What Does the Prospect of SEC Regulation Mean for the Market?
Following the publication of the DAO report in 2017, the US Securities and Exchange Commission (SEC) issued a statement stating that cryptocurrencies are investment securities. The statement implies that security trades are strictly regulated, which means that anyone who trades in cryptocurrency is breaking SEC investment laws.
It is obvious that the main reason for the cryptocurrency space’s rapid growth is the lack of clear regulations to follow. As it deepens its intent to enforce regulation in the sector this year, the SEC is now taking steps to ensure that the cryptocurrency market is regulated. According to Bloomberg, cryptocurrency exchanges and other digital asset platforms will be on the SEC’s radar in 2022. Since the Presidential Working Group (PWC) issued its findings on crypto assets, the SEC and other related bodies have been putting pressure on members of Congress to take regulatory and policy actions on cryptocurrency.
The SEC’s increased and intensified efforts to regulate the crypto market will undoubtedly alter the core of digital asset operations. BigONE anticipates the following changes:
New cryptocurrency projects bear the brunt
While the SEC first enforced regulations against ICO projects in 2017 as the sector has evolved, new projects in DeFi and NFTs have so far escaped investment law. These projects have positioned themselves as “decentralized” entities with no centralized authority. Despite this, the SEC still considers these projects to be investments, which means they are still subject to investment laws. On August 20, 2021, the SEC ordered a DeFi platform to remit $12 million in profits, and the founders each paid a $125,000 fine.
In mid-January 2022 SEC Chair Gary Gensler said he expected trading platforms would take pro-active steps to be regulated in order to ensure better protection for crypto investors. This was based on the existing regulatory principle that if you’re raising money from the public and the public is an anticipation of profit based upon
that promoter then that’s within the securities laws. It’s within the securities laws because the US Congress wanted to protect the investing public so that you have proper information and protect you against fraud, confirmed Gensler. “I’ve asked staff to look at every way to get these platforms inside the investor protection remit,” Gensler stated. “If the trading platforms don’t come into the regulated space, it’d be another year of the public being vulnerable.” Back in August, Gensler made the case for the US Congress needing to grant the SEC additional powers to regulate crypto.
Stablecoins receive closer scrutiny
Stablecoins are cryptocurrency tokens whose value is tied to fiat currencies. Most such pegged cryptocurrencies maintain and back up their value with a large reserve of cash and other low-risk assets. Notably stablecoin project Tether raised its market cap last year by minting its own tokens, minting at least 2.3 billion USDT since August 1, pushing the token’s market cap to $65 billion. It was fined $41 million by the Commodity Futures Trading Commission (CFTC) last year for misrepresenting its reserve.
While In July 2021 Treasury Secretary Janet Yellen met the President’s Working Group on Financial Markets to discuss stablecoins, “Bringing together regulators will enable us to assess the potential benefits of stablecoins while mitigating risks they could pose to users, markets, or the financial system,” Ms. Yellen said in a statement. While the startups issuing these stablecoins including Circle and Tether are responsible for assets that make them sizable players in the traditional capital markets, there are no clear rules about how the assets should be regulated to ensure stability, according to the Wall Street Journal.
Why regulation may be good news
According to the recent Alternative Investment Management Association report, on global crypto hedge funds, nearly half of hedge fund managers with $180 billion in assets under management (AUM) were considering investing in Bitcoin. And within terms of the main obstacles to investing, regulatory uncertainty was the greatest barrier (82%). So, it’s striking that the report found “64% of respondents said that if the main barriers were to be removed, they would either actively accelerate investment in digital assets.”
Considering the report’s identification of regulatory impediments to greater institutional involvement in crypto, despite the risks it’s potentially good for the current bear market that the US Biden administration is due to launch a government-wide strategy for digital assets, that will call on federal agencies to regulate digital assets such as bitcoin, ethereum and NFTs “as a matter of national security,” it’s been reported. The executive order will direct all relevant federal agencies to assess crypto’s opportunities and risks and submit their findings later in 2022. “This is designed to look holistically at digital assets and develop a set of policies that give coherency to what the government is trying to do in this space,” a source familiar with the White House’s plan told Barron’s, indicating the White House National Security Council, the State Department, Treasury Department, National Economic Council, and Council of Economic Advisers would all be involved.
Incoming regulation may well be good for the industry, and act as a catalyst for Bitcoin, according to MicroStrategy CEO Michael Saylor in a CNBC interview on February 2. “Additional regulatory clarity from the [Biden] administration is going to benefit bitcoin and accelerate institutional adoption of that asset,” Saylor said, because as a major bitcoin believer and holder he’s looking for “clear, bright line definitions of digital property versus a digital security versus a digital currency and the operating rules of the digital exchange.” Based on increased efforts and intent, BigONE believes that the SEC will prioritize regulating the crypto sector in 2022. While regulation is not inherently bad, it must be balanced and flexible to accommodate innovation and growth.
