Bitcoin Selloff and Comeback was Regulation Driven
Unless you've been under a rock over the past couple of weeks, you know that Bitcoin (BTC) got hammered recently and then made a heck of a comeback. See for yourself...
While volatility and fundamental factors are always at play, the big reason for the selloff was likely the China ban on crypto. Then the big reason for the comeback was likely the reassurance from U.S. regulators that they will not be following China's ban.
But that's not all. It's pretty clear that the comeback by BTC – and other cryptos – was due to the welcomed larger response from U.S. regulators: Not only will they not ban crypto, but they are also (finally) getting started with the job of figuring out how to regulate crypto. And in my book, that's bullish on the entire sector.
Here's what I mean.
Poor Regulation Needs to Change
I don't know about you, but when I think about regulatory clarity in the U.S. surrounding cryptocurrencies and blockchain, one word comes to mind:
There ain't none.
Ok, that's three, and poor grammar to boot.
But the fact is that U.S. regulators have dragged their feet on just about every facet of how they'll treat crypto. From the regulation of exchanges to tax policy to ETF approval, their inaction has been mind-blowing.
The good news is that soon may be changing.
U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler told Congress last week that he had no plans to ban cryptocurrencies. In fact, during the hearing, Rep. Ted Budd from North Carolina – a crypto advocate and member of the Congressional Blockchain Caucus – confronted the Chairman head-on and asked if the SEC had any plans to follow China's lead and ban cryptocurrencies. Unfortunately, Gensler's response was just as direct:
"No, that would be up to Congress."
Gensler went on to say that crypto regulation should include the need to regulate exchanges. In fact, they should "come in and register." When Rep. Himes pressed Gensler to provide clarity on decentralized (DEX) exchange regulation, Gensler said:
"Even in decentralized platforms – so-called DeFi platforms – there is a centralized protocol. And though they don't take custody in the same way [as centralized exchanges], I think those are the places that we can get the maximum amount of public policy."
And it isn't just Gensler and the SEC finally starting to do something about regulation: The Federal Reserve is also beginning to talk about getting up to speed.
At a recent hearing of the House Financial Services Committee, Federal Reserve Chairman Jerome Powell said that he had no intention to ban or limit the use of cryptocurrencies. But, again, Rep. Budd got right to the heart of the matter:
"So, Mr. Chairman, is it your intention to ban or limit the use of cryptocurrencies like we're seeing in China?"
Powell replied, "No."
But Powell added that stablecoins – which are cryptocurrencies pegged to government-issued currencies like the U.S. dollar -- would be subject to regulation. Stablecoins...
"Are like money-market funds, they're like bank deposits, but they're to some extent outside the regulatory perimeter, and it's appropriate that they be regulated."
Powell also rolled back his July comments, saying that he had "misspoke" when he said that "you wouldn't need stablecoins, you wouldn't need cryptocurrencies if you had a digital U.S. currency."
Crypto Regulation is a Good Thing... In Moderation
So, what are regulators likely to do?
First off, they need to get educated.
As we’ve extensively discussed here at INO.com, the technologies, platforms, and use cases around cryptocurrencies and blockchain are wide and diverse. Understanding, for example, the basic, but huge, differences between Bitcoin (BTC) and Ethereum (ETH) – the two biggest cryptocurrencies out there – should immediately impress regulators with how complex and intricate these assets are.
So, before regulators begin to slap on layers of rules, they need to understand what these assets do. And I don't have to tell you that they're not anything like stocks, ETFs, mutual funds, or even futures. They are their own beast and need to be regulated as such.
Once regulators get a thorough understanding of blockchain and crypto, potential regulation will likely hover around a few hot topics, including stopping cryptocurrency crime, tax evasion, exchange regulation, stablecoin regulation, and investment vehicles like ETFs.
And the fact is, I would welcome any regulation in these areas.
Why? The answer is simple. Right now, it's still the Wild West when it comes to crypto regulation. Rules are uncertain, murky, and poorly constructed. And while that lack of regulation may appeal to the egalitarian spirit of crypto, it scares investors. And when they're scared, they'll likely put their money in other asset classes. And that's bad for the whole sector.
Regulators also need to figure out how they are going to define cryptocurrencies. Are cryptocurrencies a security? A currency? A commodity?
Furthermore, what agency is going to take up the regulatory job? The SEC? The Fed? The CFTC? If they don't answer these questions correctly, regulation is likely headed into a quagmire surrounded by nasty agency turf wars.
Disclosure: This contributor may own cryptocurrencies mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.