Crypto in the Interrogation Room

Crypto in the Interrogation Room

China stood out in September, 2021 when they slapped a ban on all crypto transactions, triggering a bitcoin selloff that lopped 8.9% off the biggest digital coin. However, China’s decision “reflects on similar concerns regulators globally are sharing surrounding crypto market integrity and its role in illicit activity”, suggested Chen Arad of Solidus Labs. The reasons cited by China’s central bank for the clampdown included fears of money laundering, fraud, and the environmental impact of bitcoin mining, which aren’t exclusive to Chinese authorities.

Last year, the US Securities and Exchange Commission (SEC) cracked down on crypto with force, even suing celebrities like Kim Kardashian for publicly promoting cryptocurrencies. The SEC is pursuing its attack on Ripple Labs for selling the XRP token without registering it as a security. And, Do Kwan, the CEO of Terraform Labs, actually fled rather than face authorities’ questions following the collapse of his Terra coin.

Needless to say, the November dissolution of the FTX crypto exchange did nothing to ease authorities’ touchiness on the point of crypto. John Ray, the man in charge of guiding FTX through its bankruptcy, said he had never before seen “such a complete absence of trustworthy financial information as occurred here”.  

It’s not surprising regulators feel the need to make it safe to invest in crypto assets, ward off thieves, and stop the pollution of our planet. But, regulating this market will not be straightforward, so how are they planning to pull it off?

Silvergate

The downfall of Silvergate bank in March 2023 “was triggered by emptier crypto markets following the FTX collapse as customers fled the chaos and… exchanges… scaled back”, explains the Boston Globe. The crypto market has a need for the banking services that Silvergate used to offer, but authorities have adopted a disapproving attitude to banks with business relations to crypto.

Some people question this attitude on the grounds that, if banks had free relations with crypto firms, they might be able assist in overseeing them, taking safe custody of customers’ crypto assets, and acting as tools for regulatory action against them. According to this view, US regulators are going to have to figure out an effective way to watch over crypto businesses and banks without stepping in the way of their business dealings.

According to Hal Scott of Harvard Law School and John Gulliver of Capital Markets Regulation, the SEC could improve matters by allowing large banks to hold crypto assets. Then, “banks and affiliated broker-dealers could offer their services to US investors in cryptoassets and to crypto exchanges”.

The EU and India

Analysts praise EU authorities for working towards “one of the first attempts globally at comprehensive regulation of cryptocurrency markets”, in the words of Akin Gump law firm. Their response to the crisis in the industry was to aggressively address all the main issues of consumer protection, money laundering, and environmental impact. Anyone who wants to issue a new stablecoin in the EU will have to prove they have sufficient capital to avert the coin’s collapse. Crypto miners will have to reveal the extent of their energy consumption, too. It's possible, however, that some of the new measures will only take effect from mid-2024.

In March, India included crypto assets in its Prevention of Money Laundering Act, which will require crypto exchanges to pay more attention to the transactions on their platforms, and report suspicious ones to the authorities. These are “baby steps” towards effective regulation, in the opinion of Rajagopal Menon of the WazirX exchange, but “It’s just a matter of time (before) you have serious laws coming into the place that govern crypto”.

Indian law-enforcers have recently arrested at least five people and confiscated $115.7 million in ill-gotten fund. Crypto exchanges are meeting with regulators to comply with legislation as much as possible. India, which is tough on digital assets, taxes crypto income at the steep rate of 30% and takes 1% from all crypto trades exceeding $121.

Wrapping Up

As to the possibility of outright bans on cryptocurrency, the managing director of the IMF (International Monetary Fund), Kristalina Georgieva, believes that such action could actually be appropriate if regulation ends up ineffective, or if it takes too long to come to fruition. She is particularly interested in cracking down on privately issued cryptocurrencies.

Crypto proponents are hoping that the inevitable wave of new legislation will leave room for innovation, but also respect their ethos of generating a democratic, indiscriminate financial system for all to freely access.

If you’re planning to invest in crypto or crypto assets, do so advisedly and only with funds you can spare. One way to invest in crypto without going to the lengths (and taking the risk) of buying it, is through trading CFDs of the prices of any crypto of your choice. It wouldn’t make a difference whether you expect prices to rise or fall because CFD trading allows for both “buy” and “sell” deals on a variety of cryptos.