When crypto winter hit at the start of 2022 and Three Arrows Capital collapsed, Voyager Digital went bankrupt and crypto problems proved contagious. Crypto winter appears to have bottomed out and recovered a bit. Now the next challenge to the crypto world is a regulation storm led by the Securities and Exchange Commission. How contagious are crypto regulatory problems? Are they enough to plunge crypto into another prolonged winter?
A New Sort of Crypto Contagion
When three Arrows Capital collapsed it started a wave of crypto collapses and bankruptcies because of the incestuous relationships within crypto. Whether it was because crypto and DeFi businesses were hedging their risk or for whatever reason, there were many cross company loans and investments. The sizes of these loans and investments were such that when Three Arrows Capital fell so did many others in succession. This time around the contagion has more to do with regulators far and wide. The SEC is going after Binance and Coinbase among others. The CFTC is going after Binance and just won a lawsuit against Ooki DAO for offering trading in unregistered commodities. Regulators around the world are following suit.
Regulators in Nigeria declared Binance operations in their country illegal. This is meaningful because, after the USA, Nigeria has had the highest volume of trading on Binance. The United Nations Conference on Trade and Development is taking measures to curb cryptocurrencies in developing countries. Although crypto would seem to hold promise in regions of the world where people do not have access to banking services like money transfer, there are also substantial risks. This is what concerns the UNCTAD as regulators uncover more and more issues within crypto.
Within the US on a state level, regulators in Texas as well as New Jersey have accused the Abra trading platform of securities fraud and filed cease and desist orders against the company and its CEO.
Crypto Investors Pivot Away from Altcoins
Even though the crypto market cap is flat to falling a bit, Bitcoin’s market share of crypto has risen. This is because of a couple of things. Bitcoin is typically seen as the safest and strongest of the non-stablecoin tokens. And Bitcoin dodged a bullet when the Securities and Exchange Commission said that while a whole host of crypto tokens are actually securities, Bitcoin is not. That relieves Bitcoin of at least one regulatory issue to contend with. The shifts within crypto from token to token are part of the fallout from crypto regulatory problems.
Where Will Crypto Traders Be Able to Trade?
As more and more crypto platforms find themselves in trouble with the SEC, CTFC, or state regulators, where will traders be able to trade? We got a hint of that rec0ently as the EDX Markets crypto exchange opened for business. This crypto-compliant exchange is being set up with trading, counterparty risk management, custody of assets, and broker-dealer functions all separate. This will be just like stock exchanges or commodity futures exchanges. While EDX Markets is now only open to large investors we would expect to see more new operations spring up. These will be free of old baggage and having to deal with regulatory issues, restructuring problems, and monetary losses related to their prior activities. The migration out of tokens that have greater regulatory issues will likely continue as well as a result of regulatory contagion.
How Contagious Are Crypto Regulatory Problems? – SlideShare Version