3 Crypto Regulatory Predictions for 2022

Stablecoins could be in the dock first, but Democrats may focus on other priorities to keep control of Congress during November midterm elections.

During the last half of 2021, we heard a lot of political posturing regarding regulation of cryptocurrencies. All the expected players have weighed in, from the White House to the House of Representatives and many others from the Federal Reserve, the Security and Exchange Commission (SEC), and Treasury Department. Despite all the chatter about cryptos from politicos, virtually nothing happened on the regulatory front. Perhaps this year will be different. Here are three realistic crypto predictions for 2022.

Stablecoins will be the first target

Stablecoins will almost certainly be the first focus of any regulation, because they're the easiest form of crypto to access and the greatest perceived threat to consumers, because of potential loss of value or access to the initial investment. Regardless, stablecoins are a form of crypto issued and traded on blockchains, which are pegged to a "stable" asset such as gold, reserve currencies, or government bonds. This digital currency is designed to be less volatile and more secure than other crypto assets, thanks to that relation to a tangible asset.

Politicians are worried about stablecoins for these reasons:

• The complete lack of investor protections such as FDIC insurance if losses occur.
• Some stablecoins are backed by commercial bonds, which may lose value or block investors from cashing out.
• A decrease in the value of the pegged asset could keep stablecoin issuers from meeting redemption demands of holders.
• Certain stablecoins are susceptible to liquidation runs by investors who drain their accounts all at once. This is similar to a "run on the bank," when lending institutions only have a percentage of total assets on hand, but skittish investors race to withdraw funds, creating economic turmoil.

Lastly, stablecoins could be perceived as competing with the U.S. dollar, which could potentially undermine greenback usage and its place as a global reserve currency. Plus, stablecoin regs could easily be tucked under the Fed, and lawmakers want to focus their regulatory firepower on stablecoins first, to protect their turf.

Competing priorities will slow Congress from acting

Lawmakers have reconvened for the second half of the 117th congressional session with several other issues demanding their attention. The Democrat-controlled legislature is considering a range of policy priorities, such as approving a somewhat shrunken version of President Biden's "Build Back Better" program, increasing the debt ceiling to keep the government's credit lines open, and passing a controversial voting registration reform bill. However, they're running out of time before the midterm elections this November.

The pressure is on. The only meaningful accomplishment Congress can point to from the past 12 months is the bipartisan $1.2 trillion infrastructure bill. Thus far, their more progressive initiatives have fallen flat. A lack of big legislative points is likely to mean lackluster results at the polls.

According to Gallup, presidents with job approval ratings below 50% have seen their party lose an average of 37 House seats in midterm elections. A Marist survey from Dec. 20 shows Biden's approval languishing at 41% of those surveyed. Democrats may intentionally table talk of crypto regulations to focus on items to help them keep their slim majorities in the House and Senate.

Regulatory agencies will apply existing regulations

This one is not too tough to figure out -- officials from the Fed, SEC, and Treasury have said this is what they'll do. For instance, a Treasury undersecretary publicly prodded Congress in a recent Bloomberg interview to take quick action to regulate stablecoins, due to their perceived risk to the U.S. economy and individual investors.

"If Congress does not enact legislation, the regulators will try to use what authority they have," but won't have sufficient oversight powers, said Nellie Liang, Treasury undersecretary for domestic finance in the interview. "They can do a little here and a little there, but if these are foundational to crypto assets and they aren't stable, that could potentially be a big risk."

But Democrats probably see losing control of one or both houses of Congress as an even bigger risk. And since crypto is not a major campaign issue that drives people to vote, we may see a whole lot more of nothing regarding cryptocurrency regulation until after this year's election cycle.