As crypto thaws, regulatory questions may drive investment overseas

After a rough 2022 which saw the cryptocurrency market crash, coin prices are turning around and now nearing year-long highs. But now, advocates are worried that regulatory confusion in the U.S. may mean that new investment is going overseas.

“This is a global technology. Markets tend to overcorrect based on the United States,” said Sheila Warren, CEO of the Crypto Council for Innovation. “The global picture is really telling, and that’s what happened here.”

“Consumer confidence never left globally,” she added.

The two largest cryptocurrencies, Bitcoin and Ethereum, are up 82 and 59 percent since January, respectively, as Congress tangles with how to respond to last year’s collapse of the market exchange FTX and stability concerns in the wider crypto industry.

“The collapse of FTX last fall, and the subsequent shockwaves it sent throughout the crypto sector, revealed that the status quo is simply untenable,” Lee Reiners, a finance lecturer at Duke University and crypto critic, told the Senate Banking Committee in February.

Those hearings have resulted in a plethora of regulation proposals from lawmakers ranging from regulating crypto more similarly to stocks and bonds to attempts to better separate it from traditional banking.

While FTX’s collapse reduced confidence in the whole industry, it was not the only recent marker of instability. Earlier this year, a South Korean man was charged with manipulating the price on his cryptocurrencies Terra and Luna, which crashed last year.

Crypto-adjacent ventures like non-fungible token art have also seen massive boom and bust cycles in recent years. While major companies and celebrities launched NFT lines last year, the market for the digital assets is now nearly dead compared to its peak. 

All this feeds the debate over how to regulate cryptocurrencies, which straddle the lines of both investment vehicles and currencies.

Mixed messages from Congressional hearings have left the door open for regulators like the Securities and Exchange Commission to determine their own path for regulation without Congress, which had led to uncertainty among those in the industry, according to Blockchain Association lobbyist Ron Hammond. 

“It’s been pretty haphazard … what we’re seeing with the SEC and (Commodity Futures Trading Commission) in particular, they don’t even agree with themselves exactly which regulation makes sense,” he said.

Hammond criticized the SEC for levying enforcement actions against crypto firms no matter how closely they work with regulators, increasing costs and making it more difficult to invest in the American market. 

But those SEC notices are just the agency following the law, Reiners told The Hill.

Last month, the SEC published a warning for investors telling them to be cautious with cryptocurrency investments. Similarly, the Federal Reserve joined other agencies in leveling warnings to banks earlier this year, encouraging financial institutions to apply more thorough risk management to accounts involving cryptocurrency.

The Fed warning came after the collapse of crypto-heavy Silicon Valley and Signature banks, two of the largest bank collapses in American history.

“I don’t see a situation where developers are really clamoring to come to the United States or to start in the United States because it’s so confusing,” Hammond said. “We’ve seen companies now do their startups in Paris, Lisbon, England and Singapore because there they at least know the rules of the road.”

“We’ve noticed (firms) go to countries that have rules in the books just because they know what they can and can’t do,” he added.

A study by crypto firm Electric Capital found that fewer crypto developers live in the U.S. now than years prior. Analyzing code database GitHub contributions, about 29 percent of crypto developers live in the U.S. now compared to 40 percent in 2017.

However, in that same time period the number of developers globally has increased nearly ten-fold, the study found, and that the number of developers continued to increase even as prices collapsed last year.

“The antipathy to crypto is a uniquely American phenomenon,” Warren said. “The U.S. is being uniquely myopic when it comes to this.”

But Reiners is more skeptical of the claims of “brain drain” in the U.S. crypto industry.

“I think that claim is exaggerated. And I think it’s intentionally used to try to motivate lawmakers in the U.S. to pass a regulation that’s favorable to the interests of the industry,” he said. “I just haven’t seen — it might exist — but I just haven’t seen evidence to support that thesis.”

Some of that antipathy is driven by simply not understanding the technology, Hammond said, who has worked with lawmakers on crypto legislation since 2017. Now, many more lawmakers are involved.

“The good news is that it went from three to five members who knew what this was back in 2017 to 100 or 150 now,” he said. “We are definitely seeing a trend now where it’s based on age largely. We’re seeing the younger members of Congress especially, and the regulators too, be a lot more open to the technology, the promise of it.”

Congress has moved from broad reform to a piecemeal regulation strategy due to the difficulty of passing large legislation in a divided body, Hammond said. That piecemeal strategy also lets Congress go slower and ensure that any passed regulation is actually effective, according to Reiners.

“The important thing from a regulatory standpoint is that we get it right,” Reiners said. “I view this more as a tortoise and hare situation.”

“The devil’s in the details,” he added.

Both Hammond and Reiners expect the most likely progress to be made on regulation regarding stablecoins, cryptocurrencies which are pegged to traditional currency and can be used, theoretically, as a stable financial asset.

Stablecoin regulation has been a priority of Rep. Patrick McHenry (R-N.C.), chair of the House Financial Services Committee. The Biden administration has also called for greater regulation of stablecoins, expressing concerns about their impact on the assets used to keep them stable.

“Stablecoins is a pretty common bridge between crypto and traditional finance,” Hammond said. “I think that’s a great way for members of Congress who may not know crypto to say, ‘At least I know traditional finance,’ to understand a little bit better what this is.”

As for the best interest of the industry while Congress considers legislation, Reiners believes that no news would be good news.

“I think they’re overly focused on regulation. Whatever happens there is going to happen, but the industry needs to be thinking about building tools, products and services that people actually enjoy and find useful,” he said.