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How regulators killed cryptocurrencies

Assif Shameen
Assif Shameen • 10 min read
How regulators killed cryptocurrencies
Photo: Bloomberg
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Super Bowl, the annual final playoff game of the US National Football League to determine the league champion, is by far the biggest sporting event of the year in North America. With the highest TV ratings of the year, it attracts the biggest advertisers. Last year’s Super Bowl was dubbed the “Crypto Bowl” as giant crypto players shelled out millions.

Coinbase spent US$14 million ($18 million) for a one-minute ad of a QR code bouncing around the screen. Crypto.com’s ad featured Hollywood star Matt Damon crowing: “Fortune favours the brave.” An FTX ad had comedian Larry David, the co-creator of the TV series Seinfeld, urging viewers not to miss out on cryptocurrencies.

Expensive Super Bowl ads often signal the peak of an asset class. In the lead-up to the 2008 global financial crisis, US subprime lender Ameriquest had been a big advertiser. In early 2000, at the height of the tech bubble,14 dotcom companies were among the biggest Super Bowl advertisers. They all went belly up after the bubble burst just a few weeks later.

Like Ameriquest and the dotcom start-ups, FTX imploded late last year in what has been dubbed one of the biggest frauds in U.S. history. Its founder, Sam Bankman-Fried, is now awaiting trial on charges of cheating investors and looting customer deposits on FTX to make lavish real estate purchases, donate money to politicians and make risky trades at Alameda Research, his cryptocurrency hedge fund. Now regulators are trying to drive out Binance, the world’s biggest crypto asset exchange, and Coinbase, America’s largest crypto asset exchange.

In two days last week, June 5 and 6, the US Securities and Exchange Commission (SEC) commenced proceedings against Binance.com, its affiliated US exchange, Binance and Nasdaq-listed Coinbase. The price of Bitcoin, the biggest crypto “currency”, is down 15% since SEC unveiled charges against the two exchanges.

By moving swiftly against Binance and Coinbase, the US government has made it abundantly clear that it intends to shut down all forms of crypto trading within its borders. The regulatory action was part of a wider crackdown on the crypto industry, which Gensler has likened to the “Wild West”.

See also: Bitcoin developers are touting ‘programmability’ as the catalyst for the next rally

The SEC said Binance was commingling billions of dollars in user funds and funnelling them to a European company controlled by its China-born, Dubai-based Canadian founder Changpeng Zhao (or CZ, as he is popularly known).

The SEC also alleges that Coinbase acted as an unregistered broker and an exchange. “These trading platforms, they call themselves exchanges, are commingling several functions,” SEC Chair Gary Gensler said. “In traditional finance, we don’t see the New York Stock Exchange also operating a hedge fund making markets.”

Dramatic growth
Cryptocurrencies are digital financial instruments exchanged and recorded on public ledgers or blockchains that do not require central intermediaries like commercial banks or central banks for clearing and settlement. Users and transactions are public but pseudonymous, which means users’ identities may be obscured. Initially touted as payment tools, cryptocurrencies are mostly used as investments.

See also: Online casino guide platform finds Singapore ninth-most 'crypto-friendly' country globally

After dramatic growth over a decade that propelled it to a record high of around US$3 trillion by November 2021, the market capitalisation of cryptos fell to around US$750 billion a year later in what has been referred to as a “crypto winter.” The entire crypto ecosystem is currently valued at over US$1.3 trillion.

The most widely used cryptocurrencies are Bitcoin and Ether, which comprise nearly two-thirds of the market. Bitcoin functions as a unit of account and medium of exchange and relies on a proof-of-work consensus mechanism that rewards network participants or miners for their computational resources. Unlike Bitcoin, Ether uses proof of stake, a less energy-intensive consensus mechanism than proof of work. Ethereum also enables smart contracts that self-execute when participants meet some predetermined criteria. Because of its programmability, Ethereum is widely used for decentralised finance, or DeFi, projects that aim to mimic traditional finance without intermediaries.

Crypto has never lived up to its initial promise. It’s neither a store of value, like digital gold, nor something that might become a mode of payment. The dream of creating a digital currency that someday might replace the US dollar, or other fiat currencies, has always been illegal. Think about this: Why would the US government, or for that matter any government in Europe, the Middle East, Africa, or indeed in Southeast Asia, allow a cryptocurrency to exist or replace its sovereign currency, be it the US dollar, Euro, Japanese yen, Chinese renminbi, Singapore dollar or Malaysian ringgit?

Why would any President, Prime Minister, central bank governor, or regulator allow the killing of the country’s own currency only to be replaced by a digital currency over which they have no control? What makes a sovereign country? The way I see it, you need a government, defined borders, an army that defends those borders and a currency that can be used inside the borders by companies and individuals who can use it to buy and sell goods and services. Take the currency out and replace it with cryptos like Dogecoin or Shiba Inu or Bitcoin or Ether, and everything falls apart.

Crypto fans argue that governments and regulators closed an eye and allowed cryptocurrencies to proliferate for over 12 years, and as such, they have forfeited the right to outlaw them now. Yet a decade ago, just as cryptocurrencies were being launched, the Federal Bureau of Investigation (FBI) — the US federal police — warned that “it is a violation of (US) law for individuals to create a private coin or currency systems to compete with the official coinage and currency of the United States.”

What now?
How did we get this far and why was the crypto industry allowed to get so big? Regulators have hesitated to clamp down on cryptocurrencies until now because it was seen as a harmless sideshow. Law enforcement agencies moved in only when cryptos were used in crimes like extortion, theft, or money laundering. Little wonder, then, in that relaxed regulatory environment, cryptos prospered.

Even joke coins like Dogecoin and Shiba Inu are widely traded and created by crypto investors. US Federal Reserve-regulated crypto bank Silvergate recently went belly up. Exchanges like Coinbase were allowed to list on Nasdaq. On the day of its IPO, Coinbase’s market capitalisation exceeded US$100 billion. That’s more than the market value of listed Nasdaq, London Stock Exchange Group, Singapore Exchange S68 -

and Bursa Malaysia combined.

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Today, the market value of Coinbase is around US$12 billion, up from just over US$8 billion at its lows. At the height of the crypto boom in late 2021, Binance founder CZ was worth nearly US$98 billion, making him one of the world’s richest. His net worth has since fallen to US$10 billion.

In Silicon Valley, many venture capitalists and entrepreneurs bet blockchain technology would be as game-changing as the internet was two decades ago. They believed the US government would never ban a revolutionary technology and would indeed give crypto enough breathing room to thrive. They didn’t believe that America, the home of innovation, would crack down on something like blockchain or cryptocurrencies. Blockchain was an American technology that could be proudly exported worldwide, like the Internet, computers, or smartphones.

SEC Chair Gensler said last week that the world doesn’t need cryptocurrencies. “We already have digital currency. It’s called the US dollar. It’s called the euro or the yen; they’re all digital right now,” Gensler said in a TV interview after his move against Binance and Coinbase. “The lack of compliance by these crypto platforms means that you don’t have basic investor protections,” Gensler noted. “These are things like rulebooks and surveillance to prevent fraud and manipulation. Or appropriate custody and segregation of customer assets, so they don’t get misused or abused or simply become the property of the platform, especially if it goes into bankruptcy.”

If the SEC just wanted to enforce the rules, why did it wait so long to clamp down on cryptos? Gensler notes the delays in getting cases filed against the crypto platforms because “it takes time to do things by the book.” Investors, he argued, should be confident the SEC is attentive to risks in the digital currency world. “The investing public has the benefit of US securities laws. Crypto should be no different, and these platforms and intermediaries need to comply,” he said. “There’s no reason to treat the crypto market differently because different technology is used. We should be technology-neutral,” says the SEC Chair. The way Gensler sees it, all the SEC is doing now is enforcing the rules and telling crypto firms to work within a rather system.

Crypto companies like Binance, Coinbase and others have been betting they can operate while Congress formulated laws. A decade ago, ride-hailing firm Uber openly flouted laws with its illegal taxi service. Eventually, ride-hailing became so popular that governments changed the rules, and Uber became a legal operator.

Business as usual?
Crypto firms believed that, like Uber, they too would be allowed to remain in operation pending a retroactive change in the law. It was a “calculated economic decision”, as Gensler put it the other week. But here’s the thing. Taxis and currencies are two very different things. Taxis are not sovereign currencies.

SEC would not have moved so quickly and decisively against crypto exchanges had it not been for the implosion of FTX last November. The SEC’s main job is to protect investors. FTX implosion hurt hundreds of thousands of crypto investors in the US. Legislators and the American public were aghast. Was the regulator asleep at the wheel? So the SEC was forced to crack down hard.

So, what happens now? Americans won’t be allowed to trade cryptocurrencies once the cases against Binance and Coinbase are over. And it is highly unlikely that China, Japan, South Korea, Canada, Australia or any European country will allow their citizens to use crypto exchanges like Coinbase or Binance.

I am fairly confident that most Southeast Asian countries will follow the developed world by banning crypto exchanges, which will move to tax havens like the Bahamas, where FTX was headquartered in its final days. I will go out on a limb and predict that aside from Bitcoin and possibly Ether, most of the so-called “coins” will disappear. There will still be a few people who will own Bitcoin, but it will never be the promised “digital gold” or the replacement for the Singapore dollar, Malaysian ringgit or Chinese renminbi.

Crypto’s goose is cooked. The game is over. That doesn’t mean that blockchain is dead. Or that we won’t have digital currencies. We will soon have the digital US dollar, digital Euro and digital Yen issued by the Federal Reserve, European Central Bank and the Bank of Japan. The days of paper currencies are over. Underlying the central bank digital currencies (CBDCs) will be blockchain technology. Regulators are only killing cryptocurrencies, not innovation.

Assif Shameen is a technology and business writer based in North America

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