Cryptos like bitcoin are attractive investments for investors searching for alternatives to traditional stocks, bonds and mutual funds. Unfortunately, however, the crypto sector is also plagued by fraud and lack of regulation, raising concerns over tax evasion and cybersecurity among other issues. Furthermore, its wild price swings and high levels of volatility can devastate investors; more worryingly still is its volatile price action that caused FTX Exchange’s recent collapse – another reminder of just how unpredictable and volatile its industry can be.
However, its collapse was only one domino in a chain that started when high levels of volatility caused the value of several prominent cryptocurrencies to decline and lead firms to borrow heavily – leading them down a path toward failure such as that seen at Three Arrows Capital and Voyager which couldn’t repay their lenders (often other crypto firms), who in many instances also became lenders themselves – this being one key flaw with crypto: its highly interconnected nature makes its failure inevitable for other firms in its ecosystem.
These problems have prompted regulators to increase enforcement actions against crypto players, including Binance founder Changpeng Zhao and Kim Kardashian who settled with the Securities Exchange Commission for touting EMAX tokens. Furthermore, new rules may be created in order to better regulate this sector.
At first, this may appear as a blow against innovation in crypto, but in reality it’s a positive development. According to Reiners – also an adviser of blockchain firm Factom – an unregulated industry would allow people to invest without protection, leading to potentially disastrous outcomes.
Many investors perceive cryptocurrencies as democratic forces that wrest power away from Wall Street and central banks, while critics assert they foster criminal activity, inflame inequality, and consume enormous amounts of energy. Regulators around the globe are grappling with how best to respond; some embrace cryptos while others ban them outright.
SEC’s Gensler has stated that most cryptos fall under its purview, though creating rules will take more time than anticipated.
As investors test the market’s appetite for stablecoins with their peg to the dollar, some are testing whether people will accept stablecoins whose value remains pegged to it. USDT dropped below parity last week, leading some investors to withdraw funds from it and risk further losses as confidence in stablecoins evaporated quickly, according to Andrew Pesco of Domain Money’s head of investment management. “All it takes is pennies off its peg,” according to him.
Congress could provide another big test for crypto later this year when they vote on a bill giving the Commodity Futures Trading Commission more authority to regulate it, though political climate remains tenuous and even if passed, may take several months before taking effect. As with past deep downturns and strong recoveries, supporters of crypto remain hopeful for its spring revival.