Is Crypto Dead: The Incoming Crypto Regulation

Is Crypto Dead? The Incoming Crypto Regulation

The crypto industry has been caught in the crosshair of many regulators’ enforcement actions. Let’s dive into what has been happening in the industry and try to answer the question: Is crypto dead?

 

Crypto-Friendly Banks Shut Down: The De-Banking

Crypto De-Banking

The banking crisis of 2023 saw the collapse of several major banks. Risk mismanagement is the theme as they failed to hedge against interest rate risk. They are the more ‘risk-taking’ banks. Interestingly, there is a common denominator among some of these banks: they are betting their future on servicing the highly volatile crypto economy.

Silvergate Bank Collapse

Silvergate’s trouble started from its exposure to FTX. Silvergate’s demise triggered a warning response from the US banking regulators against servicing crypto-related companies. As the poster child among the regulated crypto-friendly banks, its failure will increase the regulators’ scrutiny of the relationship between the crypto industry and the banking system. Not in a good way, of course.

Signature Bank Shut Down by Regulators

Not long after Silvergate collapsed, Silicon Valley Bank and Signature Bank had liquidity issues after experiencing a bank run. The regulators shut both banks down overnight. Most people know the situation of the SVB bank run, but most are unsure of what happened with Signature Bank. Why was it shut down along with SVB? It was also insolvent, per the regulators’ statement. However, as the regulators try to find buyers for these failed banks, FDIC explicitly stated that it wants all crypto clients to take their money out of the bank and move it elsewhere. This restriction can be there to prevent the new owner from getting into similar risks in the future. However, the crypto industry may read this statement differently and treat this as a way for the US government to de-bank the crypto economy.

Losing the Fiat On/Off-Ramp for Crypto

Losing Silvergate Bank and Signature Bank is a blow to the crypto industry. The ‘only’ major crypto-friendly banks shut down. The crypto industry is still relatively young and may require integration with the banking system to grow. We have now lost one of the easiest fiat on/off-ramps for the crypto industry. Fiat on-ramp refers to the ability to bring our fiat dollar into the crypto world (ex: to stablecoin, Bitcoin, or Ethereum). Off-ramp refers to the ability to convert the cryptocurrency back into the fiat dollar. Losing this ability will cause less liquidity to flow into the crypto economy, thus stifling growth.

 

US Crypto Regulation: The Crackdown

Is Crypto Dead: Crypto Regulation Agencies

The theme of 2023 for the crypto industry has been about regulation. Crypto regulation is coming, and whether or not it will be in favor of the industry remains to be seen. Unfortunately, the prologue we have seen has not been so great.

SEC Crackdown

We already know that SEC filed a lawsuit against Ripple for selling unregistered security. This lawsuit has been in progress for years, and we haven’t reached any conclusion yet. Gary Gensler, the chair of SEC, has repeatedly said that the only commodity is Bitcoin, and all other altcoins are securities. Yes, everything besides Bitcoin. Should SEC manage to enforce this assessment, a significant change would happen to the crypto industry. It can be for the better, though. Regulation clarity is usually good in the long run. But already, for many years, we are yet to know what regulations will come from the SEC.

SEC also recently sued various crypto exchanges for offering staking services to US customers. This includes Kraken and Coinbase. Instead of spending their resource on providing a clear regulatory framework, they chose to engage in a legal battle with industry players. Indirectly, this sends a message to the crypto industry that the US is not crypto-friendly.

Paxos and BUSD Shut Down

The issuer of one of the most popular stablecoins, Paxos, was directed by the New York Department of Financial Services (NYDFS) to cease issuing its BUSD stablecoin. Ironically, Paxos has been regulated and compliant with NYDFS for many years. This table has turned in 2023.

Previously, the SEC had intended to sue Paxos for selling BUSD as unregistered securities. The lawsuit never came through because the NYDFS had already shut down BUSD. A lawsuit may have provided more clarity, though, as the industry needs clarification about how a stablecoin can be considered an unregistered security.

Another popular US-regulated stablecoin issuer, Circle, which issues the USDC stablecoin, is not yet in the regulators’ crosshair. But if BUSD is an unregistered security, is USDC any different? Will the regulators come for Circle as well?

CFTC after Binance

Yet another government agency is after the crypto industry. This time is the Commodity Futures Trading Commission (CFTC). CFTC filed a lawsuit against Binance and its founder Changpeng Zhao (CZ), for offering unregistered crypto derivatives products to US consumers. This lawsuit has been deemed as ‘aggressive’ by the industry players. It shows the level of resistance the crypto industry will need to prepare in the coming future.

An interesting observation from this lawsuit: The CFTC classifies Bitcoin and Ethereum as commodities. It conflicts with the SEC classification, which classifies Ethereum as security. Which one is correct? Nobody knows; even the two regulating bodies cannot agree.

 

When One Door Closed, Another Opens

Is everything doom and gloom for the crypto industry going forward? Is crypto dead? Remember, regulation is usually good in the long run. However, regulation may also cause short-term pain as the industry adjusts itself. And one thing that we need to highlight is that the above enforcement actions are all coming from just one country, the United States.

The crypto industry is global. Decentralization is its fundamental premise. The United States does not control the fate of the crypto industry, nor does any other single country. While the US is hostile, different countries embrace crypto with open arms.

Hong Kong to Legalize Crypto Trading

Hong Kong shows its desire to become the crypto hub by proposing a new regulation that legalizes crypto trading on licensed exchanges. This proposal surprised the industry because mainland China has banned crypto for many years. Hong Kong’s willingness is a breath of fresh air to the crypto industry. Sure, the US can be hostile, but Hong Kong has started to embrace crypto.

Singapore Crypto Banking Integration

Singapore has been one of the more crypto-friendly countries. Coinbase, which also operates in this tiny red dot country, recently announced an easier fiat on/off-ramp solution with a free bank transfer from any local bank. Coinbase has also integrated its registration system with the government identity service called SingPass to allow seamless registration. While the US is busy de-banking the crypto industry, Singapore is embracing crypto and integrating it into its financial system.

 

Under the Hood: Crypto is not Dead

What kind of regulation is coming to the crypto industry is unknown. We know it is coming. There is no point in speculating. However, we still want to try answering the question: Is crypto dead? We can look into what is happening within the industry to answer this question. We have previously covered what has been happening, and here we would like to update you on the recent significant development in the industry.

Ethereum is Gearing Up with L2s

Ethereum L2 War

The Ethereum killer may be here. It’s called the Ethereum Layer 2. Gone are the high gas fees we are used to in the Ethereum main net. Significant developments have been released in this L2 war as major players launched their version of the Ethereum L2 solution. Even Coinbase joined the party by releasing its Ethereum L2 solution called Base. Other players include Polygon, Optimism, Arbitrum, zkSync, and StarkNet. The L2 war is on.

 

Is Crypto Dead?

We believe crypto is not dead. Unless there is an outright ban, regulation is usually good in the long term. It provides clarity that allows more traditional players to enter the crypto industry. Regulation from the United States alone does not define the crypto industry. Crypto is decentralized and not owned by any single country. More and more countries embrace crypto, and this trend will likely continue.

Under the hood, we see that the crypto industry is moving forward at a fast pace. More innovations are happening in front of our eyes. Will you be part of it?

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Disclaimer: The information provided here is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice or recommendation of any sort.

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David Ang

About David Ang

A long-term investor with a portfolio across the United States and Asian equities, REITs, commodities, and fixed incomes. After over a decade of hands-on investing (and making countless mistakes), I'm excited to use this platform to share what I've learned over the years. And let's continue to learn together. Writing about macro economy, equities, personal finance, web3. Follow me on Twitter: @danggaku