Is the US determined to eradicate crypto?
Three years ago, the majority of the companies in the sector in which Andrew Durgee’s firm invested were American.
This year, he predicts that only one in ten will be, reflecting his firm’s assessment that the country has become increasingly hostile to digital assets like cryptocurrencies and tokens.
Mr. Durgee, the managing director of Republic’s crypto division, asserts that the administration has a clear target on the industry. Regulatory uncertainty increases the risk of investments in the United States.
The sector was already under stress after the collapse of virtual currency prices the previous year. Several prominent firms, including FTX, ran by so-called “Crypto King” Sam Bankman-Fried, who prosecutors have accused of committing “one of the largest financial frauds in U.S. history,” collapsed, causing additional harm.
In response to the turmoil, US regulators have intensified their oversight of the sector, which, according to authorities, has been on notice since at least 2017 that its activities violate US financial regulations designed to protect investors.
The campaign has produced a steady stream of charges against crypto firms and executives, alleging violations ranging from failing to register properly with authorities and provide adequate disclosure of their activity to, in some cases, more serious allegations such as mishandling consumer funds and fraud.
Bitcoin, which represents the largest portion of value in a sector where thousands of currencies have circulated, is viewed as a commodity, similar to gold, by government officials. This indicates that it has been largely unaffected by the present regulatory debate, which hinges on the legal question of what constitutes a “security” – an SEC-regulated investment such as a stock or bond.
The efforts have instead ensnared companies issuing tokens or coins to raise capital, and increasingly the exchanges on which such digital assets are purchased and sold, which frequently hold customer funds, execute trades, and engage in other traditionally distinct financial activities.
This month, legal actions were taken against two of the largest platforms: Coinbase and Binance.
Gary Gensler, the chairman of the Securities and Exchange Commission, defended the moves this month by comparing the current state of the industry to the 1920s, prior to the establishment of many of the rules in question. Cons artists. Ponzi schemes. The public fled the bankruptcy court line.”
Will Paige, a research analyst at Insider Intelligence, asserts that sentiment has deteriorated significantly since 2021, when the industry was valued at more than $3 trillion (£2.4 trillion) and appeared poised for broader acceptance, according to some estimates.
“It’s very much back on the fringes of finance,” he says. “Trust in the system is severely damaged, and the situation has only deteriorated.”
In response to the lawsuits, consumers withdrew billions of dollars. US banks limited their cooperation with Binance, compelling the exchange to stop accepting US dollars, and Robinhood, a trading app, announced that it would stop listing certain assets named in the lawsuits, citing the “cloud of uncertainty” surrounding the tokens.
Critics accuse Mr. Gensler’s SEC of hostile “regulation by enforcement” designed to enhance his political profile.
They claim that despite repeated attempts by the industry to propose new regulations, the agency has refused to recognize the distinctions between various types of crypto firms and the characteristics of the technology, such as decentralized automated processing, that challenge existing frameworks.
“It’s been a very frustrating experience,” says Bart Stephens, managing partner of Blockchain Capital, a venture capital firm that has invested in hundreds of crypto companies, some of which have struggled to find institutions willing to transact with them. There is no doubt that a regulatory assault is occurring.
Bill Hughes, senior counsel of Consensys, a Texas-based software company that uses crypto’s blockchain technology, puts it more bluntly: “The SEC has essentially determined that on its watch crypto shouldn’t exist in the United States anymore.”
Unanswered is whether the SEC’s actions could truly kill the industry, in which an estimated one out of every six Americans has invested.
The market value of crypto remains roughly a third of its all-time high. Both trading volumes and developer interest have plummeted. The level of trust remains minimal. The failures of some of the few traditional banks willing to do business with it in March constituted an additional strike.
Professor of law at American University Hilary Allen believes that crypto is inherently susceptible to boom-and-bust cycles and insider manipulation and that it should be abolished. Given the state of the industry as a whole, she believes the SEC’s actions could help relegate crypto to the domain of tech enthusiasts.
“If we combine these enforcement actions with waning public trust and possibly waning venture capital interest, there may be no future,” she says.
But Mr. Stephens, who has already endured two “crypto winters,” believes the industry’s future remains promising, despite the risk of moving overseas due to the United States’ current approach, which is viewed as less friendly than other jurisdictions, including the United Kingdom and the European Union.
He cites Bitcoin’s price, which is lingering around 2020 levels but has increased substantially since the beginning of the year. Ether has also increased in value.
Indicators monitored by venture capital firm and cryptocurrency investor Andreessen Horowitz, such as the number of active blockchain addresses and the number of smart contracts executed, are also on the rise.
“We’re not seeing founders stop forming new companies or protocols,” says Mr. Stephens, adding that Blockchain Capital invested more money in the first three months of 2023 than in any quarter of the preceding ten years, despite falling prices and the withdrawal of rival firms from the sector.
Even if the sector flourishes outside the United States, losing the American market would severely limit its prospects, warns Gina Pieters, a University of Chicago crypto expert.
“It would be erroneous to believe that the United States could destroy the industry. “However, it can absolutely shrink the crypto industry,” she says.
Many in the crypto industry are hoping for a reprieve – from the courts, which could rule that the SEC has overstepped its authority; from Congress, which is currently reviewing proposed legislation for the industry; or from a change in the White House, which could result in a policy reversal.
Regardless of how these concerns are resolved, Angela Walch, a research associate at the University College London Centre for Blockchain Technologies, says the issues are finally reaching a head.
“We are at a significant turning point,” she says. “The conflict has arrived.”
