‘We grew too fast’: Crypto faces accounts as market shakes

That could be said for the entire digital asset market, which has seen more than two-thirds of its value evaporate since peaking at $3 trillion last fall. As the Federal Reserve steps up its campaign to contain inflation, investors are shedding risky assets in anticipation of rising interest rates. The startups that soared during the stimulus-fueled two-year pandemic have begun to fall to earth.

The market drop is likely to temper expectations around a two-year lobbying campaign that has made digital assets one of Capitol Hill’s most visible industries. Crypto’s shrinking footprint could weaken a bid from major exchanges and developers to push for new, lightweight laws and regulations that they believe would allow blockchain-based businesses to thrive. And it could damage the trust the industry has built up in Washington — especially amid growing scandals at popular lending platforms where customer accounts have been frozen or wiped.

“When everything goes up, it hides a lot,” Caroline Pham, commodity futures trading commissioner, said in an interview. “From a regulator’s perspective, it really underscores that we just have to do something.”

Major stock exchanges and industry associations injected $9 million into Washington’s lobbying efforts in 2021, more than tripling their spending from the previous year, according to a report by watchdog group Public Citizen. This campaign accelerated through early 2022 and was amplified by tens of millions of campaign contributions from power brokers like FTX founder Sam Bankman-Fried.

But the battle to shape legislation and influence agency decisions aimed at tightening industry oversight is just beginning, and Caitlin Long, founder and CEO of a Wyoming-based crypto bank, said some companies of digital assets were themselves responsible for the rising heat of regulators. . The representations companies make to policymakers in Washington often amount to “regulatory theater,” she said.

“They know they exist in a regulatory gray area,” said Long, who is suing the Fed to open a master account that would put his bank under direct central bank oversight. For some crypto firms, “the strategy is to get as big as possible; become too large to be required to comply with regulations.

This strategy might be too big to work. Market regulators and law enforcement have already targeted areas such as insider trading, disclosure failures and investor protection issues. And regulators, including top brass at the Securities and Exchange Commission and the CFTC, have signaled that further investigations are likely.

“Hopefully we’ll use the turmoil of the past two weeks to see where we are from a regulatory standpoint,” said Robert Baldwin, former Treasury official and policy officer at the Association for Digital Asset Markets. . While the industry has built its credibility with policy makers, he said, recent events “are forcing people to step up and think about what’s going on. It also probably forces companies to be a bit more careful.

Meanwhile, with congressional attention divided by crises from Ukraine to inflation, the urgency to pass new crypto laws will likely fade as investors shun high-end digital assets. risk. Even with celebrities making headlines for crypto companies, a recent Fed survey found that only 12% of American adults had owned or used digital currencies in the past year.

The decline in digital asset markets, coinciding with losses in more traditional financial markets, is accelerating as hedge funds, crypto-based lending platforms and stablecoin issuers scramble for cash to to save their projects.

The latest explosion began last weekend after Celsius Network – a bank-like crypto lender that has promised annual returns of up to 18% on customer deposits – announced it was suspending withdrawals and services. crypto-for-crypto trading for approximately 2 million clients” due to extreme market conditions. The company, which did not respond to multiple requests for comment, is reportedly considering restructuring.

Celsius’ woes echoed those of TerraForm Labs – the startup behind an algorithmic stablecoin that collapsed last month – which had also attracted billions of dollars from retail traders and institutional investors in linking its token to a decentralized high-yield lending program.

The market downturn is also starting to bring down big crypto investment firms. Three Arrows Capital, a Dubai-based hedge fund, is reeling after scoring hundreds of millions in losses on its investments in TerraForm tokens and other declining digital assets.

Both companies have had run-ins with securities regulators. Celsius has been ordered by four state agencies to stop offering unregistered securities in the form of interest-bearing accounts, fearing the company may not be able to meet its obligations to depositors.

“Policymakers care less about ordinary shareholders and preferred shareholders; they care about those depositors first and foremost,” said Mike Boroughs, co-founder and head of portfolio management at blockchain investment firm Fortis Digital.

While some decentralized finance (DeFi) lenders — or more centralized firms offering access to DeFi-like returns — might offer cheaper alternatives to tightly regulated banks, the lack of institutional underwriting standards injects even more risk into crypto markets.

“If you’re offering a higher return by accepting worse loans, that’s just creating a 2008 subprime mortgage crisis in a different industry,” Boroughs said.

Crypto advocates have resisted these kinds of comparisons, arguing that standalone or community-governed systems that mimic the functions of traditional lenders and exchanges could become safer and cheaper alternatives. And, as of yet, no existing platform has been developed to the point where it could pose systemic risk to the economy.

Lawmakers and crypto proponents say market volatility could present an opportunity for some companies to shine a light on their practices as a potential model for future legislation or regulation. Meaning. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (DN.Y.) say their recent crypto bill — celebrated by the industry as a milestone — was shaped by some of the issues that arose in the wake of TerraUSD’s collapse.

“We’re kind of in this ugly duckling phase,” said Linda Jeng, a former Fed official who leads regulatory and policy efforts at the Center of the crypto industry-backed standards organization. Jeng said she looked forward to working with regulators to “develop appropriate proportionate rational rules and regulations.”

Still, the onset of more scandals could create hurdles for the industry as it tries to make that point around Washington — especially with new venture-backed platforms offering similar services coming out. of the treadmill.

“If you want to start a successful platform in this space, the current framework is just hugely ambiguous as to how you would go about it,” said Tomicah Tillemann, global policy director at Haun Ventures, a venture capital firm. which recently provided seed funding to a new DeFi lending platform. “We and others have been asking the SEC for clarification for a very long time, and they have absolutely failed to do so.”

SEC Chairman Gary Gensler says the rules for crypto lending are clear.

BlockFi, another platform that recently resisted layoffs, paid $100 million to settle claims that its yield-generating accounts were unregistered securities. Coinbase scrapped plans for a product that would have allowed customers to earn interest on their digital assets after a very public spat with the regulator last year. The agency reportedly investigated Celsius — along with several other crypto lending platforms — in the months before its clients’ assets were frozen.

An SEC spokesperson declined to say whether there were any ongoing investigations.

“Lending platforms operate much like banks,” Gensler said at an event on Tuesday, adding that trading platforms and exchanges offering exorbitant returns have largely failed to disclose enough information about their businesses. products to investors.

“If it sounds too good to be true, it might just be too good to be true,” he said.

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