Is the US attempting to harm crypto?

Is the US attempting to eliminate cryptocurrency?

Perhaps.

Three years ago, the majority of the firms in the sector that Andrew Durgee's company invested in were based in the US. However, this year, he confidently estimates that only one out of every 10 will be. This shift reflects his firm's astute judgment that the country has been increasingly hostile toward digital assets such as cryptocurrencies and tokens.

Mr. Durgee, managing director of the crypto division for tech firm Republic, firmly states, "The administration really has a target on the industry. The regulatory uncertainty makes investments in the US higher risk."

The sector had already been under pressure due to the collapse of virtual currency prices last year. The situation worsened with the meltdown of several high-profile firms, including FTX, led by the so-called "Crypto King" Sam Bankman-Fried, who prosecutors have accused of conducting "one of the biggest financial frauds" in US history.

US regulators, awakened by the turmoil, have intensified their scrutiny of the sector. Authorities argue that these firms have been on notice since at least 2017 for violating US financial rules designed to protect investors.

The campaign has resulted in a steady stream of charges against crypto firms and executives, ranging from failure to properly register with authorities and provide adequate disclosure to more damaging accusations such as mishandling consumer funds and fraud.

Bitcoin, which represents the largest portion of the cryptocurrency market, has been considered a commodity like gold. Consequently, it has largely remained unaffected by the current regulatory debate, which centers around the legal question of whether cryptocurrencies qualify as "securities" overseen by the SEC.

Rather, the crackdown has primarily targeted firms issuing tokens or coins to raise funds, as well as the exchanges where digital assets are traded. These exchanges often hold customer funds, execute trades, and engage in other activities that parallel traditional finance.

This recent enforcement wave reached its pinnacle with legal actions against two of the largest platforms, Coinbase and Binance.

Gary Gensler, the chairman of the Securities and Exchange Commission, staunchly defends these actions, likening the state of the industry to the 1920s before the US implemented many of the existing rules. He denounces "hucksters, fraudsters, scam artists, and Ponzi schemes," painting a dire picture of the industry.

Will Paige, a research analyst for Insider Intelligence, emphasizes the significant souring of sentiment since 2021, when the industry was valued at over $3 trillion (£2.4tn) and seemed poised for broader acceptance.

"It's very much back on the fringe of finance," he asserts. "Trust in the system is battered, and it has unquestionably worsened."

As a result of the lawsuits, billions of dollars were withdrawn by customers. US banks limited their engagement with Binance, leading to the cessation of US dollar acceptance by the platform. Similarly, Robinhood, the popular trading app, announced it would delist certain assets mentioned in the lawsuits due to the "cloud of uncertainty" surrounding them.

Critics accuse Chairman Gensler and the SEC of implementing hostile "regulation by enforcement" to boost their own political profiles. They argue that despite the industry's repeated attempts to propose new rules, the agency has ignored the distinctions between different types of crypto firms and the characteristics of the technology, such as decentralized automated processing, which challenge existing regulatory frameworks.

"It's been a very frustrating experience," laments Bart Stephens, managing partner of Blockchain Capital, a venture capital firm that has invested in hundreds of crypto firms. He reveals that some of these firms have struggled to find banks willing to do business with them. "There is no doubt a regulatory attack is going on."

Bill Hughes, senior counsel of Consensys, a Texas-based software company that utilizes blockchain technology, expresses a more blunt viewpoint: "The SEC has essentially determined that on

 its watch, crypto shouldn't exist in the United States anymore."

The question of whether the SEC's actions could potentially kill the industry, in which an estimated one in every six Americans has invested, remains open.

The wider market value of cryptocurrencies has dropped to approximately one-third of its peak. Trading volumes have plunged, and developer interest is waning. Trust remains low, and the failures of some traditional banks willing to engage with crypto in March dealt a further blow.

Hilary Allen, a law professor at American University, argues that crypto is inherently susceptible to boom-and-bust cycles and insider manipulation, and advocates for its ban. She believes the SEC's actions could confine crypto to the realm of tech enthusiasts, given the current state of the industry.

"If we combine these enforcement actions with waning trust from the public, with possibly waning interest from venture capital, then maybe there isn't a future," she states.

However, Mr. Stephens, who has weathered two "crypto winters" in the past, maintains a positive outlook. He believes the future remains bright, albeit at the risk of the industry relocating overseas due to America's less favorable approach compared to jurisdictions like the UK and the EU.

He points to the stable price of Bitcoin, which hovers around 2020 levels but has experienced significant growth since the beginning of the year. Ether has also seen a rise.

Some indicators tracked by venture firm and crypto-investor Andreessen Horowitz, such as the number of active addresses on the blockchain and the execution of smart contracts, are also on the rise.

"We're not seeing founders stop forming new companies or protocols," asserts Mr. Stephens, who mentions that Blockchain Capital invested more money in the first three months of 2023 than in any quarter of the past decade, capitalizing on falling prices and retreating competitors.

While the industry may thrive outside the US, losing the American market would undeniably limit its prospects, warns Gina Pieters, a crypto expert and lecturer at the University of Chicago.

"It would be a mistake to think that the US... could kill the industry. It can absolutely, though, make the crypto industry smaller," she cautions.

Many in the crypto community hope for a reprieve, whether through court decisions questioning the SEC's authority, ongoing Congressional reviews of industry legislation, or a potential policy reversal under a new administration.

Regardless of how these questions are resolved, Angela Walch, a research associate at the University College of London Centre for Blockchain Technologies, believes that the industry has reached a critical turning point.

"We are at a real inflection point," she concludes. "The showdown is here."