The crypto markets are facing unprecedented times. Crypto prices have been falling, crypto companies are announcing staff layoffs, cryptocurrency-based crime is on the rise and so are crypto-related legal cases. Are the crypto market wheels ultimately falling off?
The crypto markets went into a downward spiral following the collapse of the algorithmic stablecoin TerraUSD and its sister coin, LUNA, in May 2022. The TerraUSD/ LUNA collapse enhanced the earlier concerns about the credibility and the transparency of reserves backing stablecoins. Tether, the largest stablecoin by market cap, in its quarterly assurance opinion (as of 31st March 2022) on the strength of its reserves, revealed an overall increase in its US Bill Treasurys holdings and a reduction in commercial paper investments. The recent halting of withdrawals, swaps, and transfers by Celsius Network, the crypto lender, sent further uncertainty into the crypto markets.
Crypto markets are reeling from falling prices over concerns of tighter monetary policy. According to the US Bureau of Labor Statistics, consumer prices were up 8.6% from May 2021 to May 2022, the highest increase since the period ending December 1981. From mid-May until early June 2022, Bitcoin was trading at around $30,000 and Ethereum ( $2,000), Cardano ($0.8), XRP ($0.6), and Solana ($70). Prior to the Fed’s interest rate announcement of June 15, 2022, the price of Bitcoin plummeted to under $21,000, marking an 18-month low. The Fed announced a hike of 75 basis points in its key interest rate.
Following the Fed interest rate hike, the crypto markets have so far remained fairly stable. At the time of writing, Bitcoin is trading in the region of $19,000- $20,000 and Ethereum in the region of $1,000-$1,200, Cardano, XRP, and Solana at $0.44, $0.3, and $34 respectively. The Bank of England (BoE) has also raised its key interest rate by 25 basis points to 1.25% (June 16, 2022). Only time will tell how the crypto markets will ultimately react to these and other global interest rate hikes.
Crypto companies are feeling the heat too after a period of rapid growth. Staff layoffs and hiring freezes are in the pipeline. Within the past month, a number of staff lay-offs have been announced by BlockFi (20%), Coinbase (18%), Gemini (10%), and Crypto.com (5%). Staff layoffs and hiring freezes are aimed at managing costs and improving the efficiency of company operations.
According to the Chainalysis’ 2022 Crypto Crime Report, cryptocurrency-based crime hit a new all-time high in 2021, with illicit addresses receiving $14 billion over the course of the year, up from $7.8 billion in 2020. Most of the stolen funds reportedly occurred on Decentralized Finance (DeFi) protocols.
Crypto legal cases are on the rise with regulators, crypto companies, and individuals all getting a piece of the action. The US Securities Exchange (SEC) alleged that Ripple engaged in an illegal securities offering through the sale of its XRP token. This case has been ongoing since 2020.
Meanwhile, the digital asset bank Custodia has sued the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City over delayed approval for its application for a master account that would enable the bank to directly access the Federal Reserve payment system. Individual investors are also reported to be suing the co-founder and CEO and founder of Terraform Labs, Do Kwon, on charges of fraud over the TerraUSD /LUNA collapse.
Do the crypto markets have the resilience to overcome these recent spates of events?
Whereas staff lay-offs have been announced by some crypto companies, Binance, Kraken, and Ripple have announced plans to expand their business operations and hire new staff, citing growth opportunities.
Regulation has been fronted as a panacea to the ills of the crypto world. A bipartisan congressional bill to provide for responsible financial innovation and to bring digital assets within the regulatory perimeter has been introduced in the US but is only expected to become law after the midterm elections later this year or possibly in 2023. The European Union-wide crypto regulation is expected to take effect in 2024. As regulation is progressing at a different pace globally, it is a long-term solution to the current challenges of the crypto world.
Collaboration between law enforcement agencies and crypto companies will help to fight crypto crime. In February 2022, the US Department of Justice announced that the Federal Law Enforcement had seized $3.6 billion linked to the 2016 hack of the Bitfinex crypto exchange. In April 2022, Binance Exchange announced that it had recovered crypto assets worth $5.8 million from the Axie Infinity Hack. Collaboration with law enforcement will be supported by crypto regulation.
Education of the masses will also go a long way in creating awareness of the benefits and risks associated with cryptocurrencies. Educational resources offered by crypto companies and exchanges generally provide free cryptocurrency and blockchain training. Some colleges and universities are including courses on Blockchain Technology and Cryptocurrencies.
In early June 2022, in another initiative to increase crypto awareness, Block CEO (Jack Dorsey) partnered with Shawn Corey Carter (aka Rapper Jay-Z) to announce the launch of the Bitcoin Academy. The academy offers financial education to the rappers’ childhood community with a focus on Bitcoin and plans to expand to other neighborhoods.
So, are the crypto market wheels ultimately falling off? Well, probably not. As a fast-growing market, the crypto world will certainly have its own share of ups and downs. The recent spate of events is only a test of the crypto world’s ability to weather the storms that lie ahead. As crypto regulation comes into effect, the global framework for crypto is expected to become clearer. The hope of crypto enthusiasts is that a delicate balance will eventually be drawn between creating crypto regulation that will safeguard crypto market players adequately without stifling growth and innovation in the crypto markets.