Editor’s note: Mergers & Money is a monthly column by Senior Reporter Chris Metinko that covers dealmaking and the flow of venture capital.
Things are so bad in the crypto world right now that even when the industry gets a small taste of good news, it’s followed by a heaping spoonful of real-life medicine.
It was just last week when much of the crypto world celebrated a proposed bipartisan Senate bill—sponsored by Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-NY—which seemed to put new regulations on the digital assets space that many in the industry supported.
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This week, that celebration turned to dread as Bitcoin—the largest cryptocurrency by market cap—hit a new 18-month low, tanking all of crypto’s total market cap below $1 trillion. The market instability even caused a major lending platform to halt withdrawals.
Such a week basically sums up crypto’s 2022 so far.
A modest proposal
The Senate proposal’s main takeaway is that it will categorize crypto as a commodity and under the purview of the Commodity Futures Trading Commission—not the U.S. Securities and Exchange Commission and its chair, Gary Gensler, who has issued warnings and offered skepticism about the digital asset market.
“The bipartisan legislation announced today by Senators Lummis and Gillibrand represents a milestone moment for crypto policy and a major step forward for the crypto industry in Washington,” said Kristin Smith, executive director of the nonprofit trade group Blockchain Association, in a statement. “Good policy is the result of good debate and good discussion.”
While the bill is just a proposal, it seemed cheered by an industry that knew some form of regulation was coming.
Price drops and asset freezing
Now it’s fair to wonder if that proposal was announced this week, would it be different?
Let’s get to crypto’s greatest hits this week alone:
- Bitcoin—the largest cryptocurrency by market cap—is down about 58% in the last six months, while Ether—the second largest—is down a staggering 73%.
- The “extreme market conditions” made crypto lending platform Celsius Network suspend withdrawals, swaps and transfers. The company pays interest on crypto deposits and loans it out for return, allowing users to bypass more traditional banks.
- That was followed on Monday by Binance, the world’s largest cryptocurrency exchange by trading volume, saying it is temporarily pausing Bitcoin withdrawals “due to a stuck transaction causing a backlog.” However, the company later blamed “repairing of several minor hardware failures on wallet consolidation” for the pause, not market conditions.
That type of market volatility and freezing—albeit in Binance’s case temporarily—of people’s assets is sure to not just catch the attention of regulators, but also politicians, as the government makes a point to look more closely at the crypto industry.
It was just in March when President Joe Biden signed his long-awaited executive order on crypto that seemingly stayed away from regulation and instead asked agencies to offer recommendations and quicken their own reviews of crypto.
While most of the talk about the proposed bill has been about categorizing crypto as a commodity and keeping it away from the SEC, the proposal also seems to address another very recent collapse in the crypto market that grabbed headlines everywhere.
The proposal requires stablecoin issuers to maintain reserves that back their digital asset—which seems to speak directly to the recent TerraUSD debacle and its fallout last month.
The proposed requirement would seem to affect algorithmic stablecoins—such as TerraUSD—which use financial engineering to maintain their 1-to-1 peg between itself and its backup assets.
Without TerraUSD’s collapse, it’s fair to ponder if such a provision would have been in the proposal? Now, as this week’s events brought the industry under an even greater microscope, might more additions or changes be made to the bill?
Those are fair questions. This emerging crypto winter is now starting to affect not just people who choose freely to invest in digital assets, but those who are employed—or at least were—in the industry.
The next day, crypto exchange Coinbase announced it is laying off about 1,100 employees as its shares get battered in the public market. In an email to employees about the layoffs, CEO Brian Armstrong pointed directly to how past crypto winters have led to a decrease in trading.
“We appear to be entering a recession after a 10+ year economic boom,” he said. “A recession could lead to another crypto winter, and could last for an extended period.”
- Crypto Market Tumult Drops Bitcoin To 18-Month Low
- Crypto Bear Market Here A While
- Mergers & Money: The Instability Of Stablecoins
Illustration: Dom Guzman
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