What's going on in Crypto USA? (April 2023)

Recent facts

???? The Commodity Futures Trading Commission (CFTC) issued a lawsuit against Cryptoexchange Binance; the Securities and Exchange Commission (SEC) issued a Wells notice against Cryptoexchange Coinbase and charges against Cryptoexchange Kraken. Cryptoexchange Bittrex reportedly initiated the wind down of US operations. More regulatory actions against Cryptoexchanges and unregulated cryptoservice providers are in the pipeline. What does this mean?

U-turn?

???? Already during 2H21, the SEC initiated action to protect investors on Cryptoexchanges. Throughout 2022, the White House communicated its intention to protect investors, notably by encouraging investigations and enforcement actions against unlawful practices.
???? The US reaction to the structural weaknesses shown by the cryptofinance industry since May 2021, and then manifestly during 2022, has been aligned to the direction taken by the international regulatory policy makers.
???? On 21 March 2023, the Bank for International Settlements (BIS) confirmed an imminent regulatory wave, focused on generalising ‘standard’ banking regulation recommendations to cryptofinance. At the end of March, the G7 re-affirmed it will toughen global Cryptoregulation, focusing on investors protection.
???? Though not easy to apprehend, the recent US events are simply the concrete expression of an anticipated regulatory policy response, consistent with the stated international regulatory policy direction.

Consequences?

???? In the short term, the accelerated clampdown in the US will continue, and international regulators will enact stringent bank-regulatory-like global recommendations. Regulatory arbitrage will be decidedly disincentivised.
???? Markets are likely to experience

  • volatility driven by heightened uncertainty and headlines effects,
  • a relative dislocation of providers out of US,
  • (infra-)structural bottlenecks that Decentralised Finance (DeFi) solutions may partially compensate, and
  • liquidity limitations in terms of volumes

???? But we are still in a “Let one thousand flowers bloom” environment. Cryptofinance use cases abound (payments, AM, cap. markets, banking, lending, tokenisation, DeFi, NFTs, CBDCs). Cryptofinance ventures are still expected to grow.
???? In the mid / long term, this regulatory wave will eventually generate a better governed and legitimated cryptofinance industry, more accessible to institutional investors, and overall, more resilient and sustainable. Such environment will support the growth of the industry.

In sum

???? The 2022 governance-led crypto correction follows the 2018 ICO-related correction. Both triggered regulatory waves, and resulted in a more legitimate and better governed cryptofinance industry, able to attract more investors and investments in the space.
???? The current phase is again favourable for the initiation and development of cryptofinance projects, provided these are designed and implemented in anticipation and consideration of the regulatory developments.
???? Jurisdictions (such as Switzerland) that provide mature, clear and stable regulations should benefit from (perceived) uncertain and confused cryptoregulatory developments in jurisdictions such as the US. Other jurisdictions may see an opportunity too.