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| By Marija Matic |
Following a significant sell-off triggered by the Securities and Exchange Commission's crackdown on Binance, Coinbase (COIN) and several major cryptocurrencies, the crypto market is now experiencing a stabilization of prices.
The SEC's scrutiny primarily targets Layer-1 cryptocurrencies, leading to regulatory uncertainties for these types of digital assets, with the exception of market leaders Bitcoin (BTC, “A-”) and possibly Ethereum (ETH, “B”), which notably avoided legal action.
If you’re not caught up on the situation, you can read up on it here and here. I also recommend reading my colleague Juan Villaverde’s take on the situation from last Friday.
While the cases remain civil rather than criminal, the classification of numerous mentioned cryptocurrencies as securities remains uncertain. If the SEC's position is affirmed by lawmakers in the future, U.S. exchanges, such as Coinbase and Binance.US, would need to register as brokers, and certain cryptocurrencies could be treated as securities.
There are a few upcoming developments that are expected to provide some regulatory clarity in the cryptocurrency space soon.
The first will occur this week. The SEC has already sought a court order to freeze the assets of Binance.US. The hearing on this request is scheduled for Monday, a week from today.
In response, Binance.US has announced its intention to transition into a "crypto-only exchange" and discontinue deposits and withdrawals in USD.
Another is the continuation of an existing case: The 2020 lawsuit against Ripple (XRP, “B-”), which alleges that the sale of the XRP token constituted an unregistered securities offering.
XRP currently holds the position of the world's sixth-largest cryptocurrency, and Ripple has been engaged in a legal battle with the SEC for the past three years.
It appears as though the SEC is attempting to regulate the young crypto market through the courts, rather than letting lawmakers set the standards. The problem with this is that it creates uncertainty and confusion for those in the industry trying to stay on the right side of the law.
According to a recent JPMorgan Chase report, the importance of establishing a clear legal structure for the crypto industry is crucial. The report highlights that the ongoing crackdown by the SEC has increased the urgency for U.S. lawmakers to promptly develop a regulatory framework.
The report further predicts that without such clarity, cryptocurrency activities are likely to shift away from the United States and move toward decentralized entities. As a result, the report suggests that venture capital funding for cryptocurrencies may also remain subdued within the U.S.
But according to Felix Salmon from Axios, the question remains: Why did authorities wait until now to act?
Why did they hold back on a broad crypto crackdown as the industry developed? Why was Coinbase allowed to go public? And why was crypto bank Silvergate regulated by the Federal Reserve?
It seems that lawmakers perennially allowed bills that would regulate the industry and give it — or at least certain companies — the government's formal stamp of approval to languish in the halls of Congress.
"The overriding goal of policymakers should be to keep crypto systemically irrelevant," wrote business professors Stephen Cecchetti and Kim Schoenholtz after FTX collapsed. "Rather than creating a new legal and regulatory framework that legitimizes crypto, we should simply let it burn."
Could this be an answer to the above questions? For now, that remains nothing more than speculation. However, it’s hard to ignore in the absence of more satisfying answers.
The silver lining for investors, perhaps, is that these legal battles could help establish how — and whether — cryptocurrencies are regulated in the U.S.
Turning to near-term market health, let’s look at Bitcoin’s chart. There are three key things to note.
First, BTC is trading above its $25,200 support level, marked in purple:
We may see this level tested soon, considering BTC closed last week below its 200-day moving average (marked in blue). This means it may trade for weeks below this indicator.
Additionally, the descending pattern in which Bitcoin has been trading for the past three months (marked in orange) has not been broken.
If support can hold, there’s a chance that price action can manage to play it out in a bullish manner.
One bullish sign giving credibility to the idea that support can hold is the fact that, despite the crackdown and outflows in digital asset investment products, retail investors keep accumulating with the speed of 37,400 BTC per month, based on data from Glassnode.
Obviously, they are using the “blood on the streets” to load up. Still, it is a significantly optimistic net position change.
Notable News, Notes & Tweets
• Reddit crypto communities go dark in a protest against new monetization policies.
• a16z opening U.K. office as prime minister plans to make the country a web3 hub.
• Binance CEO CZ responds as data points to billions in exchange outflows.
What’s Next
Congress needs to sort out the regulatory mess that is the U.S.’ cryptocurrency policy before it damages the country’s reputation as a destination for new investment opportunities.
Senators and representatives also need to be careful that they don’t make crypto another single-issue vote.
Influential individuals in the crypto space are already calling awareness to the fact that the “War on Crypto” will hurt Democrats, who tend to come out stronger in favor of harsh regulations. Renowned crypto billionaire Cameron Winklevoss pointed out in a recent tweet that the youth vote rescued the Democratic party from defeat in 2020 … and that alienating them now will mean "lost votes" in the next election cycle.
I can’t agree more.
But some lawmakers are pushing the blame on SEC Chair Gary Gensler. The claim is that Gensler’s aggressive anti-crypto stance is due to “political gamesmanship” and not the best interest of American investors.
U.S. Congressman Warren Davidson (R-OH) went as far as to officially propose a bill to fire Gensler. The bill, called the SEC Stabilization Act, aims to “ensure that the SEC’s priorities are with the investors they are charged to protect and not the whims of its reckless Chair.”
And it’s still only Monday, folks. We have the rest of the week ahead of us.
And it promises to be eventful with the upcoming release of the latest Consumer Price Index data, Federal Open Market Committee meeting minutes, the SEC's Coinbase rulemaking response and the Binance.US hearing.
Hold on to your hats. It’s likely to be a bumpy ride.
Best,
Marija
