The last months of 2020 seemed like a new dawn for cryptocurrency fans after a long “night” that lasted more than two years. Indeed, there was more than enough positive news: the rapid growth of bitcoin, the addition of cryptocurrencies to the PayPal wallet, the stunning development of the DeFi market, etc.
However, towards the end of the year, a series of events occurred that made the cloudless future of the crypto industry questionable. Regulators in various countries tightened their policies on cryptocurrencies one after another, which had an immediate impact on the digital asset market as a whole.
We propose to look into the reasons behind such unfriendly gestures of financial supervisors towards cryptocurrencies. And let’s speculate on the most likely variants of further developments.
SEC strikes an unexpected blow
On December 23, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit in court. The powerful regulator is accusing Ripple and its management of knowingly breaking the law by selling XRP tokenized securities to investors for years.
The market has responded to the SEC’s allegations and actions by more than halving the value of XRP in lightning-fast fashion. Several major cryptocurrency exchanges and services announced they would either delist Ripple tokens or temporarily suspend operations with them:
- OKCoin and Coibase stopped trading and accepting deposits in XRP starting Jan. 4 and Jan. 19, 2021, respectively.
- Mike Novogratz’s crypto-bank Galaxy Digital suspended operations with the asset the day after the lawsuit was filed.
- Bitstamp, a major exchange, has so far restricted XRP to U.S. users only.
The over-the-counter OTC platform B2C2 also set certain restrictions. Interestingly, Japanese financial giant SBI Holdings, the new owner of that platform, which became the owner just two weeks before the described events, said it supported Ripple. The company said in an official statement that XRP is not a security under the law. And there is no threat to working with it in Japan.
Crypto.com is also removing the ability for U.S. citizens to work with XRP tokens starting Jan. 19, 2021.
Ripple itself is calling the SEC’s action a blow to the entire cryptocurrency industry. XRP developers called on the regulator for mutual pre-trial cooperation in resolving disputed issues.
- The ban on crypto instruments: a new trend in government regulation?
- If the SEC’s claims negatively affected only one company, the actions of similar bodies in other countries will affect the entire industry. For example, the UK’s Financial Conduct Authority (FCA) has required all companies that work with crypto-assets to go through a special registration procedure since January 10.
At the same time, a ban on crypto derivatives for retail investors came into effect in the UK on January 6, 2021. This means that the average person will now not be able to buy, sell or distribute cryptocurrency derivatives:
- exchange-traded notes, etc.
Many companies that provide services for such assets have already criticized the introduction of such a restriction. They believe that the FCA would force investors to go to unregulated platforms that are unable to protect their capital from financial risks. Executives at Coinshares, Hargreaves Lansdown, and Eden Block all agree that the FCA has demonstrated only one thing: the Authority simply doesn’t know or understand how to regulate the crypto industry.
In early January, The Sunday Times reported that HSBC, the UK’s largest bank, was blocking transfers falling under suspicion in connection with cryptocurrencies. This fact is of particular interest. After all, quite recently HSBC was at the center of a high-profile scandal: with the help of this financial and credit institution oligarchs and criminals found loopholes for tax evasion and legalization of illegal income.
In Germany, new tax rules have actually put crypto derivatives trading for retail investors under a ban. And the head of the European Central Bank has repeatedly stated that cryptocurrencies have contributed to a significant increase in money-laundering transactions.
Struggle for control of crypto
Today, there is a trend towards concerted action by regulators, with the aim of imposing significant restrictions on any cryptocurrency activity. On January 5, 2021, the Office of the Comptroller of the Currency (OCC), which is part of the U.S. Treasury Department, allowed banks to issue their own Stablecoins. Although a similar project from Facebook, Libra, was not granted such permission by the regulator.
Caitlin Long, head of Avanti cryptocurrency bank, is sure that the OCC’s decision is about the biggest banks getting control over operations with all digital assets.
Why are regulators now actively interfering in the crypto market? Could it be because just two months after adding cryptocurrencies to its wallet, PayPal started processing hundreds of millions of dollars in cryptotransactions per day? For example, bitcoin transfers through PayPal were $129 million on January 6, 2021, and $262 million on January 11.
Another point could have an impact: after reaching a price of $40,000, the capitalization of bitcoin alone reached 7% of the market capitalization of all the gold mined in the world. The total value of the cryptocurrency market exceeded $1 trillion.
Things went so far that a famous investor – Dennis Gartman – called bitcoin “gold for millennials,” and the head of MicroStrategy started talking about BTC as “digital gold. Or has the very fact that Ripple cooperates with a hundred of the largest banks become a real threat to SWIFT?
Whatever the case may be, the crypto-industry will face serious tests in the form of regulatory opposition. And the prospects for further integration of the industry into the global financial system depend on how quickly it will be able to recover from the blows and their consequences.
Today we can be sure of one thing: no one can get rid of cryptocurrencies. Too much money has come into this industry. And serious players on the world stage, like China or Japan, are interested in the development of various aspects of cryptocurrency use.