© Illustrated by Joanne Imperio / The AtlanticLast week, the Securities and Exchange Commission filed 13 complaints against Binance, the world's largest cryptocurrency exchange, accusing it of mishandling customer funds and other official violations. He accused Coinbase, a public company and the largest crypto firm in the US, of failing to register as a stockbroker.
The government's actions didn't change the price of Bitcoin much and didn't dent Coinbase's stock; Traders and investors have been waiting for action for months. And both companies have vowed to fight the allegations and stay in business. Binance "should not be subject to any enforcement action by the SEC, much less an emergency," the company said in a statement. "We are very confident in how we operate our business, the same business that we filed with the SEC to go public," Coinbase Chief Legal Officer Paul Grewal said in response.
Cryptocurrencies were in trouble even before the SEC announcement. Dozens of companies went bankrupt, millions of individual investors went into the red or cashed out, and institutional investments soared by billions of dollars. Suffering from its own chronic innovation problems, the industry now faces not just a regulatory but an existential crisis;
It clearly doesn't work, being rejected by thousands of retail and institutional investors. The most obvious problem: fraud. The biggest cryptocurrency companies in the world are scammers. Small businesses are scammers. Stablecoins are a scam. Exchanges are scams. The NFT system is a scam. Initial coin offerings are scams. Chip scammers are. Organizations run by self-proclaimed philanthropists are frauds. Companies run by delusional people are frauds. "There were a lot of so-called decentralized Web3 companies that were actually three people and pushed some servers and dumped them into the coin system," said Will Wilkinson, policy manager at TBD, a bitcoin-focused subsidiary of fintech giant Block. he told me. And even simple, legitimate crypto-activity is still prone to fraud. According to research group Chainanalysis, hackers stole nearly $4 billion worth of bitcoins and other cryptocurrencies last year alone.
The industry also has a problem of complexity. Fourteen years after Bitcoin, people are still trying to understand how blockchain works, what Web3 is, and what tokens, coins, and NFTs are. Many also struggle to understand how to buy crypto-assets and manage their investments. (Why do you still need a weird series of letters and numbers to protect your Bitcoin?)
“A mature market is one where you should not be afraid to invest your money. A group of people should not be prosecuted for greed and theft," said Yesha Yadav, an expert on financial market regulation at Vanderbilt University. A school, he told me, "Likewise, needs to be something where people feel comfortable understanding the technical details."
What is the point of doing all that anyway? For years, promoters have described cryptocurrencies as a game-changing technology that disrupts central banks, empowers people and perhaps ushers in an era of world peace. But revolutionary for whom and for what? It's hard to say: Most cryptocurrency users make only speculative bets. Most crypto companies only make or facilitate speculative bets. Crypto is largely a casino and a casino without the free drinks.
These digital assets are "almost exclusively suitable for illegal activities such as money laundering, drug terrorism and tax evasion," said Dennis Kelleher, co-founder of Better Markets, a nonprofit that advocates for financial regulation. "Is there a social or public interest in allowing such financial products?"
Then there is volatility and bubbles. Financial assets are becoming more expensive. Their prices are falling. That's his nature. But few things rise and fall like cryptocurrencies. NFTs appeared out of nowhere, accumulated billions of dollars and collapsed. Initial coin offerings have come out of nowhere, gobbled up billions of dollars, and disappeared.
Even Bitcoin, the strongest and most liquid part of the industry, still experiences wild price swings. Two years ago, the Internet and radio stations were flooded with advertisements presenting cryptocurrency as an investment for the brave, a down payment for the future. These ads target everyone, especially black investors who have historically stayed away from Main Street financial institutions. "I want to make sure communities like mine don't get left out," LeBron James said when he announced his multi-year deal with Crypto.com. It was a multi-million dollar pump-and-dump operation. "Stupid money" has come to drive out smart money. Black money has come to steal white money. The value of Bitcoin has increased five times. Then he collapsed.
Wealthy investors can afford such losses. High-risk investors can tolerate such volatility. The same goes for true crypto believers, for whom HODL, or "Hold on for dear life," is a common refrain. But most people don't want to put their lives on hold.
If that's the only problem, crypto winter might be just that: a season. Bitcoin and Ether will recover in value as they have already done. People will forget about blatant scams, flashy ads and endless hacks. They will create new initiatives. New promises will be made. New money will flow.
But for Uncle Sam. From the beginning, crypto companies have been very involved in so-called "regulatory entrepreneurship". This is an "apology, not permission" business model. startup founders probably start a company in violation of US law, claim that the law does not apply to them, become "too big to ban" and wait it out. It's possible: It sounds crazy, but it's a common Silicon Valley strategy that's worked for Airbnb, Uber, Lyft, and DraftKings, among others.
For years, cryptocurrency companies have argued that US financial regulations don't apply to them because, well, because. They lobbied Congress to "clarify" the laws. And while Congress is considering doing so, these companies are allowing individual customers to buy, trade and profit from their new assets. However, US financial institutions that comply with US financial laws have largely avoided investing money or creating crypto products due to legal and regulatory risks. Goldman Sachs didn't start integrating ether into derivatives. Bank of America won't let you pay off your mortgage with Bitcoin.
This unique status quo protects the US financial system from fraud and chaos in the crypto market. But this leaves individual crypto investors vulnerable to these scams and chaos. "It makes my blood boil that real people are losing their shirts," Yadav said, "while we're scratching our heads at what these asset classes represent."
The November collapse of FTX, the alleged Ponzi scheme of Sam Bankman and Frieda in the Bahamas, did not destabilize the financial system. But that has precluded Congress from passing crypto-friendly legislation. And while Congress has delayed, debated and moved, the SEC has argued that most crypto assets are securities, claiming that crypto companies haven't registered their businesses or aren't properly structured, and vowed to enforce them. Coinbase and Binance are just the biggest and newest companies; There have been dozens of enforcement actions over the past few years.
Crypto companies complain that it's "legal regulations" that are stifling innovation. Congress must spell out the rules before the SEC can administer them. "Imagine if regulators had taken Ford and General Motors out of banking more than a century ago because they thought cars were too risky," Wall Street wrote in March. "Major policy decisions in the United States should be made by Congress and state legislatures, not by unelected officials."
But many financial experts say the SEC's mandate is clear. Most crypto-assets are securities. "an investment of money in a common enterprise whose profits derive solely from the efforts of others," as defined in a 1946 Supreme Court case. (Bitcoin, in particular, is not a value; no one benefits from the efforts of the Bitcoin leadership because Bitcoin has no leadership.) "The SEC is trying to enforce our most basic protections for investors," Kelleher told me. "Honestly, these are not aggressive cases, don't get distracted.
However, they could disrupt the crypto industry. Many cryptocurrency businesses do not have a profitable business model when standard financial rules apply; This is the essence of regulatory entrepreneurship. According to the SEC, Coinbase is a mess of conflicts of interest, offers its customers inadequate protections and disclosures, and keeps poor records. If it were to be restructured, it would likely be a smaller company with higher costs and lower, if not eliminated, margins. (The company was profitable before the crypto crash and is now in the red.) Binance is a de facto criminal enterprise, says SEC Chairman Gary Gensler, a "vast network of fraud" that deliberately evades US laws. (The SEC complaint includes a message Binance's compliance officer sent to a colleague arguing Gensler's case on his behalf: "We're operating like an unlicensed exchange in the US, bro."
The risk of these two companies reflects the risk of the crypto industry as a whole. "It looks like this is just the beginning," crypto analyst Edward Moya wrote in a note to clients last week, adding that the "regulatory hammer" is swinging and predicts traders exiting positions, pulling assets out of stock exchanges and idle speculation. investment
Does this mean cryptocurrency is dead? Yes and no. The grandiose vision of cryptocurrency advocates that digital currency will change everything, bankrupt the Federal Reserve, displace Wall Street and Main Street, and turn the Internet into Web3 is real. Crypto is a trillion dollar global asset class. Crypto is a fringe industry that outsources, shrinks, and grows more modestly, not one that innovates and outperforms mainstream funding.
But Bitcoin and Blockchain are here to stay. the former is a popular alternative investment and currency for criminals, the latter an exciting consumer technology. “The potential is the same,” Jerry Brito, CEO of Coin Center, a cryptocurrency advocacy and advocacy group, told me. Wilkinson, for his part, emphasized how effective Bitcoin is in bringing money to people who don't have access to strong and stable banking networks: human rights defenders in Ukraine, refugees fleeing climate disasters, families receiving funds in Ghana and Kenya. Both said they believe the industry benefits from scammers and trash actors and cheap money that's easy to give up. "Some of these projects are potential game changers," Brito told me. “But I think a lot of ecosystems have gone completely wild. It doesn't help.
I still don't know how many crypto projects are useful, just revolutionary. Of course, there are use cases waiting to be discovered, but good luck to crypto companies trying to convince Americans to adopt them in the future. A recent CNBC survey found that 8% of adults are positive about cryptocurrency. A recent Pew survey found that only 2% of adults familiar with cryptocurrency are "very" confident in its safety and reliability. Falling prices, Ponzi schemes and stolen funds over the past two years haven't just ruined the government with cryptocurrency. They are also angry with the public.