Crypto’s constant crisis: Legal woes, SpaceX, and the SEC

When it rains – it pours, is a common expression to describe a run of bad luck that never seems to end. In the case of the crypto industry, the monsoon of bad news over the last year seems only to worsen as time goes by.

From FTX to SpaceX

The current run of bad tidings for crypto began in November 2022 when the FTX crypto exchange filed for bankruptcy. Rumours of mismanagement and fraud had abounded in the months leading up to FTX’s collapse. But on November 11th, Binance, another large crypto exchange, refused to bankroll FTX’s debts at the last minute, a move that many viewed as a cynical ploy by Binance to ensure the quick demise of its largest competitor. Binance’s rug-pull forced FTX´s CEO, Sam Bankman-Fried, to admit that the company could not meet its customers’ withdrawals. Criminal investigations have followed, and Bankman-Fried has been jailed pending trial.

In the months since, other cryptocurrency exchanges and cryptocurrencies have imploded and trust in the industry, always in short supply, has fallen to an all-time low. Binance’s “victory” now seems to have been pyrrhic to some degree. Regulatory scrutiny, especially in the US, has become more aggressive, and doubts have surfaced over institutional capital’s role in the industry.

To make matters worse, on August 18^th, the Wall Street Journal reported that SpaceX, Elon Musk’s space exploration company, had sold off over US$300 million of Bitcoin – though the figure and the timing of the write-down is disputed. Bitcoin, already under heavy selling pressure from wider macroeconomic fundamentals, promptly crashed a further 7%.  

Bitcoin´s recent travails are not Elon Musk’s fault through. Other factors are at play here, most notably the involvement of the US Securities and Exchange Commission (SEC).

The SEC gets serious

Since the spectacular and potentially criminal collapse of FTX, the SEC has taken a more aggressive interest in the cryptocurrency industry. In June 2023, the SEC filed lawsuits against Binance and Coinbase – the two largest crypto exchanges in the world following FTX´s bankruptcy. The SEC’s suit against Binance is potentially more serious; it accuses Binance of fraudulent behaviour like that alleged at FTX, i.e., misuse of customer funds.

With Coinbase, the suit is more interesting. It seems to be a deliberate ploy to bring crypto under the SEC´s supervision.

In the US, the regulatory status of cryptocurrencies is unclear. The CFTC regulates commodities, while stocks, bonds and other securities are regulated by the SEC. With its case against Coinbase, the SEC is arguing that cryptocurrencies are securities, not commodities, and should be regulated by the SEC rather than the CFTC, which has a lighter touch.

Prior to launching the lawsuit against Coinbase, the SEC contacted Coinbase´s CEO, Brian Armstrong, demanding that Coinbase delist every cryptocurrency on the exchange except for Bitcoin. “They came back to us, and they said… we believe every asset other than bitcoin is a security,” Armstrong said. “And, we said, well how are you coming to that conclusion, because that’s not our interpretation of the law. And they said, we’re not going to explain it to you, you need to delist every asset other than bitcoin.” 

If Coinbase had agreed, that could have set a precedent that would have left the vast majority of the American crypto businesses operating outside the law unless they registered with the SEC.

So, the Coinbase lawsuit is a fight for survival, not just for itself but for the entire US crypto industry. A win for one side of the other will be a milestone in the evolution of cryptocurrency as an asset and will send shockwaves through the market.

ETFs and institutional capital

The SEC is also the centre of another cryptocurrency storm, this one involving the vast wealth of some of the largest financial institutions in the world. There are currently about half a dozen applications for the launch of a spot Bitcoin ETF, which would track the price of Bitcoin (BTC) directly, rather than following derivatives.

Among the institutions hoping for a green light from the SEC are Blackrock, the largest asset management company in the world, as well as Wisdom Tree, VanEck, and Fidelity. As it stands, the SEC has given no clear indication of whether it will approve the ETFs. Fred Thiel, the CEO of Marathon Digital, another ETF hopeful, is cautiously optimistic – linking the ETF applications to the SEC’s recent slew of lawsuits: “I think the SEC needs to have some positive outcomes here, or else they’re just going to be under even more pressure.”

It goes without saying that if the SEC reject these institutional ETFs outright, the backlash for the crypto industry and crypto market would be massive. Conversely, an approval of even some of the applications would unlock billions of dollars for an industry that badly needs an influx of new cash.

A murky future, but money talks

So where does this leave cryptocurrency, both as an asset class and as an industry? Currently, there are too many uncertainties to make any clear predictions. But if we look at the amount of capital, both retail and institutional, invested in the crypto ecosystem at present, it’s clear that digital assets are here to stay. It’s also worth pointing out that since FTX´s collapse, the price of Bitcoin has risen from $16,000 to $26,000, and that’s including the most recent crash.

If the SEC approves even a few of the Bitcoin ETFs, it could prove a true watershed moment for the industry, unlocking vast amounts of capital and turbocharging the market. Yes, centralised exchanges like Binance and Coinbase probably have difficult years ahead, and they may be forced into tighter regulation. But is that necessarily a bad thing for the market? 

Whatever the future holds, caution is essential. As is always the case with cryptocurrencies, there are going to be bumps in the road – and inevitably, more crashes and nasty industry surprises. Speculating on cryptocurrencies is not for the faint-hearted and comes with a real risk of losing all your capital.

Bitcoin Technical Analysis

Following the sharp fall to less than $16,000 in November 2022 due to the high-profile FTX blow-up that damaged traders’ confidence, Bitcoin saw gains upward of 50 per cent through mid-March 2023, trading at the $30,000 level before retracing to the Fibonacci 38,2% level at $24794 mid-June 2023. It gained strong bullish momentum, again between mid-June and mid-July, reaching $31,665, the highest level it has seen since May 2022. Analysts suggest the approaching ‘halving’ event, aimed at making the digital currency anti-inflationary by reducing its supply, was intrinsically linked to this gain.

Subsequently, however, there has been a rather steady decline through most of August, with a sharp bearish turn on the 16th and 17th of the month, with a drop from almost $29,000 to just over $25600 following the SpaceX liquidation. Having fallen below the 200-DMA (blue) and the rising trendline since the end of 2022, it confirms that the 2023 upward pressure may have dissipated. Over the last week, Bitcoin has tested key support at the 23.6% Fibonacci Retracement level of around $26,000. If it dips below the June low of $24,750, it could trigger a double top (the highs seen in April and July 2023), and a possible retracement toward the March 2023 low of $19,550.