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Is the US trying to kill crypto? [bbc.com]:

Is the US out to kill crypto?

Maybe.

Three years ago, the majority of the firms in the sector that Andrew Durgee's company invested in were based in the US.

This year, he estimates that just one out of every 10 will be - a reflection of his firm's judgement that the country has been growing increasingly hostile to digital assets such as cryptocurrencies and tokens.

"The administration really has a target on the industry," says Mr Durgee, managing director of the crypto division for tech firm Republic. "The regulatory uncertainty makes the investments in the US higher risk."

The sector was already under pressure, after prices of virtual currencies collapsed last year. Further damage came from the meltdown of several high-profile firms, including FTX, run by the so-called "Crypto King" Sam Bankman-Fried [bbc.co.uk], whom prosecutors have accused of conducting "one of the biggest financial frauds" in US history.

Jolted by the turmoil, US regulators stepped up their policing of the sector, which authorities say has been on notice since at least 2017 that their activity runs afoul of US financial rules intended to protect investors.

The campaign has yielded a steady drumbeat of charges against crypto firms and executives, alleging violations ranging from failing to register properly with authorities and provide adequate disclosure of their activity to, in some cases, more damaging claims such as mishandling of consumer funds and fraud.

Bitcoin, which represents the biggest chunk of value in a sector in which thousands of currencies have circulated, is viewed by officials as a commodity, like gold. That means it has been largely unaffected by the current regulatory debate, which hinges on the legal question of what constitutes a "security" - an investment like a stock or bond that is overseen by the SEC.

The efforts have instead ensnared firms issuing tokens or coins to raise money - and increasingly the exchanges on which such digital assets are bought and sold, which often hold customer funds, execute trades and engage in other activity that is separated in traditional finance.

The crackdown culminated this month in legal actions against two of the biggest platforms: Coinbase and Binance.

• US sues Coinbase as crypto crackdown widens [bbc.co.uk]
• Binance accused of 'web of deception' in US [bbc.com]
• Do Kwon: US regulator charges 'cryptocrash' boss with fraud [bbc.com]

Gary Gensler, the chairman of the Securities and Exchange Commission, defended the moves this month, comparing the state of affairs in the industry to the 1920s, before the US put in place many of the rules in question: "Hucksters. Fraudsters. Scam artists. Ponzi schemes. The public left in line at the bankruptcy court."

Will Paige, research analyst for Insider Intelligence, says sentiment has soured significantly since 2021, when the industry was worth more than $3 trillion (£2.4tn) by some estimates and seemed poised for wider acceptance.

"It's very much back on the fringe of finance," he says. "Trust in the system is battered and it's definitely gotten worse."

In the wake of the lawsuits, customers yanked billions of dollars of funds. US banks limited their work with Binance, forcing it to stop accepting US dollars and Robinhood, the trading app, said it would stop listing certain assets named in the lawsuits, citing the "cloud of uncertainty" surrounding the tokens.

Critics accuse the SEC under Mr Gensler of hostile "regulation by enforcement" aimed at boosting his own political profile.

They say that despite repeated efforts by the industry to propose new rules, the agency has refused to acknowledge the distinctions between different types of crypto firms and the characteristics of the technology, like decentralised automated processing, that challenge existing frameworks.

"It's been a very frustrating experience," says Bart Stephens, managing partner of Blockchain Capital, a venture capital firm that has invested in hundreds of crypto firms, some of which he says have been struggling to find banks willing to do business with them. "There is no doubt a regulatory attack is going on."

Bill Hughes, senior counsel of Consensys, a Texas-based software company that uses crypto's blockchain technology, puts it even more bluntly: "The SEC has essentially determined that on its watch crypto shouldn't exist in the United States anymore."

Whether the SEC's moves could actually kill the industry - in which by at least one estimate [pewresearch.org] one in every six Americans has invested - is another question.

Crypto's wider market value remains roughly a third of what it was at its peak. Trading volumes have plunged and developer interest is falling. Trust remains low [morningconsult.com]. The failures in March of some of the few traditional banks willing to do business with it marked a further blow.

Hilary Allen, a law professor at American University, thinks crypto is inherently susceptible to boom-and-boost cycles and manipulation by insiders, and thinks it should be banned. She says the SEC's actions could help re-confine crypto to the realm of tech enthusiasts, given the wider state of the industry.

"If we combine these enforcement actions with waning trust from the public, with possibly waning interest from venture capital, then maybe there isn't a future," she says.

But Mr Stephens, who has weathered two "crypto winters" already, says he thinks the future remains bright - if at risk of ending up overseas, given America's current approach, which is seen as less friendly than other jurisdictions, including the UK and the EU.

He points to Bitcoin's price, which is hovering around 2020 levels, but has gained significantly from the start of the year. Ether has also risen.

Some indicators tracked by venture firm and crypto-investor Andreessen Horowitz [a16zcrypto.com], such as the number of addresses active on blockchain and the number of smart contracts being executed, are also climbing.

"We're not seeing founders stop forming new companies or protocols," says Mr Stephens, who says Blockchain Capital invested more money in the first three months of 2023 than in any quarter in the previous 10 years, as prices fell and rival firms backed away from the sector.

Even if the sector thrives outside the US, losing the American market would severely limit its prospects, warns Gina Pieters, a crypto expert who teaches at the University of Chicago.

"It would be a mistake to think that the US… could kill the industry. It can absolutely, though, make the crypto industry smaller," she says.

Many in crypto are hoping for a reprieve - from the courts, which could decide the SEC has overstepped its authority; from Congress, where draft legislation for the industry is under review; or from a change in the White House, which could prompt a policy reversal.

However those questions get decided, the issues are finally coming to a head, says Angela Walch, a research associate at the University College of London Centre for Blockchain Technologies.

"We are at a real inflection point," she says. "The showdown is here."

• United States [bbc.com]
• Cryptocurrency [bbc.com]

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only-physical-money-is-real dept.

Federal Reserve Issues New Restrictions on Crypto Banking [nextgov.com]:

The Federal Reserve Board warned member banks that it intends to presumptively prohibit a large portion of cryptocurrency banking activity, as the demand for more guidance over digital assets has grown following rampant instances of fraud.

Outlined in a final rule [federalregister.gov] published on Tuesday, the Board of Governors of the Federal Reserve System offered an interpretation of section 9(13) of the Federal Reserve Act to govern the use of digital assets within the federal banking ecosystem. That section specifically applies rules set by the Federal Reserve for member banks, dictating the banking activity state depository institutions are legally able to conduct as only that which is also permissible for national banks.

Federal Reserve member banks consist of financial institutions at the state level that meet the operational requirements of the Federal Reserve System, and are overseen by the 12 designated regional banks across the U.S.

The rule issues two directives pursuant to the Federal Reserve’s existing laws: that the Board will “presumptively prohibit” member banks from holding most crypto assets, and that member banks wishing to utilize dollar tokens will need to prove certain security measures and receive formal approval prior to its use in banking transactions.

Both rules cite the “significant risks” associated with the cryptocurrency sector, including fraud, legal ambiguity and volatility.

“With respect to any novel and unprecedented activities, such as those associated with crypto-assets or use of distributed ledger technology, it is particularly important for a state member bank to have in place appropriate systems to monitor and control risks,” the rule reads [federalregister.gov], noting the ways in which most digital assets inherently prevent banks from ensuring such security.

“The Board believes this presumption is bolstered by safety and soundness concerns,” the Board notes. “The Financial Stability Oversight Council has observed that, in the absence of a fundamental economic use case, the value of most crypto-assets is driven largely by sentiment and future expectations, and not by cash flows from providing goods or services outside the crypto-asset ecosystem.”

The final rule continued that the volatility in most decentralized digital assets prevents financial firms from taking the necessary risk-management procedures associated with other forms of capital. Additionally, the inherent anonymity in cryptocurrency user transactions also poses security risks, particularly along distributed ledger technologies like blockchain.

Despite largely concurring that employing digital assets in the U.S. banking system poses security threats, the Board offered some avenues for potential incorporation.

The final rule notes that issuing dollar tokens along decentralized ledgers was also likely unsafe. However, member banks are eligible to receive a “supervisory nonobjection” from the Board provided they can demonstrate the ability to conduct safe banking with dollar tokens.

Commonly referred to as stablecoins, dollar denominated tokens differ from traditional cryptocurrencies in that they are pegged to the U.S. dollar, thereby presenting a lower risk in price volatility. Deploying dollar tokens along a distributed ledger software still poses a significant amount of cybersecurity and operation risks, according to the Board, namely among illicit finance activity.

“The Board generally believes that issuing tokens on open, public and/or decentralized networks or similar systems is highly likely to be inconsistent with safe and sound banking practices,” it said.

This decision opens a new chapter in the regulatory battle regarding the digital asset and crypto industry. President Joe Biden recently issued an executive order [nextgov.com] that spurred more research into cryptocurrencies’ effect on the broader economy, and money laundering [nextgov.com] via digital assets amid the ongoing Russia-Ukraine war has spotlit the security risks within the emerging technology.

The Board’s final rule regarding state bank operations with digital assets diminishes hopes of incorporating cryptocurrencies into the regulated economy, and is consistent with other recent actions of the Federal Reserve. In late January, the agency rejected [custodiabank.com] digital asset transaction firm Custodia Bank for membership as a subsidiary bank.

“Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks,” the bank said in a statement. “The Board’s denial is unfortunate but consistent with the concerns that Custodia has raised about the Federal Reserve’s handling of its applications, an issue we will continue to litigate.”

If CBDCs Are the Future of Money, What Does That Mean for Bitcoin? @themotleyfool #stocks $BTC $BAC [fool.com]:

The concept of a central bank digital currency [fool.com] (CBDC) -- digital money backed and issued by a central bank -- has been bubbling under the surface for the past few years. Now, it looks like it is ready to take off. The topic has already been debated at this year's World Economic Forum in Switzerland, and Bank of America(BAC [fool.com]) just released a report suggesting that central bank digital currencies have the potential to revolutionize the global financial system. According to that report, these digital currencies represent "the most significant technological advancement in the history of money."

In many ways, it's a question of when, not if, this transformational change is going to happen. According to the Atlantic Council, 114 nations around the world are exploring the introduction of CBDCs, and 18 of the G20 nations are in the advanced stages of launching one. So, if CBDCs are "the future of money," what does that mean for Bitcoin(BTC [fool.com])? After all, wasn't Bitcoin supposed to be the future of money?

Scenario 1: CBDCs fail to take off

While some nations -- such as China -- are well advanced in the pilot stages of their CBDC rollouts, other nations lag behind. The United States, notably, is far behind other nations when it comes to a CBDC rollout. In September 2022, the White House released a report titled "Technical Possibilities for a Central Bank Digital Currency," and it's clear there are a lot of potential stumbling blocks. For one, as the paper points out, there is concern about equitable access and what impact a "digital dollar" might have on the average U.S. citizen. There are also a number of purely technological issues to sort out.

For reasons such as these, it's easy to imagine a scenario in which CBDCs never really get off the ground, and Bitcoin emerges as the winner when it comes to digital currencies. In many ways, that was the vision that many people had for Bitcoin [fool.com] at the outset. For more than a decade, crypto enthusiasts have argued that Bitcoin should replace traditional fiat currencies. From this perspective, CBDCs are just reinventing the wheel. If you buy into this narrative, then Bitcoin is a strong long-term buy and hold, because it will be the future of money.

Scenario 2: CBDCs and Bitcoin coexist

Of course, it's possible central banks will manage to work out all the intricacies of CBDCs and launch them into the market. But that doesn't mean the average person is going to use them. For example, due to their complexity, CBDCs might just be used as tools to facilitate transactions between central banks and commercial banks, or as a way for the government to interact directly with citizens. But they might never go mainstream. For example, you might pay taxes with a CBDC account, or you might receive a stimulus check via a CBDC account, but you wouldn't shop online and pay for your purchases with your CBDC account.

This is probably the most likely scenario, simply because there could be a massive outcry from the private sector if any of today's major financial players -- such as commercial banks -- are disintermediated out of the system. And private citizens might respond quite negatively if they think CBDCs are being used by central banks to gain sensitive information or data about them, such as their precise spending patterns.

Scenario 3: CBDCs replace Bitcoin

In this scenario, CBDCs become a huge hit, people realize the limitations of cryptocurrencies such as Bitcoin, and cash disappears. In this potential future, the past decade will be seen as just a period of experimentation with digital currencies. Historians will say that Bitcoin helped pave the way for national CBDCs, but lament the fact that the original crypto has largely been relegated to the dustbin of history.

The possibility of a course of events like this may be a reason why some predict that Bitcoin will eventually go to zero. They realize the immense forces at work in the financial system, and the need for central banks and sovereign governments to retain their authority and power for this system to work. If you believe in the likelihood of this scenario, then Bitcoin is not a suitable long-term investment option, because regulators will eventually find a way to limit its scale and reach.

Is Bitcoin the future of money?

I'm bullish both short term and long term on Bitcoin. If you read through the technical papers about CBDCs, it's striking how cryptocurrencies already solve many of the problems that CBDCs are supposed to solve. For example, one big issue is financial inclusion, or the need to include everyone in a new digital financial system. What easier way is there than by empowering people to create their own mobile blockchain wallets [fool.com] in order to hold Bitcoin, such as they are already doing in El Salvador?

Ultimately, digital currencies have the potential to revolutionize the global financial system, as Bank of America suggests. The only question is who will be the ultimate winners here. Right now, I'm putting my full faith in Bitcoin. Governments are good at many things, but not at financial innovation.

Original Submission