Cryptocurrency: Here come the regulators

Woman holding a phone.

Woman holding a phone. Gettyimages

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“The sun may be setting on the cryptocurrency craze,” said Michael Hiltzik in the Los Angeles Times. Crypto’s decline from a peak market capitalization of more than $3 trillion in late 2021 to about $800 billion today means that late-stage investors likely reaped “enormous losses.” And now, initiatives in Congress that were aimed at liberalizing the crypto market “appear to be running out of steam” as regulators have “tightened the screws.” Evangelists for the new form of currency had claimed it was a financial innovation that would allow those on the margins of the financial system to prosper. But after 14 years of bubbles and scams, it’s become clear that crypto is merely a speculative asset, something to buy in the hope that someone else will buy it for more. That’s “often described as the ‘greater fool’ theory.” What the unbanked really need are simple and inexpensive ways to save their money, but crypto transactions, bristling with hidden fees, “tend to be just the opposite.”

“Crypto’s free pass is getting yanked” because of the sudden failure of crypto exchange FTX last year, which lost investors billions, said Yueqi Yang, Katanga Johnson, and Austin Weinstein in Bloomberg. To prevent a repeat of the 2008 financial crisis, authorities are now trying to “build a wall” between the crypto trading market and the banking and securities markets. The Federal Reserve and other top financial regulators jointly issued a blunt New Year’s warning to banks to ensure that “crypto-related risks” don’t affect the banking system, and since then regulatory actions have come thick and fast. In late January, the Fed barred crypto firm Custodia Bank from “coveted access to the central bank’s payment system.” In just the past week, the SEC fined a crypto promoter and sued a startup that issued digital coins, while New York’s financial services department ordered the company Paxos to stop issuing BUSD, a popular stablecoin.

In response, bankers “are re-evaluating any exposure to the crypto sector, no matter how small,” said Rachel Louise Ensign and David Benoit in The Wall Street Journal. Banks that were once “deep into crypto” are reducing or even eliminating their exposure, while those that kept their distance are now actively “shunning customers” with crypto ties. This restructuring is bringing to light the extent to which crypto businesses that pitched themselves as an alternative to banks still rely on those institutions for access to hard currency. When Citigroup Inc. “abruptly closed” the account of Swan Bitcoin, for example, the company had to scramble to pay its employees.

This “aggressive government crackdown” has caused “outrage and anxiety” in the crypto industry, said David Yaffe-Bellany in The New York Times. Kristin Smith of the Blockchain Association, an industry group, called it a “crypto carpet bombing.” After the SEC reached a settlement with the U.S. crypto exchange Kraken, removing one of its products from the market, the company’s founder briefly “posted an obscene meme” about the agency’s chief. And this upheaval won’t end any time soon. Industry lawyers say the spate of enforcement is likely just “a prelude to a protracted spell of legal wrangling.”

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.

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