The Next Phase in the U.S. Regulators’ War on Crypto
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| By Juan Villaverde & Alex Benfield |
By now, you’ll likely have heard the news. On Monday, the Securities and Exchange Commission filed a lawsuit against the largest centralized exchange, Binance. Then, it filed a separate suit against the U.S.-based centralized exchange, Coinbase (COIN).
My colleagues Marija Matić and Bruce Ng already covered the allegations listed in the lawsuits.
But we have yet to cover the big picture.
This isn’t just the SEC’s latest attempt to brand cryptos as securities and pull them under its control. Sure, that’s still a goal. But not the goal.
Rather, this represents the next phase in what some in the crypto community are calling "Operation Chokepoint 2.0."
Let's rewind a bit for context.
Remember the banking crisis earlier this year? That was phase one.
Our first casualty, Silvergate Bank, bit the dust following accusations of fraudulent activities. According to members of the U.S. Senate, these claims highlighted the bank's substantial engagement in crypto services.
Then, the Federal Reserve demanded a reduction of crypto operations to only 15% of its overall business. Considering its clientele, this proved an impossible task, forcing Silvergate to pack up and leave the market.
Next up, we had Signature Bank. This institution wasn't as heavily invested in the crypto world, but it served its fair share of crypto customers. Signature claims they were solvent and healthy when the feds swooped in and moved them into Federal Deposit Insurance Corporation receivership.
The bank was left with a big question mark — why were they chosen for this unexpected intervention?
Well, both Silvergate and Signature had a unique selling point: proprietary technologies that served crypto clients, enabling 24/7 fiat transactions settlement.
That’s a lifesaver for businesses operating in the crypto world, where markets don’t close and trading never stops. When these banks were forced to shutter, their pioneering technologies were explicitly denied to any potential buyers.
The last contestant on the chopping block was Silicon Valley Bank, the figurehead for the Banking Crisis of 2023.
Although not a crypto-centric institution, buyers of the bank’s assets were banned from acquiring accounts linked to Chinese or Cayman Islands nationals or those dealing in crypto during its asset sale.
Quite a specific directive, don't you think?
In all three cases, there's a recurring theme: The U.S. government appears to be placing severe restrictions on crypto-related banking.
Now, fast forward to today. The SEC has fired warning shots at two of the world's most prominent crypto exchanges.
One of which happens to be a publicly traded U.S.-based company, already under U.S. regulatory oversight. In fact, Coinbase needed SEC approval to even go public.
And while the allegation that cryptos are securities is nothing new, the fact is that the SEC filed these lawsuits now … rather than waiting for the judgment from a similar existing lawsuit against Ripple (XRP, “B-”) to come down.
Usually, it’s easier to win if you have a judgment in your favor from a previous case.
It's almost as if someone wants to create a murky, nerve-wracking environment that makes it painful for anyone in the crypto space to operate within U.S. borders.
But why all this song and dance?
The secret ingredient in this spicy soup is capital controls.
It’s no secret the U.S. government is in debt and reliant on the Fed to buy its bonds to generate income in the near term. And its overarching scheme for financial survival is to trap as much money as possible in the bond market and allow inflation to run hot.
Imagine the government as a bankrupt gambler desperately trying to convince everyone to bet on their bond market while distracting them from the inflation that’s stealing chips from the table.
To pull this off, they need to corral savings into a few government-friendly megabanks.
Enter crypto, the defiant thorn in the government's side.
It provides a way to secure wealth out of reach from Uncle Sam's long arms — a major red flag for those in power.
And since it can’t outright ban crypto, it’s attempting to choke it off through a series of inconvenient roadblocks.
Basically, it would seem the SEC is hoping to make crypto-friendly banking and onboarding into crypto so cumbersome that most investors will give up.
So, how will this play out?
Well, we should keep in mind that this year's banking shutdowns and SEC actions may just be the opening act in a series of moves designed to pin you down.
My humble advice? Take a page out of Houdini's book and plan your escape while there's still time.
Where should you escape to? DeFi, where you are your own bank, and no central authority can change that.
Now, I’ll turn things over to Alex to bring you up to speed on how the market has reacted in the days since the lawsuit hit the headlines.
Crypto Shows Strength in the Face of FUD
Juan said it best: The war on crypto is real, and the U.S. regulators are escalating the situation at a rapid pace.
Surprisingly, however, the market has held up fairly well in the wake of all this news. After a brief 5% drop in most assets, the market has pretty much recovered completely.
Prices remain relatively unchanged over the past month.
It’s always a good bottom indicator when markets stop reacting to bad news. That means most sellers have already left the market.
That seems to be exactly what we’re seeing with the crypto market right now.
Bitcoin (BTC, "A-") looked like it might attempt a breakout at the beginning of the week, but the news of the Binance lawsuit sent it all the way down to $25,500. That marks a new medium-term low.
However, no important support levels were broken, leaving BTC in basically the same situation it was in last week. The bulls need to push prices through the resistance levels in order to trigger a breakout.
For now, we’re keeping our eyes on the resistance just under $28,000 and the recent low Bitcoin set at $25,500.
If Bitcoin fails to rally and slips down below Monday’s low, then we would expect a neutral or bearish market for the rest of the summer. Right now, we can only sit back and wait to see how things play out.
Ethereum (ETH, “B”) has already broken above its recent downtrend lines, signaling that it’s close to rallying. However, we are waiting to see if Bitcoin can break out above its downtrend before calling for a rally in ETH.
ETH has been leading BTC for a while, and right now we’re trying to figure out if it can do that one more time. The current resistance levels on Ethereum’s chart are $1,900, $2,000 and the yearly high of $2,150.
The battle lines have been drawn and the war horns have been sounded. The U.S. regulators have declared war on the crypto industry.
Expect crypto companies to ramp up efforts to lobby Congress and raise money to fund pro-crypto politicians. These lawsuits will likely take years to play out, and there will likely continue to be a lack of regulatory clarity in the U.S. for years.
Investments in the industry will likely move offshore in response.
That’s why it’s vital for the U.S. to eventually embrace this burgeoning technology. That is, if it wants to remain the biggest economy in the world.
Tech has been the U.S.’ biggest asset over the last few decades. But if regulators fail to embrace crypto, that will cease to be the case.
The blockchains will continue to operate and the crypto industry will live on with or without support from the United States. All we can do is hope this is a speed bump on the way to the future of decentralized money.
Best,
Juan & Alex
