- By Natalie Sherman
- Business Journalist, New York
Is the US Ready to Kill Crypto?
Three years ago, the majority of the companies in the sector in which Andrew Durgee's company invested were based in the United States.
This year, he estimates only one in 10 will — reflecting his company's judgment that the country is increasingly hostile to digital assets such as cryptocurrencies and tokens.
“The administration really has a target on the industry,” says Mr. Durgee, managing director of the crypto division of tech company Republic.. "Regulatory uncertainty makes investing in the United States more risky."
The sector was already under pressure, after virtual currency prices collapsed last year. Further damage was caused by the collapse of several high-profile companies, including FTX, run by self-styled "Crypto King" Sam Bankman-Fried, which prosecutors have accused of running "one of the biggest financial frauds" in the history of the United States.
Shaken by the turmoil, U.S. regulators have stepped up scrutiny of the sector, which authorities say has been warned since at least 2017 that its activity goes against U.S. financial rules meant to protect investors.
The campaign has resulted in a steady drumbeat of accusations against crypto companies and executives, alleging violations ranging from failure to properly register with authorities and provide adequate disclosure of their activity to, in some cases, more damaging claims such as mismanagement of consumer funds and fraud.
Bitcoin, which represents the largest share of value in an industry in which thousands of currencies have circulated, is considered by officials to be a commodity, like gold. That means it has been largely unaffected by the current regulatory debate, which hinges on the legal question of what constitutes a "security" - an investment like a stock or bond that is overseen by the SEC.
The efforts have instead ensnared companies issuing tokens or coins to raise funds – and increasingly the exchanges on which these digital assets are bought and sold, which often hold customer funds, execute trades and engage in other activities separate from traditional finance.
The crackdown culminated this month in legal actions against two of the biggest platforms: Coinbase and Binance.
Gary Gensler, the chairman of the Securities and Exchange Commission, defended the rulings this month, comparing the state of the industry to the 1920s, before the United States implemented many of the rules in question: " Hucksters. Fraudsters. Scam artists. Ponzi schemes. Public lined up in bankruptcy court."
Will Paige, research analyst for Insider Intelligence, says sentiment has deteriorated significantly since 2021, when the industry was worth more than $3trillion (£2.4bn) by some estimates and looked poised to be more widely accepted.
"It's really on the fringes of finance," he says. “Trust in the system is shaken and it has definitely gotten worse.”
As a result of the lawsuits, clients withdrew billions of dollars in funds. US banks limited their work with Binance, forcing it to stop accepting US dollars and Robinhood, the trading app, said it would stop listing certain assets named in the lawsuits, citing the "cloud of 'uncertainty' surrounding the tokens.
Critics accuse the SEC under Mr Gensler of hostile "regulation by enforcement" aimed at boosting its own political profile.
They say that despite repeated industry efforts to come up with new rules, the agency has refused to acknowledge the distinctions between different types of crypto businesses and features of the technology, like decentralized automated processing, that challenge into question the existing frameworks.
"It's been a very frustrating experience," says Bart Stephens, managing partner of Blockchain Capital, a venture capital firm that has invested in hundreds of crypto companies, some of which he says are struggling to find loans. banks willing to do business with them. "There is no doubt that a regulatory attack is underway."
Bill Hughes, senior counsel for Consensys, a Texas-based software company that uses crypto blockchain technology, puts it even more bluntly: “The SEC has essentially determined that, under its watch, crypto should no longer exist in the states. -United".
Whether the SEC's rulings could actually kill the industry — in which, by at least one estimate, one in six Americans have invested — is another question.
The broader Crypto market value remains around a third of what it was at its peak. Trading volumes have plummeted and developer interest is down. Confidence remains low. The failures in March of some of the few traditional banks willing to do business with it marked a new blow.
American University law professor Hilary Allen thinks crypto is inherently susceptible to boom-and-boost cycles and manipulation by insiders, and thinks it should be banned. She says the SEC's actions could help confine crypto to the realm of tech enthusiasts, given the general state of the industry.
"If we combine these enforcement actions with decreasing public confidence, possibly with decreasing interest from venture capital, then maybe there's no future," she says.
But Mr Stephens, who has already been through two “crypto winters”, says he thinks the future remains bright – if he is likely to end up overseas, given America’s current approach , which is considered less friendly than other jurisdictions, including the UK and EU.
He points to the price of Bitcoin, which is hovering around 2020 levels but has risen significantly since the start of the year. Ether also rose.
"We don't see founders stopping building new companies or new protocols," says Stephens, who says Blockchain Capital has invested more money in the first three months of 2023 than in the past. any quarter in the previous 10 years as prices fell and rival companies backed away from the sector.
Even if the sector thrives outside the US, losing the US market would severely limit its prospects, warns Gina Pieters, a cryptography expert who teaches at the University of Chicago.
“It would be a mistake to think that the United States…could kill the industry. It can, however, absolutely make the crypto industry smaller,” she says.
Many in crypto are hoping for a reprieve — from the courts, which may decide the SEC overstepped its authority; Congress, where a bill for the industry is under consideration; or a change in the White House, which could cause a reversal of policy.
However these questions are decided, the issues are finally coming to a head, says Angela Walch, a research associate at the University College of London Center for Blockchain Technologies.
"We're at a real inflection point," she says. "The showdown is here."