“We grew too fast”: Crypto seems to expect the market to shake

This can be said for the entire digital asset market, which has seen more than two-thirds of its value evaporate since reaching its $ 3 trillion peak last fall. While the Federal Reserve is stepping up its campaign to curb inflation, investors are dumping risky assets in anticipation of rising interest rates. Startups that increased during the two stimulus-driven pandemic years have begun to fall to the ground.

The market slump is likely to dampen expectations around a two-year lobbying campaign that has made digital assets one of the most visible industries on Capitol Hill. Crypto’s shrinking footprint could weaken an offer from top exchanges and developers to push for new laws and light regulations that they claim will allow blockchain – based businesses to thrive. And it can hurt any confidence the industry has built up in Washington – especially in the midst of growing scandals on popular lending platforms where customer accounts have been frozen or deleted.

“When everything goes up, it hides a lot,” Commodity Futures Trading Commissioner Caroline Pham said in an interview. “From a regulator’s perspective, it really just emphasizes that we just need to do something.”

Top exchanges and industry associations pumped $ 9 million into lobbying in Washington in 2021, more than tripling their spending from the previous year, according to a report by the watchdog group Public Citizen. This station accelerated through the beginning of 2022 and was reinforced with tens of millions in campaign contributions from power brokers such as FTX founder Sam Bankman-Fried.

But the battle to shape legislation and influence agency decisions to tighten industry oversight has just begun, with Caitlin Long, founder and CEO of a Wyoming-based crypto bank, saying some digital asset companies are to blame for rising heat from regulators. . The representations that companies give to politicians in Washington often constitute “regulatory theater,” she said.

“They know they exist in a regulatory gray area,” said Long, who is suing the Fed to open a main account that will bring her bank under central bank direct supervision. For some crypto companies, “the strategy is to get as big as fast as possible; to get too big to be required to follow the rules.”

That strategy may be too big to work. Market regulators and law enforcement have already targeted areas such as insider trading, disclosure failures and investor protection issues. And regulators, including top executives at both the Securities and Exchange Commission and the CFTC, have signaled that more investigations are likely.

“I hope we use the turmoil of the last couple of weeks to look at where we are from a regulatory standpoint,” said Robert Baldwin, a former finance minister and head of policy at the Association for Digital Asset Markets. While the industry has built credibility with decision makers, he said, recent events are forcing “people to take a step back and think about what is happening. It probably also forces companies to be a little more careful. “

Meanwhile, with Congress’s attention divided by crises from Ukraine to inflation, the need to adopt new cryptocurrencies is likely to diminish as investors shy away from high-risk digital assets. Even with headlines capturing celebrities at cryptocurrencies, a recent Fed survey found that only 12 percent of U.S. adults had had or used digital currencies during the previous year.

The decline in the digital asset markets, which coincides with losses in more traditional financial markets, is accelerating as hedge funds, crypto-based lending platforms and stackcoin issuers are looking for liquidity to save their projects.

The latest explosion began last weekend after Celsius Network – a bank-like cryptocurrency lender that promised annual returns as high as 18 percent on customer deposits – announced that it would stop withdrawals and crypto-by-crypto trading services for around 2 million customers due to extreme market conditions. ” The company, which has not responded to further requests for comment, is reportedly investigating restructuring.

Celsius’ plight reflected TerraForm Labs – the startup of an algorithmic stack coin that collapsed last month – which had also attracted billions of dollars from retailers and institutional investors by linking the token to a high-yield decentralized lending program.

The market downturn is also beginning to bring down large crypto-investment companies. Three Arrows Capital, a Dubai-based hedge fund, is retreating after marking hundreds of millions in losses from its investments in TerraForm tokens and other flagship digital assets.

Both companies have had races with securities supervision. Celsius was instructed by four government agencies to stop offering unregistered securities in the form of interest-bearing accounts for fear that the company would not be able to meet its obligations to depositors.

“Police officers care less about ordinary shareholders and preferred shareholders; they care primarily about these depositors, “said Mike Boroughs, co-founder and portfolio manager of blockchain investment firm Fortis Digital.

While some decentralized financial lenders (DeFi) – or more centralized companies that sell access to DeFi-like returns – may offer cheaper alternatives to strictly regulated banks, the lack of institutional guarantee standards injects even more risk into the crypto markets.

“If you offer higher returns by taking out worse loans, then it only creates a subprime crisis in 2008 in another industry,” said Boroughs.

Proponents of crypto have resisted such comparisons, arguing that autonomous or community-based systems that mimic the features of traditional lenders and exchanges may be safer and cheaper alternatives. And so far, no existing platform has scaled up to a point where it could pose a systemic risk to the economy.

Lawmakers and crypto-advocates say that market volatility may provide an opportunity for certain companies to put the spotlight on their practices as a potential model for future legislation or regulations. Sens. Cynthia Lummis (R-Wyo.) And Kirsten Gillibrand (DN.Y.) says their recent cryptocurrency bill – celebrated by the industry as a milestone – was shaped by some of the problems that arose after the TerraUSD collapse.

“We are, in a way, in this ugly duckling,” said Linda Jeng, a former Fed official who leads regulatory and political efforts at the standard crypto-industry-backed Center. Jeng said she looked forward to working with regulators to “develop appropriate proportionate rational rules and regulations.”

Nevertheless, the advent of more scandals could create obstacles for the industry as it tries to do so in Washington – especially with new venture capital-backed platforms offering similar services that roll off the assembly line.

“If you want to start a successful platform in this area, the current framework is just extraordinarily ambiguous as to how you want to proceed to do so,” said Tomicah Tillemann, global head of policy at Haun Ventures, a venture firm that recently delivered start-up financing for a new DeFi lending platform. “We and others have been asking the SEC for clarification for a very long time, and they have completely failed to do so.”

SEC leader Gary Gensler says the rules around cryptocurrencies are clear.

BlockFi, another platform that has recently resisted layoffs, paid $ 100 million to settle claims that its return-generating accounts were unregistered securities. Coinbase scrapped plans for a product that would have allowed customers to earn interest on their digital assets after a very public search with the regulator last year. The agency reportedly investigated Celsius – as well as several other crypto-lending platforms – in the months before it froze customers’ assets.

A SEC spokesman declined to comment on whether there are any ongoing investigations.

“Lending platforms, they operate a bit like banks,” Gensler said at an event on Tuesday, adding that trading platforms and exchanges that offer sky-high returns have largely failed to disclose enough information about their products to investors.

“If it seems too good to be true, it may well be too good to be true,” he said.