After a tough 2022 that saw the cryptocurrency market crash, coin prices are turning around and are now approaching one-year highs. But now proponents fear that regulatory confusion in the United States will mean new investment is going overseas.
“It’s a global technology. Markets tend to overcorrect based on the US,” said Sheila Warren, CEO of the Crypto Council for Innovation. “The overall picture is really eye-opening, and that’s what happened here.”
“Consumer confidence has never left the world,” she added.
The two biggest cryptocurrencies, Bitcoin and Ethereum, have risen 82% and 59% respectively since January, as Congress ponders how to respond to the collapse of market exchange FTX last year. and stability issues across the crypto industry.
“The collapse of FTX last fall and the shockwaves it sent throughout the crypto industry revealed that the status quo is simply unsustainable,” said Lee Reiners, professor of finance at Duke University and crypto critic, to the Senate Banking Committee in February.
These hearings resulted in a plethora of regulatory proposals from lawmakers, ranging from regulating crypto more similarly to stocks and bonds to attempts to better separate it from traditional banking.
While the collapse of FTX has reduced confidence across the industry, it was not the only recent marker of instability. Earlier this year, a South Korean man was accused of manipulating the price of his Terra and Luna cryptocurrencies, which crashed last year.
Crypto-adjacent businesses such as the art of non-fungible tokens have also seen massive boom and bust cycles in recent years. While big companies and celebrities launched NFT lines last year, the digital asset market is now nearly dead from its peak.
All of this fuels the debate over how to regulate cryptocurrencies, which straddle both investment vehicles and currencies.
The mixed messages from the congressional hearings left the door open for regulators like the Securities and Exchange Commission to determine their own regulatory path without Congress, which had led to uncertainty among industry players, according to the lobbyist of the Blockchain Association, Ron Hammond.
“It’s been pretty hit or miss…what we’re seeing with the SEC and (Commodity Futures Trading Commission) in particular, they’re not even agreeing with themselves on regulation that makes sense,” he said. declared.
Hammond criticized the SEC for imposing enforcement actions against crypto firms regardless of how closely they work with regulators, increasing costs and making it more difficult to invest in the US market.
But those SEC notices are just the agency following the law, Reiners told The Hill.
Last month, the SEC issued a warning for investors telling them to be careful with cryptocurrency investments. Similarly, the Federal Reserve joined other agencies in leveling warnings to banks earlier this year, encouraging financial institutions to apply more thorough risk management to accounts involving cryptocurrencies.
The Fed’s warning came after the collapse of crypto-heavy Silicon Valley and Signature banks, two of the biggest banking meltdowns in US history.
“I don’t see a situation where developers are really clamoring to come to the US or start in the US because it’s so confusing,” Hammond said. “We have seen companies create their startups in Paris, Lisbon, England and Singapore because there they at least know the rules of the road.”
“We’ve noticed (companies) going to countries that have rules on the books just because they know what they can and can’t do,” he added.
A study by crypto firm Electric Capital found that fewer crypto developers live in the United States today than in previous years. Analyzing contributions from the GitHub code database, roughly 29% of crypto developers live in the US, up from 40% in 2017.
However, over the same period, the number of developers worldwide has increased almost tenfold, according to the study, and the number of developers has continued to rise even when prices crashed last year.
“Antipathy for crypto is a uniquely American phenomenon,” Warren said. “The United States is particularly short-sighted about this.”
But Reiners is more skeptical of claims of “brain drain” in the US crypto industry.
“I think that statement is exaggerated. And I think it’s being intentionally used to try to motivate US lawmakers to pass regulations that are favorable to industry interests,” he said. “I just haven’t seen – it could exist – but I just haven’t seen evidence to support this.”
Some of that antipathy is driven by simply not understanding the technology, said Hammond, who has worked with lawmakers on crypto legislation since 2017. Now, many other lawmakers are involved.
“The good news is that it’s gone from three to five members who knew what it was like in 2017 to 100 or 150 now,” he said. “We’re definitely seeing a trend now where it’s based largely on age. We’re seeing younger members of Congress in particular, and regulators as well, being much more open to technology, to its promise.
Congress has shifted from sweeping reform to a piecemeal regulatory strategy because of the difficulty of passing significant legislation in a divided body, Hammond said. This piecemeal strategy also allows Congress to move more slowly and ensure that any regulations passed are actually effective, Reiners said.
“The important thing from a regulatory standpoint is that we do it right,” Reiners said. “I view this more as a tortoise and hare situation.”
“The devil is in the details,” he added.
Hammond and Reiners expect the most likely progress in regulation regarding stablecoins, cryptocurrencies that are pegged to traditional currency and can be used, in theory, as a stable financial asset.
Regulating stablecoins has been a priority of Rep. Patrick McHenry (RN.C.), chairman of the House Financial Services Committee. The Biden administration has also called for greater regulation of stablecoins, expressing concerns about their impact on the assets used to keep them stable.
“Stablecoins are a fairly common bridge between crypto and traditional finance,” Hammond said. “I think it’s a great way for members of Congress who may not know crypto to say, ‘At least I know traditional finance,’ to understand what it is a little bit better.”
As for the industry’s best interest while Congress considers the legislation, Reiners thinks no news would be good news.
“I think they are too focused on regulation. Whatever happens will happen, but industry needs to think about creating tools, products and services that people actually enjoy and find useful,” he said.
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