Last week, the Securities and Exchange Commission (SEC) made significant moves against Binance, the world’s largest cryptocurrency exchange, and Coinbase, the largest US crypto company. The SEC accused Binance of mishandling customer funds and engaging in various white-collar crimes, while Coinbase was charged with failing to register as a broker-dealer. However, these actions did not have a major impact on the price of bitcoin or Coinbase stock, as traders and investors had already anticipated them. Both Binance and Coinbase affirmed their intention to fight the charges and continue their operations, with Binance stating that the enforcement action was unwarranted and Coinbase emphasizing their confidence in their business practices.
Even before these SEC announcements, the crypto industry was facing significant challenges. Numerous firms had already failed, individual investors experienced losses, and institutional investments were moving away from crypto. The industry now not only faces a regulatory crisis but also an existential one: Is crypto on the decline or nearing its end?
There is a prevailing belief that crypto is a hotbed of scams. Whether it’s big or small firms, stable coins, exchanges, NFT schemes, or initial coin offerings, many see them all as scams. Even seemingly legitimate crypto activities are susceptible to fraud, with hackers stealing billions of dollars’ worth of cryptocurrencies.
Another hurdle for the industry lies in its complexity. Despite the existence of bitcoin for over a decade, many people still struggle to grasp the intricacies of blockchain, Web3, tokens, coins, and NFTs. Furthermore, buying and managing crypto assets can be challenging for individuals. A mature market should inspire confidence and understanding rather than fear and confusion.
The question then arises: what is the purpose of all this? Crypto boosters have long touted it as a revolutionary technology that empowers individuals, weakens the influence of central banks, and ushers in a new era of peace. However, it is difficult to determine who benefits from this revolution and in what way. Most crypto users are simply making speculative bets, and most crypto firms are doing the same. In essence, crypto is akin to a casino, albeit one without the complimentary drinks.
Critics argue that these digital assets are primarily used for illicit activities such as money laundering, narco-terrorism, and tax evasion. They question the social value of enabling such financial products.
Volatility and bubbles further undermine the credibility of the industry. While price fluctuations are natural for financial assets, crypto experiences extreme volatility. NFTs and initial coin offerings have surged in popularity, only to see their value plummet in a short period. Even bitcoin, considered the most stable part of the industry, is subject to wild price swings.
While wealthy and high-risk investors may tolerate these losses and volatility, most people prefer stability. If these were the only issues, the crypto winter could be a passing phase. Bitcoin and ether prices may recover, people may forget the frauds and crashes, and new businesses would emerge. However, this is not the case when it comes to regulatory matters.
From the beginning, many crypto businesses adopted a “regulatory entrepreneurship” approach, challenging American financial regulations and hoping to avoid legal consequences. As a result, these companies allowed individual customers to invest in crypto assets, while American financial firms largely stayed away due to legal and regulatory risks. This protected the broader financial system but left individual investors vulnerable. The collapse of FTX, a Bahamian crypto exchange allegedly involved in a Ponzi scheme, closed the door on the possibility of crypto-friendly legislation. In the absence of clear rules, the SEC has taken the lead in enforcing existing regulations and pressuring crypto companies to comply. Coinbase and Binance are just the latest in a series of enforcement actions.
Crypto firms argue that this approach stifles innovation and call for Congress to clarify the regulations before the SEC acts. However, financial experts argue that the SEC’s authority is clear, and they are enforcing necessary investor protections. As a result, the industry may face devastating consequences.
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