Who remembers Crypto? 3 fresh developments spelling more trouble for the sector

Remember cryptocurrencies? All the rage in 2021, the largely experimental asset category was one of the first canaries in the coal mine of 2022.

Risk-off sentiment was first and foremost distrusting of the newest type of tradeable product outside of mainstream equity and fund service providers. 

All year, cryptocurrencies have been vastly underperforming when compared to the run they enjoyed in 2021. 

US regulator slams crypto trading

Now, sentiment towards crypto will likely take another hit as the US Federal Department of the Treasury released a new report overnight highlighting the dangers cryptocurrencies pose to the US economy. 

Published by the Financial Stability Oversight Council (FSOC), the report ultimately calls for more regulation on the crypto sector. 

This is nothing new from the US regulator, but its warnings are perhaps more impactful as the US endures a technical recession and one of the worst years for stock markets in over a decade. 

Not helping things is that the subcultures among whom crypto trading is popular tend to be anti-authoritarian (if not conspiracy theorists,) where government intervention is often viewed as instrumental in a larger more dire schematic of control. 

For that reason, it is likely the FSOC’s new report will ruffle feathers. 

The report made the following findings: 

• Most cryptocurrency trading “lacks basic risk controls” 

• Prices have repeatedly recorded broad declines 

• Many crypto trading firms have “risky business profiles” 

• Crypto spot markets are basically unregulated 

• Crypto trading firms are not bound to any standardised laws 

• Retail investors are being exploited by crypto trading firms 

What will follow the report remains to be seen. Australian readers would be wise to keep in mind Canberra is set to publish its own review of crypto trading later this year. 

In March, the Federal Government announced that a terms of reference review into the Australian crypto sector would be undertaken by the Federal Board of Taxation. 

Consultations took place last month with little fanfare. 

Kim Kardashian hit with US$1m fine

In related crypto news, celebrity influencer Kim Kardashian has been charged over US$1m by the US trading regulator Securities and Exchange Commission (SEC) for crypto-related posts on Instagram. 

In June last year, Kim Kardashian published a one-off post on the app promoting a smallcap cryptocurrency coin to her followers. 

The move wasn’t technically illegal; US financial advice laws are more relaxed compared to Australia, and the US has not been cracking down on ‘finfluencers’ in the same way Australia has been. 

However, Kim Kardashian has been charged for failing to disclose the post was an advertisement. In fact, Kim was paid US$250,000 to post it on her account. Now, she must pay US$1.26m.

For a woman who just launched an equity fund, this may not be that much of a drama for her personally, but the move does send a signal to participants in the crowdsourced financial advice scene, if you will. 

International arrest warrant for Terra founder 

In another high-profile move, international policing agency Interpol has put out a high-level global arrest warrant for the founder of failed cryptocurrency Terra, a man called Do Kwon.

Kwon’s firm lost over US$60bn of investors’ money when the Terra cryptocurrency failed back in May, which Market Index News covered at the time. 

The experimental 'stablecoin' Terra was designed to always stay at 1:1 with the price of the US$. That, clearly, did not translate into practice.

Stablecoins are often used on retail cryptocurrency exchanges to enable buy and sell operations. By a varying approach of methodologies, stablecoins are intended to lure in risk-averse crypto traders.

A similar product, Tether, is used by the Australian crypto exchange Swyftx to allow users to buy and sell assets such as bitcoin and ethereum. 

Crypto communities have long been trying to shake off the reputation of criminal dealings associated with the money, not helped by the fact crypto has been used to ransom computers, avoid sanctions, and facilitate drug dealing. 

An international arrest warrant placed upon one of the scene’s best-known players does not necessarily help fade that reputation. 

However, pro-regulation investors may be happy to learn the US wants to clean up the sector’s act, and go after players who break the rules. 

A look at Bitcoin's one year charts (Source: TradingView; price in US$)