‘Crypto is dead in America.’ How the FTX crash instigated a Biden crackdown on the digital asset sector.

'Crypto is dead in America.'  How the FTX crash instigated a Biden crackdown on the digital asset sector.

Few assets performed better in 2023 than cryptocurrencies, but the outlook for the sector in the US has arguably never been worse due to a large regulatory crackdown spearheaded by Securities and Exchange Commission chairman Gary Gensler.

The gravity of the situation is illustrated by cryptocurrency exchange Coinbases


Monday’s decision to take the SEC to court, demanding that the agency respond to a request filed last July to issue new rules to govern the regulation of digital assets, including a new framework for how the agency will identify which digital assets are securities and therefore which cryptocurrencies issuers need to register with the agency.

Coinbase does not take any controversy lightly, especially when it relates to one of our regulators, wrote Paul Grewal, Coinbase’s chief legal officer, in a blog post announcing the lawsuit.

Financial regulator Todd Phillips discussed on Twitter that the lawsuit will fail because the initial petition was filed only nine months ago, a very short timeframe for the federal regulatory apparatus, and because the best Coinbase can hope for is for the SEC to deny the petition.

As a legal strategy, Coinbase’s motion may not sound particularly compelling, but it could be an effective strategy to mobilize demoralized supporters of the cryptocurrency industry.

The lack of morale among crypto boosters was evident over the weekend when longtime bitcoin booster and billionaire investor Chamath Palihapitiya said cryptocurrency is dead in America, in response to a recent spate of regulatory actions against the industry, including the SEC which sent Coinbase a Wells notice signaling the agencies’ intention to initiate enforcement action against it.

to know more: Coinbase Stock Drops 16% After Crypto Exchange Reveals SEC Warning

US authorities have firmly turned their guns on cryptocurrencies, said Palihapitiya, who once predicted that bitcoin


would reach $200,000.

Crypto startups were probably the most threatening to the establishment, he added during an episode of his podcast. They were the ones who, in fairness to regulators, pushed the boundaries more than any other sector of the startup economy. So yeah, the bill is out for them.

Greg King, founder and chief executive officer of cryptocurrency investment firm Osprey Funds, which manages approximately $120 million in assets, said in an interview with MarketWatch that the fall of cryptocurrency exchange FTX in the fall was a moment of breakthrough that has really chilled a lot of receptivity, particularly on the Democratic side of the aisle towards the cryptocurrency industry.

Congresswoman Maxine Waters of California, the top Democrat on the House Financial Services Committee, told a hearing last week that following the collapse of FTX and other industry failures, she withdrew her support for a bill bipartisan law regulating stablecoins, saying they were starting from scratch, on the legislation despite her deeming a bill regulating stablecoins needed.

Stablecoins are a type of cryptocurrency that fixes its value to government-backed currencies such as the US dollar

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and are used by cryptocurrency traders to store undistributed assets. The vast majority of exchanges for cryptocurrencies such as bitcoin and ether


involve a stablecoin, according to the Federal Reserve.

Until May, the Biden administration was much more balanced in its statements about cryptocurrencies. The industry has acclaimed a Digital Assets Executive Order directing federal agencies to exploit the potential benefits of digital assets and their underlying technology.

Since that time, the Treasury Department has focused primarily on the perceived threats cryptocurrencies pose to government efforts to stop money laundering and the financing of illicit activities such as terrorism and drug trafficking.

Last August, the Treasury Department fined Tornado Cash, a decentralized finance (DeFi) protocol that allows users to obfuscate transactions on the Ethereum blockchain, for its alleged role in helping North Korean hackers launder ill-gotten proceeds.

The move has been criticized by crypto advocates as an abuse of a law that allows the Treasury to prevent U.S. people from transacting with sanctioned foreigners or foreign entities.

Earlier this month, the Treasury released a 40-page report outlining the threats it sees posed by such DeFi services, recommending the US government strengthen its oversight and enforcement against digital asset firms that facilitate the money laundering and terrorist financing activities.

Even President Joe Biden’s annual economic report, released in March, contained an entire chapter aimed at refuting claims that digital assets would benefit the US economy.

There was a lot of optimism about what would come of the executive order and it was hoped that it would serve as an indicator that the administration wanted to embrace the technology and establish clear road rules that would protect investors and consumers, Brett Quick, head of government affairs for the Crypto Council for Innovation, he told MarketWatch. Unfortunately that’s not what we’ve seen most recently.

Quick says there are still those in the Biden administration, like Commodity Futures Trading Commission chairman Rostin Behnam, who have taken a more industry-friendly approach, but that these overtures are controversial given the chairman’s increasingly hawkish stance. SEC Gensler.

Miller Whitehouse-Levine, managing director of the DeFi Education Fund, a DeFi advocacy organization, sees Gensler’s attitude towards the industry changed markedly early last year when he stopped asking Congress to approve legislation to prevent the decline of transactions, products and platforms. between regulatory cracks, as he did in an August 2021 speech.

Indeed, Gensler’s speech that day was consistent with more recent statements that the law is clear when it comes to which digital assets are securities and which are not, although the regulator has become more strident in his criticism of the industry. of cryptocurrencies.

I’ve been in finance for 40 years, one way or another, Gensler said in a hearing last week. I have never seen a field so non-compliant with laws written by Congress and upheld time and time again by the courts.

Whitehouse-Levine believes Gensler was emboldened by FTX’s failure and its effect on Democratic lawmakers and administration officials, in light of FTX founder Sam Bankman-Fried’s high-profile donations to Democratic lawmakers. (Bankman-Fried said in an interview after his downfall that he has given to both parties but hasn’t been public in his donations to Republicans).

I don’t think Gensler has gotten more motivated since the collapse of FTX, he said. I think he faces no more opposition to his agenda than him to ban cryptocurrencies in this country to a degree that he had before the FTX crash.

Gensler denied wanting to ban cryptocurrencies in public hearings with lawmakers and that he is simply trying to protect investors and create a level playing field between cryptocurrency companies and those raising money in traditional financial markets.

Congress has given the committee a mandate to protect investors, regardless of labels or technology used, Gensler told the House Financial Services Committee last week. Nothing on the cryptocurrency markets is incompatible with securities laws.

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