Sign up for our newsletter
Receive insights on the current developments at SEBA and stay ahead of the curve with our well-founded in house research papers.
First name
Last name
Email address
Continue
Market Correction and Regulatory Action as A Chance to Promote Institutional-Grade CryptofinanceOther Noteworthy DevelopmentsConclusion
Thursday, 10 June, 2021
The Digital Regulator

Cryptocurrency Markets and Regulators - What to expect

Abstract

The 12-month period of substantial increases in cryptocurrency values (bitcoin’s value grew by 845% from 14 April 2020 to 14 April 2021) evolved, in May 2021, in a correction that has exposed market conduct, infrastructure, and investors’ protection issues. The US federal financial and banking regulators have teamed up to pursue, rapidly and rigorously, a clear and explicit cryptocurrency regulatory framework. Given the US share in the global economy and the influential role of its regulators, the outcome of the process is likely to shape cryptocurrencies regulation and markets globally. Investors should welcome further regulatory clarity in areas such as market infrastructure, conduct, and investor protection inspired by traditional financial regulation, which will promote the development of institutional-grade cryptofinance in the mid to long term. Cryptocurrencies are not deemed systemically relevant by Central Banks, and a major clampdown can be excluded.

The last few weeks have offered several noteworthy regulatory developments in the digital space. For example, Germany and Spain softened the requirements for institutional asset managers to invest in cryptocurrencies, various nations took further steps to develop Central Bank Digital Currencies (CBDC), crypto exchanges have come under scrutiny in a few jurisdictions, and several new countries announced the introduction of cryptofinance regulatory frameworks.

Market Correction and Regulatory Action as A Chance to Promote Institutional-Grade Cryptofinance

Financial regulators have been traditionally supportive of cryptofinance. The regulatory frameworks that have been put in place at different paces and levels of sophistication in various countries—such as Switzerland, several European and Asian countries, and the US—over the last few years have supported the development of cryptofinance infrastructure, which in turn has allowed an increasing number of investors to participate in cryptocurrency markets. The rapid expansion of these markets over the last year has, however, also exposed weaknesses in crypto areas such as market infrastructure, market conduct, and investors protection and led US regulators, in particular, to act. Below, we briefly review these developments to conclude that stepping up the regulatory frameworks governing cryptocurrencies markets is a wise strategy in support of the development of institutional-grade cryptofinance.

  • Market growth and recent correction - Bitcoin price rose from USD 6,845 o n 14 April 2020 to USD 64,705 on 14 April 2021. A correction has followed, which has taken the price from the all-time high level of USD 64,705 to USD 31,663 as of 17 May 2021, marking bitcoin’s sixth major historical historical link1correction from all-time highs in relative terms and the major correction in USD terms. The use of leverage leverage link1served to magnify the movements, particularly from January 2021 (the total number of outstanding derivative contracts reached a level of USD 27.7 billion on 13 April 2021; liquidations reached a level of 7.1 billion USD on 18 May 2021).
  • Market weaknesses exposed - The market growth and correction exposed market conduct, infrastructure, and investors protection issues. The ability of influential market participants such as E. Musk to materially move the market by tweeting decisions and opinions has raised market conduct concerns among regulators and the broader public. The same goes for the opacity surrounding the operations of pivotal elements of cryptocurrencies markets such as Tether, which disclosed that, as of 31 March 2021, only 3.8% of the over USD 40 billion Tethers in circulation were backed by cash (USD). This disclosure surprised investors on the negative side and raised market transparency concerns. Also, major cryptocurrency exchanges suffered outages outages link1during the correction. Coinbase experienced difficulties on 19 May 2021, with some users unable to log in, view balances, and make trades; on the same day, Binance had to pause some crypto withdrawals temporarily, and Kraken remained frozen frozen link1for hours. These events led to losses driven by weak infrastructure. Lastly, publicly accessible information and analyses support the idea that the sell-off experienced in May 2021 was mainly attributable attributable link1to short term retail holders or late retail investors and deleveraging activity, despite several regulators issuing investor alerts since the beginning of the year. The market correction was also materially affected by China’s announcement of a national policy banning crypto mining and prohibiting payment firms, including online firms, from facilitating transactions in cryptocurrencies.
  • US regulatory response - On 20 May 2021, the Office of the Comptroller of the Currency (OCCOCClink1) announced talks with the Federal Reserve (FED) and the Federal Deposit Insurance Corporation (FDIC); the aim of these meetings is to set up an interagency policy team pursuing a clearer cryptocurrencies regulatory framework. The OCC OCC link1has requested a review of the cryptocurrencies standards, including interpretative letters and guidance regarding cryptocurrencies and digital assets. Meanwhile, the FED, OCC, and FDIC have begun collaborating on the production of a joint cryptocurrency regulatory framework, specifying that core topics for consideration include the capital and operational treatment of cryptocurrencies. On 26 May, the Securities and Exchange Commission (SECSEClink1) reported that cryptocurrency markets are currently subject to regulatory gaps and pointed to regulatory action to protect cryptocurrency investors on crypto exchanges; the regulations are to be similar to those characterising traditional exchanges such as the New York Stock Exchange or the Nasdaq.

The steady growth in the bitcoin price and, more broadly, the cryptocurrency market cap over the last twelve months that culminated in a severe market correction in May 2021 has exposed weaknesses at the level of market infrastructure (operations and governance of crypto exchanges), market conduct (the influence of individuals, headlines, and trading behaviours on prices), suitability requirements, and protection measures for retail investors. Neither the US federal banking and financial regulators nor the European Central Bank European Central Bank link1currently see the volatility in the cryptocurrency markets as a threat to the stability of the broader financial market; thus, a major clampdown can be excluded. The focus of the ongoing regulatory action will, therefore, be investor protections, which will probably take the form of increased prudential oversight and regulation of cryptocurrency markets and their players, particularly cryptocurrencies exchanges. These actions will likely bring the regulation and prudential oversight of cryptocurrencies markets closer to those regimes in place for traditional financial markets. Until clarity on any additional regulation and oversight of cryptocurrencies markets is available, investors are likely to suffer from heightened uncertainty and refrain from acting, keeping the markets in a ‘wait and see’ position. However, investors should welcome the prospect of regulation and oversight of cryptocurrency markets, akin to traditional markets, because it will allow more institutional investors to engage with cryptocurrencies and expand market participation.

Other Noteworthy Developments

Institutional investors see some ease in the conditions required to participate in the cryptocurrencies markets. The positive changes concern Germany and Spain and shall help institutional adoption.

  • GermanyGermanylink1 has passed legislation that allows wealth and institutional investment fund managers (called Spezialfonds, estimated to be as much as 4,000 institutions) to invest as much as 20% of their portfolio in cryptocurrencies. The law is set to come into effect on 1 July 2021.
  • SpainSpainlink1 has softened the rules governing cryptocurrencies investments. It will allow investment fund operators, collective investment institutions, and variable-capital collective investment programs’ investment companies to invest in cryptoassets.

Numerous developments in the CBDC space emphasise the priority Central Banks (CB) are giving to the introduction of CBDCs.

  • The CB of KazakhstanKazakhstanlink1 will launch a CBDC pilot program. The first step shall be a comprehensive study of the benefits and risks of CBDC and the definition of some core tasks such as the method of its emission and distribution, the technology used, and the impact on monetary policy.
  • The CB of GeorgiaGeorgialink1 considers the introduction of a CBDC. The country hopes to benefit from the advantages of CBDCs as outlined by other countries. It clarified upfront that it will adhere to the technical standards set out by the Bank for International Settlements.
  • The CB of BahrainBahrainlink1 is working with JPMorgan Chase on a project to settle digital funds transfers from and to Bahrain in USD. This action may be the first step in the broader development of a CBDC.
  • The CB of IsraelIsraellink1 communicated details about its CBDC project, noting its retail features such as the ability by citizens to use it even in offline payments and to the possibility to convert it to cash at any moment.
  • The US FEDUS FEDlink1 will issue a CBDC discussion paper in the coming months. The focus shall be on whether and how a CBDC could improve upon already safe, effective, dynamic, and efficient domestic payment systems in the US. The paper will also discuss important monetary policy, financial stability, consumer protection, legal, and privacy considerations that would be raised by the introduction of a CBDC.
  • The CB of South KoreaSouth Korealink1 will start a CDBC trial in the next months. The first stage will end in December 2021 and will focus on feasibility and effectiveness issues. The CB emphasised that it has no concrete issuance plan as of yet.
  • The CB of IndonesiaIndonesialink1 is studying the potential benefits of a CBDC and analysing the infrastructural requirements and their impact on monetary policy and payment systems.
  • The CB of South AfricaSouth Africalink1 has commenced a feasibility study for a retail CBDC. The study is expected to close in 2022. • The CB of Sweden announced a partnership with Handelsbank to test its CBDC in a real environment after having developed the e-krona only in a simulation environment.
  • The CB of SwedenSwedenlink1 announced a partnership with Handelsbank to test its CBDC in a real environment after having developed the e-krona only in a simulation environment.

Various cryptocurrencies exchanges have come under regulatory scrutiny in the wake of the market correction, evidencing the focus on this infrastructure by regulators triggered by the correction.

  • TurkeyTurkeylink1 announced reporting obligations for cryptocurrencies exchanges that concern any transactions exceeding an equivalent of USD 1’200 to the government’s financial crime agency.
  • ThailandThailandlink1 strengthens the requirements for the opening of new accounts at crypto exchanges. The crypto exchanges must now verify the identities of new customers in person, requiring customers to be physically present for the verification process.
  • ArgentinaArgentinalink1 has ruled that all cryptocurrency exchanges operating within the country must file comprehensive transaction data on their customers every month. The rules also require exchanges to identify all their clients.

Several new jurisdictions are committed to regulating cryptocurrency markets, which will strengthen cryptocurrencies markets globally.

  • The government of VietnamVietnamlink1 recently commissioned a research group with the task to conduct an in-depth study of cryptocurrencies for the purpose to regulate the sector. The group shall consider cryptocurrencies regulation already promulgated (or being developed in countries such as the US, Japan, and Europe.
  • UgandaUgandalink1 shall develop a comprehensive cryptocurrencies regulatory framework. This move follows initial steps taken to amend the country’s Anti-Money Laundering laws to include crypto exchanges and other virtual asset providers.
  • Bosnia and HerzegovinaBosnia and Herzegovinalink1 intends to prepare a bill to regulate cryptocurrencies in preparation for developing the sector in an orderly manner.

Conclusion

The significant appreciation of cryptocurrencies values over the last year that culminated in a major and ongoing market correction since May 2021 has exposed weaknesses in the cryptocurrency markets at both the infrastructure level and the participant conduct level; the correction also clarified the need to step up protection for investors. The US regulators have taken the lead in developing a more suitable regulatory framework that is likely to extend key features of traditional financial market regulation into cryptocurrencies markets. There is consensus amongst the major central banks that cryptocurrencies are not systemically relevant. This view should exclude any major clampdown on the cryptocurrencies industry. While the ongoing regulatory action leaves market participants under heightened uncertainty and the markets in a “wait & see” position, investors should welcome additional regulatory clarity for cryptocurrencies markets because it will create additional stability and allow more participants to engage.

0
Download pdf
Share:
Subscribe to the research newsletter and get weekly updates about the latest articles of SEBAresearch
Subscribe to newsletter

Authors


Mattia Rattaggi
External Regulatory Analyst METI Advisory AG
in
Yves Longchamp
Head of Research SEBA Bank AG
in
research@seba.swiss | Disclaimer

Disclaimer

This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is published solely for information purposes; it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial investment or to participate in any particular investment strategy. This document is for distribution only under such circumstances as may be permitted by applicable law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction.

No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this document, except with respect to information concerning SEBA. The information is not intended to be a complete statement or summary of the financial investments, markets or developments referred to in the document. SEBA does not undertake to update or keep current the information. Any statements contained in this document attributed to a third party represent SEBA's interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party.

Any prices stated in this document are for information purposes only and do not represent valuations for individual investments. There is no representation that any transaction can or could have been effected at those prices, and any prices do not necessarily reflect SEBA’s internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions by SEBA or any other source may yield substantially different results.

Nothing in this document constitutes a representation that any investment strategy or investment is suitable or appropriate to an investor’s individual circumstances or otherwise constitutes a personal recommendation. Investments involve risks, and investors should exercise prudence and their own judgment in making their investment decisions. Financial investments described in the document may not be eligible for sale in all jurisdictions or to certain categories of investors. Certain services and products are subject to legal restrictions and cannot be offered on an unrestricted basis to certain investors. Recipients are therefore asked to consult the restrictions relating to investments, products or services for further information. Furthermore, recipients may consult their legal/tax advisors should they require any clarifications. SEBA and any of its directors or employees may be entitled at any time to hold long or short positions in investments, carry out transactions involving relevant investments in the capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment itself or to/for any company commercially or financially affiliated to such investment.

At any time, investment decisions (including whether to buy, sell or hold investments) made by SEBA and its employees may differ from or be contrary to the opinions expressed in SEBA research publications.

Some investments may not be readily realizable since the market is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. Investing in digital assets including cryptocurrencies as well as in futures and options is not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may under certain circumstances occur. The value of any investment or income may go down as well as up, and investors may not get back the full amount invested. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. Tax treatment depends on the individual circumstances and may be subject to change in the future.

SEBA does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific investor’s circumstances and needs. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of individual investors and we would recommend that you take financial and/or tax advice as to the implications (including tax) prior to investing. Neither SEBA nor any of its directors, employees or agents accepts any liability for any loss (including investment loss) or damage arising out of the use of all or any of the Information provided in the document.

This document may not be reproduced or copies circulated without prior authority of SEBA. Unless otherwise agreed in writing SEBA expressly prohibits the distribution and transfer of this document to third parties for any reason. SEBA accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this document.

Research will initiate, update and cease coverage solely at the discretion of SEBA. The information contained in this document is based on numerous assumptions. Different assumptions could result in materially different results. SEBA may use research input provided by analysts employed by its affiliate B&B Analytics Private Limited, Mumbai. The analyst(s) responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting market information The compensation of the analyst who prepared this document is determined exclusively by SEBA.

Austria: SEBA is not licensed to conduct banking and financial activities in Austria nor is SEBA supervised by the Austrian Financial Market Authority (Finanzmarktaufsicht), to which this document has not been submitted for approval. France: SEBA is not licensed to conduct banking and financial activities in France nor is SEBA supervised by French banking and financial authorities. Italy: SEBA is not licensed to conduct banking and financial activities in Italy nor is SEBA supervised by the Bank of Italy (Banca d’Italia) and the Italian Financial Markets Supervisory Authority (CONSOB - Commissione Nazionale per le Società e la Borsa), to which this document has not been submitted for approval. Germany: SEBA is not licensed to conduct banking and financial activities in Germany nor is SEBA supervised by the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), to which this document has not been submitted for approval. Hong-Kong: SEBA is not licensed to conduct banking and financial activities in Hong-Kong nor is SEBA supervised by banking and financial authorities in Hong-Kong, to which this document has not been submitted for approval. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Hong-Kong where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not “professional investors” within the meaning of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules made thereunder (the “SFO”). Netherlands: This publication has been produced by SEBA, which is not authorised to provide regulated services in the Netherlands. Portugal: SEBA is not licensed to conduct banking and financial activities in Portugal nor is SEBA supervised by the Portuguese regulators Bank of Portugal “Banco de Portugal” and Portuguese Securities Exchange Commission “Comissao do Mercado de Valores Mobiliarios”. Singapore: SEBA is not licensed to conduct banking and financial activities in SIngapore nor is SEBA supervised by banking and financial authorities in Singapore, to which this document has not been submitted for approval. This document was provided to you as a result of a request received by SEBA from you and/or persons entitled to make the request on your behalf. Should you have received the document erroneously, SEBA asks that you kindly destroy/delete it and inform SEBA immediately. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Singapore where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not accredited investors, expert investors or institutional investors as defined in section 4A of the Securities and Futures Act (Cap. 289 of Singapore) (“SFA”). UK: This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product.

SEBA is not an authorised person for purposes of the Financial Services and Markets Act (FSMA), and accordingly, any information if deemed a financial promotion is provided only to persons in the UK reasonably believed to be of a kind to whom promotions may be communicated by an unauthorised person pursuant to an exemption under the FSMA (Financial Promotion) Order 2005 (the “FPO”). Such persons include: (a) persons having professional experience in matters relating to investments (“Investment Professionals”) and (b) high net worth bodies corporate, partnerships, unincorporated associations, trusts, etc. falling within Article 49 of the FPO (“High Net Worth Businesses”). High Net Worth Businesses include: (i) a corporation which has called-up share capital or net assets of at least £5 million or is a member of a group in which includes a company with called-up share capital or net assets of at least £5 million (but where the corporation has more than 20 shareholders or it is a subsidiary of a company with more than 20 shareholders, the £5 million share capital / net assets requirement is reduced to £500,000); (ii) a partnership or unincorporated association with net assets of at least £5 million and (iii) a trustee of a trust which has had gross assets (i.e. total assets held before deduction of any liabilities) of at least £10 million at any time within the year preceding the promotion. Any financial promotion information is available only to such persons, and persons of any other description in the UK may not rely on the information in it. Most of the protections provided by the UK regulatory system, and compensation under the UK Financial Services Compensation Scheme, will not be available.

© SEBA / Kolinplatz 15, 6300 Zug, Switzerland

Research

more
Yearn Finance – Decentralised Asset Management
In this edition of Digital Investor, we cover the largest decentralised asset management protocol, Yearn Finance. We cover its fair launch, the value drivers for the token, its moat and significant pr...
Read more
NFT: A New Fancy Technology
We uncover the latest trend in the cryptoverse, Non-Fungible Tokens or NFTs. NFTs are often mistaken to be digital art, however, they are not the art or asset itself but the deed or proof-of-ownership...
Read more
FATF and DeFi: Further thinking is required
The updates proposed by the Financial Action Task Force (FATF) to its Guidance on the risk-based approach to virtual assets are not conducive to the development of sustainable Decentralised Finance (D...
Read more

Join us as we

redefine finance.

Contact us
SEBA logo

SEBA Bank AG
Kolinplatz 15
6300 Zug
Switzerland

CompanyResearchCareersContact
Receive the newest insights, research and news from SEBA Bank directly to your inbox
Newsletter subscription
© 2021 SEBA Bank AG