Capital Alpha Partners. "But he doesn't have enough support in the Democratic-led Senate, and the deeper we get into an election year the harder it will be to maneuver complex legislation through Congress."

The North Carolina Republican's plans to attach bills to spending or agriculture legislation are likely to face pushback from Senate Democratic banking leaders like banking chairman Sherrod Brown of Ohio and Senator Elizabeth Warren of Massachusetts. Growing concerns about crypto as a funding method for entities like Hamas — which has spawned a rare bipartisan front — further steepen the legislative hill McHenry must ascend in order to get a law enacted.

"While McHenry's efforts have some support among Democrats, Brown still views the legislation as 'industry-written,'" Katz wrote. "Leading Democrats haven't shown much interest in the stablecoin bill, and some see it as giving too much authority to state regulators and not enough to federal agencies."

SEC And CFTC Chairs Testify Before House Appropriations Subcommittee

Gary Gensler, chairman of the U.S. Securities and Exchange Commission, has insisted that cryptocurrencies can be regulated under existing securities laws.

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SEC vs. CFTC tug-of-war

The regulatory landscape for crypto in 2024 will be marked by a tussle between the Securities and Exchange Commision and the Commodity Futures Trading Commission, two agencies with increasingly divergent approaches towards overseeing the industry. The SEC, led by Chair Gary Gensler, recently rejected Coinbase's plea for new regulations, with Gensler doubling down on his nearly dogmatic belief in the applicability of existing securities laws to the crypto securities markets.

Jaret Seiberg, policy analyst at TD Cowen said that Gensler's actions and remarks suggest he'll continue to approach regulating crypto much like the Asset-Backed Securities markets — that is, using enforcement actions to clarify the SEC's approach and then only adopting a regulatory regime to codify such an approach. A comprehensive ABS regulatory framework took years to accomplish, and Seiberg thinks crypto advocates should appreciate a deliberate , if slow, process. Greater time allows for U.S. regulators to digest the lessons from other countries who are also rolling out regulations.

"We believe the crypto sector should not want to lock in a regulatory regime quite yet. This industry is still evolving. Delay gives the United States the ability to see what works best in other markets. It suggests the ultimate U.S. regime could be superior even if it takes longer," Seiberg said.

Just days after the SEC's action in December the CFTC handed the industry a win when it approved a clearinghouse operation for Bitnomial, which already operates a crypto exchange, a brokerage and a market-making trading firm. Experts like Ian Katz of Capital Alpha Partners said the divergent decisions highlight the contrasting views within even the current Democratic administration and underscore the ongoing tug-of-war within regulatory agencies to establish a cohesive framework for the evolving crypto industry.

"[The Bitnomial decision is] probably the most crypto-friendly decision made by a federal regulator since the FTX fiasco, and perhaps in the Biden era," noted Katz. "It also highlights the differences between the SEC and CFTC on crypto – personified by Gensler and Behnam – and goes to show the variety of views toward the industry even within the Democratic Party."

A big year for Bitcoin

Bitcoin could be set up for a big year, with firm Standard Chartered forecasting the token's value could potentially reach $50,000 by the end of 2024. Bitcoin currently trades at over $43,000, as of December 21.

Additionally, U.S. regulators at the Securities and Exchange Commission must decide by January 10 whether to approve at least two companies' — Cathie Wood's ARK Investment and 21Shares — applications for a Bitcoin ETF. And even if the SEC doesn't approve these first two, more than 10 companies including BlackRock have pending applications for these ETFs, increasing the chances one will get the green light.

A few months after that, the scheduled "halving" of bitcoin production in April 2024, — where the number of coins generated from blockchain transactions is reduced — is anticipated to result in a decreased supply and, according to crypto industry advocates, a rise in prices.

Crypto industry players like James Lawrence, co-founder of NFTY Finance, says these both could lead to a substantial influx of capital into blockchain markets.

"I predict a large rally for Bitcoin," he said. "There's an ongoing power shift happening, and it's not clear who will be the winner just yet, but Pandora's box of blockchain technologies has been opened, and I don't think it will ever be shut again."