The cryptocurrency asset class is now undoubtedly in a bear market. Falling over 75% in market capitalization from January to February, crypto tried to stage a reversal but was pushed back by massive selling pressure in March. Bitcoin (BTC) and Ether (ETH) were unable to rally to the $12,000 and $1,000 levels, and bearish momentum has pushed prices back to multi-month lows. Now as the crypto space faces key technical hurdles under the 200-day exponential moving average, perhaps a new concern on fundamentals arrives as US regulators have stepped up efforts to crack down on some crypto activities.
The first prong of regulation has come from the Securities and Exchange Commission (SEC), a federal agency tasked with enforcing securities laws and regulating exchanges. The SEC’s Enforcement Division Co-Director Stephanie Avakian recently confirmed that the SEC has been conducting several investigations of companies that have participated in initial coin offerings (ICOs). That is in addition to a March 7 statement that reminded current US-based exchanges to register as national security exchanges with the SEC or risk running afoul of federal securities laws. Though the SEC has been offering friendly reminders to exchanges so far, the agency’s enforcement arm might not be so gentle in the future. Finally, the investigations into ICOs are a highly bearish signal, as the SEC asserts that unregistered ICO companies have violated federal law.
The second prong of regulation has originated with Congress. The question is how to regulate crypto by the federal government. The Winklevoss twins, Bitcoin billionaires who founded the Gemini exchange, have offered a laissez-faire self-regulatory approach. They want to create a private nonprofit group called the Virtual Commodity Association that will work together with the Commodity Futures Trading Commission (CFTC) to help prevent fraud and support transparency. The crypto association would be similar to the current Financial Industry Regulatory Authority (FINRA) and be funded by membership fees from crypto industry institutions. In contrast, the Coinbase/GDAX exchange has taken a different approach. Mike Lempres, Coinbase’s chief legal and risk officer, told Congress that there is no need for a new crypto regulator. He argued that crypto is already regulated by the SEC, CFTC, the Federal Trade Commission, and the Treasury Department’s Financial Crimes Enforcement Network. Coinbase called for not more regulation, but more communication and coordination between regulators and crypto companies.
Although Congress has not taken any direct action against crypto, individual members of Congress have expressed worried or negative sentiments. During the House Financial Services Committee hearing, Congressman Brad Sherman (D-CA) stated: “Cryptocurrencies are a crock. They allow a few dozen men in my district to sit in their pajamas all day and tell their wives they're going to be millionaires.” He criticized crypto for aiding tax evasion, terrorism, fraudulent startups, and intellectual property theft. Representatives Bill Huizenga (R-MI) and Carolyn Maroney (D-NY) called for regulation to protect investors more. However, Representative Tom Emmer (R-MN) wanted Congress to not police but celebrate crypto. Representative David Scott also advocated for a more streamlined, minimal regulatory touch.
The third prong of regulation has come from municipalities. On Thursday, the New York State Public Service Commission gave cities and towns the power to charge higher rates to crypto mining companies. The action was meant to prevent abuse of cheap power by mining farms. The city of Plattsburgh has banned crypto mining for 18 months. If more cities across the US follow its lead, crypto mining could be pushed abroad entirely.
Increased regulatory scrutiny could result in heightened effects on crypto prices. Traders and investors should tread carefully.
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The author owns a small amount of BTC.