Crypto regulation looms, but bitcoin rallies. Here's why
By Frances Yue
Hello! Welcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.
U.S. regulators have been doubling down on efforts to increase oversight of the crypto industry. Over the past few days, the U.S. Securities and Exchange Commission shut down crypto exchange Kraken's staking program, issued a Wells notice to warn stablecoin issuer Paxos it could face an enforcement action, and proposed a rule that could make it harder for many asset managers to invest client money in digital assets.
Still, bitcoin posted a major rally since Wednesday, up more than 14% to trade above $25,000 briefly Thursday, at the highest level since June, according to CoinDesk data. Several other major cryptocurrencies also went up, with ether reaching as high as $1,740 on Thursday, the loftiest level since September.
In this installment, I caught up with a few industry participants to help explain potential reasons for the rally.
And as always, find me on Twitter at @FrancesYue_ to share any thoughts on crypto, this newsletter, or your personal stories with digital assets.
Why crypto surged?
"I don't see any fundamental reason for the strength in crypto asset prices" over the past two days, said David Tawil, president and co-founder at ProChain Capital. It might be the crypto ecosystem's way of telling the SEC "do what you will, we'll keep doing what we're doing," Tawil said.
Still, recent actions by U.S. regulators could have been worse, particularly after the collapse of crypto exchange FTX in November resulted in billions of dollars in customer losses, said Ian Weisberger, co-founder at CoinRoutes. "It would have been 10 times worse had the SEC come out and ask Coinbase to delist all these coins saying because they're securities," said Weisberger.
The SEC has been targeting specific companies, but hasn't issued any outright ban on crypto services, Weisberger said. "I think people are realizing now that even the SEC knows that they can't overstep because they would fear backlash, like they can't go too far," said Weisberger.
James Butterfill, head of Research at CoinShares, said a recent survey by the firm showed that the SEC's actions are a top concern among investors, while fear over a government ban has decreased.
"The regulation rather than ban narrative is in some ways a positive outcome as it will help legitimize the crypto industry," Butterfill wrote to Distributed Ledger over email.
From a technical perspective, bitcoin's midweek rally squeezed some traders' short positions, with the resulting momentum carrying the cryptocurrency above the $24,000 resistance level, said Jan Sammut, vice president of marketing at Origin Protocol.
It's also worth noting that in the latest rally, bitcoin outperformed most other crypto, noted Weisberger. "Reading between the lines, we think that the SEC acknowledges that bitcoin specifically is not under their jurisdiction, but proof of stake coins like Ethereum, as well as staking & lending products are," said Weisberger.
SEC Chairman Gary Gensler has said bitcoin is the only cryptocurrency he's prepared to publicly label a commodity."
Bitcoin's recent strength also contrasts with the stock market's weakness on Thursday, even though the two assets often traded in tandem. The Dow Jones Industrial Average closed down 1.3% Thursday, and the tech-heavy Nasdaq Composite dropped 1.8%.
SEC's proposed rule
The SEC voted 4-1 Wednesday on a proposal that would expand the types of assets that investment advisers are required to hold using qualified custodians, according to a report by The Wall Street Journal.
The rule could make it more challenging for some firms to custody crypto assets, and narrow the scope of firms that registered investment advisers can work with when they invest clients' money in crypto, according to Christopher Avellaneda, partner at law firm Schulte Roth & Zabel.
Proposed SEC rules are usually open for comments for 60 days after publication, Avellaneda noted.
Paxos ceased minting BUSD
Paxos said Monday that it would stop minting new BUSD, a dollar-pegged crypto issued by the company and branded by the world's largest digital asset exchange Binance, following an order by the New York State Department of Financial Services required it to cease minting it.
The stablecoin issuer also said it received a Wells notice from the SEC on Feb. 3. The notice said the SEC is considering recommending an action alleging that Paxos failed to register BUSD, as a security.
Read:Crypto exchange Binance hit by major outflows. Here's why
Kraken ends staking in the U.S.
Last week, the SEC charged crypto exchange Kraken with failure to register its staking program as security. Kraken has ended its staking program in the U.S. and agreed to pay $30 million to settle the charges, without admitting or denying the allegations, according to a Thursday statement.
Read: Crypto staking: what it means, why it matters, and how a crackdown will change investing.
Staking, which allows users to earn rewards by using their existing holdings of tokens to verify transactions, is a feature of proof-of-stake blockchains, such as Ethereum , Solana and Cardano .
Read: Crypto industry fears a staking ban, as some turn to bitcoin: 'It has always been on the safe side of regulation'
Crypto in a snap
Bitcoin gained 10.7% in the past week, and was trading at around $24,484 on Thursday, according to CoinDesk data. Ether advanced 7% in the same period to around $1,680.
Biggest Gainers Price %7-day return Floki $0.00006 109% Bitget Token $0.49 98% Mina Protocol $1.08 31% Loopring $0.47 25% WhiteBIT Token $4.10 24% Source: CoinGecko as of Feb. 16 Biggest Decliners Price %7-day return PancakeSwap $4.10 -12.2% Chiliz $0.14 -11.8% The Sandbox $0.76 -11.5% Axie Infinity $10.65 -10.8% Frax Share $10.93 -10.8% Source: CoinGecko as of Feb. 16
Crypto companies, funds
Shares of Coinbase Global Inc. (COIN) gained 10% for the week to around $65.36. MicroStrategy Inc. (MSTR) rallied 14% thus far on the week, to $284.80.
Crypto mining company Riot Blockchain Inc. (RIOT) surged 12.6%, to $6.43, as of Thursday. Shares of rival Marathon Digital Holdings Inc. (MARA) were up 22% to $7.21, over the past week. Ebang International Holdings Inc. (EBON) advanced 16% over the past week and was trading at $8.35.
Overstock.com Inc. shares (OSTK) went up 5.2% to $21.65, over the week.
Shares of Block Inc. (SQ), formerly known as Square, obtained 3.2% to $78.52 for the week thus far. Tesla Inc. shares (TSLA) dipped 2.6% to $201.00.
PayPal Holdings Inc. (PYPL) slid 2.2% over the week, to trade at around $76.80. Nvidia Corp. (NVDA) lost 1.5% at $219.81 for the past week.
Advanced Micro Devices Inc. shares (AMD) went down 3.8% to $80.15 for the week.
Among crypto funds, ProShares Bitcoin Strategy (BITO) jumped 12.8% over the week to $15.36 Thursday, while counterpart Short Bitcoin Strategy ETF(BITI) plunged 12% to $25.91. Valkyrie Bitcoin Strategy ETF (BTF) marched 12.8% over the past week to $9.76, while VanEck Bitcoin Strategy ETF (XBTF) rose 13% to $24.84.
Grayscale Bitcoin Trust(GBTC) gained 13% for the past five days to $11.89 on Thursday.
(END) Dow Jones Newswires
February 16, 2023 17:34 ET (22:34 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.