A Quick Look at the New U.S. Post-Election Cryptocurrency Policy Regime

While the message from crypto asset markets so far has generally been positive, specific announcements from new presidential executive orders (“Orders”) do not appear to have visibly impacted prices, at least on the dates the Orders went into effect.  There have been two executive orders so far on cryptocurrency.

The first Order that went into effect on January 23, 2025 was “to promote United States leadership in digital assets and financial technology.”⁴ Based on the chart data, the announcement of the Order appears to have caused little movement in the market prices of Bitcoin and Ether. However, the Order’s broad goals supporting cryptocurrency including its declaration that the U.S. would not seek to establish a central bank digital currency (CBDC) may not have been a total surprise to markets.  Hence, without further investigation such as an event study analysis, it is not clear whether or not the Order had a direct impact on market prices; or, for example, the effects of the Order were already impounded in the market prices of Bitcoin and Ether upon the presidential election outcome.

The second Order effective Thursday March 6, 2025 established a “Strategic Bitcoin Reserve.”⁵  The market prices of Bitcoin and Ether were up slightly on the day of the Order but trading at price levels much lower than the record prices reached shortly after the election.

In theory, a strategic reserve for Bitcoin and a stockpile of other digital assets could indicate a potentially important new direction in federal policy for cryptocurrencies.  The U.S. has a strategic petroleum reserve and, of course, the U.S. Federal Reserve’s monetary policy sets interest rates in part by targeting reserve balances of banks.  Tools used to adjust reserve balances can significantly alter market prices and improve macroeconomic conditions.

Looking more closely at Bitcoin and Ether prices near the Order implementation date, the above chart does show a spike in market prices a few days ahead of the Order.  News of a U.S. strategic reserve for Bitcoin (and other crypto assets) was apparently revealed to the market prior to the Order, which could account for some of the earlier price jump.

In addition, as more information about the strategic reserve became known on the Order date, the market’s enthusiasm may have waned.  The Order indicated that the source of reserve assets, to be managed by the U.S. Treasury, would include only coins and tokens confiscated from prosecution of illegal activity.  In other words, as the market learned that the U.S. Treasury cannot actively intervene in the aggregate supply and demand for crypto assets, some of the earlier upward price pressures may have dissipated.

The crypto asset market prices discussed here suggest that the presidential election outcome instilled upward price momentum.  Second, shorter term price movements in response to information about policy pronouncements suggests the market is attentive to and anticipating substantive policy and regulatory changes.  Among those developments is the U.S. regulatory transition now underway.

The Post-Election Cryptocurrency Regulatory Transition

As a result of the presidential election, new leadership is coming to the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), the two principal regulators of securities, commodities, derivatives and the exchanges and platforms on which these instruments trade.⁶  The new leadership of the SEC and CFTC (still at the nomination stage) will likely push for a major shift in cryptocurrency regulation, likely toward it being less restrictive, and employing a different set of goals and tactics that will take time and effort to formulate.

The outgoing Chair of the SEC, Gary Gensler, who resigned on January 20, 2025, had pursued regulation of cryptocurrencies primarily by enforcement actions.  That is, a key part of the regulatory approach by the previous SEC was to file legal actions in federal courts to enforce existing securities laws, which Mr. Gensler viewed as adequate and applicable to digital assets and cryptocurrencies.

One of the most contentious issues that former Chair Gensler grappled with (as will the incoming SEC and CFTC chairs) is whether cryptocurrencies should be considered securities and thus subject to U.S. securities laws.  If the answer is yes, then such crypto asset issuers must file registrations with the SEC, a complex and resource-intensive process that U.S. corporations comply with when issuing stocks or bonds to the investing public.⁷

The legal criteria for determining whether a financial instrument (outside of things like stocks and bonds) are a security has for many decades been based on a 1946 U.S. Supreme Court ruling and has come to be known as the “Howey Test.”⁸  The Howey Test specifies certain features of a financial instrument and the relationship with investors that qualify it as an “investment contract” and thus a security under U.S. securities laws.⁹  The Howey Test defines an investment contract as (a) an investment of money; (b) in a common enterprise; and (c) profits generated by the efforts of others.

Applying this three prong criteria, the Howey Test was invoked by the SEC in numerous enforcement actions alleging a crypto asset was an investment contract and hence in violation of securities laws by failing to register with the SEC.  The Howey Test has also been invoked in several private investor class actions alleging cryptocurrencies were investment contracts and thus sold unlawfully as unregistered securities.

Many on the opposite side of these actions, such as crypto asset issuers, financiers and digital asset trading platforms, have viewed the Howey Test as outdated and incapable of addressing the unique features of crypto assets.  Moreover, many market participants see the SEC’s approach to regulatory oversight by separate enforcement actions of individual crypto assets as too particularized and burdensome to provide the comprehensive regulatory guidance they seek and claim would be more effective for realizing the crypto asset market’s potential in the U.S.

Early indications about how regulatory reform will proceed in 2025 and beyond are beginning to take shape.  So far, the shift in direction by the SEC favors relying less on an enforcement action approach and shift toward a rulemaking approach as discussed next.

Proposed U.S. Regulatory Reform of Cryptocurrency in 2025 and Beyond

The SEC is moving quickly on cryptocurrency regulatory reform, and the CFTC has also signaled interest in a new regulatory approach.  As readers familiar with these two agencies know, the CFTC regulates commodities while the SEC regulates securities.  It is therefore crucial to first resolve, as briefly discussed above, what cryptocurrencies are securities and which ones are commodities (or possibly both or neither).  There are over 10,000 cryptocurrencies on the market, so the process will be complex, challenging and controversial.¹⁰

A notable first step in this process was the formation in January 2025 of an SEC Crypto Task Force to be led by SEC Commissioner Hester Peirce.¹¹  To begin its new journey, as Commissioner Peirce described it,¹² the SEC has announced a series of roundtable discussions for reforming cryptocurrency regulation.

High on the roundtable agenda will be the crypto asset taxonomy proposed by Commissioner Peirce.¹³  The taxonomy lays out four groups of digital assets:

1. Crypto assets that are securities because they have the intrinsic characteristics of securities;
2. Crypto assets that are offered and sold as part of an investment contract, which is a security, even though the crypto asset may not itself be a security;
3. Tokenized securities;
4. All other crypto assets, which are not securities.

Taking each group in turn, group 1 appears to refer to digital assets whose design or function is in essence a security.  This group could possibly include cryptocurrency tokens that give holders voting rights and/or shares in the profits of the entity issuing the cryptocurrency, similar to the way stocks issued by corporations grant shareholders a claim on profits and right to vote in corporate decisions.  For example, Group 1 could include so-called governance tokens, which are available to inside and outside investors to participate in the control and management of a cryptocurrency.¹⁴

The second group invokes the “investment contract” term, which as discussed above are deemed securities under U.S. securities law and has been the approach taken by the SEC to classify many crypto assets as securities under the Howey Test.

As group 2 language suggests, this group could be quite broad as it applies to cryptocurrency assets that are embedded in or are referenced by a security, even though the underlying crypto asset itself is not a security.  The vast market for securitized assets, exchange-traded funds (ETFs) or other instruments like derivatives defined as securities suggests a potentially large parallel set of security products could emerge tied to underlying crypto assets.

Group 2 of the taxonomy also mentions taking into consideration the market in which the instrument is offered or sold.  Thus, it is not only the properties of the financial instrument that defines a security, but the venue in which it trades in the market.

An instructive example of how trading venue can affect the security determination is the SEC enforcement action against the cryptocurrency Ripple (XRP).  While the pursuit of this matter at the appellate level was recently dropped by the SEC, there remains a judicial ruling on how to treat Ripple as a security.¹⁵  The district judge ruled that under the Howey Test Ripple was a security when it was sold in the market to institutional investors; however, Ripple was ruled not a security when sold on an exchange to investors.¹⁶

Tokenized securities in group 3 are tokens that are digital representations of financial instruments defined as a security under U.S. securities laws.  For example, tokenizing a security such as a bond allows it to be offered, traded and settled on a blockchain ledger or a cryptocurrency exchange.  Currently, this market is not large, roughly $200 million in total market capitalization according to a recent U.S. Federal Reserve study.¹⁷  While this indicates low liquidity of these instruments at this stage, it provides proof-of-concept that tokenization is feasible for at least some mainstream security instruments.

Group 4 “All other crypto assets” appears to be a residual catch-all, viewed by Commissioner Peirce as the largest group.  Whether by largest Commissioner Peirce means number of instruments, trading volumes or market capitalization, it suggests the SEC may have a prioritization or threshold in mind for attempting to sort cryptocurrencies into securities (groups 1 – 3) versus non-securities (group 4).  This stands in contrast to former SEC Chair Gensler who expressed the view that as a starting point cryptocurrencies were generally securities, with exceptions to be made for coins like Bitcoin and Ether.¹⁸

While group 4 tokens will depend on how groups 1 to 3 are defined (or possibly another taxonomy as Commissioner Peirce proposed one possible taxonomy), group 4 tokens could conceivably include meme coins, non-fungible tokens on say a work of art, or tokens that function as a medium of exchange, i.e., a transaction currency.  Market participants have indeed expressed a desire to define this fourth non-security category quickly so as to understand what digital assets will safely be considered outside of SEC registration requirements.

Other issues to be taken up by the roundtable include custody, registration, security tokenization, Decentralized Finance (DeFi), and potential use of “sandbox” collaborations between cryptocurrency innovators and regulators.¹⁹

Summary

A new path forward for U.S. cryptocurrency regulation is beginning to emerge. It is too early to project how new U.S. regulations will affect cryptocurrency markets. However, statements by some Commission members, acting chairs and chair nominees of both the SEC and CFTC convey they are optimistic that changes up ahead will be beneficial to cryptocurrency innovation yet maintain sufficient regulatory oversight to provide investors with a safe way to participate in cryptocurrency markets. How their efforts translate into specific policies and the market’s reaction remains to be seen.

Today there are over 10,000 different cryptocurrency coins and tokens on the market.²⁰  Attempting to fit all 10,000 into one of the four groups proposed by the SEC (or even a subset of the 10,000) poses a great challenge, especially if the SEC is to satisfy the goal stated by Commissioner Peirce of a “predictable, legally precise, and economically rational” taxonomy of digital assets.