I have warned investors that a significant decline in the crypto market could occur if Bitcoin’s value falls below $24,000, amidst a bullish trend since mid-December. This prediction has come true as Bitcoin’s price has dropped by 10% from its February peak, with the possibility of further drops to $20,000. Crypto’s growth in 2022 was driven primarily by monetary policy, but regulations may become a decisive factor this year in determining which companies will succeed and which will fail.
This situation is due to several factors, including the sustained tightening of liquidity and the suspension of bank transfers, notably by Binance in early February. The closure of Silvergate’s exchange network in early March has exacerbated the existing predicament. Furthermore, Signature Bank has recently informed its crypto exchange clients that SWIFT payment transfers of less than $100,000 will no longer be supported, which is related to Coinbase suspending trading of Binance USD. This is a pressing concern that must be considered.
A growing effort is underway to reconsider the relationship between traditional banking systems and the rapidly evolving crypto economy. The fundamental principle of Bitcoin was to create a financial system that operates independently of banks, and some experts are advocating for a completely “bankless” crypto ecosystem. However, the regulatory crackdown this year has given rise to offshore stablecoins such as Tether’s, which continue to gain traction despite a decline in trading volumes.
The lack of a mechanism for transferring traditional currency into the crypto space appears to be causing stagnation, depriving it of the innovation typically associated with a burgeoning industry. This is where Silvergate has emerged as a critical link between investors, hedge funders, and venture capitalists. In addition to facilitating these essential connections, Silvergate allows its clients to settle their balances at any time of day, including weekends and holidays. This 24-hour settlement feature is paramount in the crypto market, allowing investors to capitalize on arbitrage opportunities and ensuring the seamless exchange of collateral, which is managed through smart contracts.
As regulatory hurdles continue to crop up around crypto, the potential consequences of these barriers cannot be ignored. A recent report from Coindesk reveals that close to 200 members of Congress accepted campaign donations from FTX executives. This raises concerns that those who have received these donations may be less inclined to support further regulations, fearing a negative association with an exchange that has previously misused user funds.
Adding to mounting concerns, on January 3, the U.S. Federal Reserve, the FDIC, and the Treasury Department’s Office of the Comptroller of the Currency issued a joint statement warning about the risks that crypto-assets pose to the banking sector. While regulators have previously cautioned against the instability of cryptocurrencies, this latest alert highlights the impact that the crypto ecosystem could have on the financial resilience of traditional banks. This shift in warning, reportedly initiated by the Biden administration, has had a significant impact, causing a chain reaction.
On January 13, the Securities and Exchange Commission (SEC) leveled accusations against the Gemini crypto exchange and Genesis Trading, asserting that the two firms failed to register a crypto lending scheme as a securities offering. The SEC’s stance is that the lending scheme offered by the two firms necessitated registration with the SEC and compliance with relevant securities laws and regulations. The failure to meet these requirements, according to the SEC, put investors at risk and could have violated securities laws.
Custodia Bank, which was founded three years ago to serve as an intermediary between digital assets and the U.S. dollar payment system, suffered a significant setback in late January. The bank was denied membership to the Federal Reserve System and was also refused a master account. One of the primary advantages of being part of the Federal Reserve System is access to a master account, which allows banks to settle transactions with other banks and financial institutions. Custodia Bank’s lack of a master account means that it will have to rely on other banks to handle its transactions, resulting in higher fees and slower processing times. This puts the bank at a significant disadvantage compared to other banks in the digital asset space that have successfully obtained membership in the Federal Reserve System.
Signature Bank has taken a bold move in the face of the crypto industry’s growing regulatory challenges. In early February, the bank announced its decision to suspend SWIFT transfers of crypto-related firms of less than $100,000. The move is a clear indication of the financial institution’s cautious approach to cryptocurrencies, which have been plagued by regulatory ambiguity and concerns over financial crimes. The decision is expected to impact many smaller crypto firms that rely on such transfers, as they may now have to seek alternative methods to move funds. However, some experts argue that the bank’s move is a necessary step to mitigate risks and safeguard the banking sector from potential threats posed by the crypto industry.
In early February, Kraken, a popular crypto exchange, agreed to pay $30 million to settle charges filed by the SEC that it provided unregistered securities through its staking program. The program offered a fixed rate of return to users, regardless of the actual performance of the staked assets, which the SEC determined to be a violation of securities laws. Kraken’s failure to properly register with the SEC put investors at risk and created an unfair advantage for the platform. The settlement serves as a reminder that the cryptocurrency industry is subject to the same rules and regulations as traditional financial markets.
On February 13, Paxos was ordered to halt production of the Binance-branded BUSD stablecoin over concerns that Paxos may have been negligent in monitoring the application of the stablecoin. As a result, the market capitalization of BUSD plunged from $16 billion to its current value of $8 billion. The decision by the New York Department of Financial Services (NYDFS) to halt the production of BUSD caught many in the industry off guard. Paxos had been considered one of the most reliable stablecoin issuers in the market, having received regulatory approval from the NYDFS to operate as a trust company. However, the NYDFS’s move underscores that even well-established firms are subject to regulatory scrutiny.
On March 4, Silvergate Bank made the unexpected move of suspending its exchange network which resulted in the termination of the bank’s relationships with Circle, Crypto.com, and Coinbase. The closure of the exchange network also had potential implications for Bybit, as the exchange had to stop dollar transfers. Silvergate Bank’s decision comes amid mounting scrutiny due to its links with FTX.
On March 8, four days later, Silvergate Bank announced that it was shutting down and liquidating its operations, citing the majority of its deposits leaving its balance sheet, which has impaired its financial stability ratios. The closure of Silvergate Bank highlights the potential fragility of financial institutions in the crypto space and the impact of regulatory changes on their operations.
In a major development for the crypto industry, on March 10, the New York Attorney General’s office filed a lawsuit against KuCoin for alleged violations of securities and commodities laws. The lawsuit accuses KuCoin of misrepresenting itself as an exchange while functioning as a securities and commodities broker-dealer and seeks to block the exchange’s access in New York. However, what is particularly noteworthy about the complaint is the assertion that Ethereum, the second-largest cryptocurrency by market capitalization, is also a security. The lawsuit argues that ETH, along with other cryptocurrencies such as LUNA and UST, is a speculative asset that relies on third-party developers to provide profit to holders of the cryptocurrency. This lawsuit could have significant implications for the entire industry, as it could open the door to increased regulatory scrutiny and potentially even more legal challenges in the future.
I am very sure that crypto investors are not giving up without a fight. Although Kraken faced a staking defeat, Coinbase CEO Brian Armstrong has defended the firm’s staking service and is willing to defend its product in court if necessary. Well-funded firms such as Coinbase and Ripple may have the financial means to take on the SEC. Ripple’s CEO Brad Garlinghouse has warned that SEC regulations could make the U.S. a less attractive location for crypto firms.
Although the SEC had initially opposed Binance’s acquisition of Voyager Digital which filed for bankruptcy after Three Arrows Capital defaulted on a $670 million loan provided by the broker, a bankruptcy judge has approved the deal. While there are still regulatory obstacles to overcome, the judge appears to be leaning toward approval. Following the announcement, the Voyager VGX tokens saw an increase of 16% in 24 hours, potentially resulting in Voyager creditors receiving 73% of their funds back.
In a separate case, judges are questioning why Bitcoin spot markets can be manipulated while Bitcoin futures markets, which are approved for trading on U.S. soil and through ETFs, cannot. The SEC has claimed that a 99% correlation does not equate to causation, citing the fragmentation of Bitcoin spot markets compared to the centralized trading of Bitcoin futures on the CME in Chicago. As a result, the discount on the Grayscale GBTC has decreased from an all-time low of -48% to -36%, as speculation about the possibility of converting the trust into an ETF has increased. The spread has likely reached a floor with a potential downside of -10% and an upside of +33%, which I predicted in our 2023 outlook report published in December 2022. Although a Bitcoin ETF would have been significant two years ago, many interested investors have since set up alternative accounts to buy Bitcoin.
However, all hope is not lost, and these developments indicate potential opportunities in the cryptocurrency market for investors.
Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.
Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.
An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.