According to a research paper released by the investment bank Berenberg on Tuesday, stablecoins and decentralized finance (DeFi) are expected to be the next areas the U.S. Securities and Exchange Commission (SEC) targets in its campaign against the cryptocurrency market.
As per Berenberg, the SEC may now concentrate on bringing decentralized financial protocols and stablecoins — including the two largest by market cap, Tether (USDT) and USD Coin (USDC) — into regulatory compliance.
Earlier this month, the SEC announced that it was bringing legal action against the cryptocurrency exchange Binance, its creator Changpeng “CZ” Zhao, and the corporation that runs Binance.US for alleged violations of federal securities laws. A day later, it brought a similar lawsuit against Coinbase, a competing exchange.
The SEC could “target the stablecoins that serve as the lifeblood of decentralized finance” if it wants to lessen the likelihood that unregulated DeFi protocols would be viable substitutes for regulated lenders and exchanges, according to analysts led by Mark Palmer.
Other than stablecoins, the SEC could also undermine the DeFi ecosystem by focusing on these stablecoins, the paper warned.
Given that interest income from USDC reserves accounted for $199 million in net revenue for Coinbase in the first quarter of 2023, or roughly 27% of the total, Berenberg claims that if USDC is singled out by American regulators, the impact on the exchange’s revenue might be severe.
The final winner of the crackdown is likely to be Bitcoin (BTC), which the SEC has confirmed is a commodity rather than an unregistered investment, according to the paper.
The Commodity Futures Trading Commission (CFTC),said that cryptocurrencies like Bitcoin and Ether can be regulated as commodities under the CEA.
The CTFC’s main argument is that a cryptocurrency like Bitcoin is a commodity because each Bitcoin has the same worth as another Bitcoin of the same grade and can be exchanged for another Bitcoin on exchanges. The CFTC’s action against the stablecoin issuer Tether and the cryptocurrency exchange Bitfinex served as confirmation of this opinion. In a filing from October 2021, the group asserted that “digital assets such as Bitcoin, Ether, Litecoin, and Tether” are all commodities.
On the other hand, the SEC’s chair Gary Gensler has asserted that he thinks his agency can regulate cryptocurrencies and that “most crypto tokens are securities,” but he avoided answering the question of whether Ether was a security during a contentious hearing in April 2023.
Given the company’s emphasis on acquiring and storing Bitcoins, MicroStrategy (MSTR) shares are well positioned to outperform, according to the research. The regulatory crackdown will likely result in a more Bitcoin-focused U.S. crypto business than it has been in recent years.
For crypto companies, the U.S. remains a crucial market. According to a NBC News poll , about 20% of Americans said they have purchased, traded, or utilized cryptocurrencies, and about 42% of Americans between the ages of 18 and 34 said they have dabbled in cryptocurrency trading.
However, platforms may choose to focus their attention on nations with more certain legal requirements in order to avoid the potential regulatory dangers associated with operating in the U.S.
Analysts contend that a big migration of cryptocurrency traders from different exchanges is not something we should anticipate anytime soon.
Despite the SEC’s legal actions, the people who are still investing and utilizing services like Coinbase are undoubtedly fine with the dangers involved.
People who want to acquire cryptocurrency will continue to find methods to do so, and using reputable crypto exchanges that are regulated in the U.S. is still one of the best and safest ways. This is true even though the ongoing regulatory dynamic in the U.S. can have some impact on demand.
Gurbir Grewal, the director of SEC enforcement, recently disputed criticism of the regulatory body’s crackdown on cryptocurrencies and criticized the sector for breaking applicable securities rules.
Grewal declared that the SEC had made careful, modest progress in this area. “Normally, you’d also see compliance, but in this case, we’re not seeing that, so we had to adjust our tactics,” he added.
The developing cryptocurrency sector has emphasized that the US regulations as they stand are insufficient and has advocated for new regulations. Grewal had questioned whether these revised guidelines would be effective in addressing wrongdoing last Friday.
“Even if you created a set of custom regulations, there is an entire sector of the economy where violation is the norm,” he concluded.
Except Bitcoin, and Ethereum, some tokens like Litecoin, Dogecoin, and Monero that had fair or transparent launches, and do not fit the SEC’s definition of a security and are, therefore, likely to escape the present crackdown.
The most probable outcome will be that SEC won’t be going after all cryptocurrencies.
In its action against Coinbase and Binance, the SEC listed a large number of tokens as securities, the majority of which were proof-of-stake coins or tokens with a pre-mined distribution, which have more centralized ownership.
The SEC, a single government agency, is primarily responsible for the present crackdown, therefore the pressure on the business is still well below its maximum level.