Far-reaching effects of aggressive crypto market regulation

Far-reaching effects of aggressive crypto market regulation

Time Stamp: June 18, 2023 4:00 AM

Amid the crypto market regulation headwinds, one question remains: will authorities accept that digital assets represent the future and stop stonewalling it from the traditional financial structure?

  • The spectacular rise of the cryptocurrency industry has presented a fresh challenge for financial regulators.
  • The recent SEC actions against Binance and Coinbase have reignited the focus on crypto market regulation.
  • The crypto industry remains laser-focused on global regulatory headwinds, with regulators crafting new rules to manage digital asset trading.

The spectacular rise of the cryptocurrency industry has presented a fresh challenge for financial regulators. Some researchers and policymakers have warned the overly aggressive crypto market regulation might clutter the promising new financial asset class. Others have indicated that businesses could flee the jurisdictions whose regulations they consider ‘anti-crypto’ to the less regulated jurisdictions. Moreover, some have suggested that crypto regulatory actions will inspire market activity by offering clarity to participants.

Standing behind these divergent opinions is a discussion regarding the desirability of either outcome. Some believe authorities should promote the crypto industry’s growth within their jurisdictions. In contrast, others view crypto as a channel of fraud and illegality that needs controlling through strict regulation or even outright bans. However, these discussions have, to date, happened almost entirely exclusive of data regarding the effects of crypto market regulation.

The SEC regulatory crackdown

Following months of deliberations, warnings and threats, the US Securities Exchange Commission (SEC) took action against the most influential force in the world of digital assets. The US financial overseer accused the crypto exchange Binance and its founder Changpeng Zhao of carrying out a “web of deception,” charging him and his exchange with 13 offences.

Binance handles billions of crypto investments and transactions daily. However, the effects of SEC action will likely go beyond the cloistered, online world of crypto. The SEC seems determined on a broader crypto crackdown. Its action is incited by last year’s collapse of the Bahamas-based FTX.  FTX founder, US national Sam Bankman-Fried, has been charged with money laundering and securities fraud, among other offences.

The SEC also accused another crypto firm, Coinbase, of risking customers’ assets through an “unregistered broker, exchange and clearing agency”. Coinbase has long marketed itself as a reputable crypto exchange. However, the SEC seems to differ.

The twin enforcement actions against Binance and Coinbase suggest that the financial regulator broadly aims at crypto firms and exchanges. The SEC considers these firms to be circumventing crypto market regulation, either by obscuring the difference between on- and offshore services, as with the accusation against Binance, or trading unregulated securities in the case of Coinbase.

These issues beg the more fundamental question of whether cryptocurrencies represent something completely new, requiring a unique regulatory regime, or they represent digital versions of pre-existing financial instruments under the oversight of existing regulatory regimes. The SEC believes that a good share of the industry is the latter. Thus, the regulator seeks to ensure that crypto companies either comply or stop operating.

Read more: Crypto regulations hold back Africa’s Web3 potential

The aftermath of crypto market regulation headwinds

Mass withdrawals

According to Glassnode, customers withdrew $4 billion from Binance and Coinbase in a week following the SEC action. “Crypto traders, spooked by SEC lawsuits, are withdrawing assets from exchanges en masse,” said Alex Kuptsikevich, a senior market analyst at FxPro.

The mass withdrawals from Coinbase and Binance represent the largest daily crypto outflow since February. In February, the New York state regulators stopped issuing the Binance-related stablecoin BUSD.

The scale of the outflows aligns with previous traumatic events within the crypto industry, including the banking crisis in March and the FTX exchange collapse late last year. The latter shook investor confidence in centralised exchanges, heightening the calls for crypto market regulation.

Crypto Prices

Crypto market regulation/Bitcoin price

The uncertainty surrounding the crypto market regulation pushed Bitcoin prices back below $28,000 in May. [Photo/Pexels]

Bitcoin (BTC) and other top cryptocurrencies dragged back from 2023 rises in May as the SEC and other global regulators tightened the screws on the crypto market regulation. Investors flocked to Bitcoin and other cryptocurrencies in March and April when the banking crisis triggered contagion fears. But concerns about the stability of the US banking system vanished as quickly as they arrived, ending the crypto rally.

The crypto industry remains laser-focused on global regulatory headwinds, with regulators crafting new rules to manage digital asset trading. Moreover, investors remain hopeful that the Federal Reserve can finally pause interest rate hikes—or somehow give a hint on when to end the rate hikes.

The uncertainty surrounding the crypto market regulation pushed Bitcoin prices back below $28,000 in May. Crypto prices stabilised towards the end of May as market volatility significantly subsided. However, the decline has persisted, with Bitcoin trading just above $25,000 at the time of writing. Since dropping as low as $1,740 in May, Ethereum (ETH) prices have also dwindled significantly to trade at $1600.

Read more: SEC warns crypto traders and investors of looming honey trap

Bearish sentiments in the crypto market

The legal tussles with the SEC continue to cast a shadow over the crypto market. The revocation of some crypto services by platforms, including Robinhood and eToro, has triggered a liquidity crunch and panic selling in altcoins.

Ali, a crypto trader, citing data from Santiment, observes that investor sentiment towards digital assets has plummeted to levels not seen since the March 2020 crypto market crash during the COVID-19 outbreak.

Meanwhile, Anthony Sassano, the Daily Gwei founder, has suggested that the next 12 months could see a flurry of crypto projects going under. “Some will be good-intentioned projects that just didn’t find product/market fit, but most will be things that never should’ve been created/funded in the first place,” he said on Twitter.

Africa still lags in crypto regulation

The recent SEC actions against Binance and Coinbase have reignited the focus on crypto market regulation. Regulating a decentralised and highly volatile system poses a significant challenge for most governments, necessitating a balance between maximising innovation and minimising risk. According to IMF, Africa lags in crypto market regulation, with only one-quarter of sub-Saharan African countries formally regulating crypto.

Africa is one of the fastest-growing crypto markets globally, according to Chainalysis. Many Africans use digital assets for commercial transactions. However, crypto volatility has made it unfit as a store of value.

Policymakers have expressed concerns that people could use cryptocurrencies to illegally transfer funds out of Africa and circumvent local regulations to avert capital outflows. Widespread use of crypto could also undermine the effectiveness of monetary policy, creating risks for financial and macroeconomic stability.

What is next amid crypto market regulation uncertainty

The sector, already bruised by far-reaching challenges, remains firmly at the heart of a “crypto winter.”  Investments are drying up, with regulators getting ready to pounce. The SEC’s reading of US law is possibly detrimental for a large portion of the crypto industry and could prompt businesses to relocate. Nevertheless, regulatory havens are increasingly few and far between.

In the UK, the prime minister, Rishi Sunak, has historically supported the crypto industry. The prime minister used his time at the UK Treasury to command the Royal Mint to make and sell a collectable “NFT” and push the Bank of England to issue guidance on stablecoins and “central bank digital currencies”. But in recent months, the UK has discussed introducing stricter rules, as Sunak’s attention has turned to AI: a May report from MPs called for regulating cryptocurrencies as a form of gambling.

Amid the crypto market regulation headwinds, one question remains: will authorities accept that digital assets represent the future and stop stonewalling it from the traditional financial structure? A proper balance remains necessary to maximise potential benefits while protecting consumers.

Read more: Binance fights crypto crackdown, threatens to sue SEC

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