Home Morning Commentary Morning Commentary – Regulators Continue to Pressure Cryptocurrencies

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Bitcoin and other cryptocurrencies slumped sharply yesterday as US federal regulators continued to crack down on companies in the marketplace. While the SEC’s freezing of a $600 million cryptocurrency product launch was highly important, the biggest story was that the CFTC had subpoenaed the cryptocurrency exchange Bitfinex and its affiliate Tether Limited as early as December 2017. Together the two companies are likely to have engaged in fraudulent activities designed to inflate the price of Bitcoin and other cryptocurrencies.

Specifically, it has been alleged for at least a year by critics of the two companies that the two companies are run by the same management staff and use the entity Tether Limited to create artificial USD in the form a of cryptocurrency whose symbol is USDT. USDT is claimed by Tether to be fully backed in a ratio of 1:1 by actual USD cash held in a bank account, by the company has repeatedly failed to provide proof via professional auditing of its alleged reserves. Since USDT is used by the majority of the largest cryptocurrency exchanges as a digital substitute for USD, where clients often receive USDT tokens in exchange for their cash deposits, it becomes clear that the entire cryptocurrency marketplace is exposed to enormous counterparty risk.

If the CFTC or other regulators move to block investors from using USDT for trading of of cryptocurrencies, then this would require holders to immediately buy other cryptocurrencies in order to then transfer them to an exchange that denominates cryptocurrencies in USD cash only rather than in USDT. Ultimately, it seems that CFTC would only approach these companies on strong evidence that fraud has likely occurred. Currently, the are over 2.2 Billion USDT tokens in circulation, thus yielding an alleged equivalent of $2.2 Billion in buying power that has been deployed over the last year to purchase Bitcoin and other cryptocurrencies.

Since cryptocurrency market caps are based upon the relatively small proportion of available tokens that are being actively traded at the major cryptocurrency exchanges and widespread adoption of these digital assets by venders is greatly lacking, it is unlikely that the cryptocurrency marketplace has actually since a level of capital inflows as great as the over $400 billion market cap that is currently the running estimate by most commentators. It seems more likely that the actual inflows are much smaller, particularly given the actual ratio of USD cash to USDT tokens is probably much smaller than the 1:1 ratio claimed by Tether Limited.

Ultimately, we will see how the markets continue to react to this news and what will be the next move by regulators, but we can clearly expect by now that the outcome will not be positive overall. Expect more downward pressure and volatility for cryptocurrencies until this matter is resolved.

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