Altcoins Are Surging Under Trump. How New Regulations Could Create Winners and Losers. — Barrons.com

By Elsa Ohlen

Bitcoin has finally broken into the mainstream after years as the noisy rebel of the financial system. Now, the Trump administration's crypto push could do the same for altcoins — at least some of them.

For years, the world of cryptocurrencies operated as a financial Wild West, characterized by unchecked speculation, regulatory ambiguity, and occasionally spectacular downfalls. Now, just about three years after the collapse of exchange FTX shattered confidence in the sector, lawmakers are actively engaging in shaping rules to govern cryptos, classifying them as either commodities or securities. That, in turn, will remove the ambiguity and overlap over regulation, making investing less of a risk.

"It adds more certainty that [cryptocurrency] is here to stay," Jamie Hopkins, CEO of Bryn Mawr Trust Advisors told Barron's.

For years, it has been unclear just where crypto fits in to the world of financial assets. Despite their name, cryptocurrencies aren't regulated as currencies and there have been legal cases over whether certain tokens should be considered commodities or securities. That ambiguity has had impact on their supervision and regulatory overlap between the Commodity Futures Trading Commission and Securities and Exchange Commission. The lack of a regulatory framework left investors in limbo, while the many attempted cases of litigation and government enforcement have discouraged people wanting to enter the industry.

"It creates a cautionary principle where you don't go to the edge of the cliff," Bitwise Chief Investment Officer Matt Hougan tells Barron's. "You have to stop a hundred yards from the edge of the cliff because you don't know where the cliff is."

A multiyear legal battle between Ripple Labs and the SEC served as a cautionary tale. The regulator charged Ripple in 2020 for selling XRP, which it considered an unregistered security. Ripple denied the accusations, arguing that XRP didn't act like a security and therefore shouldn't be subject to securities control.

A district judge issued a split ruling in 2023 stating that retail XRP sales on public exchanges didn't qualify as securities transactions, however, some institutional sales did. After over four years, Ripple and the SEC finally settled and Ripple agreed to pay a fine of $125 million. In August this year, they jointly filed for dismissal of the case.

The Clarity Act could be key to finally giving the industry the rules and predictability it has craved. It lays out a framework to distinguish whether digital assets are classified as commodities, overseen by the CFTC, or securities, under the jurisdiction of the SEC. Stablecoins, or coins typically pegged to the dollar that act like a crypto version of a money-market fund, have their own category and would fall under joint oversight of the SEC and the CFTC.

The Act's backers say it gives the sector just that, while critics argue it doesn't do enough to ensure effective ways to enforce its rules and provide enough protection.

The act still needs to pass through the Senate, which has published its own discussion draft market structure bill that would likely put most cryptos under SEC jurisdiction, although with exemptions from many aspects of securities laws.

The House bill, would define a commodity as an asset with its value intrinsically linked to the use of a blockchain — that has a decentralized record of transactions maintained across computers. Furthermore that blockchain must be one that isn't controlled by any one person or group. Coins with a central issuer or controlling entity would fall under the SEC as a security. Most will want to avoid the latter, Hougan says. True value, he suggests, lies in the trust and characteristics of a truly decentralized ownership and governance structure. If a coin is too centralized to be classified as a commodity, it's little more than a "a bad database."

Law firm McMillan suggests a reconciliation process is expected that will converge both bills into a final text for passage.

So far Bitcoin and Ether have typically been considered commodities by regulators due to their distinct decentralized nature of a broad ownership and governance structure, but most other coins remain largely undefined. Comparing them to Bitcoin or Ether would be like comparing the world's most valuable company, Nvidia, to a penny stock, Hougan says.

For Bitcoin and Ether, regulatory advancements will be "strictly positive," he adds. It could reduce their notorious volatility as well as remove the reputational risk that surrounds cryptos. Other coins, however, face a potential divide.

The total cryptocurrency market has a value of nearly $4 trillion — around the same as Microsoft — with Bitcoin accounting for about two thirds of that. The rest is altcoins, or alternative coins, of which there are thousands. About 80 tokens have a market capitalization of more than $1 billion, according to CoinDesk data.

The new law could give cryptos tied to a blockchain a leg up on their competitors, according to Professor Sarit Markovich at Kellogg School of Management. She sees cryptos tied to a blockchain like Ether, Solana, and Ripple's XRP as "two-sided markets" — operating systems with app developers on one side and users on the other. Regulatory clarity and legitimacy would bring more users to these ecosystems, increasing their value and the price of the tokens tied to them, she says.

In contrast, the long-term prospects for meme coins such as Dogecoin, Shiba Inu, or $TRUMP, despite potential short-term price bumps, appear more challenging. Meme coins don't typically have their own blockchain but are built on top of other blockchains.

While financial advisors are coming round to making a place for cryptos in portfolios, they are divided on coins besides Bitcoin. Hopkins says he recommends clients interested in cryptos invest between 1% and 3% in via spot ETFs such as those by Fidelity, BlackRock, and Bitwise, leaning toward the lower end of that range, as opposed to investing in the coins themselves.

BlackRock offers the iShares Bitcoin Trust ETF and the iShares Ethereum Trust ETF. Similarly, investors can buy the Fidelity Wise Origin Bitcoin Fund or the Fidelity Ethereum Fund.

Bitwise also offers funds tracking the price of a basket of coins like the Bitwise 10 Crypto Index Fund, which is heavily overweight on Bitcoin but also includes 1% or more of Ethereum, XRP, Solana, and Cardano, as well as minor holdings of Chainlink, Sui, Avalanche, Litecoin, and Polkadot.

If passed, the legislation would remove a key impediment to investing in crypto by providing much-needed regulatory clarity. The Bitwise 10 Crypto Index Fund may be a good place to start.

While many still oppose cryptos altogether, that battle appears to have been fought and lost. Digital assets are here to stay — maybe it's time to embrace them.

Write to Elsa Ohlen at elsa.ohlen@barrons.com

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