As we approach the end of 2023, the crypto industry has undergone significant transformations. While the market anticipates that the SEC approval of crypto ETFs in early 2024 and the Bitcoin halving will trigger an unprecedented crypto bull cycle, the collapse of big crypto schemes has not yet been properly digested. Several high-profile insolvencies and legal battles have marked the fallout from the crypto hype between 2020 and 2022 and initiated the ongoing transformation.
The Big Crypto Cases
It was not until spring 2022 that the collapse of Terra-Luna‘s stablecoin scheme marked the beginning of the crypto winter. Within a few months, large and market-dominating schemes collapsed in a domino effect. Founders and managers were charged, convicted, and imprisoned. Settlements have been reached, but the crypto winter will keep the courts busy for months, if not years. Here’s an overview of the key developments:
- Terra-Luna Collapse: This was one of the largest market meltdowns, with the algorithmic stablecoin UST and token LUNA collapsing, triggering a series of bankruptcies and highlighting the vulnerability of algorithmic stablecoins.
- Voyager Digital Bankruptcy: Following the Terra-Luna collapse, Voyager Digital, a crypto broker, filed for Chapter 11 bankruptcy due to its exposure to Three Arrows Capital.
- Celsius Network Insolvency: This crypto lending platform faced significant challenges, including a massive drop in its liquidation price and large outstanding loans, leading to its bankruptcy filing.
- Three Arrows Capital (3AC) Liquidation: The collapse of 3AC, partly due to its losses in the Terra-Luna debacle, underscored the interconnectedness and risks in the crypto sector.
- FTX Collapse: The bankruptcy of FTX in November 2022 was a major event that disrupted the crypto market, with the arrest of its founder, Sam Bankman-Fried, on various charges, including wire fraud and securities fraud. FTX founder and former CEO Sam Bankman-Fried (SBF) has been convicted over fraud charges and is facing up to 110 years in prison. The sentencing is scheduled for February 2024.
- Binance $4.3 Billion Settlement: In a landmark event, Binance, the world’s largest cryptocurrency exchange, agreed to a $4.3 billion settlement with the U.S. Department of Justice, the U.S. CFTC, and FinCEN. This resolution addressed charges of violating sanctions and money-transmitting laws, with Binance founder Changpeng Zhao pleading guilty to related charges and stepping down as CEO. The settlement has significant implications for the industry, signaling a shift towards more stringent regulatory compliance for cryptocurrency exchanges.
- Coinbase‘s Battle with the SEC: Coinbase has been in a regulatory tussle with the SEC, pushing for clarity in rules governing the crypto sector and defending its practices amidst accusations of resisting regulation through a “revolving door” hiring strategy.
These cases have been pivotal for regulators, law enforcement, and crypto firms as they navigate the complex terrain of the crypto industry. The involvement of major firms like BlackRock signals a new era of institutional involvement and potentially stricter regulatory oversight. Despite regulatory crackdowns, the crypto market has shown resilience, with the total market cap rising and leading cryptocurrencies like Bitcoin and Ethereum approaching significant resistance zones. The developments in 2023 marked a critical juncture in the crypto industry’s evolution, underscoring the need for robust regulatory frameworks and responsible innovation.
The Challenged Crypto Regulation
The regulatory environment for cryptocurrencies has seen significant developments in both the European Union (EU) and the United States (US), especially in the wake of major crypto firm collapses between 2020 and 2022. These developments have been crucial in shaping the future of the crypto industry.
In the EU, the Markets in Crypto-Assets (MiCA) framework was finalized and approved in 2023, setting a comprehensive legal framework for crypto-assets. This legislation aims to create a harmonized regime for the issuance and provision of services related to crypto-assets, consistent with the international nature of these technologies. Key aspects of MiCA include the regulation of the issuance and trading of crypto-assets, licensing of crypto-asset service providers, and implementation of consumer protection rules. The MiCA framework is expected to be fully implemented by 2024 or 2025 and is seen as a significant step towards a unified regulatory environment in the EU.
In contrast, the regulatory landscape in the US, primarily overseen by the U.S. Securities and Exchange Commission (SEC), has been criticized for its lack of clarity, particularly concerning the classification and treatment of cryptocurrencies as securities.
The ongoing debate around “Security Tokens” and the SEC’s approach towards major crypto companies like Binance and Coinbase highlights the uncertainty and challenges in the US crypto regulatory framework. For instance, Coinbase has been in a regulatory tussle with the SEC, defending its practices against accusations of resisting regulation. This uncertainty has led some US-based crypto companies to shift their focus towards the EU, where regulatory frameworks like MiCA provide clearer guidelines and more certainty.
The differences in these regulatory approaches reflect a broader divergence in how the EU and the US are handling the evolving crypto industry. While the EU is moving towards a more unified and comprehensive regulatory environment with MiCA, the US continues to grapple with regulatory clarity and consistency, particularly around the classification of cryptocurrencies and related assets. These developments underscore the need for ongoing dialogue and potentially more harmonized regulatory approaches to foster a stable and thriving global crypto market.
