Crypto Faces Critical Moment as Regulatory Walls Rise

Crypto Faces Critical Moment as Regulatory Walls Rise

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I have warned investors that a significant drop in the crypto market could occur if the value of Bitcoin falls below $24,000, amid an uptrend since mid-December. This prediction has come true as the price of Bitcoin has fallen 10% from its February high, with the possibility of further falls to $20,000. Crypto’s growth in 2022 was mainly driven by monetary policy, but regulations they may become a deciding factor this year in determining which companies will succeed and which ones will fail.

This situation is due to several factors, including the sustained tightening of liquidity and the suspension of bank transfers, in particular by Binance in early February. The shutdown of the Silvergate exchange network in early March has exacerbated the existing situation. Additionally, Signature Bank recently informed its cryptocurrency exchange clients that SWIFT payment transfers under $100,000 will no longer be supported, which is related to Coinbase suspending Binance USD trading. This is a pressing concern that must be considered.

There is a growing effort underway to rethink the relationship between traditional banking systems and the rapidly evolving crypto economy. The founding principle of Bitcoin was to create a financial system that would operate independently of banks, and some experts advocate a completely “bankless” crypto ecosystem. However, this year’s regulatory crackdown has given rise to offshore stablecoins like Tether, which continue to gain ground despite a decline in trading volumes.

The lack of a mechanism to transfer traditional currency to the crypto space appears to be causing stagnation, depriving it of the innovation typically associated with a flourishing industry. This is where Silvergate has become a vital link between investors, hedge investors and venture capitalists. In addition to facilitating these essential connections, Silvergate allows its customers to pay off their balances at any time of the day, including weekends and holidays. This 24-hour settlement feature is critical in the cryptocurrency market, as it allows investors to capitalize on arbitrage opportunities and ensures smooth collateral exchange, which is managed through smart contracts.

As regulatory hurdles around cryptocurrency continue to emerge, the potential consequences of these barriers cannot be ignored. A recent Coindesk report reveals that nearly 200 members of Congress accepted campaign donations from FTX executives. This raises concerns that those who have received these donations may be less inclined to support further regulation, fearing a negative association with an exchange that has previously embezzled user funds.

Adding to growing concerns, on Jan. 3, the US Federal Reserve, FDIC, and Treasury Department’s Office of the Comptroller of the Currency issued a joint statement warning of the risks crypto assets pose to the banking sector. . While regulators have previously warned against instability of CRYPTOCURRENCIESThis latest alert highlights the impact that the crypto ecosystem could have on the financial resilience of traditional banks. This warning change, supposedly initiated by the Biden administration, has had a significant impact, causing a chain reaction.

On Jan. 13, the Securities and Exchange Commission (SEC) filed indictments against cryptocurrency exchange Gemini and Genesis Trading, claiming that the two companies failed to register a cryptocurrency lending scheme as a securities offering. . The SEC’s position is that the loan plan offered by the two companies required registration with the SEC and compliance with relevant securities laws and regulations. Failure to comply with these requirements, according to the SEC, put investors at risk and could have violated securities laws.

Custodia Bank, which was founded three years ago to serve as an intermediary between digital assets and the US dollar payment system, suffered a significant setback at the end of January. The bank was denied membership in the Federal Reserve System and was also denied a master account. One of the main advantages of being part of the Federal Reserve System is access to a master account, which allows banks to settle transactions with other banks and financial institutions. The lack of a Custodia Bank master account means you’ll have to rely on other banks to handle your transactions, resulting in higher fees and slower processing times. This puts the bank at a significant disadvantage compared to other banks in the digital asset space that have successfully gained membership in the Federal Reserve System.

Signature Bank has taken a bold step in the face of the growing regulatory challenges of the crypto industry. In early February, the bank announced its decision to suspend SWIFT transfers from cryptocurrency-related businesses under $100,000. The move is a clear indication of the financial institution’s cautious approach to cryptocurrency, which has been plagued by regulatory ambiguity and financial crime concerns. The decision is expected to affect many smaller crypto companies that rely on such transfers, as they may now have to look at alternative methods of moving funds. However, some experts argue that the bank’s move is a necessary step to mitigate risks and safeguard the banking sector from potential threats posed by the crypto industry.

In early February, Kraken, a popular cryptocurrency exchange, agreed to pay $30 million to settle charges brought by the SEC that it provided unregistered securities through its staking program. The program offered a fixed rate of return to users regardless of the actual return on the assets at stake, which the SEC found to be a violation of securities laws. The failure of Kraken to properly register with the SEC put investors at risk and created an unfair advantage for the platform. The agreement serves as a reminder that the cryptocurrency industry is subject to the same rules and regulations as traditional financial markets.

On February 13, Paxos was ordered to halt production of the Binance-branded BUSD stablecoin over concerns that Paxos may have been negligent in monitoring the stablecoin’s enforcement. As a result, BUSD’s market capitalization plummeted from $16 billion to its current value of $8 billion. The decision by the New York Department of Financial Services (NYDFS) to halt production of BUSD caught many in the industry by surprise. Paxos had been considered one of the most trusted stablecoin issuers on the market, having received regulatory approval from the NYDFS to operate as a trust company. However, the NYDFS move underscores that even well-established companies are subject to regulatory scrutiny.

On March 4, Silvergate Bank made the unexpected decision to suspend its exchange network, resulting in the termination of the bank’s relationships with Circle, Crypto.com, and Coinbase. The shutdown of the exchange network also had potential implications for Bybit, as the exchange had to halt dollar transfers. Silvergate Bank’s decision comes amid increasing scrutiny due to its ties to FTX.

On March 8, four days later, Silvergate Bank announced that it would shut down and liquidate its operations, citing that most of its deposits left its balance sheet, which has affected its financial stability ratios. The closure of Silvergate Bank highlights the potential fragility of financial institutions in the crypto space and the impact of regulatory changes on their operations.

In a significant development for the cryptocurrency industry, on March 10, the New York Attorney General’s office filed a lawsuit against KuCoin for alleged violations of securities and commodities laws. The lawsuit accuses KuCoin of misrepresenting itself as an exchange while operating as a stock and commodity broker and seeks to block the exchange’s access in New York. What is particularly noteworthy about the complaint, however, is the claim that Ethereum, the second-largest cryptocurrency by market capitalization, is also a security. The lawsuit argues that ETH, along with other cryptocurrencies such as LUNA and UST, is a speculative asset that relies on third-party developers to generate profit for cryptocurrency holders. This lawsuit could have significant implications for the entire industry, as it could open the door for increased regulatory scrutiny and potentially more legal challenges in the future.

I am very sure that crypto investors will not give up without a fight. Although Kraken faced a betting loss, Coinbase CEO Brian Armstrong has defended the company’s betting service and is willing to defend its product in court if necessary. Well-funded companies like Coinbase and Ripple may have the financial wherewithal to take on the SEC. Ripple CEO Brad Garlinghouse has warned that SEC regulations could make the US a less attractive place for cryptocurrency companies.

Although the SEC had initially opposed Binance’s acquisition of Voyager Digital, which filed for bankruptcy after Three Arrows Capital defaulted on a $670 million loan provided by the broker, a bankruptcy judge approved the deal. While there are still regulatory hurdles to clear, the judge appears to be leaning toward approval. Following the announcement, Voyager VGX tokens surged 16% in 24 hours, which could result in Voyager creditors receiving 73% of their funds.

In a separate case, the judges question why Bitcoin spot markets can be manipulated while Bitcoin futures markets, which are approved to trade on US soil and through ETFs, cannot. The SEC has claimed that 99% correlation does not equal causation, citing the fragmentation of Bitcoin spot markets compared to centralized Bitcoin futures trading at the Chicago CME. As a result, the discount on Grayscale GBTC has decreased from an all-time low of -48% to -36%, as speculation has increased over the possibility of converting the trust to an ETF. The spread has likely hit a floor with a possible downside of -10% and upside of +33%, which I predicted in our 2023 outlook report published in December 2022. Although a Bitcoin ETF would have been significant two years ago years, many interested Since then, investors have established alternative accounts to buy Bitcoin.

However, all hope is not lost, and these developments indicate potential opportunities in the cryptocurrency market for investors.

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