Regulatory offensives have been coming for crypto in waves ever since the sector’s first boom-and-bust cycle in 2016-2017. The US “taxman” was the first to raise an eyebrow and then to issue stern warnings to anyone who thought they could make a profit with Bitcoin without declaring it to the IRS. But after that initial implosion, the whole crypto space was prematurely declared dead by many mainstream analysts, causing a lot of investors and the general public to lose interest. The regulators did as well, or so it appeared at least.

However, the nascent asset class didn’t take long to make a comeback thereafter. Instead of pouring cash into fraudulent IPOs and worthless coins, more savvy and long-term oriented investors emerged to fund the much-needed infrastructure that would support the real growth and adoption of crypto. Exchanges, serious and regulated funds, and other services and products paved the way for the sector’s “maturity”.

It didn’t happen overnight, but happen it did: Larger, more conservative retail investors entered the fray as did institutions eventually. The wild price fluctuations were still there - to an extent, "the nature of the beast" - but it wasn’t a “Wild West” type of landscape anymore. Crypto was finally getting close to offering reliability on top of its inherent privacy and decentralization advantages.

The most recent escalation

Fast forward to the end of last year when the sector started making headlines for all the wrong reasons. The first and largest domino to fall was the cryptocurrency exchange FTX, the third-largest exchange by volume with over one million users. The FTX scandal shook not only the crypto space, which lost billions and fell below a $1 trillion valuation as a result, but it impacted the entire investment world too. Once the magnitude of the fraud became clear, namely the misappropriation of around $8 billion in customer assets, prosecutors accused the platform’s founder and CEO, Sam Bankman-Fried, of conducting "one of the biggest financial frauds" in US history.

That was certainly and justifiably more than enough to grab the regulators’ attention. Calls for more transparency, for more stringent checks and balances, and for more oversight were heeded and the SEC descended upon the entire industry like the proverbial ton of bricks. As the BBC reported, “The campaign has yielded a steady drumbeat of charges against crypto firms and executives, alleging violations ranging from failing to register properly with authorities and provide adequate disclosure of their activity to, in some cases, more damaging claims such as mishandling of consumer funds and fraud.”

The scope of that campaign soon widened, and widened, to an arguably indiscriminate extent. Up to the middle of this year, the SEC had filed around 130 crypto lawsuits, largely targeting smaller companies, many of which had to shut down before they ever had their day in court as they were unable to shoulder the cost of litigation. And then, in June, SEC chairman Gary Gensler targeted two of the biggest platforms, Binance and Coinbase. Both exchanges have been widely used by individual, smaller investors and have heavily contributed to the adoption of crypto by “ordinary” people, allowing them easy and affordable access to this asset class. As a result of the lawsuits, customers withdrew billions of dollars, while US banks cut or limited their relationships with the platforms. The SEC chairman’s own comments fueled the panic. Defending the agency’s moves, he responded: "Hucksters. Fraudsters. Scam artists. Ponzi schemes. The public left in line at the bankruptcy court."

De-platforming crypto?

A lot of crypto investors and industry experts have objected to this exceptional treatment by regulators. They point to the repeated efforts by the industry itself to propose new rules and the level of compliance and adaptability that so many companies have already shown to all the changes and new regulatory burdens imposed on them so far. They also highlight the fact that the SEC has refused to acknowledge the important distinctions between different kinds of firms and the technologies they use, instead lumping more risky structures together with totally decentralized ones that by nature cannot be vulnerable to fraudulent activities like those of FTX.

There is no doubt that there are bad actors in this space, but it is also quite hard to understand why the SEC has singled out this relatively tiny corner of the finance and investment industry as uniquely dangerous to the wider public. The agency’s fervor appears even more perplexing if we bear in mind that a lot of it was unleashed at the same time that a banking crisis saw US lenders go bust and required the government’s full and prompt backing in order to avoid a full-on bank run. Were there no “hucksters” or no “Ponzi schemes” to be investigated then? What if we look further back, at the causes and the perpetrators of the 2008 global financial crisis? Was the public not “left in line at the bankruptcy court” then?

The sheer scale of the abuses, the fraudulent activities and even the actual convictions by companies in the conventional banking and investment industry makes the crypto cases, even the mammoth FTX one, pale by comparison, yet the SEC seems intent on challenging the latter with a single-mindedness that has rarely been displayed before by regulators.

One coin to rule them all

If we zoom out for a moment and consider the bigger picture and what else has been going on in the digital currency realm, the whole “war on crypto” issue has revealed itself to be an even more tangled web. At the same time that the SEC, under Biden appointee Gensler, has been targeting crypto firms large and small, the US government itself has been working on the introduction of its very own “coin”. The digital dollar, and the rise of Central Bank Digital Currencies (CBDCs) in general, is a topic we have extensively written about in previous editions of the Digger, and it is slowly but surely now transitioning from theory to practice.

Specifically, the FedNow system, which we also recently wrote about and is widely seen as the precursor to the digital dollar, is set to go live in late July, with fifty-seven firms already certified to use it. As Reuters reported: “41 banks and 15 service providers, including large firms like JPMorgan Chase, Bank of New York Mellon, US Bancorp and Wells Fargo, have completed formal testing and will be ready to provide instant payments after the new service is live.” The Fed’s new system is meant to increase liquidity and provide instant payments capabilities for businesses, allowing banks, businesses, and consumers to send and receive payments within 10 seconds, 24/7.

On the surface, it might sound like it offers the same convenience and efficiency that leading crypto coins promise, only with the backing and trustworthiness of the US government itself. However, there is one particularly important distinction: Unlike the decentralized crypto alternatives it aims to compete with, the FedNow system is very much centralized and entirely under the direct control of the Fed itself. Thus, whatever convenience it might be able to offer, must be weighed against serious concerns over privacy, state overreach and individual financial sovereignty.

At the end of day, it doesn’t really matter if the regulatory attacks on crypto are in fact concerted and aimed at paving the way for the digital dollar by eliminating the competition. All that matters is that if they are successful, the average citizen will be left with no other choices or alternative currencies to bank in, to save in, and/or to trade in within the increasingly important digital realm.

This article was published by BFI Bullion Inc. in their recent newsletter "Digger Quarterly". To check out the full report feel free to download it below.