Research institution Messari | 2022 Forecast Report Summary Chapter 4: US Cryptocurrency Policy

The research institution Messari's 2022 forecast report is divided into ten chapters, spanning over 130 pages. The report contains a significant amount of content that is emotional and in plain language. Here are the key points summarized:

Top 10 Chapters

• Ten Major Events and Investment Themes
• 10 Key Figures to Watch
• Ten Thoughts on Bitcoin
• US Crypto Policy
• Market Infrastructure
• NFTs and Web3 Systems
• DeFi 2.0
• Ethereum, Layer 2, and Cross-Chain Bridges
• DAO within DAO
• Additional Inclusions: Speak Freely

Chapter 4: US Crypto Policy

1. Setting the US Battlefield

Messari is not optimistic about the prospects of crypto regulation. They found that the Republican Party is gradually using cryptocurrency as a political tool, and regulatory agencies within the party provide more empathetic and rational perspectives when discussing cryptocurrencies.

Although the crypto space greatly needs allies in the Senate, the crypto industry can be said to have no friends in the Biden administration and its progressive party faction. Messari urges the need to quickly win the support of legislators, as regulatory policies will determine whether the US can have another golden decade like the 90s.

In Chapter 4, Messari will outline the following key points:

1. Key participants and critical issues in the US policy struggle.
2. Issues to address: taxation, fraud, exchanges, stablecoins, anti-money laundering, banking risks.
3. Two FUDs: securities rules, privacy concerns.
4. How can a long-term regulatory battle lead to victory?

2. Real Risks and User Self-Regulation

Messari lists the potential risks associated with cryptocurrencies but also proposes what they consider to be the ideal response:

• Trading risks: Implement relevant education for users.
• Stablecoin/lending risks: The Fed accepting projects like USDC and USDP is wiser.
• Bank integration risks: The need for compliant "crypto banks" to prevent the single point of failure risk in traditional banks.
• Anti-money laundering monitoring risks: Illegal activities account for only 0.34% of crypto, lower than traditional finance, showing that blockchain's traceability is actually very beneficial for enforcement.
• Tax evasion risks: Exchanges should be responsible for providing tax reports on behalf of users.
• Securities fraud risks: High volatility does not mean it's a Ponzi scheme, but information asymmetry and formal reporting in the crypto industry need optimization and standardization.
• Privacy protection: Requiring users to disclose peer-to-peer transactions and self-custodied assets is unconstitutional overreach.

3. Financial Stability Oversight Council (FSOC) and SEC

Here, all regulatory bodies that may affect cryptocurrencies are listed, with the FSOC responsible for identifying risks and emerging threats in the financial system, given that the US holds 38% of the global financial market, the influence of the FSOC is indeed global.

• Federal Reserve: Somewhat negative towards cryptocurrencies, but Chairman Powell claims they will not ban cryptocurrencies, so Messari is relieved by Powell's recent reappointment for another four years.
• Treasury Department: Yellen pushing for crypto broker provisions in the infrastructure bill, aiming to strengthen tax enforcement, is very unfavorable.
• SEC: Messari has a strong dislike for Chairman Gary Gensler, as will be discussed later.
• CFTC: With the chairmen who launched Bitcoin and Ethereum futures stepping down, will DeFi enforcement actions begin?
• OCC: May regulate stablecoin issuers as banks.
• Consumer Financial Protection Bureau: New Chairman Rohit Chopra includes stablecoins in the review scope.
• FDIC: Chairman Jelena McWilliams has spoken in favor of stablecoins. Messari just wants to say that not all regulatory agencies are bad.

4. Crypto (Lobbying) Alliances

There are five major cryptocurrency policy participants in Washington, D.C.:

1. Coin Center
2. Blockchain Association: Messari, Ripple, Coinbase withdrew due to the inclusion of Binance US.
3. The Crypto Council for Innovation: Led by Paradigm.
4. a16z Policy Team: With significant resources and strong influence.
5. Chamber of Digital Commerce

Messari believes that the above still needs a leader and urges donations to Coin Center and joining the Blockchain Association.

5. Proactive Approach

In summary, Messari believes that in the absence of a functional regulatory framework, it is advantageous for the crypto industry to proactively establish policies. The main agenda includes:

• Establishing stablecoin regulations and integrating with banks like the Federal Reserve/OCC.
• Establishing clear KYC/AML guidelines while protecting privacy with FinCEN.
• Establishing clear tax and exchange reporting standards with the IRS.
• Creating safe harbor regulations for governance tokens with the SEC.
• Introducing DAOs as a new organizational structure in Congress.
• Coordinating exchange regulation, requiring a Web3 committee.
• Opening up crypto experiments in various states and cities with the courts/Enumerated Powers.

Good-faith policies can increase government revenue, while foolish policies will cause the US to lose its leading edge and potentially push revolutionary tech ecosystems to other countries.

6. Stablecoins and Systemic Risks

Messari predicted last year that USDT would be the biggest ticking time bomb this year, but with only a few days left in December, USDT should safely pass through the year.

However, Messari still insists that the crypto industry should have united to face regulatory scrutiny on stablecoin reserve transparency years ago. This would allow for handling the ongoing criticism of Tether stablecoin without stifling compliant stablecoins like USDC and Paxos.

Now, apart from a fully transparent reserve mechanism and a direct confrontation with regulatory bodies, the only other options are a complete ban on stablecoins or the issuance of central bank digital currencies, which would essentially cede control of stablecoin technology to other countries.

Messari believes that integrating stablecoins with existing banks would be the best solution.

7. Rise of Crypto Banks

Stablecoins are practically viewed by the American public as deposits, but stablecoins are not covered by FDIC insurance. If holders start to worry about redemption, it could trigger a run.

Therefore, Messari believes that regulating exchanges within the banking system may be more meaningful than banks openly dealing with cryptocurrencies, and predicts that crypto banks like Silvergate and Avanti will become unicorns in 2022.

8. Crypto Does Not Facilitate Misdeeds

Crypto is Bad for Bad Business. The eighth point discusses the traceability of blockchain, making cryptocurrencies unfavorable for illicit activities, as they are difficult to launder and easier to track compared to cash crimes.

However, cryptocurrencies are not a panacea. Like any new technology, criminals can also exploit them, such as in cases of ransomware involving cryptocurrencies. Messari urges businesses and governments to upgrade related infrastructure for security.

9. Tax Enforcement and Tax Products

The US crypto tax laws are a disaster for users, as they face high financial and time costs when dealing with tax reporting, encountering challenges such as:

• No trading records in the past 90 days.
• No trading records before 2020.
• Single transactions might be split into multiple orders by the system, all of which must be reported on Form 8949, even if split into 100 orders.
• Current tax software cannot track users' margin trades.
• Valuing airdrops and forked coins.
• Calculating the costs of complex DeFi transactions.
• Explaining NFT minting taxes to the IRS.

Given the above issues, the financial and time costs faced by crypto users in handling tax matters are too high, and Messari expects a wave of acquisitions in the crypto tax accounting field dominated by exchanges next year.

10. Gary Gensler

Messari founder Ryan Selkis has a deep disdain for SEC Chairman Gary Gensler. The report dedicates at least ten pages to Gensler, accusing him of:

• Exploiting SEC staff to work long hours.
• Spending millions on lawsuits for non-existent benefits with Ripple.
• Interfering with the unreleased product Coinbase Lend.
• Prioritizing Bitcoin futures ETF while passing the buck to the CFTC.
• Opposing Hester Peirce's safe harbor proposal.
• Rendering the securities exemption "Reg A+" useless.
• Enabling Chinese stock listings while stifling cryptocurrencies.

Using EOS as an example, Messari points out that after SEC intervention, developer Block.One settled for $24 million, leaving holders with a fragmented, devalued blockchain network. Chief Technical Officer Daniel Larimer was forced to leave because Block.One couldn't allow EOS to look like a security.

Messari asks, "Is the SEC satisfied with such victories?"

Messari highlights Gensler's grand ambitions, amassing $120 million in assets during his time at Goldman Sachs, understanding how politics work, polishing personal reputations, being adept at fighting hard, constantly appearing in the news, and now hijacking the entire crypto industry.

Messari also reveals that they have negotiated with some very smart, talented, and well-intentioned SEC members, while Gensler is a fraud, hindering their progress, and SEC members deserve better treatment.

11. Ripple vs. SEC vs. Safe Harbor Act

First, Messari provides an objective commentary on the use case of Ripple:

XRP has risen as a viable potential "bridge currency," such as settling transactions between an African Bank and a Latin American Bank that do not frequently transact. Usually, this requires an intermediary reserve bank and multiple transfers to complete. XRP can replace multiple intermediaries, reducing banking costs. The Ripple network could slowly evolve towards decentralization, which is unlikely but possible.

However, Messari also points out their dissatisfaction with Ripple's selective disclosures in marketing tactics:

• Marketing tactics akin to dark direct sales.
• Exaggerating overseas trading volumes.
• Emphasizing new liquidity, institutional buying interest from retail traders.
• Confusing all related institutions' trading volumes.
• Officially selling billions of tokens annually.

Messari believes that Hester Peirce's Safe Harbor Act would help increase Ripple's transparency, further monitoring the continued sales by executives like Chris Larsen, Brad Garlinghouse, Jed McCaleb, and others.

However, Gensler has consistently ignored Peirce's Safe Harbor Act, and the SEC will continue to be a burden on US crypto companies.

12. The Battle for Privacy

Messari is disappointed with the digital privacy laws enacted by US legislators, which indiscriminately invade the public's digital assets under the guise of national security, catching bad actors, and collecting taxes, without restrictions.

Messari refers to the US infrastructure bill, which plans to expand the definitions of "cryptocurrency brokers" and "investors," as well as the hidden Section 6050I tax law amendment in the crypto bill.

In essence, any role in the industry, such as miners, nodes, developers, smart contracts, could be deemed as having reporting obligations as a collecting brokerage of KYC information.

As for the 6050I tax law, anyone receiving over $10,000 in digital assets must submit personal information to the government within 15 days, including sender's name, address, and social security number. Failure to comply will result in mandatory fines and a maximum five-year prison sentence.

If these two points remain unamended, Messari believes the regulations may violate the First and Fourth Amendments of the US Constitution, leading to legal challenges.

13. Introducing DAOs

This year, Messari saw the smartest policy recommendation coming from a16z.

In their article "How to Win the Future," they describe the future of Web3, empowering users to become platform owners and promoting financial inclusion, fostering competition among large tech companies without being controlled by corporations or authoritarianism.

In their paper "A Legal Framework for Decentralized Autonomous Organizations," a16z shifts the focus away from DeFi and cryptocurrencies, no longer emphasizing tokens, and introduces DAOs as a new legal structure.

However, the ultimate issue still boils down to ensuring governance tokens and how the new company form "DAO" can legally operate in the US. While the CFTC regulates commodities, the OCC regulates currencies, and the SEC regulates securities, Messari believes a new regulatory body may be needed.

14. American Web3 Council

Messari envisions a new regulatory body, The American Web3 Council (AW3C), that can coordinate existing regulatory units. Its functions include:

• Enforcing Hester Peirce's Safe Harbor Act.
• Transferring cases falling within the securities scope to the SEC.
• Collaborating with the CFTC to regulate DeFi.
• Collaborating with the IRS to set tax reporting standards.
• Working with the IRS to establish taxable legal structures for DAOs.

In early October, Coinbase released a new proposal for a crypto industry regulatory system, aiming to break free from the old system and establish a new regulatory body. Messari believes it aligns closely with their envisioned proposal, outlining:

1. Regulating digital assets under independent guidelines.
2. Assigning regulatory agencies to oversee digital asset markets.
3. Protecting and authorizing digital asset holders.
4. Promoting interoperability and pursuing fair competition.

However, Messari is quite pessimistic about the current situation, facing a stagnant Congress and a government hostile to the crypto market, indicating that the future of US cryptocurrency seems to be under the relentless legal attack of the SEC.

15. Land vs. Metaverse

Wyoming is going on a wild startup spree for crypto banks and DAO governance structures, with mayors of various states beginning to vie to become crypto hubs. Messari believes it's time to shift focus to virtual assets, urging everyone to fight for an open metaverse world and achieve victory in Washington to overcome regulation.

16. The Most Punk Thing: Fighting for Crypto Regulation

In the final point of this chapter, Messari quotes Punk6529's article "On America and crypto."

The article serves as a faith-based text on the US, highlighting the country's strengths including being the largest economy and financial market, the US dollar, a powerful military, tech startups, and the fundamental belief in freedom.

Punk6529 believes that the US will ultimately embrace open systems like blockchain, something competitors cannot achieve, and the US will be the first to adopt, with the EU following closely behind.