The US SEC takes crypto regulations seriously; Bifurcation on the horizon

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  • The Coinbase Wells notice was a regulatory missile
  • President of the SEC, fintech expert
  • Protect the public or defend the status quo?
  • Money: the root of power
  • Expect regulatory levels; Bifurcation on the horizon

Regulation is a thorny issue for global assets and the markets in which they are traded. Before the global financial crisis of 2008, the regulation of commodity markets was not what it is today. Futures markets were regulated and players in the US market had to be careful when dealing overseas.

The Foreign Corrupt Practices Act of 1977 prohibits US citizens and corporations from bribing officials of foreign governments for the benefit of their business interests. The law has put commodity traders and commodity producers in the United States, as well as consumers, at a disadvantage compared to many other countries.

There is no division between government and the production of raw materials in many producing countries. So the only way to do business in many of these areas was to break the law, leaving the business in the hands of other market players, including China and other countries.

The Dodd-Frank Act tightened regulation beyond the futures market in physical exchanges and other transactions. In recent months, traders have been charged and convicted of identity theft along with other offenses that are now white collar crimes.

The regulatory framework has widened in recent decades. It is only a matter of time before it casts a shadow over the burgeoning cryptocurrency asset class. Additionally, cryptos threaten one of the government’s critical energy sources, the money supply.

We should expect vigorous regulation in the months and years to come. The more the market capitalization of the crypto asset class grows, the faster the rules will emerge. We just witnessed what might be first love at first sight when the Securities and Exchange Commission (SEC) sent Coinbase (NASDAQ 🙂 a letter warning them against deploying a new crypto product.

The Coinbase Wells notice was a regulatory missile

On September 7, the day that El Salvador officially adopted as its national currency, the price of the major cryptocurrency hit its most recent high and reversed lower.

Source: CQG

As seen in the September daily chart, the crypto pack leader hit a short-term high of $ 53,125, reversed and fell to a low of $ 43,704, creating a bearish key reversal pattern on the daily and weekly charts of the week. September 7. Bitcoin followed lower, hitting a low of $ 43,310 on September 13.

One of the reasons Bitcoin fell 18.5% on September 7 is because Coinbase, the leading cryptocurrency exchange, received a Wells Notice from the Securities and Exchange Commission, informing that the SEC intends to sue COIN for its Coinbase Lend program. Lend allows customers with crypto tokens to lend them to other market participants, thereby creating a return or interest rate for Bitcoin and other cryptos offered on the Coinbase exchange.

Wells’ notice warned Coinbase that the company should think twice before rolling out its loan program. Plus, it was a regulatory missile to the asset class that transcends Coinbase.

President of the SEC, fintech expert

SEC Chairman Gary Gensler is the former chairman of the Commodities Futures Trading Commission. He presided over the authorization of the CME and other futures exchanges to list Bitcoin futures in December 2017. Although the listing took place after his tenure at the CFTC, the request was considered during his tenure. As chairman of the CFTC, Mr. Gensler seemed to embrace fintech and the cryptocurrency revolution.

Prior to being named Chief of the SEC, Gensler taught at the Massachusetts Institute of Technology. The subject was fintech. Cryptocurrencies and blockchain are the heart and soul of the evolution of the fintech revolution.

Some market participants logically thought that President Gensler would be an advocate for crypto at the SEC. However, a political agenda could take precedence over the evolution and acceptance of fintech.

Protect the public or defend the status quo?

The SEC and other powers in Washington have said they want to protect the public from an unregulated cryptocurrency asset class. Many cite nefarious uses of cryptocurrencies, including their usefulness for hackers using ransomware to attack systems in the United States and around the world.

In 2021, we have already seen a hack of the Colonial Pipeline and the main US meat packing plant. The U.S. government has expressed concern that cryptos allow criminal forces to operate beyond their reach, creating risks for businesses and individuals.

The first regulatory missile came into the mind of “protecting the public”. However, this is more of a defense of the status quo.

Money: the root of power

We’ve all heard the saying “money is the root of all evil“, Which comes from the New Testament of the Bible,”because the love of money is the root of all evil. “

For governments, money is the root of power. The ability to expand and contract the money supply became much easier after the abandonment of the gold standard. During the 2008 global financial crisis and the 2020 global pandemic, governments significantly increased the money supply to stabilize the economy.

If cryptocurrencies were to replace fiat currencies, it would limit or end the government’s ability to deal with events using monetary policy. Ideologically, the crypto revolution is a challenge to government control of money, as the burgeoning asset class embodies a libertarian approach, returning power to individuals at the expense of governments.

To expect governments to relinquish control of the money supply is naïve. Last week, famous hedge fund manager Ray Dalio said of regulators and Bitcoin:

I think in the end, if it’s really successful, they’ll kill him and they’ll try to kill him. And I think they’re going to kill him because they have ways to kill him.

The bottom line is that the SEC Wells advisory sent to Coinbase could be the first missile in a government-sponsored war on the asset class for political rather than regulatory reasons.

Expect regulatory levels; Bifurcation on the horizon

I expect to see a substantial bifurcation in the cryptocurrency asset class as the SEC, Congress, and other U.S. government agencies and branches sink their regulatory claws into the asset class and its technology. There is no doubt that blockchain technology has ubiquitous utility and acceptance. Tokens, not so much.

Cryptocurrencies are likely to be at the top of the risk ladder, receiving the most severe regulatory treatment. Bitcoin and, the leaders in digital currency, are part of this class. Stable coins tied to the values ​​of underlying assets and government-issued digital currencies are likely to operate under a much more flexible regulatory regime.

I see the Wells Opinion as the first regulatory step in a game of chess that will develop over the months and years to come. With each correction in the cryptocurrency market, the government is likely hoping that it will go away.

Each time it comes back stronger and reaches new heights, we are likely to see increased regulatory and government oversight. While an aggregate market capitalization of just over $ 2,000 billion does not pose systemic risks to the financial system, a market capitalization of $ 10,000 billion is another story.

Expect more missiles, which will lead to increased volatility. Acceptance of crypto in the market continues to grow, but governments are ideologically on the other side of the argument.

Money is the root of power, because control of the purse strings is a critical element of control. Don’t expect governments to look the other way when market capitalization increases.

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