Exploring the Crypto Seas: Regulatory Challenges and Market Volatility

[TL; DR]

The United States SEC is currently investigating Ethereum with the aim of designating ETH as a security.

Prometheum has become the first US-approved Special Purpose Crypto-broker.

The capital inflows and outflows into the crypto market has been impacting Bitcoin volatility since the launch of BTC ETFs in January.

Keywords: SEC crypto regulation, Gary Gensler crypto, Crypto firms registration, Bitcoin price volatility, Cryptocurrency market sell-off, Coinbase SEC rulemaking, Ethereum security investigation, GBTC outflows, Spot bitcoin ETFs, Prometheum broker-dealer, Crypto market recovery, Federal Reserve and cryptocurrency, Digital asset investment, U.S. Securities and Exchange Commission crypto, Crypto legal challenges

Introduction

The United States Security and Exchange Commission (SEC) remains focused on instituting punitive actions against crypto firms that are reluctant to comply with its regulatory drive. Gary Gensler, the SEC chairperson, recently confirmed that the regulatory agency is walking its path to ensure that crypto projects operating in the country are compliant with its regulations.

The SEC requires crypto firms that offer securities to register with it and meet its regulatory guidelines. Presently, the US regulatory agency is pursuing several enforcement actions against crypto projects that are failing to cooperate with it. This article covers the SEC’s investigation of Ethereum and other related organizations.

We will also discuss how Prometheum has complied with the US crypto regulation and plans to launch its products. Finally, we shall focus on other developments in the crypto sector like the fall in Bitcoin price and the existing macroeconomic environment.

The SEC’s Crusade against Non-compliance

Gary Gensler, the US SEC chairperson, is well-known in the crypto sector for his hard stance against different crypto activities. As a result, he drives the United States regulatory authority to introduce stringent crypto legislation.

Also, the agency works hard to enforce the SEC crypto regulation pertaining to registration and disclosure compliance. Its main focus is to protect the national economy and the consumers.
As per a recent publication by TheBlock, Gensler said that many crypto projects are unwilling to comply with national crypto laws, a reason the SEC is trying to enforce the relevant regulations. He said, “There are participants in crypto securities markets that seek to avoid these registration requirements.”

He added, “No registration means no mandatory disclosure. Many would agree that the crypto markets could use a little disinfectant.” In the past the SEC sued crypto exchanges like Coinbase and Kraken for offering what it termed unregistered securities.

Then, again, the SEC believes that crypto firm registrations will coerce them to make disclosures of several important aspects like the cyber risks they face and their utive compensation. The SEC chairperson has emphasized that the SEC and other US regulatory bodies like The Commodity Futures Trading Commission have a great role to regulate the sector.

Investigation into Ethereum and Potential Classification of Asset as Security

As hinted above, The United States Security and Exchange Commission is doing much to ensure that crypto projects comply with the existing SEC crypto regulation. For example, currently the SEC is carrying out an Ethereum security investigation.

Some analysts believe that the regulator aims to classify ETH as a security following its switch over from the proof-of-work consensus mechanism to the proof-of-stake one.

There are many crypto companies that operate in the country that have received subpoenas from the SEC in its bid to uncover their work relationship with Ethereum Foundation. The agency has asked the companies to provide it with different documents that include financial records.

Ethereum’s security investigation seems to have stemmed from the blockchain’s adoption of the proof-of-stake consensus mechanism. The SEC deems the network change to have transformed Ethereum to resemble an investment asset. If that is the case, the SEC may re-designate Ether (ETH) as a security.

The other reason why the SEC might have adopted its recent stance against ETH is that several Republican lawmakers who include the chairperson of the House Financial Services Committee and House Committee on Agriculture have asked Gensler to clarify whether or not Ethereum is a security.

This request comes after Prometheum Ember Capital, a FINRA-approved SPBD, has divulged that it will offer custody services for Ethereum to institutional investors. With this, the regulator wants to assess the legal implications of such a move. But that is only applicable if the SEC has finalized ETH’s asset class.

This development comes a few weeks before the set date for the approval or disapproval of spot Ethereum ETFs. If the SEC designates ETH as a security that means it will not be able to approve spot ETH ETFs, expected to be done in the near future.
Nonetheless, some market analysts have said that designating ETH as a security may lead to a legal challenge from some sectors of the crypto industry. And they have pointed out that there will be a high probability that the SEC may lose the legal battle. There are several reasons for that.

For example, the SEC already implicitly stated that ETH is a non-security when it approved ETH Futures. Likewise in 2018, the then SEC chairperson implicitly stated that ETH is a non-security. In addition, the SEC has never boldly stated that ETH is a security despite the CFTU’s admission that it is a commodity.

Read also: Bitcoin Spot ETF Vs. Bitcoin Futures ETF

Prometheum as the first Firm to Become an Approved Special Purpose Crypto-broker and its significance

Prometheum has become the first Approved Special Purpose Crypto-broker after it has complied with the various regulations in the United States. Already, Prometheum broker-dealer has indicated that ETH will become its first SEC-compliant custody product. Thereafter, it will introduce its custody service for other cryptocurrencies.

As a fact, Prometheum is the first crypto-broker that the SEC has authorized to offer cryptocurrency custody service. If Prometheum, a registered custody crypto securities provider, launches its custody service for Ethereum that will confirm ETH as a security rather than a commodity.

In the meantime Prometheum has clarified that it has decided to offer its custody services to its institutional clients because ETH is one of the cryptocurrencies with the highest liquidity. In an interview with CoinDesk, Aaron and Benjamin Kaplan, Prometheum’s co-CEOs said, “We want to be able to service the largest market cap and most liquid token.”

Responding to the view that the CFTC has designated ETH as a commodity, Kaplan said, “The CFTC is not our regulator. When the SEC says to us, ‘It’s not a security,’ then we’ll be troubled.”

Bitcoin’s Price Rollercoaster and ETF Outflows

Amid these crypto legal challenges the bitcoin price dropped significantly on 22 March, falling below $63,000 during the US session. Definitely, that was a show of high volatility considering that it traded above $67,000 a few hours earlier. The following chart shows the bitcoin price fall that occurred during the cited period.

Bitcoin Price Fall – CoinDesk

As The Graph indicates, the bitcoin price dropped by a large margin within a period of 7 hours.Generally, bitcoin price volatility was very high during the past one month. First its price rose to its fresh all-time high of $73,737 on 14 March before tumbling to below $63,000 on 22 March.

During the same period there was a wide cryptocurrency market sell-off resulting in many major coins experiencing significant price drops. For example, on the same day the Solana price plummeted by more than 10% while the value of the CoinDesk 20 Index decreased by over 4.4%.

That weak price action was a result of spot bitcoin ETFs outflows in the United States market. The U.S.-listed spot bitcoin ETFs experienced sharp capital outflows for four consecutive days leading to the 22 March BTC price fall. Although some BTC ETFS recorded cash inflows they could not counteract the effect of the massive GBTC outflows. During that week the spot BTC ETFs recorded over $830 million in outflows.

However, some analysts have emphasized that once the BTC ETFs stop there will be a crypto market recovery. Sadly, that market recovery may take long time to show. This led Mike Novogratz, Galaxy CEO, to say, “It will take some time before we take out that $73,000 again.”

The Macro Environment and Future Outlook

The market anticipates the current disinflationary trend to continue into the future which will be a positive thing for digital asset investment. It may also be acceptable to the Federal Reserve and the cryptocurrency community in general.

Concerning this, a Coinbase author said “We think the macro environment remains amenable for more spot bitcoin ETF inflows following the Federal Reserve meeting that concluded on March 20.”

He/she added, “We expect the current US disinflationary trend to remain intact, financial conditions in the US to continue easing, and markets to be supported by the tapering of the Fed’s quantitative tightening program.”

It is interesting to note that for several months now the Federal Reserve has maintained the interest rate between 5.25% and 5.50% as the next graph indicates.

Federal Funds Rate – 10-year historical chart: Macrotrends

As observed between 2022 and 2024 the US interest rate has remained below 5.50%. The reason is that the Fed’s move was meant to support economic growth and stabilize inflation, creating confidence in the economy.

The Fed rate has a strong impact on both the traditional financial markets and the crypto one. For example, lower interest rates make high risk investment assets like cryptocurrencies attractive. On the other hand, high interest rates Gemini Dollaren the appeal of such investment instruments, especially crypto assets.

Conclusion

The United States Security and Exchange Commission (SEC) has said that it will do everything to bring regulatory compliance in the crypto sector. According to the SEC, the crypto sector is reluctant to adhere to crypto regulations in the country. Currently, the SEC is investigating Ethereum intending to designate it as a security.