In the last day, the ongoing cryptocurrency crash has attracted comments from multiple regulators, including the SEC and CFTC in the United States and Europe’s financial services commissioner. Bitcoin’s price continues to tumble, plummeting by a third in five days and nearing a major support threshold of $20,000. And it’s far from being the worst performing cryptocurrency.
The crypto crash continues
On Monday, centralized crypto lender Celsius Network confirmed it was pausing withdrawals. According to a Wall Street Journal (WSJ) report yesterday evening, the firm has hired restructuring attorney Akin Gump Strauss Hauer & Feld LLP. Late last year, multiple U.S. states issued cease and desist notices against Celsius, including New York, Texas, New Jersey and Kentucky.
The company had $11.8 billion in assets in mid-May and claimed 1.7 million users, which means many retail clients deposited stablecoins with the lure of high return rates.
A Celsius FAQ posted a few hours ago declines to say whether the company will honor withdrawals in future, in contrast to the statement two days ago when it said it was aiming to be “in a better position to honor, over time, its withdrawal obligations.”
Q: Will the withdrawal request I submitted prior to today be honored? When?A: Withdrawals, Swap, and transfers between accounts are currently paused. We will continue to share information with the community as and when it becomes appropriate.
High leverage rates have been a feature of the latest crypto boom, so there are likely to be more casualties. The transparency of public blockchains might not seem as attractive to those rapidly selling holdings to meet margin calls.
Rumors are swirling around crypto hedge fund Three Arrows Capital (3AC), a major backer of Luna and its associated failed Terra stablecoin. The sales of many of 3AC’s digital assets are being monitored on blockchain explorers in real-time. Its co-founder Zhu Su went from around 1,000 Twitter followers in mid-2020 at the start of the DeFi boom to more than 550,000 today.
In response to reports about failing to meet margin calls, Su tweeted, “We are in the process of communicating with relevant parties and fully committed to working this out.”
And the rout might not be over. Arthur Hayes, who received a suspended sentence in connection with operating the derivatives and crypto exchange Bitmex, tweeted that if Bitcoin breaks $20,000 or ETH drops below $1,000 there will be even more selling pressure. Earlier this morning, the price was within a couple of hundred dollars for Bitcoin but has since bounced a little.
Regulators chime in: SEC
Yesterday, Gary Gensler, SEC Chair, responded to questions about the crypto crash and regulation at a WSJ event. Asked about the urgency of regulation, he said, “the urgency is highlighted, but the urgency has been there.” In August last year, the SEC blocked Coinbase from launching a lending product, and Gensler has called out lending services as securities several times. The SEC reached a settlement with Celsius competitor BlockFi which agreed to pay $100m in penalties.
The SEC Chair was reluctant to comment on the recent bipartisan Lummis-Gillibrand bill, which would put the regulation of some cash cryptocurrency trading under the purview of the CFTC. However, he warned at a more general level of creating regulatory loopholes.
“We don’t want to undermine the protections we have in the $100 trillion capital markets,” said Gensler. “We don’t want our current stock exchanges, our current mutual funds, our current public companies to inadvertently by a stroke of a pen say I want to be non compliant as well, I want to be outside of this regime.”
CFTC on crypto
At an Axios crypto event yesterday, new CFTC Commissioner Goldsmith Romero chimed in on the regulatory gap. Former Commissioner Dawn Stump previously outlined where the CFTC’s authority lies. It regulates derivatives markets, whether the underlying instrument is considered a commodity or security. But it can only take enforcement action in cash markets where there’s a derivative based on a commodity.
“We’ve got a pretty sizable market that’s largely unregulated – regulators just have no window into it,” said Goldsmith Romero. “I am certainly of the opinion that I would like Congress to act to close the regulatory gap and give the CFTC greater authority beyond our anti-fraud authority into the spot market.”
Will the EU accelerate MiCA crypto regulation?
Also yesterday, EU Commissioner Mairead McGuinness who is responsible for financial services, financial stability and capital markets, said that enacting the EU’s MiCA regulations for crypto-assets was “something that is so urgent given recent developments.”
“Two events, but I might say three now, have shown that regulating all crypto-assets – whether they’re unbacked crypto-assets or so-called ‘stablecoins’ – and crypto-asset service providers is necessary,” said McGuinness. She believes the MiCA regulations are the right tool.
The EU’s legislative process involves a final set of three-way negotiations between the European Parliament, which has already voted on MiCA, the European Council (individual states), and the European Commission. She mentioned participating in MiCA trilogue discussions yesterday afternoon.
Never mind the rout in cryptocurrency markets, the specter of Celsius, at best, giving a haircut to potentially more than a million retail investors will mean legislation will come sooner or later. While it may appear to be late, the downside of rushing is the risk of enacting legislation that fails to sufficiently balance innovation with consumer protection.