President Trump’s second administration has already begun shaping the landscape for digital assets and cryptocurrencies in the United States. Within the first week, executive orders and regulatory actions have been implemented, signaling a shift towards a more favorable environment for digital asset technology and its development.
Executive Order: Strengthening American Leadership in Digital Financial Technology
One of the most significant moves was the signing of the executive order called “Strengthening American Leadership in Digital Financial Technology.” This order highlights the importance of nurturing innovation within the regulatory frameworks governing digital assets. Unlike earlier periods where cryptocurrency companies operated under the shadow of potential enforcement actions, this order emphasizes the need to foster the growth of digital assets.
The order promotes the development and adoption of digital assets, stressing their potential to stimulate innovation and bolster economic growth. In a virtual address at the World Economic Forum, President Trump underscored his commitment to positioning America as a “global hub for AI and crypto.”
At the Bitcoin 2024 conference in Nashville, Tennessee, then-candidate Trump voiced his strong support for the digital asset space. This support extended to several topics, encompassing a Strategic Bitcoin Reserve and even the release of Ross Ulbricht.
The executive order also prioritizes protecting individual rights, a key tenet of Libertarian ideals, while simultaneously advocating for the advancement of new technologies, a viewpoint often associated with pro-business and conservative ideologies. The order guarantees that individuals and private-sector organizations can freely access and utilize open public blockchain networks to develop software, engage in mining activities, and maintain secure self-custody of their digital assets.
Stablecoins: Building Blocks For FinTech Development
The administration’s backing of lawful, legitimate, dollar-backed stablecoins is also noteworthy. This endorsement aligns with arguments suggesting that a robust stablecoin ecosystem could support the U.S. Treasury market and bolster the U.S. dollar’s dominance in the global digital economy.
In January 2023, USD-denominated stablecoins accounted for virtually 99% of the total stablecoin market. The market capitalization of stablecoins has since exploded from $138 billion to roughly $222 billion. If stablecoin issuers were considered as a single investor entity, they would be the 18th largest holder of U.S. Treasuries, just trailing behind Brazil which holds $228 billion.
Perhaps the most crucial aspect of the executive order is its prohibition on the establishment, issuance, circulation, and use of Central Bank Digital Currencies (CBDCs) within the United States. This decision indicates the U.S.’s stance to champion decentralized digital assets over centralized digital currencies.
SAB 121: Classification of Cryptocurrencies as Liabilities Rescinded
A second significant development was the SEC’s rescission of Staff Accounting Bulletin No. 121 (SAB 121). Issued by the SEC in 2022, SAB 121 mandated that corporations holding cryptocurrencies on behalf of clients classify these assets as liabilities on their balance sheets. This approach contrasted with conventional accounting practices. Unlike cryptocurrencies, when banks hold securities for clients, they are neither recorded as assets nor liabilities on the bank’s balance sheet, but disclosed in financial statement notes.
By classifying cryptocurrencies as liabilities, financial institutions faced heightened compliance costs and complexities in their financial reporting, discouraging them from integrating digital assets into their operations and product offerings. The escalating risks, regulatory scrutiny, and potential adverse financial impacts deterred institutions from engaging with cryptocurrencies, hindering the growth and adoption of digital assets within the U.S.’s established financial system.
Rescission of SAB 121: A Positive Shift
Acknowledging industry feedback and the evolving digital asset landscape, the SEC rescinded SAB 121 and introduced SAB 122 this past Thursday. The new bulletin allows firms to use broader accounting standards to assess their options and obligations to safeguard client assets and account for potential losses as contingent liabilities. Banks and financial institutions now have greater flexibility, allowing the provision of crypto custody services without the burden of SAB 121 compliance.
The revision of SAB 121 reduced the apparent risks and complexities associated with holding cryptocurrencies, making it more appealing for financial institutions to provide digital asset services. SAB 122’s treatment of contingent liabilities and assets more closely aligns with accepted accounting standards set by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board.
Paving the Road Ahead for Institutional Investment
The executive order “Strengthening American Leadership in Digital Financial Technology” and the SEC’s rescission of SAB 121 create a positive outlook for institutional investment in digital assets. By establishing clear guidelines, the Trump Administration has opened doors for innovation in the United States to flourish. Removing accounting challenges surrounding digital assets further supports this goal.
These actions pave the way for increased institutional participation and engagement with digital assets, without fear of adverse enforcement, which enables the establishment of frameworks that are analogous to the markets in which institutional investors currently operate. There is no doubt that innovation in cryptocurrencies will continue, now more easily onshore, led by the United States.
