Here's how things are going in the cryptocurrency industry these days: US authorities are hauling in several players with charges, lawsuits, fines and orders to shut down various deals. Stable metals, relatively small assets backed by the US dollar, have also come under fire.
A year after the cryptocurrency market lost nearly two-thirds of its value and the FTX fiasco shattered investor confidence, pressure is rocking the sector. However, this is what the industry needs to abandon its grandiose dream of a technological revolution and turn into something viable: a business, or rather, a viable business.
Fourteen years after Bitcoin, the cryptocurrency industry is still trying to prove its worth. Bitcoin has not been a new railroad for payment processing, and has been unable to hedge against inflation and monetary policy during the recent exchange rate cycle due to its association with stocks. Meanwhile , Ethereum, the "smart contract" network built to reshape finance, will need a series of upgrades over the next few years to prove it can process transactions at near-Visa volumes .
It is becoming increasingly difficult to see cryptocurrencies as anything more than a haven for charlatans. Or at least that's the prevailing story. Thus, what the cryptocurrency community calls a scourge, regulators can do a great good by cleaning up the industry.
So what does a cleaner cryptocurrency industry look like? If you take the dram out of cryptocurrency, what's left? Trading game today. A hobby for bored monkey lovers? Or does the original assumption that blockchain technology can transform financial infrastructure still hold? If so, that's probably why Fidelity Investments, Apollo Global Management and Andreessen Horowitz are still putting so much money into the space. And why traditional finance can be a source of sustainability for cryptocurrency needs.
But first the organizational attack. This moment has been around for a long time. US Securities and Exchange Commission Chairman Gary Gensler is urging the industry to adopt sound securities laws and move in the right direction starting in 2021. Don't be fooled. The Biden administration has clearly done what cryptocurrencies have long feared. As every financial manager knows, this means that issuers of digital assets must register their offerings with the Securities and Exchange Commission and follow the same disclosure and client protection requirements governed by traditional capital market participants. In other words, cryptocurrencies are the same as stocks and bonds.
"It's not really that hard," said John Reed Stark, former head of the SEC's Office of Online Protection. "Sign up like everyone else."
This may sound like a no brainer, but it's fire and brimstone for the crypto community. The whole industry relied on it, it did not need the state, hence the central banks, commercial banks and other "tools". Ever since bitcoin gained its mojo a decade ago, cryptocurrency leaders have argued that their industry needs to break free from the traditional scrutiny of the traditional market. Thanks to the decentralized online model, blockchain-based businesses are now “permitted,” or self-regulating.
That arrogance evaporated when FTX co-founder and CEO Sam Bankman-Fried looted client deposits to cover billions of dollars in losses for his hedge fund. Even seasoned professionals were impressed. Philippe Behze, CEO of cryptocurrency trading firm XBTO Group in St. Moritz, Switzerland, recently said that investing in an exchange like FTX is no different than giving a company an interest-free loan with no liability or money. . Save the bankruptcy courts.
Lack of oversight in the cryptocurrency industry should lead to punishment, Stark says. "There's no certainty. There's no oversight, no checks, no audits, no stock requirements, no rules against commingling client funds," said the former SEC official, who is now a consultant.
This month, the Federal Reserve released two indicators that will change the direction of cryptocurrencies. On February 9, Kraken, the world's No. 3 cryptocurrency exchange, agreed to pay a $30 million fine and suspend one of its products as part of a settlement with the SEC. problem. The company has yet to register its future business, the sharing service, which allows investors to earn revenue by gifting their tokens to blockchain-based "validators." Kraken certainly believes that betting should not be viewed in the same way as an equity or fixed income offering. After determining that betting as a service requires registration, the SEC sent a letter to the industry.
Now, crypto companies may be scrambling to get toothpaste back into production. "Providers of staking services, including many cryptocurrency exchanges, should consider suspending or restructuring their staking programs," Silicon Valley law firm Wilson Sonsini said this month.
On February 16, the Securities and Exchange Commission expanded the definition of cryptocurrency, accusing businessman Do Kwon and his co-founder Terraform Labs of defrauding retail and institutional investors through an "affiliate token chain." In the 55-page filing, the SEC defined a "crypto-asset security" as any commodity issued or transferred using blockchain technology. This includes Terraform Labs' stablecoin, UST.
(The collapse of this “algorithmic stablecoin” unleashed a cascade of toxic debt and margin calls that engulfed a number of cryptocurrencies last summer and ultimately sank hedge funds Bankman-Fried and FTX.
The New York State Department of Financial Services has told Paxos to stop mining its stablecoin, BUSD, after discovering "several unresolved issues" with supply controls. SEC veteran Stark says regulatory action is just getting started because it's too easy to file lawsuits against cryptocurrency exchanges that haven't registered their offerings. "It's like shooting fish in a barrel," he says.
No wonder the industry is seething with discontent. Crypto Twitter is abuzz with claims that the feds are trying to stifle or drive the industry abroad. Last year, the Washington industry lobby aggressively pushed a bill that would create a regulatory regime that recognizes industry-specific qualities. These efforts seem futile, especially since FTX's lavish spending on Capitol Hill over the past two years has embarrassed many members of Congress.
Apparently, the most popular bill in Congress is a bill co-sponsored by Sen. Elizabeth Warren (D-Massachusetts) and Sen. Roger Marshall (R-Kansas). They found common ground in describing cryptocurrencies as a threat to national security. Their bill would introduce new restrictions on digital assets to combat money laundering and terrorist financing.
Cryptocurrency entrepreneurs also suspect that the SEC's requirement to register their tokens is a ploy to lure them into red tape.
It's a big deal, says a senior SEC official. Commissioner Hester Pearce, a longtime cryptocurrency advocate, disagrees with stock exchange agency Kraken's decision.
"Whether one agrees with this analysis or not, the more fundamental question is whether an appeal to the SEC is possible," he wrote in a statement posted on the Commission's website. "Currently, cryptocurrency offerings do not go through the SEC filing process."
Either way, traditional financial institutions can be the biggest beneficiaries of federal funds. While cryptocurrency companies are struggling, TradFi companies are using their experience and compliance practices to get ahead. In terms of industry resources, Fidelity Investments is developing a waiting list for Fidelity Crypto, a platform that will offer commission-free trading for US clients. Bitcoin and Ethereum trading. The exchange can compete with Coinbase and Kraken.
In terms of cryptocurrency, Apollo Global Management, a $548 billion alternative asset investment firm, plans to invest in and develop blockchain as a “new technology way to automate capital allocation.” Christine Moy, Head of Digital Assets and Blockchain Expert at JPMorgan Chase, explains that the software can, among other things, make the distribution of securities in the market more efficient. It would be ironic indeed if a company like Apollo on Wall Street took a step forward in rebuilding the IT infrastructure of the markets with blockchain technology.
And of course, venture capitalists are betting that Ethereum could usher in the era of decentralized finance, or DeFi. Perhaps no one made a bigger bet than Andreessen Horowitz, which raised $7.6 billion to invest in crypto startups. Ironically, thanks to the revolutionary enthusiasm of startup founders and their venture capital backers, DeFi relies on TradFi for growth. Major DeFi lenders such as Aave and MakerDAO are investing resources into pooling bonds, loans and other “real assets” on blockchain networks, with deposits totaling $12 billion. In January, Société Générale's crypto arm made a $30 million loan to its parent bank using a stablecoin issued by MakerDAO.
On February 23rd, Berlin-based cryptocurrency exchange Swarm Markets kicked things up a notch by issuing tokens representing Apple, Tesla and US Treasury ETFs. Swarm, which is regulated by German watchdog BaFin, plans to add more token shares to its offering in the coming months.
It remains to be seen whether the relationship between DeFi and TradFi will continue to develop and evolve. But the bottom line is that institutions are still hungry for DeFi despite a terrible crypto year. This is a boon to the struggling industry, but the strategy won't work without anti-money laundering, compliance for your customers, and registration with organizations like the SEC.
If cryptocurrency entrepreneurs can come to terms with this reality, this could be the moment the industry transitions from an illegal playground to a viable business.