Will the FCA, SEC and IMF inadvertently further legitimise Bitcoin?

Bitcoin’s chances of mass adoption could be unwittingly increased by the actions and words of regulators on both sides of the Atlantic.

The key adversary standing between Bitcoin, by far the best-known cryptocurrency, and mass adoption for commercial and personal use, lies in regulatory opposition.

bitcoin

In common with almost every coin, Bitcoin’s price has been exceptionally volatile when compared to regular fiat currencies. Worth $64,400 last November, it fell below the symbolic $20,000 watermark in July, before recovering to $23,000 today.

Further volatile patches seem inevitable given the wider economic background. A global recession now seems all but inevitable, which could see Bitcoin’s price fall even further. On the other hand, Bitcoin could now be at an attractive low for novice investors.

Moreover, if the key regulators get their wishes on firmer regulatory control, they could inadvertently promote Bitcoin as a reliable portfolio asset.

1) Financial Conduct Authority (FCA)

In a recent policy document, the FCA revealed it’s planning a ban on offering bonuses to clients who refer friends and preparing for new laws that could extend its powers to cover cryptoassets.

In April, then-Chancellor Rishi Sunak enthused he wanted the UK to become a crypto hub. But the recent market crash, including the collapse of TerraUSD, Celsius, and Three Arrows Capital, has led the FCA to become more determined to act on high-risk investing. This is particularly pertinent given the current political and economic uncertainty.

FCA executive director Sarah Pritchard argues ‘we want people to be able to invest with confidence, understand the risks involved and get the investments that are right for them…where we see products being marketed that don’t contain the right risk warnings or are unclear, unfair, or misleading, we will act.’

While the FCA advises that crypto exposure should be limited to 10% of assets as part of a ‘diversified portfolio,’ crucially, it says cryptoassets will likely fall under an intermediate regulatory category of ‘restricted mass-market investments.’

This means marketing to retail clients will not be banned, but there will be more limits than those applying to safer assets, such as equities.

But paradoxically, this half-measure could instil more confidence into nervous Bitcoin investors due to the additional regulation.

2) Securities and Exchange Commission (SEC)

Now conducting multiple investigations into crypto, including the $300 million Forsage Ponzi scheme and former Coinbase executives, SEC Chairman Gary Gensler recently published his thoughts on how the SEC will begin to regulate the crypto market in the US.

SEC Chairman Gary Gensler

Gensler notes that ‘when you trade on a stock market, you have certain protections’ including ‘against fraud, manipulation, running and the like.’ Now he wants to ensure that the ‘tens of millions’ of retail clients trading in crypto enjoy ‘similar protections’ that should exist on crypto platforms.

Accordingly, he wants certain tokens to be registered as securities bound by SEC oversight — and Bitcoin would be a prime candidate. Moreover, Gensler has ordered an investigation into whether crypto platforms should be separated from their market-making functions to prevent any conflicts of interest.

Key to this, he tweeted that ‘if a company builds a crypto market that protects investors & meets the standard of market regulations, people will more likely have greater confidence in that market.’

3) International Monetary Fund (IMF)

In an interview with Yahoo Finance, IMF director of monetary and capital markets Tobias Adrian warned the stablecoin sector remains exposed to a downturn, warning ‘some of the algorithmic stablecoins have been hit most hard, and there are others that could fail.’

The director specifically mentioned Tether (USDT), the largest stablecoin by market cap. He warned ‘there’s some vulnerability there, because they’re not backed one to one… some of the stablecoins are not fully backed by cash-like assets.’

Moreover, like his comrades at the SEC and FCA, Adrian remains in favour of regulating ‘the entry points such as exchanges and wallet providers to invest in those coins, that’s something that is very concrete and very feasible.’

In the IMF’s World Economic Outlook Update report, the fund noted that while the crypto market has experienced a ‘dramatic sell-off…spillovers to the broader financial system have been limited so far.’ This key fear seems to have been allayed for now.

This leaves international regulators seemingly preferring to crack down on stablecoins, while simultaneously providing greater investor protection at the exchange and wallet level.

And in the long term, this could drive more investors to Bitcoin, helping its long-term price recovery at the expense of alternatives.