2021 Digital Asset Regulatory Lookback (US Edition)

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Popular and institutional interest in digital assets, decentralized applications, NFTs, and blockchain technology skyrocketed, and regulators sprinted to catch up.

For the digital asset markets, 2021 was a banner year. Among the milestones:

  • Bitcoin prices hit an all-time high, exceeding $65,000, up from about $30,000 at the end of 2020.
  • Total value locked in decentralized finance (DeFi) surged from under $20 billion to over $250 billion in 12 months.
  • Market capitalization for all digital assets reached $3 trillion.
  • Non-fungible tokens (NFTs) went from crypto curiosity to mainstream phenomenon, with a single NFT selling for $69 million at a traditional auction house and notable NFT collections reaching trading volumes in the billions.
  • Valuations for crypto companies and cryptoassets soared, with at least 40 unicorns (valuation of $1 billion or more) minted.
  • Venture capital (VC) firms invested an estimated $32.8 billion into crypto and blockchain-related startups, including $10.5 billion in Q4 2021 (up from an estimated $8 billion for all of 2020). Furthermore, 49 new crypto-focused VC funds were raised, with three of those funds raising over $1 billion and two topping $2 billion.

Beyond these market metrics, crypto (along with Web3) solidified its place as mainstream. Previously considered a niche industry by many, crypto has now unequivocally caught the attention of financial institutions, venture capitalists, and hedge funds. In 2021, various governments engaged with crypto through a range of approaches. El Salvador adopted Bitcoin as legal tender, and other countries adopted or experimented with central bank digital currencies (CBDCs). Global regulatory scrutiny of the burgeoning industry increased with similarly diverse approaches: China banned Bitcoin mining, while the Securities and Exchange Commission (SEC) approved a US Bitcoin Futures ETF.

The growth in the crypto industry was not without some clear growing pains. According to Chainalysis estimates, a record $14 billion in crypto transactions was related to criminal activity, with $7.8 billion stolen in scams (including over $2.8 billion lost to blockchain-related rug pulls). In response, regulators and law enforcement authorities heightened their focus on the use of digital assets in criminal activity and ransomware attacks.

Below is a summary of the significant crypto developments in the US in 2021 from a legal, regulatory, and policy perspective.

Increasing Federal Focus and Congressional Interest

Banking Regulators Get Up to Speed

Early in 2021, the US Federal banking agencies indicated that they were conducting “regulatory sprints” to come to grips with the current state of affairs in the digital asset markets. While these sprints have yet to result in any tangible regulatory changes, it does appear that the agencies are placing a much greater focus on these issues than they have previously.

  • On November 23, 2021, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the Federal banking agencies) issued a joint statement that summarized the work conducted during the sprints. According to the statement, the Federal banking agencies “plan to provide greater clarity throughout 2022 on whether certain crypto-related activities conducted by banking organizations are legally permissible.” In addition, the Federal banking agencies plan to provide greater clarity regarding expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations related to:
    • Cryptoasset safekeeping and traditional custody services
    • Ancillary custody services
    • Facilitation of customer purchases and sales of cryptoassets
    • Loans collateralized by cryptoassets
    • Issuance and distribution of stablecoins
    • Activities involving the holding of cryptoassets on balance sheets

Congress Delves Into Crypto

December 2021 saw significant congressional hearings, with major players in the digital asset industry testifying before lawmakers. While the hearings were mostly exploratory, they were described by many in the industry as watershed moments for crypto.

  • Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States (December 8, 2021)
  • Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks? (December 14, 2021)

Proposals for Statutory Frameworks Emerge on Capitol Hill

  • On July 28, 2021, Representative Don Beyer introduced the Digital Asset Market Structure and Investor Protection Act (the Bill). The Bill is perhaps the most promising effort to date by Congress to enact legislation that would address some of the legal ambiguities for digital assets and better define their place within existing financial regulatory structures. Rep. Beyer described the current legal landscape for digital assets as “ambiguous and dangerous for investors and consumers.” Broadly, the Bill seeks to address deficiencies and/or ambiguities relating to consumer protection, trade reporting and transparency, and anti-money laundering / know your client (AML/KYC) procedures for digital assets. The Bill also seeks to address a wide range of practical issues, from the fundamental (such as defining industry terms and categorizing cryptoassets) to the more nuanced (such as establishing standards for transaction reporting and consumer protection and advisories). (See New US Digital Assets Bill Casts Wide Net.)
  • SEC Commissioner Hester Peirce has been a relentless supporter of digital asset innovation and is an advocate for clear regulatory guidance where she perceives they are lacking. To remedy some of those issues, Commissioner Peirce published a Token Safe Harbor Proposal on February 6, 2020, and reissued a revised version (Proposal 2.0) on April 13, 2021. (See The Return of the Token Safe Harbor.) Proposal 2.0 never gained traction at the SEC, but it did find an ally in Congress. On October 5, 2021, Representative Patrick McHenry, the ranking member on the House Financial Services Committee, introduced the Clarity for Digital Tokens Act of 2021, a bill that substantially embodies Commissioner Peirce’s Token Safe Harbor Proposal 2.0. (See The Token Safe Harbor Lands on Capitol Hill.)
  • Other legislative efforts making the rounds on Capitol Hill include the Eliminate Barriers to Innovation Act, the Token Taxonomy Act of 2021, and the Digital Commodity Exchange Act of 2021.

There’s a New Sheriff in Town — Gensler Installed at the SEC

In early 2021, President Biden nominated Gary Gensler to chair the SEC. After a contentious Senate confirmation hearing, Gensler was sworn into office on April 17, 2021. Given his history as chair of the Commodity Futures Trading Commission (CFTC) and a professor at MIT who taught courses on digital currencies and blockchain, many market participants were hopeful that his appointment would be a boon for the digital asset industry. While the jury is still out on the net impact of his appointment, Chairman Gensler has been very vocal about his conviction that the digital asset industry falls squarely within the SEC’s purview and that the SEC will apply its authority via regulation or enforcement, where appropriate.

  • On August 3, 2021, Chairman Gensler gave a speech on the digital asset industry. The speech offered some indication of what he expects the SEC to focus on in this area but did not provide concrete guidance for industry participants looking for clarity on regulatory uncertainties. He did, however, clarify that he believes “we just don’t have enough investor protection in crypto” and that the SEC will play a more active role in regulating the industry. (See New SEC Chairman Gives His First Speech on Crypto.) Further speeches, interviews, testimony, and remarks have cemented the general view that Chairman Gensler is intensely focused on bringing crypto fully within the remit of the securities laws and consumer protection regulations. Chairman Gensler has also said he would like Congress to expand the SEC’s remit to bring law and order to an industry that he has described on many occasions as the “Wild West.”
  • Earlier in the year, on February 26, 2021, the SEC Division of Examinations issued a Risk Alert reflecting the Division’s continued focus on digital asset securities. The Alert (i) provides Division observations from examinations of investment advisers, broker-dealers, and transfer agents regarding digital asset securities, and (ii) outlines areas of focus for the Division’s future examinations of those entities. The Division highlighted six areas of primary risk for investment advisers that manage digital assets based on past examinations: portfolio management, recordkeeping, custody issues, investor disclosures, pricing client portfolios, and appropriate registration requirements. The Division also pointed to six areas of regulatory and compliance risk for broker-dealers: safekeeping funds and operations, registration requirements, anti-money laundering procedures and controls, offerings, conflicts of interest disclosures, and outside business activities procedures and controls.

CFTC Continues to Prosecute Fraud While New Leadership Takes Charge

  • On August 23, 2021, CFTC Commissioner Dawn D. Stump published a statement and infographic seeking to clarify the agency’s current role and authority with respect to digital assets. She noted that the CFTC has plenary regulatory and supervisory authority only with respect to certain transactions in commodities (including digital asset commodities) — namely, commodity futures, options, and swaps, along with certain retail leveraged transactions in commodities. On the other hand, the…



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