The world’s largest cryptocurrency exchange, Binance, was charged with 13 charges last week by the Securities and Exchange Commission, which also accused it of a long list of other white-collar offences. It also accused Coinbase, a publicly traded company and the largest crypto company in the United States, of failing to register as a broker-dealer.
Since traders and investors had been anticipating the enforcement steps for months, the government’s actions had little impact on the price of bitcoin or the shares of Coinbase. Both businesses also committed to fight the accusations and continue doing business. Binance should not be the subject of an SEC enforcement action, let alone on an emergency basis, the company claimed in a statement. Paul Grewal, the chief legal officer of Coinbase, responded, they are quite confident in the way they run the business—the similar business they presented to the SEC in order for them to become a public company.
The crypto market was in peril even before the SEC announcements. Numerous businesses had collapsed, millions of ordinary investors had lost money or pulled out, and institutional investors had shifted billions of dollars’ worth of investment elsewhere. The industry, which has been plagued by persistent issues of its own making, is currently experiencing both a regulatory and an existential crisis: Is cryptocurrency down or dead?
Thousands of individual and institutional investors have written it off, so it is undoubtedly in the red. Scams are the most evident problem. In the cryptosphere, large companies are frauds. Small businesses are frauds. The same can be said for stable coins, exchanges, NFT schemes, initial coin offerings, and tokens. Self-described altruist-run businesses are scams. Scams are businesses conducted by the shadiest men you can possibly imagine.
Will Wilkinson, the head of policy at TBD, a bitcoin-focused division of the finance behemoth Block, told that there had been many purportedly decentralised Web3 companies that were really just three individuals and a pair of servers in a pump-and-dump coin scheme. And even straightforward, lawful crypto activity is still vulnerable to fraud. According to the research team Chainalysis, hackers stole roughly $4 billion worth of bitcoin and other cryptocurrencies last year alone.
The sector also has a complexity issue. People still find it difficult to understand how the blockchain operates, what Web3 is, and what tokens, coins, and NFTs are 14 years after the invention of bitcoin. Many people also experience difficulty managing their money and purchasing cryptographic assets. (Again, why do you need a strange combination of letters and numbers to protect your bitcoin?)
A mature market is one where investing shouldn’t make you nervous. Yesha Yadav, a specialist in financial-market regulation at Vanderbilt University’s law school, advised that you shouldn’t be alienating a lot of people with greed and theft. It should also be one where people are at ease knowing the technicalities.
What purpose does it serve to carry out all of this? Cryptocurrency has long been hailed as a revolutionary technology that could dismantle central banks, empower private citizens, and possibly even usher in a new period of peace on Earth. But who and how was it revolutionary? It’s difficult to say. Most cryptocurrency users only place speculative bets, and most crypto companies only engage in speculative bets themselves or facilitate them. For the most part, Crypto is a casino—one without free drinks.
According to Dennis Kelleher, a co-founder of Better Markets, a nonprofit organisation that supports financial regulation, these digital assets are mostly useful for criminal operations like money laundering, narco-terrorism, and tax evasion. Is it in the public or societal interest to enable such a financial product?
There are also bubbles and volatility. Financial assets increase in value. They become less expensive. This is their nature. Cryptocurrency, however, fluctuates more than most other items. NFTs appeared overnight, drained billions of dollars, and then failed. Initial coin offerings sprang out of thin air, devoured billions of cash, and then vanished.
Even bitcoin, which is the most reliable and liquid component of the market, experiences enormous price changes. Internet and radio commercials from two years ago painted cryptocurrency as a risky investment and a down payment on the future. Black investors, who have traditionally been rejected by Main Street financial institutions, were specifically targeted in these advertising.
LeBron James declared when launching a multiyear deal with Crypto.com that he wanted to make sure that communities like the one he is from weren’t left behind. A multibillion dollar pump and dump was involved. “Dumb money” was brought in to drive away smart money. To drive out white money, black money entered. Bitcoin tripled in value. Afterward, it broke.
Such losses may be tolerated by wealthy investors. The ability to withstand this kind of volatility may lie with high-risk investors. And so might crypto enthusiasts, for whom the mantra “HODL,” or “Hold on for dear life,” is a popular refrain. The majority of individuals, though, don’t want to hang on for dear life.
If only these problems existed, the crypto winter might only last a season. Bitcoin and ether prices would increase again, like they do now. People would forget about the blatant forgeries, clammy advertisements, and never-ending hacks. New ventures would launch, promises would be made, and cash would pour in.
Numerous crypto firms have been practicing “regulatory entrepreneurship” since the outset. The company’s guiding principle is “ask forgiveness, not permission” Startup founders establish a business in likely violation of American law, contend that the law should not apply to them, expand to the point of being “too big to ban,” actively lobby, and hope for the best. It may come out as naive, but Silicon Valley employs this tactic frequently, and it has been successful for companies like Airbnb, Uber, Lyft, and DraftKings, among others.
For years, cryptocurrency businesses have maintained that they are exempt from American banking regulations. They urged Congress to “clarify” the laws. These businesses also permitted individual customers to purchase, trade, and leverage their novel assets while Congress deliberated whether and how to do so. However, due to the legal and regulatory risk, American financial companies that adhere to American financial legislation largely avoided investing in or developing products utilizing cryptocurrency. Bank of America would not allow you to pay your mortgage with bitcoin, and Goldman Sachs did not begin packaging ether into derivatives.
This peculiar state of affairs shielded the larger American financial system from the fraud and volatility of the cryptocurrency markets. However, it exposed lone crypto investors to that fraud and chaos. Yadav stated that while they are up here scratching their chins over what these asset classes actually stand for, real people have been losing their shirts, which makes her anger boil.
The fall of FTX, Sam Bankman-Fried’s alleged Ponzi scheme and crypto mega-exchange in the Bahamas, in November did not cause the financial system to become unstable. But it did put a stop to any hope of Congress drafting laws supportive of cryptocurrencies. And the SEC moved on, insisting that the majority of crypto assets are securities, asserting that crypto companies have failed to register their businesses and properly organise them, while Congress delayed, discussed, and withdrew. The SEC also promised to enforce compliance with the law on behalf of the crypto industry. There have been numerous enforcement actions in the previous few years; Coinbase and Binance are only the biggest and most recent targets.
Crypto companies claim that this “regulation by enforcement” stifles innovation because Congress must first define the regulations before the SEC can enforce them. Imagine if banking services had been denied to Ford and General Motors more than a century ago because authorities deemed cars to be too dangerous. Popular cryptocurrency investor Katie Haun penned an article for The Wall Street Journal in March. Congress and state legislatures should make major decisions regarding U.S. policy, not unelected authorities.
However, a lot of financial professionals contend that the SEC has clear power. According to a 1946 Supreme Court decision, the majority of crypto assets are securities, which are defined as financial investments in collective businesses where returns will only come from the labour of others. (Notably, Bitcoin is not a security; nobody benefits from its leadership’s work as it lacks any.) Kelleher informed that the SEC is working to uphold the most fundamental investor protections we have. Actually, these are not particularly aggressive cases. These are not close calls.
They might be disastrous for the crypto business, though. The essence of regulatory entrepreneurship is that many crypto enterprises do not have a business model that nets out if regular finance rules are in place. The SEC claims that Coinbase is a mess of conflicts of interest, offering inadequate client safeguards and disclosures, and doing poor bookkeeping. If it reorganised, it probably would become a smaller corporation with higher costs and reduced or even nonexistent profitability. (The business was lucrative prior to the crypto market crash, but it is currently losing money.)
SEC Chair Gary Gensler claims that Binance is essentially a criminal enterprise—”an extensive web of deception” that is deliberately obstructing American law. (The SEC complaint contains a communication that Gensler’s advocate, Binance’s chief compliance officer, sent to a coworker: We are operating as a fking unlicensed securities exchange in the USA bro.)
The dangers facing those two companies are similar to the dangers facing the whole crypto sector. The “regulatory hammer” is swinging, said crypto analyst Edward Moya in a letter to clients last week, adding that it appears that this is just the beginning. He forecast that traders will exit positions, remove assets from exchanges, and sell speculative investments.
Does this indicate that crypto has died? No and yes. The biggest dream of cryptocurrency proponents—that cryptocurrencies would revolutionise society, destroy the Federal Reserve, replace Wall Street and Main Street, and transform the internet into the Web3—seems to have come true. A trillion-dollar global asset class is cryptocurrency. Cryptocurrency is also a niche market that is outsourcing, contracting, and becoming even more niche, not one that is developing alongside or competing with Big Finance.
The blockchain, a fascinating general-use technology, and bitcoin, a well-liked alternative investment and favoured currency of criminals, will still endure. The potential is the same, according to Jerry Brito, the executive director of Coin Centre, a think tank and advocacy organisation for cryptocurrencies. Wilkinson, on the other hand, emphasised how effective bitcoin has been in delivering funds to those without access to reliable and robust financial networks, such human rights campaigners in Ukraine, refugees escaping natural catastrophes, and families receiving remittances in Ghana and Kenya. They both expressed the opinion that flushing out the dubious actors and easy money would be beneficial for the industry. According to Brito, some of these initiatives could be revolutionary.
Its still skeptical of how useful or even revolutionary many cryptocurrency projects actually are. Undoubtedly, there are certain use cases just waiting to be found, but good luck to cryptocurrency companies who hope to convince Americans to use them in the future. According to a recent CNBC poll, 8% of respondents think cryptocurrency is a good thing. According to a recent Pew survey, only 2% of respondents who are aware with crypto are “extremely” confidence in its security and dependability. Not only has the government lost trust in cryptocurrencies after the past two years of price crashes, Ponzi schemes, and stolen money. They have also soured the public.
