US political moves makes 2024 a pivotal year for Web3 and crypto

From the bull run in cryptocurrency prices early in the year to Donald Trump’s u-turn on Bitcoin, 2024 marks a decided shift in momentum for blockchain-based technologies. Trump, the Republican nominee for the Presidential election, has shifted his stance to support the crypto industry after labelling it a “scam” just a few years ago. He is now promising to make the U.S. a global leader in crypto and to stockpile Bitcoin obtained through asset seizures.

Republicans warm to crypto

Trump has also committed to removing SEC Chair Gary Gensler, who has been critical of the crypto industry and his running mate, vice-presidential hopeful JD Vance, is a Bitcoin evangelist.

“Mr. Trump’s pivot attests to a new power emerging in American politics: a class of technological entrepreneurs and venture capitalists uncomfortable with government regulations intended to protect American consumers,” The Washington Post reported this week.

But some see Trump’s support for crypto as fleeting and based on his desire to secure campaign donations and the support of tech elites such as Elon Musk, who has endorsed Trump for President and made his support clear to his 192 million X followers.

“Despite all this, there are crypto fans who are sceptical that Trump’s sudden embrace of Bitcoin will carry lasting weight beyond an election year talking point. Some of Trump’s avowed policy proposals, which have been described as authoritarian, seem to counteract Bitcoin’s anti-government, libertarian bent,” Time reported.

For instance, TIme points out, Trump’s call for all Bitcoin mining to be located in the US annoys many crypto idealists “as decentralisation and immunity to governmental pressures is a key part of the ethos of crypto mining”.

The Biden administration has been more muted on cryptocurrencies, but in the wake of the FTX crypto exchange collapse has moved closer to regulating the sector in the interests of protecting consumers’ interests.

Regulatory developments

The U.S. Securities and Exchange Commission (SEC) made a significant decision in January by approving 11 spot Bitcoin exchange-traded funds (ETFs). This move has been seen as a major step towards providing clearer regulatory frameworks for cryptocurrencies in the U.S., although the overall regulatory environment remains uncertain. Additionally, the SEC's approval of spot Ethereum ETFs has further buoyed investor confidence, with eight spot Ethereum ETFs trading since July 23.

In June, the U.S. Treasury finalised new tax reporting rules for cryptocurrency brokers, including exchanges and payment processors. These rules, stemming from the 2021 Infrastructure Investment and Jobs Act, require brokers to report user transactions to the IRS, aiming to close tax evasion loopholes and bring in significant revenue over the next decade. The rules will be phased in starting next year, with full implementation expected by the 2026 tax filing season.

Despite the relatively small percentage of Americans holding cryptocurrencies, the crypto industry has managed to secure some significant political victories. Notable figures such as Senate Majority Leader Chuck Schumer and former House Speaker Nancy Pelosi have shown support for crypto-friendly legislation.

This bipartisan support was evident when the House in May passed the Financial Innovation and Technology for the 21st Century Act, which aims to create a regulatory framework for digital assets and designate the Commodity Futures Trading Commission (CFTC) as the primary regulator.

Despite that support, the crypto sector faces ongoing regulatory uncertainty, particularly if there are changes in leadership at key regulatory bodies like the SEC.

Spot EFTs and the market rally

The approval of Bitcoin ETFs helped boost Bitcoin prices early in the year. Bitcoin prices saw a significant uptick, reflecting increased investor confidence and anticipation of higher demand,

but crypto prices in general have since fallen amidst general market volatility.

Analysts predicted that the introduction of Bitcoin ETFs could draw substantial inflows, potentially driving Bitcoin prices higher. Some estimates suggest that ETFs could attract US$50 billion to $100 billion in investments this year alone, with Bitcoin prices potentially reaching new highs.

The approval of Bitcoin ETFs is seen as a watershed moment for the cryptocurrency industry, signalling a shift towards greater regulatory acceptance and integration with traditional financial markets. This move could pave the way for the approval of other cryptocurrency ETFs, such as those for Ethereum, which was also approved by the SEC in May 2024.

Despite the positive implications, the approval of Bitcoin ETFs brings increased regulatory scrutiny and associated risks. The SEC has emphasised that its approval does not constitute an endorsement of Bitcoin, and it has warned investors about the risks associated with cryptocurrency investments, including volatility, market manipulation, and the potential for fraud.

AI brings its own regulatory risks and opportunities

There is a growing trend towards merging artificial intelligence (AI) with blockchain technologies. Innovators are exploring the potential of combining these technologies to revolutionise everything from market trading strategies to metaverse-like virtual reality applications. This convergence is likely to attract regulatory scrutiny as jurisdictions develop frameworks for both AI and crypto.

But AI could assist efforts to make the Web3 space compliant with existing and potential new regulations.

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Smart contract audits: AI can be used to audit smart contracts, identifying vulnerabilities and ensuring that they operate as intended. Companies like Certik leverage AI to secure decentralised applications and smart contracts.

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Fraud detection: AI can analyse transaction patterns to detect fraudulent activities, enhancing the overall security infrastructure of blockchain networks. Tools like Chainalysis use AI to analyse blockchain data and prevent illegal activities, promoting regulatory compliance and building trust in blockchain technology.

The local outlook: low key developments following crypto inquiry

In April, the New Zealand Government issued a short response to the Finance and Expenditure Committee's (FEC) report on the future nature, impact, and risks of cryptocurrencies. The report, published in August 2023, included 22 recommendations aimed at fostering the growth of the digital assets sector while addressing associated risks such as ransomware, international crimes, and scams.

Key points from the government response include:

1) Support for digital asset growth: The government expressed support for the primary purpose of the report, which is to facilitate discussions ensuring New Zealand is well-positioned to handle digital assets and blockchain technologies.

2) Ongoing work by government agencies: Several government bodies are already working on initiatives related to digital assets:

The Reserve Bank of New Zealand is exploring the future of digital assets, including the potential for a central bank digital currency (CBDC).
The Council of Financial Regulators is providing guidance to startups through its Digital and Innovation Community.
The Ministry of Justice is implementing recommendations related to anti-money laundering and counter-terrorism financing (AML/CFT) for virtual asset service providers.
The Financial Markets Authority (FMA) continues to provide guidance on digital assets under the Financial Markets Conduct Act and takes regulatory action against breaches. In April, the FMA released its Enhanced Customer Due Diligence Guidelines to assist businesses do due diligence on customers under the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act 2009 (the Act).
Inland Revenue (IR) is offering guidance on the tax treatment of digital assets in New Zealand. IR has this year intensified its focus on tax compliance for crypto asset activities. In July 2024, IR announced increased scrutiny on individuals and businesses dealing in crypto assets who are not declaring their income. IR is using data analytics to identify non-compliant taxpayers and has signed up to the crypto asset reporting framework, enhancing its ability to track crypto transactions both domestically and internationally.

US moves reverberate here

As New Zealand takes a “wait and see” approach on cryptocurrency regulation, the major developments in the US this year have implications for New Zealand consumers and Web3 entrepreneurs alike.

The approval of Bitcoin and Ethereum ETFs, new US tax reporting rules, and increased political support underscore the growing influence of cryptocurrencies in the key market where they are traded.

The potential re-election of Donald Trump could further reshape the landscape, potentially leading to a more crypto-friendly regulatory environment. However, the long-term implications of these changes remain to be seen, as the industry continues to navigate a complex and evolving regulatory landscape. 🖌️ Article written by Peter Griffin.