Table of Contents
Does Cryptocurrency Regulation Impact Crypto Price? Let’s find out!
Investors know what to expect when trading stocks. Stocks are tightly regulated and protect investors against fraud and other risks. Government regulations are still being developed for cryptocurrencies. The crypto markets are less secure than the stock market, which means they pose a greater risk.
This has been a boon for some investors. The unregulated nature of crypto investing was a boon for early investors. They made a lot of money in space over the past decade. Partly, this was because early crypto investors found the lack of regulation compelling. Many of these early investors believed that cryptocurrency could change global finance’s rules.
The total market cap of all cryptocurrencies reached $2.9 trillion at its peak in November 2021. This is clearly a small drop in the bucket when compared to the stock market’s $48 Trillion value. It was significant for an asset class that was barely a decade old.
Bitcoin (BTC), however, has lost over 70% of its value since 2021 when it reached its peak. Today, the crypto markets are worth less than $1 trillion. It appears that government regulations may soon be implemented,
In March 2022 President Joe Biden signed an executive order to create a “whole of government approach” to address the risks and maximize the potential benefits from digital assets and their technology. China plans to launch a digital currency in 2023. In addition, 10 countries already have a digital currency. More than 100 countries are looking into starting their own cryptocurrency, accounting for 95% of the global gross domestic product.
Some crypto investors panic, while others look forward to a more regulated future. Let’s look at what regulations could mean for investors as well as the price of crypto assets.
- How cryptocurrency regulations affect crypto prices and investing in cryptocurrency.
- Who will be regulating cryptocurrencies?
- Cryptocurrency regulations and the price of cryptocurrencies.
How Cryptocurrency Regulations Affect Crypto Prices and Investing in Crypto
Adam Reeds, the founder and CEO at Ledn, a crypto lending company, believes regulations are a positive thing for the industry. “Many institutions and larger established organizations are waiting on the sidelines,” he said. He believes that many of these institutions would love to invest in crypto but the lack of regulations makes it impossible.
Additionally, regulations should create a framework that allows for disclosures, says Katherine Dowling (general counsel and chief compliance officer at Bitwise Asset Management). Dowling continues to state that transparency will be a benefit for all investment classes.
Institutional investors must be transparent. This cannot be overemphasized. Institutions are risk-management-oriented and require a risk profile for every investment. These types of risk profiles are only possible for transparent assets. Cryptocurrencies simply don’t have them.
The lack of transparency regarding the algorithmic stablecoin TerraUSD, (UST), not only caused huge price drops in May but also had a significant impact on its sister coin LUNA, and BTC prices. Six crypto venture capital firms that had backed Terra tokens during the period before the collapse were recently sued by a Chicago investor.
This was not the first time that cryptocurrency has caused financial hardships for investors. The hack that led to the theft of Ethereum’s Ether (ETH), coin’s $60 million, caused Ethereum’s DAO coin to fail in 2016. The stolen currency was eventually returned to Ethereum’s original blockchain. However, the experience had profound consequences. Not least because the Ethereum community now has two blockchains: Ethereum Classic and Ethereum Classic.
Tether’s USDT currency has been opaque in recent times, which has created problems for stablecoin. The Commodity Futures Trading Commission fined USDT’s issuer $42 million after it was found that the company had violated the Commodity Exchange Act as well as other CFTC regulations. In addition, USDT’s issuer was fined $42 million by the Commodity Futures Trading Commission for violating the Commodity Exchange Act and other CFTC regulations. This settlement was made in February 2021. Many of the fines and settlements were related to audit issues in USDT’s existing Treasury. This is an example where more crypto regulation could help.
Experts say that it is unlikely that there will be any price drops until regulations are in place for trading and reporting cryptocurrency assets. This type of uncertainty can be dangerous for large financial firms. Financial firms might avoid investing in assets that could result in them losing large amounts of capital because they have huge balance sheets.
According to Vin Narayanan (chief strategy officer at KingsCrowd), large institutional investors could be able to make more investments in crypto with the help of regulations and transparency. This could also help stabilize asset prices, he says. Reeds say that his retail and high-net-worth clients want to know what their investments are. This clarity will not be possible for cryptocurrency until there are regulations.
These regulations are on the horizon. Many crypto investors now want to know: How will they look and who will enforce them?
Who Will Be Regulating Cryptocurrencies?
Sen. Cynthia Lummis (R-Wyo.) and Sen. Kirsten Gilbrand (D-N.Y.), recently introduced the bipartisan Responsible Financial Innovation Act. This has been referred to the Senate Committee on Finance.
Dowling said that one of the most important aspects of the bill is its proposal that the CFTC should be the primary regulator for cryptocurrencies. Dowling then points out that Gillibrand is a member of the Agricultural Committee which has oversight over the CFTC.
Dowling points out that the greatest problem in the debate around cryptocurrency regulation is the definition of what “bucket” the asset class falls under. Are they securities? Are they commodities? Are they commodities?
Dowling states that, despite the fact that many investors consider them securities, it is not an obvious conclusion that digital assets are securities. Many aren’t. Many are not.
Gary Gensler, the SEC Chair, seemed to echo that sentiment when he said recently that Bitcoin is a commodity. This is in keeping with the belief of many crypto investors that Bitcoin is “digital silver.”
This is also a vast departure from the time Gensler reached an agreement with Jay Clayton, former Chair of SEC. Clayton stated that he believed that “every ICO” he had seen was secure. An ICO refers to an initial coin offering. This is the way that cryptocurrencies are introduced to the market. Chairman Clayton stated that the SEC had “jurisdiction” over cryptocurrencies and that federal securities laws applied.
However, this would not be true if cryptocurrency were classified as commodities. Different asset classes would have different definitions, which would lead to different regulations. Lummis and Gillibrand should be able to offer a balanced view of these various regulatory classes. Lummis is on the Senate Committee on Banking, Housing and Urban Affairs, which oversees the SEC.
Dowling points out that certain cryptocurrencies may still be securities if they have certain attributes. These will most likely fall within the scope of the SEC. Dowling continues by pointing out that it is crucial to “create these definitions and make sure they are accurate.” She says that if you don’t define cryptocurrency correctly, it could lead to them being treated in inappropriate ways.
This could end up being the most important function of Lummis & Gillibrand’s Responsible Financial Innovation Act. It determines how the government defines cryptocurrency and under what jurisdiction each currency falls.
Concerning the question of who will regulate cryptocurrencies? The verdict is not yet in, but there are two options: the CFTC or the SEC.
Cryptocurrency Regulations and the Price of Cryptocurrencies
No matter how the regulation of cryptocurrency unfolds, experts in this field believe that regulation and oversight will eventually help stabilize digital assets’ values.
Since the fourth quarter of 2021, cryptocurrency prices are in freefall. Many retail investors believe that a bottom will never be reached. The Chinese government has already predicted that Bitcoin will reach zero. This statement could, however, be enough to drive many retail investors away from the asset class, increasing its losses.
Narayanan believes that regulations will eventually stabilize crypto prices. Narayanan believes this is because regulations may allow for greater institutional investment and retail investors to inject more capital into digital assets. The potential for large capital inflows could lead to a stabilization of cryptos’ prices, which would attract retail investors who aren’t yet serious about the asset class. This would increase stability and value.
Reeds state that crypto price worries today are not related to any pending regulations for investors concerned about cryptocurrency regulation. Reeds say that the current decline in cryptocurrency prices is more due to global macro factors.
Reeds’ company is having “a lot of discussions, especially with Canadian regulators and really looking forwards to protecting our clients, and making sure that all information regarding these products is disclosed.” Reeds say that a nation will eventually host the “new SWIFT banking system” for digital assets. He explains that a government stablecoin cannot be used as the global reserve for digital assets. It must be transparently regulated.
Although cryptocurrency is currently at a low price, the genie has not yet emerged. It may not be possible to imagine a world without cryptocurrency, even if Bitcoin “goes to zero.” If regulation is a solution to stabilizing crypto prices then competition in that field could enable new crypto leaders.
