Will Regulation Kill Crypto in 2025?

It seems like barely a month goes by without news of another SEC move against a cryptocurrency or cryptocurrency exchange. The latest installment in the regulation soap opera is potential SEC action against Crypto.com and Crypto.com's decision to file a lawsuit against the SEC.

To be clear, regulation won't kill crypto. It might, however, severely clip its wings, particularly in the U.S. Indeed, it is already impacting American crypto investors in terms of where you can buy crypto and which coins and tokens you can access. If you're worried about what impact regulatory moves might have on your investments, you're in the right place.

What U.S. investors need to know about regulation

I'm not going to get bogged down in all the different cases, legal arguments, or even broader regulatory moves at a government level. As a crypto investor -- or potential crypto investor -- you probably have one burning question: What do regulatory changes mean for any cryptocurrency I own?

The answer is that increased regulation will almost certainly change crypto investing, but it won't happen overnight. Some of the ways it can impact you as an investor are by:

• Changing market sentiment, which has a direct impact on prices
• Restricting the way you can buy, sell, and store your cryptocurrency
• Limiting the services and functionality of crypto platforms
• Making it harder to trade specific cryptocurrencies

Pew research shows that around 17% of Americans have owned crypto at some point. Of those, it says 69% still do. The SEC and other authorities may want to bring the sprawling crypto industry under control. But nobody wants to be responsible for around 40 million Americans losing their investments.

One way you can protect yourself against regulatory changes is to use a reputable cryptocurrency exchange or brokerage. For example, avoid platforms that skip know-your-customer processes. Click here to learn more about finding trustworthy crypto exchanges and brokerages.

Regulation won't kill crypto -- but keep it on your radar

Sadly, crypto investors can't ignore the regulatory and legal environment. If the SEC can get the courts to agree that many cryptocurrencies are in fact unregistered securities, it could impact how you buy and sell your assets.

The reason? Securities are a type of investment. Investments are regulated by the SEC and there are controls over who can sell them, what information they release, and more. SoFi Invest® has already dropped its crypto products altogether, while eToro recently cut the number of cryptos it offers down to three.

It isn't all bad. Securities have investor protections that don't exist in the crypto industry. If your brokerage fails, your investments are covered by something called SIPC insurance. There are also rules designed to stop things like market manipulation and fraud. If cryptos are designated as securities, that will almost certainly cause short-term price pain. But it could also mean more protections in the long run.

Pay attention to how the SEC's cases against Coinbase and other top platforms play out. Be particularly vigilant if you hold cryptocurrencies the SEC has named as unregistered securities in its charges. These include Solana (SOL), Cardano (ADA), or Polygon (MATIC). If the courts agree with the SEC, their prices may drop and crypto platforms might also restrict trading.

Understand new tax requirements

I said I wouldn't get bogged down in details, but there is one definite change to know about. Starting in 2025, the IRS has new reporting rules for crypto exchanges and brokers that let you store your crypto with them -- also known as custodial platforms.

As a consumer, your tax obligations won't change: You still need to declare your crypto transactions. But from next year onward, crypto platforms will have to file a 1099-DA form, just as banks and brokerage firms do. This will change the way you report your crypto moves.

How to mitigate the risk of regulatory change

Regulation is only one of several risks associated with buying and owning cryptocurrency. Cryptocurrency is an extremely volatile investment and there's a lot we don't know about how the industry will unfold. As such, make sure crypto only makes up a small part of your wider portfolio. It's one thing to take risks with 5% of your investments, and quite another to risk 95%.

If you're worried about regulation, here are some ways to minimize your risk:

• Invest in crypto EFTs: The SEC has approved several spot Bitcoin and Ethereum ETFs. This makes it easier to add crypto to your portfolio from your current brokerage account.
• Stick to BTC: Buying Bitcoin carries less risk than other cryptos. Not only is Bitcoin the biggest cryptocurrency, but its decentralized nature has also kept it out of the SEC's crosshairs. Ethereum has also avoided being labeled as a security, but the case is not so clear cut.
• Avoid any crypto staking or interest-earning programs: The SEC has pursued several crypto platforms that allow investors to earn interest from their crypto. Tempting as it is to put your assets to work for you, wait until the legalities are clearer.

Bottom line

In the absence of clear moves at a governmental level, the SEC is likely to continue to pursue individual cases against crypto platforms in 2025. That's a frustrating scenario for investors who want a clear set of rules. For now, all we can do is watch the court cases and minimize our crypto risks.