Crypto regulation looms, but bitcoin rises. Here’s why

by Arthur · February 16, 2023

Hello! Welcome back to the Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.

US regulators have redoubled efforts to increase oversight of the crypto industry. In recent days, the US Securities and Exchange Commission has shut down crypto exchange Kraken’s betting program, issued a Wells notice to warn stablecoin issuer Paxos that it could face enforcement, and proposed a rule that could make it more difficult for many asset managers to invest client money in digital assets.

Still, bitcoin posted a big rally since Wednesday, up more than 14% to trade briefly above $25,000 on Thursday, at its highest level since June, according to CoinDesk data. Several other major cryptocurrencies also rallied, with ether reaching as high as $1,740 on Thursday, its highest level since September.

In this section, I reached out to a few industry participants to explain potential reasons for the rally.

And as always, find me on Twitter at @FrancesYue_ to share some thoughts about crypto, this newsletter, or your personal stories with digital assets.

Why did crypto rise?

“I see no fundamental reason for the strength in cryptoasset prices” over the past two days, said David Tawil, president and co-founder of ProChain Capital. It could be the crypto ecosystem’s way of telling the SEC “do what you want, we’ll keep doing what we’re doing,” Tawil said.

Still, recent actions by US regulators could have been worse, especially after the collapse of crypto exchange FTX in November resulted in billions of dollars in customer losses, said Ian Weisberger, co-founder of CoinRoutes. “It would have been 10 times worse if the SEC had come out and told Coinbase to remove all these coins because they are securities,” Weisberger said.

The SEC has targeted specific companies but has not issued any outright bans on crypto services, Weisberger said. “I think people are realizing now that even the SEC knows they can’t overreach because they would fear backlash, like they can’t go too far,” Weisberger said.

James Butterfill, head of research at CoinShares, said a recent survey by the firm showed that the SEC’s actions are a major concern among investors, while fears of a government ban have subsided.

“Regulating rather than banning narrative is in some ways a positive outcome as it will help legitimize the crypto industry,” Butterfill wrote to Distributed Ledger over email.

From a technical perspective, bitcoin’s midweek rally squeezed some traders’ short positions, with the resulting momentum taking the cryptocurrency above the $24,000 resistance level, said Jan Sammut, vice president of marketing at Origin Protocol.

It’s also worth noting that in the recent rally, bitcoin outperformed most other crypto products, Weisberger noted. “Reading between the lines, we believe the SEC recognizes that bitcoin is not specifically under their jurisdiction, but proof of stake coins like Ethereum, as well as staking and lending products,” Weisberger said.

SEC Chairman Gary Gensler has said bitcoin is the only cryptocurrency he is prepared to publicly label a commodity.”

Bitcoin’s recent strength also contrasts with the stock market’s weakness on Thursday, although the two assets often trade in tandem. The Dow Jones Industrial Average closed down 1.3% on Thursday, and the tech-heavy Nasdaq Composite fell 1.8%.

The SEC’s proposed rule

The SEC voted 4-1 Wednesday on a proposal that would expand the types of assets investment advisers are required to hold using qualified custodians, according to a report by The Wall Street Journal.

The rule could make it more challenging for some firms to deposit crypto assets, and limit the scope of firms that registered investment advisers can work with when investing clients’ money in crypto, according to Christopher Avellaneda, a partner at the law firm Schulte Roth & Zabel.

Proposed SEC rules are typically open for comment for 60 days after publication, Avellaneda noted.

Paxos stopped influencing BUSD

Paxos said on Monday it would stop minting new BUSD, a dollar-pegged crypto issued by the company and branded by the world’s largest digital asset exchange Binance, following an order from the New York State Department of Financial Services requiring it to stop minting it.

The stablecoin issuer also said it received a Wells notice from the SEC on February 3. The announcement said the SEC is considering recommending an action alleging that Paxos failed to register BUSD as a security.

Read: Crypto exchange Binance hit by large outflows. Here’s why

Kraken stops betting in the US

Last week, the SEC accused the crypto exchange Kraken of failing to register the stake program as collateral. Kraken has ended its enforcement program in the United States and agreed to pay $30 million to settle the allegations, without admitting or denying the allegations, according to a statement Thursday.

Read: Crypto stakes: what it means, why it matters, and how a crash will change investing.

Staking, which allows users to earn rewards by using their existing holdings of tokens to verify transactions, is a feature of proof-of-stake blockchains, such as Ethereum

ETHUSD

,
Solana

SOL USD

and Cardano

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.

Read: Crypto industry fears betting ban, as some turn to bitcoin: ‘It’s always been on the safe side of regulation’

Crypto in a flash

Bitcoin gained 10.7% in the past week, trading at around $24,484 on Thursday, according to CoinDesk data. Ether rose 7% over the same period to around $1,680.

Biggest winners	Price	%7-day return
Floki	$0.00006	109%
Bitget Token	$0.49	98%
The Mina Protocol	$1.08	31%
Loop ring	$0.47	25%
The WhiteBIT token	$4.10	24%
		Source: CoinGecko as of February 16

Biggest losers	Price	%7-day return
Pancake Swap	$4.10	-12.2%
Chillies	$0.14	-11.8%
The sandbox	$0.76	-11.5%
Axie Infinity	$10.65	-10.8%
Frax Del	$10.93	-10.8%
		Source: CoinGecko as of February 16