Last years crypto market crash sparked a series of bankruptcies that almost completely reshaped the digital asset industry. This year, government watchdogs appear to be on the scene to finish the job.
Last week the industry was hit with another deluge of news about law enforcement, The SEC’s threat to take legal action against Coinbase Inc. and its lawsuit against the Tron blockchain network to the apprehension of crypto fugitive Do Kwon. Even famous crypto promoters like actress Lindsay Lohan and rapper Soulja Boy have caught up in repression.
As the headlines piled up, the developments put a lid on in rally in Bitcoin which had pushed the oldest token towards the closely watched $30,000 level. A friday morning glitch during the crypto exchange, Binance took spot trading offline for more than two hours on a platform whose market dominance has only grown as other players retreated, adding to sour mood. Bitcoin drifted around $27,500 on Saturday.
The collision course between the US government and the vision of true believers in crypto of a system where money can be freely exchanged around the world without “censorship” by authorities has been accelerated by the terra blockchain failure stablecoin to maintain its peg at $1 and the bankruptcy of FTX last year, which combined to vaporize nearly $2 trillion in digital wealth. This month’s implosion of crypto-friendly banks Silvergate Capital Corp. And Signature Bank added fuel.
At the center of much of the recent action is the SEC’s decision to process numerous cryptoassets as titles which must be registered with the agency and subject to all accompanying regulations. Needless to say, digital asset aficionados were furious with much of the week’s newsflow, especially regarding exchange-listed Coinbase, which says it has tried several times dialogue with the regulator in vain.
“An reprehensible amount of resources and intelligence has been expended in the United States trying to engage with this SEC and trying to create substance and a way out of the ghostly comments made by the agency,” Sheila Warren , chief executive of the Crypto Council for Innovation trade group, said in an email. “Meanwhile, most other major economies are actively in productive consultation with experts on how to land on the regulatory plane.”
The treatment of many crypto coins as securities means the SEC is testing its authority, leaving those caught in its crosshairs an option: capitulate and pay a settlement with the regulator, or fight it in court. Coinbase CEO Brian Armstrong made it clear the company would fight the complaint, tweeting that the process would prove “the SEC simply hasn’t been fair, reasonable, or even demonstrated serious purpose when it comes to its engagement. on digital assets.”
Six of eight celebrities touting crypto, including Lohan and YouTube prankster turned boxer Jake Paul – decided to write a check to the SEC after the regulator accused them of touting coins traded on the Tron blockchain without disclosing that they were paid to do so.
DeAndre Cortez Way – aka rapper Soulja Boy — and singer Austin Mahone didn’t settle. The celebrities are silent on the whole issue. (For what it’s worth, the only thing Soulja Boy was peddling this week on Twitter was a pink hoodie with a cartoon image of his smiling face. It’s definitely not a security.)
Of course, some of the alleged crimes went beyond just trading in unregistered securities. The case against Justin Sun and three of his Tron blockchain-connected companies also involves charges of fraud and market manipulation that artificially inflated token trading volume by encouraging employees to perform more than 600,000 so-called washout transactions. Sun wrote on Twitter that he believed the SEC’s complaint was unfounded.
Do Kwon’s US indictment, which came shortly after his Thursday arrest in Montenegro, also revealed that the government believes the collapse of its Terra blockchain project was more than just a $60 billion crash. Prosecutors say Kwon also engaged in market manipulation and misled investors about aspects of the project. His U.S. attorney did not respond to a Bloomberg request for comment.
By the end of the week, everything had started to look like a drama that could be called “Law & Order: Web3”. So what will the next episode entail? Many industry watchers are bracing for more shoes to drop.
“Overall, I expect we will see more law enforcement news like this in the future given that we operate in an environment with little or no regulatory guidance,” said Campbell Harvey, a finance professor at Duke University.
For crypto optimists looking for a silver lining, it’s all about looking to the future instead of dwelling on the ugliness of the past week. The latest dramatic episode in the market “tells us nothing,” says Aaron Brown, a crypto investor who writes for Bloomberg Opinion
“Useful attention should be paid to new ships preparing for departure, those that will lead the next boom,” he said. Many of the developments over the past week were just “the wrecks and jetsams that ran aground long after the storm passed”.
Or maybe Soulja Boy put it better back in its MySpace days when it rapped: “On the Internet, I blew them off the wall.”
— With the help of Emily Nicolle