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After the Bell: Has the worst storm in the cryptocurrency industry passed?


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    In New York, the crypto trial of the …. you know … something is taking place. Former FTX CEO Sam Bankman-Fried, a name I still find childishly amusing, is standing trial, charged with one of the biggest frauds in financial history. The legal proceedings have, among other things, put cryptocurrency, blockchains, crypto coin releases, the auditing of crypto exchanges and many other things related to the industry in the dock.

    So, obviously, cryptocurrency has lost value. Actually, not so much. Bitcoin, for example, is up by 100% year to date and is now trading at more than $35,000. Ether less so, but it too is up, by 50% year to date. How is this possible? It’s hard to imagine a more negative publicity campaign than the trial of a CEO who once presided over the second-largest cryptocurrency clearing house.

    The most proximate reason is that the US financial authorities seem to be warming to the idea of allowing crypto exchange-traded funds (ETFs) — partly as a consequence of some US court decisions on the seemingly arcane issue of whether or not cryptocurrency is a security. The courts in the Grayscale Investments case and the Ripple case both found it is not a security, like, for example, shares in a company.

    The decisions might be abstruse, but the significance is not. If they are considered securities, then exchanges must seek licences from securities regulators, which typically have a very demanding set of requirements, financial and otherwise. 

    So, this may be a bullet dodged by the industry, although the courts’ findings are being appealed against. In the interim, several players have approached the US Securities and Exchange Commission (SEC), seeking to become digital asset custodians. These include big names like Deutsche Bank. Other big-name financial players such as Charles Schwab, Fidelity and Citadel Securities have launched digital exchange services, which in effect means they facilitate client trading.

    And then some big asset managers, including the largest of them all, BlackRock, have applied to the SEC for a bitcoin ETF. This would effectively allow its clients to invest quickly and easily in a financial product which would mirror the rises and falls of bitcoin itself. 

    All of these events have counteracted the terrible news flow from the Bankman-Fried trial. But why is the SEC apparently changing its approach? I think it’s the old story of rather having your enemies inside the tent pissing out than outside the tent pissing in. I suspect US financial authorities are worried about how citizens could be defrauded or duped in the process. But, allowing established financial brands to perform the services might go a long way to clean up the industry, because these brands are not going to put their reputations on the line unthinkingly. At least we hope not.

    This doesn’t, however, change the essential problem for crypto, which is its limited use case. James Lanigan, the CEO of Luno, one of SA’s biggest crypto trading platforms, makes the point in a recent press release that despite unhelpful regulatory developments in the US, there have been “positive and progressive movements” in the 40 other countries in which Luno operates.

    “Europe introduced the Markets in Crypto-Assets regulation in 2022, and in South Africa, crypto asset providers have applied for licences from the FSCA [Financial Sector Conduct Authority] following the classification of crypto assets as financial products,” he says.

    Investment is still currently the most common use case for crypto, he acknowledges, but trading turnover has been stable. In SA, for example, owners hold on to their crypto for around seven months, which is longer than the global average. 

    Lanigan points out that many people are now using crypto as a hedge against political or currency instability or inflation, holding it as a store of value. It’s noteworthy, he points out, that Luno’s strongest markets are emerging markets.

    There have also been some incremental steps forward in using crypto in transactions, but Lanigan says the important thing to remember is that the crypto industry is still in its infancy and adoption rates are still relatively low.

    For me, the big question is not so much around the regulatory environment or even transactional use, but whether the focus of the tech and the investment industries has just moved on to artificial intelligence. In some ways, that could be a good thing: crypto might benefit from a quiet period. But Lanigan’s suggestion, I suspect, is that if adoption rates increase then it’s more likely the industry will stabilise and the value of the coins will rise.

    We are going to have to wait to see whether that assumption is correct. DM

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