China banned crypto last month. And what happened? Bitcoin prices rose. Take that, Xi Jinping.
Bitcoin and other crypto’s have been up nearly every day this month and is up again on Monday, so, as that old Sunkist tuna commerical used to say back in the 1970s…Sorry, Charlie.
As most cryptocurrency investors know, the People’s Bank of China and the National Development and Reform Commission outlawed cryptocurrency mining and declared all cryptocurrency transactions illegal.
The question that I’ve often asked, as an investor in Bitcoin and numerous altcoins is – how long before the Fed kills this market? Is it a serious possibility?
At first, I wondered about central banks just gobbling up Bitcoin and taking it out of circulation. But people I spoke to in the market, including issuers, told me not to worry (too much…yet). I wrote about that here.
Now on to the Securities and Exchange Commission. China regulated Bitcoin to smithereens then flicked the kill switch as it starts to roll out its digital renmimbi (RMB). There is no date on that yet for a full roll out, but wheels are in motion and it was already pilot tested in some small cities. Bitcoin, others, are competition for a centralized RMB on a government controlled blockchain.
The U.S. has also talked about a digital dollar, though we are further behind on that. So that largely leaves crypto in the hands of the SEC and the SEC has been more friendly to crypto than unfriendly.
One example of the SEC’s battle with crypto, of course, is Ripple (XRP). Last month, XRP said “no deals” to settling its dispute with the SEC. That’s because they believe SEC chairman Gary Gensler will drop the case altogether.
On the other hand, Gensler’s SEC is not opening the floodgates to cryptocurrency becoming the new financial market of the U.S.
Coinbase couldn’t get through the SEC on its plans to expand and create a crypto lending arm, known as Lend. They’ve abandoned it.
“The SEC has told us it wants to sue us over Lend. We don’t know why,” Coinbase said on September 7. “The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion.”
The SEC is right. Lending can be packaged into a security. Wall Street sells loans all the time. People have them in their 401ks.
“Lending has become one of the main services in the DeFi sector, gaining popularity this year,” says Evgeniy Butyaev, CEO of the SWT project in Russia. They’re creating cryptocurrency bank. SWT stands for Smart Wallet Token. “To get a loan, you need to leave a collateral – usually in one of the main cryptocurrencies. Most often, the borrower also receives the funds in crypto. There are several reasons why a crypto loan can be attractive. Traders are often reluctant to close their positions, and can borrow to have access to crypto. Another is to invest in a crypto loan to generate passive income,” Butyaev said. “(Banking) authorities are not entirely happy that there are financial transactions out of their control.”
Things are moving fast in crypto.
Coinbase just went public this year. The $44 billion Grayscale is releasing new crypto funds. They created a DeFi exchange traded fund this summer.
A “cryptocurrency Wall Street” is being built up every day, only outside of the confines of the usual brand name firms in the asset management space. These things are not being wheeled out by BlackRock and Vanguard.
The SEC can do a China-style smackdown on these companies.
“Unfortunately, we will see a deeper crackdown,” thinks Daniel Santos, CEO of DeFi.Finance, a project of Woonkly Labs. Defi.finance is in the hybrid finance space, aka “HyFi”, which is usually described as a bridge between cryptocurrency DeFi and the old school, centralized financial institutions. “Unregulated defi products will face difficulties. Governments aren’t going to allow (crypto lending) platforms that don’t require know-your-customer and follow anti-money laundering laws,” Santos says. Woonkly Labs is working on DeFI and NFT platforms that comply with the European regulators. They are based in Estonia, which has set itself to be a hub for crypto start-ups in the Eurozone. “Only time will tell what’s going to happen next.”
Everyone knows a regulatory crackdown is coming. But is it bad?
Gensler has often compared the SEC’s role in crypto to being a sports referee or traffic cop. He has not spooked the market all that much. He says the onus falls on crypto investors and fund managers to make sure they abide by “anti-money laundering laws, tax compliance, and (know that regulators) have a responsibility to the American public.”
During an interview with former federal prosecutor Preet Bharara at Vox Media’s Code Conference in Beverly Hills on September 27, the SEC Chairman said the growth of the cryptocurrency market makes regulatory action more important today that it did a year ago. “This is not going to end well if it stays outside of the regulatory space,” Gensler said. “To think that a field that’s grown 10-fold in the last 18 months—not just in terms of asset value, but in the underlying lending and much more—that it’s going to stay outside of these public policy frameworks and succeed… We’ll end up with a problem and a lot of people will be hurt.”
Yes, we don’t want Bernie Madoff-esque wipe outs of crypto investors. Seeing how fast and strong crypto has risen, I can assure you many people under the age of 40 now have more money in Bitcoin than they have in their 401k, and may even consider it a huge part of their retirement. I know I’m leaning in that direction.
Most people in the market are not worried about regulation. They have been calling for it for years now. The argument is – Wall Street-style regulation on crypto means crypto is a real investment asset and more investors will buy in, driving up asset values.
“Regulators are and will most definitely move in further on crypto, as we’ve seen recently with Binance in different regions. This is not necessarily a bad thing,” thinks Moe Carrim, co-founder and CFO of Curate, an NFT platform.
“A crackdown can help to smooth out a lot of the drawbacks in the industry, particularly as we saw with the DeFi boom and the large amount of scams. You’ll need to make new monitoring tools that work in a decentralized ecosystem, which is significantly better for a multitude of reasons like 24/7 service and no need to trust a single company. Crypto is ready to embrace regulation if it is set by a well-informed government that understands the technicals and the economics of cryptocurrency,” says Carrim. “Like the internet back in the early 2000’s, crypto will experience these (regulatory) growing pains. With the right tools, crypto will become more transparent, more identifiable, more accountable and more accurate than most centralized systems of finance,” he says.
China tends to spook the crypto world, giving traders a reason to sell. But, am I wrong here…the cryptocurrency universe is becoming, perhaps, unspookable.
Every time Beijing cracks down on Bitcoin, the running joke is that China has already banned cryptocurrency 18 times.
Chinese government agencies have issued a string of increasingly restrictive but never conclusive legal prohibitions of various aspects of crypto since 2013, but as Wired magazine UK points out, China’s crypto industry has thrived.
“Big things are happening in China right now and for the umpteenth time China is cracking down on the crypto business and the market is in a state of flux. The last China regulator crackdowns was a buy the dip opportunity and this one certainly looks like it’s following the same pattern with BTC touching $40,000 over the weekend and swiftly recovering to over $44,000,” Waseem Mamlouk, Vice President of Capital Markets at the Nimbus Platform told me when we first discussed this issue nearly two weeks ago now. On Monday, October 11, Bitcoin was trading over $57,000.
Yeah, take that China!
The ramp up of China’s repression of bitcoin and other cryptocurrencies was always going to happen. Crypto’s borderless and unregulated nature runs counter to the Chinese government’s vision for a state-dominated economy. Beijing sees cryptocurrencies as the epitome of mindless guesswork, Wired reported and I would add – Beijing sees it as Macau-style gambling and nothing more.
So regulate and ban all you want. To date, it has not put any serious dent in crypto. And with Wall Street fully backing this with a fleet of new products and new companies being born out of it, this isn’t going anywhere. The battle of centralization and decentralization will be one to watch for many years to come.
Mamlouk thinks it gets more heated as technology advances and your crypto is mined by stateless algorithms. (Maybe even stellar level algorithms, from a satellite in space.)
“The real battle is going to start when a truly autonomous system is created and can run its own platforms with minimal help from humans,” Mamlouk says, meaning it would be harder for a state to target them individually.
“Artificial intelligence will play a huge role and for crypto — it is a major game changer,” Mamlouk says. “Any system that can domicile its servers in the right place and has the ability to move them swiftly is basically bulletproof from a regulatory standpoint. What will remain is how these systems stand the test of time from a technology perspective (not a regulatory one).”
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