Hello and welcome to the latest edition of the FT's Cryptofinance newsletter. This week, we'll take a look at the powers of US regulators to ruin the cryptocurrency parade in 2024.
As Christmas approaches, there is no shortage of bullish predictions for 2024 across the cryptocurrency market. After 18 months of misery and personal and corporate failures, confidence runs through an atrophied system.
Bitcoin, developed by mysterious creator Satoshi Nakamoto, is comfortably above $40,000 and has been forecast to reach between $60,000 and $250,000. After all, it is the time of year when a group of believers declare a man never seen in public as a savior who promises a better future.
But it is not the only sign. Alternative tokens ether and solana have risen 10 percent and 18 percent respectively, and the total value locked in decentralized finance projects has risen to $52 billion, a 40 percent increase over the past three months.
Even NFTs, long declared dead, have generated a return, with the Blur market recently taking over nearly 80 percent of trading volume, according to data published by The Block.
The narrative underpinning the surge is a mix of speculation that the SEC will approve a spot bitcoin ETF, a scheduled halving of bitcoin supply intended to boost the currency's value, and the belief that the U.S. .will cut interest rates broadly next year. , ushering in a new injection of cheaper money available for speculation.
But if the crypto market has taught us anything, it is that there is always room for a strong dose of FUD (read: fear, uncertainty and doubt). In the classic story by Charles Dickens A Christmas Carolthe ghost Jacob Marley appeared to warn Scrooge to atone for past sins committed on the path to making his fortune.
Playing the role this year is New York Attorney General Letitia James, who offered a vision of 2024 when she sued cryptocurrency exchange KuCoin for failing to register as a securities and commodities broker and falsely representing itself as an exchange.
The exchange paid a $22 million fine, including $16.7 million to pay 150,000 New Yorkers, and agreed to cease operations in the Empire State.
This may seem like retreading old ground. Coinbase and Binance were charged with the same charges by a higher authority, the Securities and Exchange Commission, six months ago.
The New York case is important because, when it brought the case in March, it argued that ether was a security. Not even the SEC and its tough boss Gary Gensler have made such a claim, because it's hard to conclusively prove that people buy it with the expectation that it will produce a return.
James' view was that ether was dependent on the efforts of third-party developers to provide profits to the coin's holders. If so, that opens vast areas of the market to litigation in the United States.
Ether is not only the second-largest cryptocurrency behind bitcoin, but it is also the engine driving almost all activity in various pillars of the crypto space, including decentralized finance, NFTs, and gaming.
“Ether classifying as a security would be a watershed moment for the crypto industry,” added Charles Storry, head of growth at crypto platform Phuture. "This could redefine the regulatory landscape and impact the entire market, bringing any new momentum to an abrupt halt."
The NYAG agreement did not describe ether as a security by name, but said: "KuCoin admits that it operates a cryptocurrency trading platform on which users, including users in the state of New York, can buy and sell cryptocurrencies that are securities or commodities as defined in the laws of the State of New York.”
The deal could have particular implications for DeFi, a form of cryptocurrency trading without a centralized authority. Regulators have long worried that DeFi markets lack the entities that governments turn to for help enforcing anti-money laundering laws: bankers, brokers, and money transmitters who stand between the people and markets.
“DeFi is the only frontier that regulators face a particular challenge in terms of how to oversee these very global blockchains. This is potentially a way for New York state to seek to assert some jurisdiction by going after ether,” Yesha Yadav, a law professor at Vanderbilt University, told me.
So don't be fooled by the industry narrative: cryptocurrencies remain firmly at odds with US regulators. At the end of A Christmas Carol, Scrooge repents and becomes more generous. It remains to be seen whether crypto companies hand over their money to authorities so voluntarily.
What's your take on the New York attorney general going after ether? As always, email me at scott.chipolina@ft.com.
Weekly highlights
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Credit rating agency S&P Global Ratings evaluated stablecoins for their stability and rated them on a scale from one (very strong) to five (weak). Tether's USDT, the market's largest stablecoin, scored a four, because S&P was concerned about the "lack of information on custodians, counterparties or bank account providers."
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The Internal Revenue Service's Criminal Investigations unit released its “Top 10 Cases” of the year, which included four crypto fraud schemes. They included a mention of James Zhong, who was sentenced to one year and one day in prison for committing wire fraud after illegally obtaining 50,000 bitcoins from the now-defunct dark web marketplace Silk Road.
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While we're on the topic of the IRS, the tax agency came under fire this week from the bankrupt FTX stock exchange for going after billions of dollars in tax liabilities from the collapsed mall. “It simply does not make sense for a company that lost many billions of dollars to have a substantial tax liability, much less one of $24 billion,” FTX said in a Dec. 10 filing.
Soundbite: The soul of ransomware
The UK's joint committee on national security strategy this week published a report that found large swaths of UK critical infrastructure remained vulnerable to ransomware attacks.
The ransomware industry's relationship with cryptocurrencies has been well documented, particularly through North Korean hackers using cryptocurrencies as the currency of choice following high-profile ransomware attacks.
The UK report has reinforced this link, claiming that cryptocurrencies are the "lifeblood" of the current ransomware industry:
“Crypto assets are the lifeblood of the ransomware ecosystem and have been a major driver of the rise in the threat.”
Data mining: out of thin air
One reason to be suspicious of bitcoin's rally this year has been the shallow depth of the market for trading.
In May I pointed out That trading remained thin even as bitcoin rose 70 percent compared to the start of the year. That trend has yet to change, even if the narrative around cryptocurrencies is very different.
According to figures provided by CCData, 1,418 bitcoins would have been needed to move the price of the token by 1 percent at the beginning of the year. By the end of April, that figure was down to just 462 bitcoins. The latest figures show that today only 386 bitcoins would be needed to have the same impact.
FT Cryptofinance is edited by Philip Stafford. Please send your thoughts and comments to cryptofinance@ft.com.
