Cryptocurrency: Here come the regulators
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“The sun may be setting on the cryptocurrency craze,” Michael Hiltzik said in the paper Los Angeles Times. Crypto’s decline from a peak market cap of more than $3 trillion in late 2021 to around $800 billion today means late-stage investors likely reaped “huge losses.” And now, initiatives in Congress that were aimed at liberalizing the crypto market appear to be “running out of steam” as regulators have “tightened the screws.” Evangelists for the new form of currency had argued that it was a financial innovation that would allow those on the fringes of the financial system to flourish. But after 14 years of bubbles and scams, it has become clear that crypto is only a speculative asset, something to buy in the hope that someone else will buy it for more. It is “often described as the ‘greater fool’ theory.” What the unbanked really need are easy and affordable ways to save their money, but crypto transactions, fraught with hidden fees, “tend to be the opposite.”
“Crypto’s free pass is being jolted” by the sudden failure of crypto exchange FTX last year, which lost investors billions, Yueqi Yang, Katanga Johnson and Austin Weinstein said in Bloomberg. To prevent a repeat of the 2008 financial crisis, the authorities are now trying to “build a wall” between the crypto trading market and the banking and securities markets. The Federal Reserve and other top financial regulators jointly issued a stark New Year’s warning to banks to ensure that “crypto-related risks” do not affect the banking system, and since then regulatory actions have come thick and fast. At the end of January, the Fed blocked the crypto firm Custodia Bank from “coveted access to the central bank’s payment system”. Just last week, the SEC fined a crypto promoter and sued a startup that issued digital coins, while New York’s Treasury Department ordered the company Paxos to stop issuing BUSD, a popular stablecoin.
In response, bankers are reassessing any exposure to the crypto sector, no matter how small, Rachel Louise Ensign and David Benoit said in the The Wall Street Journal. Banks that were once “deep in crypto” are reducing or even eliminating their exposure, while those that kept their distance are now actively “shielding clients” with crypto ties. This restructuring brings to light the extent to which crypto businesses that have presented themselves as an alternative to banks are still dependent on these institutions for access to hard currency. When Citigroup Inc. “abruptly closed” the account of Swan Bitcoin, for example, the company had to step in to pay its employees.
This “aggressive government crackdown” has caused “outrage and anxiety” in the crypto industry, David Yaffe-Bellany said in New York Times. Kristin Smith of the Blockchain Association, an industry group, called it a “crypto carpet bombing.” After the SEC reached a settlement with US crypto exchange Kraken, removing one of its products from the market, the company’s founder briefly “posted an obscene meme” about the agency’s chief. And this upheaval will not end anytime soon. Industry lawyers say the wave of enforcement is likely just “a prelude to a protracted period of legal wrangling.”
This article was first published in the latest issue of The week Blade. If you want to read more like it, try six risk-free issues of the magazine here.
