Crypto is not immune to regulation, US crackdown is immensely hurtful

Key Takeaways

• The US regulatory crackdown continues, with Coinbase and Binance sued last week and a list of tokens declared securities by the SEC
• Crypto.com is shutting down its institutional exchange, citing lower demand following recent events in the industry 
• Retail will always be able to access crypto, but institutional capital will dwindle, which will dampen trajectory of industry going forward, writes our Head of Research

The great regulatory clampdown on the US crypto industry is in full flow. To some, they argue that crypto will be fine. This is just the latest hurdle in the road for an industry that has always fancied itself as the underdog, they say. Crypto is inherently decentralised, and besides, it can move offshore.  

For me, I’m not so sure. While I don’t believe that the SEC can shut down the entire cryptocurrency industry, I do think they can shut down the US crypto industry. And that represents a problem. That represents a big problem. 

The US is the biggest financial market in the world. Looking specifically at crypto, Triple-A estimates 45 million crypto owners reside in the US alone, behind only India and China. But the real story here may go beyond retail numbers. The real story may be institutional cash.

At one point in 2021, it seemed as if crypto was truly making a run into the mainstream and establishing itself as its own asset class. The ascent was upward, and for the first time in the history of crypto, there was a tangible movement from institutions into the space. Tesla bought $1.5 billion of Bitcoin for its balance sheet in February 2021. In June of the same year, El Salvador declared Bitcoin legal tender. Three months later, ProShares launched the first futures-based Bitcoin ETF, trading on the New York Stock Exchange under the ticker “BITO”. 

It was no longer a niche Internet toy for cryptography enthusiasts. This was a financial asset with tangible macro implications, and fund managers wanted to get involved. Demand was bursting. The aforementioned BITO became the most successful new ETF in history, attracting $1 billion (!) of inflows in its first week. 

Fast forward to today, and the trajectory is now the complete opposite. Not only have prices and volumes collapsed (BITO lost $1.2 billion of investors’ money in its first year, the worst debut year of an ETF ever), but crypto’s…