A Hard Fork for Crypto and Consumer Credit: Gensler’s Departure Opens the Door to Divergence

As someone who has spent years analyzing the intersection of blockchain, cryptocurrency, and consumer credit during my time at Moody’s, I’ve seen firsthand how regulatory shifts ripple across these markets. With Gary Gensler stepping down as Chair of the SEC, the crypto world stands at a crossroads. While much of the discussion has focused on industry innovation, this transition also has critical implications for consumer credit. From crypto-backed lending to stablecoins and decentralized finance (DeFi), the choices made by Gensler’s successor will shape how digital assets integrate—or fail to integrate—into the broader consumer credit landscape.

?

This moment provides an opportunity to reflect on both the opportunities and risks ahead. With the incoming Trump administration signaling a more crypto-friendly approach, the next few years could mark a turning point. This shift matters for consumer credit because crypto isn’t just a speculative asset—it aspires to be both a currency and a lending product. Meanwhile, blockchain technology, the foundation of crypto, could transform how consumer transactions and sensitive financial information are processed, creating the “rails of the future” for the credit ecosystem. Gensler’s departure provides a timely opportunity to examine what these changes could mean for the consumer credit landscape. Here’s my take.

?

Introduction

Gary Gensler, the Chair of the U.S. Securities and Exchange Commission (SEC), has officially announced his resignation, effective at noon on January 20, 2025, coinciding with the presidential inauguration. The crypto community has largely welcomed the news, anticipating that new SEC leadership may adopt policies more conducive to industry growth. This optimism has been reflected in market movements, with Bitcoin nearing the $100,000 mark following the announcement.

As the transition unfolds, stakeholders are closely monitoring potential shifts in regulatory priorities that could significantly impact the future landscape of cryptocurrency regulation in the United States.

What will his departure mean for the industry?? Below are the opportunities and risks organized by: 1) Regulation, 2) Innovation and 3) Enforcement.

1. Regulation

Opportunities

Gensler’s tenure has been criticized for relying on enforcement actions instead of issuing clear rules, leaving businesses guessing. New leadership could implement a well-defined regulatory framework that supports compliance while fostering innovation.

One area ripe for clarity is token classification. Many crypto projects struggle to determine whether their tokens are securities, commodities, or neither.? Ripple (XRP) has been embroiled in a years-long lawsuit because the SEC claims it sold unregistered securities, while Ripple argues XRP is not a security [1]. This uncertainty deters projects from launching in the U.S., leading to capital flight to more crypto-friendly jurisdictions like Singapore or Switzerland. A new SEC chair could create explicit criteria (e.g., updating the Howey Test [2]), giving businesses the confidence to operate within legal boundaries.

Stablecoins also require clearer rules.? These widely used digital currencies face inconsistent regulatory treatment. Are they securities, payment systems, or banking products? Tether (USDT) faced scrutiny over its reserves, raising concerns about whether stablecoin issuers need to meet banking-like reserve requirements. Without clear guidance, stablecoins risk being seen as systemic threats, leading to regulatory crackdowns. Regulations requiring transparent reserves and audits could protect consumers while fostering trust in stablecoins.

Similarly, crypto exchanges face a regulatory gray area. The SEC claims crypto exchanges like operate as unregistered securities platforms. Platforms like Coinbase have repeatedly requested guidance on how to register but claim the SEC has provided little actionable advice.? Establishing a formal registration process for exchanges could reduce enforcement actions and encourage more compliance.

Decentralized Finance (DeFi) platforms add further complexity.? These platforms rely on smart contracts - automated blockchain programs - to provide financial services like lending without intermediaries.? In so doing, they operate outside traditional regulatory frameworks and current securities laws don't fully account for DeFi's decentralized nature. For instance, it’s unclear how securities laws apply to DeFi protocols.? Should a DeFi protocol like MakerDAO, which facilitates loans through crypto collateral, be regulated like a financial institution or a software provider? Clear DeFi-specific guidelines could distinguish between platforms operating as intermediaries (i.e.? traditional finance companies) and those that are purely decentralized (i.e. DeFi platforms).

?

Risks?

Regulatory inertia - the persistence of unclear or outdated rules - poses significant risks. Without comprehensive legislation, agencies like the SEC continue regulating through enforcement, as seen in the Ripple case, leaving businesses in legal limbo. This piecemeal approach discourages innovation, pushing startups to relocate to crypto-friendly jurisdictions like the EU or Dubai, where frameworks like MiCA [4] provide clarity.

?

Political gridlock exacerbates the problem, delaying much-needed rules for emerging technologies such as tokenized real estate and decentralized autonomous organizations (DAOs). Meanwhile, gaps in oversight enable fraudulent schemes like Terra (LUNA) to thrive, exposing investors to catastrophic losses and eroding trust in the crypto ecosystem [5].

?

2. Innovation

Opportunities?

Innovation-friendly policies could foster a more collaborative and supportive environment for the cryptocurrency and blockchain industries, keeping the U.S. competitive in emerging technologies. For example, regulatory sandboxes, could allow startups to test blockchain-based financial products in a controlled, monitored environment, easing compliance hurdles for new entrants. Similarly, updated token classification frameworks could differentiate between securities, commodities, and utility tokens, reducing legal ambiguities and promoting legitimate token launches without fear of sudden enforcement actions.

?

Building on the need for clearer regulations, DeFi protocols require guidelines tailored to their unique structure. Distinguishing between decentralized platforms, like MakerDAO or Uniswap, and centralized financial intermediaries is critical. For example, decentralized protocols, which rely entirely on smart contracts and lack central control, should not (arguably) face the same regulatory burdens as traditional banks. Meanwhile, stablecoins, which often operate alongside DeFi protocols, could benefit from rules ensuring transparency and adequate reserves. These measures would not only foster trust in stablecoins but also position them as essential tools for expanding access to mainstream financial services, such as lending and payments.

?

Blockchain innovation could also extend beyond finance.? Grants, tax incentives, and public-private partnerships could encourage blockchain use in areas like supply chain management, healthcare, and intellectual property rights.?Moreover, harmonizing oversight among agencies like the SEC and CFTC or establishing a unified regulatory body could streamline compliance, reducing uncertainty for business.

?

Finally,?sustainability-focused policies?could position the U.S. as a leader in green blockchain technologies. Incentives for energy-efficient consensus mechanisms, such as proof-of-stake, could address criticisms about crypto’s environmental impact while attracting investment in sustainable projects.

?

Risks?

Looser oversight could lead to a “Wild West” environment, increasing the likelihood of fraudulent projects and scams. This would harm the industry’s reputation and discourage institutional adoption. Without robust enforcement, the risk of systemic failures like Terra (LUNA)’s collapse could grow, eroding trust in crypto and destabilizing the broader market.

?

3. Enforcement

Opportunities?

A less enforcement-heavy approach might encourage innovation and reduce fear among entrepreneurs, drawing more blockchain businesses to the U.S. market. Under Gensler's leadership, many companies complained of being penalized without receiving clear guidance on how to comply with regulations. New leadership could offer more proactive guidance and collaboration with the industry.? This shift would foster a more welcoming environment for innovation.

?

Risks?

While Gensler's approach has been criticized for stifling innovation, it also played a crucial role in protecting investors. The collapse of FTX, one of the largest crypto exchanges, revealed mismanagement and fraudulent practices, leading to billions in investor losses. The Ripple case brought attention to unregistered securities offerings, encouraging greater compliance across the industry. The Terra (LUNA) implosion highlighted the dangers of algorithmic stablecoins, which wiped out over $60 billion in value and caused financial distress for many retail investors. These enforcement actions not only held bad actors accountable but also sent a message to the industry about the consequences of deceptive practices, helping to safeguard retail and institutional investors alike. Many enforcement actions under Gensler (e.g., FTX, Ripple, Terra) arguably?protected investors from large-scale fraud.

?

Lax enforcement could embolden bad actors, increasing systemic risks and undermining trust in crypto by enabling fraudsters and poorly managed projects to proliferate, leading to scams, market manipulation, and financial collapses. While a more lenient regulatory environment might attract innovators, it could also create conditions for another Terra-like collapse, where failures in stablecoins or DeFi protocols erode trust in the broader ecosystem. These risks could escalate into systemic issues, affecting both crypto markets and traditional financial systems integrating blockchain technology. Striking a balance between fostering innovation and maintaining accountability is essential to protect investors and ensure trust in the growing crypto industry.

?

Conclusion?

?

Gary Gensler’s departure marks a pivotal moment for U.S. crypto regulation, with the potential to significantly reshape the industry. While a shift toward clearer rules and innovation-friendly policies could boost U.S. competitiveness, the risks of lax oversight must not be ignored. The challenge for new leadership will be to strike a balance between fostering innovation and enforcing accountability. The outcome will determine not only the future of U.S. crypto regulation but also its position as a global leader in blockchain technology.

?

Footnotes:

?

[1] The Howey Test is a legal framework established by the U.S. Supreme Court in 1946 to determine whether a financial transaction qualifies as an "investment contract" and thus a security under U.S. law. A transaction is considered a security if it involves (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived from the efforts of others. The test is central to debates about how cryptocurrencies should be classified.'

?

[2] The SEC sued Ripple Labs in December 2020, alleging that its XRP token constituted an unregistered security, violating U.S. securities laws. Ripple countered that XRP is not a security and challenged the application of the Howey Test to its token. In August 2024, federal court ruled that?institutional sales of XRP were unregistered securities offerings, but sales to retail investors via exchanges were not. Ripple's partial victory may fuel optimism for a regulatory environment that might better balance consumer protection and industry growth.

?

[3] DeFi is a way to use blockchain technology to provide financial services, such as loans, payments, and investments, without relying on traditional banks or institutions. It relies on smart contracts—automated programs that run on blockchains—to manage transactions, making these services decentralized and accessible globally. However, DeFi operates very differently from traditional financial systems, and current regulations don’t account for these differences.

?

[4] MiCA (Markets in Crypto-Assets) is a comprehensive regulatory framework adopted by the European Union to govern crypto assets and their service providers. It aims to provide legal clarity for issuers and exchanges, establish investor protections, and promote innovation within a standardized set of rules across EU member states.

?

[5] The Terra ecosystem revolved around a stablecoin (UST) that was algorithmically pegged to the U.S. dollar using the LUNA token as collateral. When UST lost its peg in May 2022, it triggered a death spiral, leading to the collapse of both tokens and erasing over $60 billion in market value. The fallout exposed systemic risks in unregulated stablecoin ecosystems and prompted investigations into its founder, Do Kwon.