Crypto is not immune to regulation, US crackdown is immensely hurtful

Key Takeaways

• The US regulatory crackdown continues, with Coinbase and Binance sued last week and a list of tokens declared securities by the SEC
• Crypto.com is shutting down its institutional exchange, citing lower demand following recent events in the industry 
• Retail will always be able to access crypto, but institutional capital will dwindle, which will dampen trajectory of industry going forward, writes our Head of Research

The great regulatory clampdown on the US crypto industry is in full flow. To some, they argue that crypto will be fine. This is just the latest hurdle in the road for an industry that has always fancied itself as the underdog, they say. Crypto is inherently decentralised, and besides, it can move offshore.  

For me, I’m not so sure. While I don’t believe that the SEC can shut down the entire cryptocurrency industry, I do think they can shut down the US crypto industry. And that represents a problem. That represents a big problem. 

The US is the biggest financial market in the world. Looking specifically at crypto, Triple-A estimates 45 million crypto owners reside in the US alone, behind only India and China. But the real story here may go beyond retail numbers. The real story may be institutional cash.

At one point in 2021, it seemed as if crypto was truly making a run into the mainstream and establishing itself as its own asset class. The ascent was upward, and for the first time in the history of crypto, there was a tangible movement from institutions into the space. Tesla bought $1.5 billion of Bitcoin for its balance sheet in February 2021. In June of the same year, El Salvador declared Bitcoin legal tender. Three months later, ProShares launched the first futures-based Bitcoin ETF, trading on the New York Stock Exchange under the ticker “BITO”. 

It was no longer a niche Internet toy for cryptography enthusiasts. This was a financial asset with tangible macro implications, and fund managers wanted to get involved. Demand was bursting. The aforementioned BITO became the most successful new ETF in history, attracting $1 billion (!) of inflows in its first week. 

Fast forward to today, and the trajectory is now the complete opposite. Not only have prices and volumes collapsed (BITO lost $1.2 billion of investors’ money in its first year, the worst debut year of an ETF ever), but crypto’s reputation has been tarnished by several high-profile scandals which have engulfed the space, most notably the collapses of FTX and Terra.

And now, regulators are putting the squeeze on. Whether you agree or disagree, the reality is that the law is coming down hard on crypto. The two biggest exchanges, Coinbase and Binance, were sued last week, and a raft of cryptocurrencies were declared as securities by the SEC. 

The effects are already being felt. Robinhood announced that customers will no longer be able to trade Solana, Polygon and Cardano.These were three of the tokens formally outlined as securities by the SEC last week. eToro announced similar this Monday – suspending trading for US customers of four cryptocurrencies: Polygon, Algorand, Decentraland and Dash. 

While these two moves affect retail more than institutions, the former is traditionally less sensitive to regulation when it comes to crypto. The reason why so many companies within the space were determined to launch Bitcoin ETFs was because regulation made it so difficult for funds to allocate to Bitcoin. For individuals, it was far easier. 

But with regulation pushing the industry out of the US – as it seems it is doing – this makes the prospect of investing in crypto far more awkward, especially for institutions. And beyond the sheer logistics and legality of it becoming tougher to wrap one’s head around, it also paints it a far less desirable light. 

What funds are going to allocate client money to a sector which has CEOs of the biggest companies calling the SEC out on Twitter? What funds are looking to buy into an industry that is facing new lawsuits seemingly every day? Don’t forget, this legal trouble comes off the back of a year in which prices have deflated spectacularly and scandals have been rampant. 

The sobering reality is that the regulatory crackdown is hurting crypto immensely, because it is becoming harder to imagine US institutions and “Wall Street” capital moving into the space. Over the weekend, Crypto.com even announced it was shutting down its institutional exchange, citing a lack of demand in the wake of events in the industry. Its retail platform will remain fully operational.

As I said above, I don’t think this is terminal for crypto. Especially for Bitcoin (if you still view that in the same category as crypto, which I personally don’t), it will likely be fine. But the trajectory which the entire space was on previously is no longer there. And if regulation continues to turn the screw in the US, the sector will be cut off from the biggest financial market in the world. Retail customers will still be able to buy crypto, albeit with more effort. For institutions however, it may not be that easy. 

Make no mistake, this is a massive problem for crypto, no matter what some cohorts may argue about decentralisation or any other kind of immunity the industry may inherently boast. The US market is too big, and even if crypto flourishes elsewhere, it will never reach the same highs without the US on board.