Crypto boom turns bust as regulators go in circles – The Irish Times

On Feb. 13, a mysterious QR code bounced like a pong ball onto nearly 37 million television screens in the United States and others around the world that were tuned in to watch the Super Bowl, urging smartphone users to scan and follow. a link. Paid for by cryptocurrency exchange Coinbase, it was one of several cryptocurrency-related commercials featured during what is arguably the biggest advertising event of the calendar year.

But less than four months after shelling out $14 million (€13.16 million) for prime time, Coinbase — a totem of the industry’s growing legitimacy following its initial public offering in April 2021 — has announced plans of losing 18% of its global workforce share in the face of a global cryptocurrency price meltdown. The company, which like many of the industry’s biggest players has its European headquarters in Dublin, shed more than 1,000 jobs in the following month, many of them in Ireland.

Such a crash would wipe out around $2 trillion from the overall market capitalization of the cryptocurrency industry since its peak in May 2021.

A sea of ​​red in the cryptocurrency markets would eventually engulf several high-profile victims as well, including algorithmic stablecoin Terra and Sam Bankman-Fried’s FTX exchange, as disgruntled investors moved to withdraw their funds and reduce their their losses.

Arrested in December on wire fraud charges for allegedly diversion of billions of dollars in customer deposits, the fall from grace of Bankman-Fried and FTX was the catalyst for further declines in values. Bitcoin, the cryptocurrency world’s flagship asset, is down more than 62% this year to $15,700, and 20% lower since early November, when the outlines of the FTX scandal were beginning to emerge.

After two years of soaring asset prices and a growing sense that the sector was perhaps on the verge of joining the financial mainstream, it wasn’t to be. In accounts filed in September, the Irish arm of Coinbase reported a more than 300% increase in after-tax earnings in 2021 to €2.7 million on revenue of €64.5 million. Following a pandemic-related boom in cryptocurrency prices, it and other exchanges like Binance had reaped the rewards, charging investors, many of them amateurs, fees for any transactions conducted via their platforms.

But the collapse in asset prices this year has also seen a decline in cryptocurrency trading volumes that began in the early summer of 2021, which has wiped out a portion of the estimated 22,000 coins and tokens on the market. As a result, exchanges like Gemini are bracing themselves for a run of much slimmer figures in 2022 as investor interest wanes, a phenomenon known in the industry as the “cryptocurrency winter.”

Inflation and its impact on the disposable incomes of retail investors that cryptocurrencies have attracted as of late, along with the general flight from risky assets, were also major factors behind the meltdown. But the collapse of FTX towards the end of the year is also making this latest crypto winter particularly harsh, if not existentially threatening. Bloomberg reported earlier this month that average daily trading volumes had halved between late October and early December as fears about contagion and the safety of customer deposits mounted.

“I think going so well over a period of time, [the correction] it was predictable in the sense that people probably thought it couldn’t last forever,” says Rachel McCausland, associate attorney at Taylor Wessing law firm, which has counseled cryptocurrencies and other disruptive technology companies. “But I don’t think anyone anticipated everyone the other factors which then led to the reduction we have seen”.

As 2022 draws to a close and winter sets in, the resources and ecosystem that supports the cryptocurrency industry are in tatters. But it wasn’t all bad news for the industry, at least on the regulatory front.

This year, Gemini and Coinbase registered as Virtual Asset Service Providers (Vasps) with the Central Bank of Ireland, bringing the US-listed cryptocurrency exchange under its oversight for anti-money laundering and criminal financing regulations. European regulators have long taken a stand-alone approach to cryptocurrencies, fearing that the volatility seen in asset prices and trading volumes could harm consumers or even spill over into the “mainstream” financial system if the asset class is dragged under. official supervision and treated similarly to other financial products.

Against this backdrop, the central bank continued to warn cryptocurrency investors about the dangers of the unregulated asset. “People should only invest their money in cryptocurrencies if they are willing to lose it all,” Governor Gabriel Makhlouf said in November, although the fallout from the cryptocurrency price crash this year on the broader financial system has “remained limited.” .

With the European Union’s vaunted Markets in Crypto Assets (Mica) regulations due to come into force in 2024, the question is how financial authorities can be seen to bring some semblance of law and order to the Wild West of cryptocurrencies without effectively legitimizing a a former fringe asset class that has exhibited such volatility, affected so many consumers and hobbyist investors, and suffered so much reputational damage in 2022.

The government is also keen to promote the development of the wider blockchain industry in Ireland, as outlined in its October revised Ireland for Finance strategy. All this makes the regulatory and political balance difficult.

“It’s a difficult space to regulate,” says McCausland. “I think the difficulty comes from trying to strike a balance between innovation, investor protection and market integrity. It didn’t take long and it’s a positive development. But the difficulty with this industry is that because it develops and grows at such a rapid rate, it is nearly impossible to keep up with regulatory developments. But [Mica] will go a long way.”

Not everyone agrees, however, and a number of MEPs recently expressed scorn over the Mica regime proposed in the wake of the FTX collapse, wondering loudly whether it would prevent a similar catastrophe from happening in Europe. The Council and the EU Parliament are still expected to ratify the package in the first quarter of 2023. Barring any delays, entities falling within the scope of the regulation will have 12-18 months to request authorization from a member state of the EU to the passport of its services throughout the bloc. With many of the largest and most well-known exchanges having their European base of operations in Dublin, central bank officials are predicting a busy year.

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