Bear Market a chance for cryptocurrencies to “pivot,” says Chainalysis

Despite a contracting crypto market, the blockchain analysis firm Chainalysis believes that the recent fallout provides an opportunity for budding businesses, especially when it comes to strengthening the industry’s image in the eyes of the law.

In the wake of TerraUSD’s collapse in May, several regions around the world moved to crack down on what they perceived as a systemic threat to global financial stability posed by stablecoins and crypto. Legislators also sought to strengthen consumer protection stemming from risky cryptocurrencies.

Terra got into trouble when its algorithmic stablecoin, UST, drastically fell below the intended 1-to-1 parity with US dollars due to a critical failure in the design, which effectively encouraged the price to “death spiral” after it had been deposited. -fested.

Other stable currencies such as Circles USDC and Tether’s USDT claim to be supported by a basket of reserves including cash, commercial paper, bonds and cash equivalents.

Todd Lenfield, Chainalysis’ country manager for Australia and New Zealand, told Blockworks in an interview that regulation will continue to evolve.

“I do not think we are seeing anyone shy away from that, but we do not want to stifle the industry as well,” Lenfield said.

UST’s fall surprised many borrowers, especially those who had taken out under or unsecured loans to exploit deeper into Terra’s ecosystem. These borrowers were forced to swallow margin calls and liquidations that led to some of the industry’s largest lenders filing for bankruptcy.

The Bellwether cryptocurrency bitcoin has since taken a hit, having fallen close to 50% since Terra began flashing signs of capital flight to $ 20,000.

Late last month, EU policy makers reached an agreement on the long-debated Markets in Crypto Assets (MiCA) bill, which sought to establish rules for how digital assets, including stack coins, should be treated in the block.

MiCA tries to identify where existing legislation on financial services falls short, especially around how stable coins should be controlled and the total reserves these projects should have at hand. The bill also seeks to crack down on money laundering by requiring service providers who do not comply with the requirements to be listed in a public register, in the hope of distinguishing them as bad actors.

The chainalysis leader sees this as a time to grow

Although the effect regulation could have played to prevent infection that is currently being felt across the market is debatable, the general consensus among decision makers is that crypto needs more harsh rules – and fast.

Concerns from regulators as well are now centered around the worn-out issue of money laundering and evasion of sanctions, including Russia’s avoidance of sanctions by Western allies following the invasion of Ukraine in February.

Jason Allegrante, institutional manager Fireblock’s chief legal and compliance officer, told Blockworks in an email that it is important for the cryptocurrency industry to clearly define its positive uses.

“One reason for this is that we have done a pretty poor job as an industry in explaining the positive uses of blockchain technology, including utility cases that actually advance the interests of law enforcement,” Allegrante said.

He continued: “Another reason is the perception that these markets are largely unregulated and operate without meaningful supervision. Ultimately, MiCA [and others like it] will help minimize these concerns by putting the burden on the industry to act. “

Yet, according to Chainalysis’ Lenfield, there is a silver lining somewhere among ominous dark clouds.

“We have always said that when there are downturns in the market, it is our chance to grow,” Lenfield said. “We see cryptocurrencies as traditional exchanges that look at offering different types of services, adding value to their customer sets, which is no different from any other business and what they would do in a downturn.”

Chainalysis’ primary pitch focuses on assisting the police in their attempts to catch illegal actors by analyzing blockchain data and mapping addresses belonging to criminals.

“This place is moving so fast that we need to turn around and think about how we want to deal with the changes that are happening in the blockchain area,” Lenfield said. “As it grows and as we want to bring people on board – we want to build that trust – we have to do it by having knowledge and using some information sharing or regulations that work with it.”

Fireblocks’ Allegrate agrees to add a global, principles-based consensus on certain business norms, including anti-money laundering measures, must be incorporated into the industry’s latest projects.

“Some companies will do this better and more efficiently than others, and those who are able to adapt will in many cases thrive,” he said. “Regulation provides clarity and stability; it is often the case that stable markets with clear rules for doing business become more attractive to new players.”

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