important point
- Crypto.com closed US institutional exchanges this week, citing lack of demand
- Cryptocurrencies are becoming impractical for financial institutions as the regulatory environment has deteriorated significantly in the U.S.
- Last year’s macro photography and space-wide scandals also contributed, writes our head of research Dan Ashmore.
I put this together two months ago piece We analyze institutional and cryptocurrencies. Specifically, we asked whether institutional money had flowed out of the industry.
This weekend we have the latest evidence of just how violent the outflow of institutional money is. Crypto.com has announced that it will close its institutional exchanges in the US, citing lack of demand. The retail platform will continue to operate, but the institutional platform will no longer operate.
This is no surprise. The announcement came amid an increasingly hostile regulatory crackdown taking place in the United States, so it wasn’t even timed. Binance and Coinbase were sued by the SEC last week after growing concerns that cryptocurrencies could flow offshore.
But regulation is not the only reason for institutional funding, although it is an important factor.
macro environment
During the pandemic boom, we saw Tesla announce it would buy bitcoin to maintain its balance sheet (and then sold most of that bitcoin). We have seen fund managers on TV on a daily basis discussing the growing demand from clients to offer Bitcoin investment vehicles. Bitcoin spot ETFs were rumored to be coming soon.
Eighteen months later, things are a little different. Despite gaining 55% this year, Bitcoin is still 60% away from its peak as markets across the financial system struggle.
This follows the move to a tighter monetary policy, the first of its kind in Bitcoin’s lifetime, which began in 2009 and remains at underground interest rates for the next decade. be.
Rising interest rates have pushed financial institutions back on the risk curve. Unlike near-zero interest rates that have been offered for most of the last 15 years, today’s treasury bills offer his 5%, which is a viable alternative. This alternative and the siphoning of liquidity from the system in the hopes of curbing rampant inflation has kept prices of all risk assets in check. The tech-heavy Nasdaq has shown this well, losing a third of its value last year. Bitcoin is even more risk-on than tech products and as a result has a hard time raising money.
reputation
The macro picture is outside the control of the cryptocurrency industry, but perhaps the most concerning development is damage to its long-term reputation. Last year saw the dramatic collapse of the UST stablecoin, part of the once-thriving $60 billion Terra ecosystem. After that, Celsius, Voyager Digital, and many cryptocurrency financial institutions were involved in the spread of infection.
But perhaps it was the shocking November demise of FTX, led by the infamous Sam Bankman-Fried, that was the highlight. The exchange tycoon has lobbied Congress on behalf of the industry, graced the front pages of magazines, and wowed Wall Streeters with his charisma and willingness to rise to the top of cryptocurrency.
it was all a lie. For some, it may have been the straw that broke the camel’s back. When Bitcoin bull Kathy Wood worries about the impact on financial institutions, she knows there’s a problem. ing).
“One of the delays is probably just agencies stepping back and saying, ‘Okay, do you really understand?'” Wood said in an interview with Bloomberg last year.
regulation
Whether financial institutions see cryptocurrencies as having a tarnished reputation or see macroeconomic conditions making cryptocurrencies less attractive to administrators, regulatory issues are a pressing issue. is. Even if financial institutions want to buy, the U.S. crackdown could make it significantly more difficult. And the greater the friction, the less likely mass pick-up.
There are very real concerns that the U.S. crypto industry is shrinking to the point that companies are forced to move elsewhere.as i wrote last week, I don’t think any particular counterparty in the cryptocurrency industry has helped itself (and that leads to my aforementioned point about reputation), but whether it’s due or not, in a way doesn’t matter . It’s happening, and that’s all that matters.
For financial institutions, that means buying becomes increasingly difficult. While no one is sure if Ethereum is a security and exchanges wanting to buy Ethereum are fighting lawsuits from the SEC, what funds would be willing to load into Ethereum?
final thoughts
There is nothing particularly groundbreaking about this work. All these developments are clear. There are no graphs, minimal data, and little beyond obvious guesswork. But in a way, that’s the point. The changes in this space over the last year have been remarkable, especially regarding institutional attitudes (which means beyond the crypto bubble!).
The crypto industry has had many ups and downs over the years, but the concern this time around is that while the rate of decline may be similar, the previous bear markets weren’t on such a big stage. The amount will be larger, but the reputational damage will also be larger. This was an important time for cryptocurrencies. Financial institutions had real interest in this as a reputable asset class entering the mainstream.
This could help Bitcoin separate from the crowd and carve out its own niche (more than ever), but it is still set back. But the real concern lies with the rest of the cryptocurrencies, which face a tougher battle to regain their legitimacy.
