Lately, it appears the U.S. has set its sights on a substantial crackdown within the crypto industry.
Over the past few weeks, we’ve witnessed the U.S. ratchet up its assault on the crypto sector. This development is remarkable considering that regulators like the SEC, which is tasked with safeguarding consumers, have previously remained somewhat passive, even in the face of debacles like FTX, Celsius, Terra/LUNA, and more.
The role of regulators in driving potential bad actors out of the crypto industry is to be commended. However, some believe there’s more to these recent actions. Could they be part of a coordinated effort by regulators to undermine Bitcoin and the broader crypto space? Some speculate that the aim might be to pave the way for the adoption of a U.S. Central Bank Digital Currency (CBDC). The recent announcement of the FedNow launch, a system allowing instant weekend payments, might well serve as infrastructure for a CBDC or stablecoin.
The U.S. Federal Reserve’s Chair, Jerome Powell, maintains that while a CBDC isn’t imminent, its rollout could be swift. He further argues that the introduction of a CBDC could potentially reduce the value of Bitcoin and other cryptocurrencies to zero. Nevertheless, it’s worth noting that there will likely always be a demand for assets beyond the traditional financial system, such as gold and Bitcoin.
Below, we outline key developments from the past few weeks that contribute to the growing challenges facing the crypto industry.
Banks and Fiat On/Off Ramps
The traditional banking system remains a sore point for the crypto economy, functioning as a bridge to transfer dollars to crypto exchanges for buying Bitcoin or back to traditional bank accounts for converting Bitcoin to dollars. Any hurdles in this process can discourage investors from entering the cryptocurrency market.
Recently, the turmoil surrounding Silvergate and Silicon Valley Bank sent shockwaves through Signature Bank customers. In a span of a mere two days, over $10 billion of deposits were withdrawn, prompting a bank run on Signature Bank. Customers swiftly moved their assets to more substantial institutions like JPMorgan Chase and Citigroup. The situation escalated, leading to regulatory intervention with the abrupt closure of Signature Bank.
The last openly crypto-friendly bank, Signature Bank’s closure, now complicates the ability of exchanges to interact with the traditional banking system, hindering the seamless flow of U.S. dollars in and out of exchanges. According to the New York Department of Financial Services (DFS), there’s no boycott. They argue that Signature Bank failed to provide credible information, eroding confidence in the bank’s leadership and necessitating a takeover by regulators to ensure customers could access their funds.
Additionally, Custodia Bank, a crypto industry-driven initiative aiming to establish a full-reserve bank, faced rejection in its bid to become part of the Federal Reserve System. The Fed’s denial implies that the U.S. government seeks to restrict associations between banks and the crypto industry.
Many U.S. crypto companies have already turned to European banks, such as Sygnum Bank or SEBA in Switzerland, and Bank Frick in Liechtenstein. Europe’s efforts to finalize the Markets in Crypto-Assets Act (MiCA) provide a clear regulatory framework. Dubai is also positioning itself as a welcoming destination for crypto industry players. In contrast, the lack of definitive and consistent regulations in the U.S. fuels frustration among crypto industry stakeholders and may even motivate some to seek more crypto-friendly jurisdictions.
Are Cryptocurrencies Securities?
The SEC classifies Bitcoin as a commodity, which keeps it beyond the SEC’s regulatory scope. Other cryptocurrencies, however, are treated as securities and may not be offered to Americans without SEC registration. An ongoing lawsuit against KuCoin by the New York Attorney General alleges that KuCoin provides unregistered securities by offering assets like ETH.
SEC Chairman Gary Gensler’s stance on Ether has recently evolved, now categorizing it as a security due to its transition to Proof-of-Stake. This shift implies that Ether and other cryptocurrencies with staking functionalities would require registration with the SEC, delaying exchange listings. Most other crypto tokens traded on exchanges could face a similar fate.
Exchanges in the Crosshairs
The SEC has issued subpoenas to multiple exchanges in recent weeks, reflecting the increased scrutiny. Kraken reached a $30 million settlement with the agency, obliging it to cease providing staking services to U.S. customers.
Most recently, the SEC targeted Coinbase. A Wells notice signals the possibility of future penalties or restrictions. This move comes in response to issues concerning Coinbase’s staking services and other matters, such as the cryptocurrency listing process. Coinbase defends its efforts to comply with regulations but faces the dilemma of regulatory ambiguities. Currently, no framework exists for cryptocurrency exchanges to register with the SEC, while operating without registration exposes them to penalties.
The Commodity Futures Trading Commission (CFTC) has also entered the fray, pursuing Binance and CEO Changpeng Zhao (CZ). Binance has long failed to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. It faces the prospect of substantial penalties, and its future form is in doubt. Binance will likely mount a vigorous defense, but hefty fines and obstacles await. Notably, the CFTC’s charges encompass derivatives on Bitcoin and Ethereum, both of which are regarded as “commodities” according to the CFTC. The regulatory discord is evident in this instance.
Decentralized Exchanges Under Fire
Even decentralized exchanges (DEXs) have come under regulatory scrutiny. Sushi DAO and Jared Gray recently received subpoenas from the SEC for their involvement in SushiSwap, highlighting that decentralized autonomous organizations (DAOs) are not immune when key individuals can be identified by regulators.
Attack on Bitcoin: Paving the Way for a CBDC
The White House recently released its “Economic Report of the President,” replete with familiar FUD (Fear, Uncertainty, Doubt) around Bitcoin and crypto. It references Bitcoin’s energy consumption without acknowledging its positive impact on renewable energy. Bitcoin mining can be toggled on or off depending on the electricity supply and demand. Major solar energy projects become more economically viable with Bitcoin mining.
Moreover, the report compares Bitcoin’s transaction finality to Visa’s approvals without clarifying the difference. Bitcoin’s Lightning Network, which enables swift, nearly cost-free transactions, is conspicuously omitted from the report, painting a skewed picture of Bitcoin.
President Biden’s proposal to impose additional taxes on Bitcoin miners, including a 30% tax on electricity costs, signifies an ongoing effort to drive away miners. Yet, some U.S. cities have benefited greatly from mining operations. Mining enhances the electricity network’s capacity and provides stability; miners can be paused during electricity shortages.
Furthermore, other legislation looms that could threaten Bitcoin, such as the RESTRICT Act. While primarily aimed at banning TikTok in the U.S., the Act’s broad interpretation could encompass the Bitcoin network. Yet, they cannot control a decentralized network, so the focus may shift toward controlling on/off ramps.
The “Economic Report of the President” proposes its CBDC as a solution to purported Bitcoin shortcomings. The ongoing crypto industry crackdown could be a means to remove competition to a potential CBDC, further fueling speculation.
The tides are shifting rapidly in the U.S. crypto landscape, and the ramifications extend far beyond its borders. Regulatory challenges persist, leaving industry players and enthusiasts eagerly awaiting regulatory clarity while navigating the evolving landscape.
