Bitcoin’s prices are in free fall with no bottom in sight. Bitcoin has lost 30% of its value in the last five days. It has broken through one resistance line after another and forecasts struggle to keep up with the losses of value. Press articles predict the next resistance line only to discover those figures are obsolete only a few hours later instead of days. And The question in everyone’s mind is what is causing the market to drop. Some believe is shorting, Futures contracts, weak volume, and downward pressure. But there is an evident explanation that can account for all of it: Regulation.
This week the SEC fined crypto start-ups AirFox and Paragon $250,000 in penalties in its latest crackdown on ICOs. This action caps a year long hunt against projects deemed as violating securities laws. With the securitization of Bitcoin imminent, the US government is taking steps to ensure that the $30 trillion securities market is not affected by crypto currencies malicious practices. Using a loose interpretation of the Howey Test, the SEC is formulating regulation to regulate ICOs , exchanges, and industry managers.
On October 2, the SEC seized the 1Broker.com crtpto exchange based in the Marshall Islands. This was the first clear move by the SEC to enforce US securities law and protect US investors from potential loss. At the time this was taken as a warning and seen as an isolated incident. However, things got real a month later when the exchange EtherDelta was also targetted and fined $400,000. Earlier in the year, the SEC’s Enforcement Division co-director Stephanie Avakian remarked during a conference that the SEC was looking into dozens of ICOs investigations. Suddenly, this matter struck home in the mind of developers and executives who like Zachary Coburn could be charged for operating an unregistered security exchange.
Guidance by Enforcement
What is causing panic and a massive sell off is not regulation itself. But the manner and ambiguity on how regulators enforce the laws. As of now, the SEC does not have clear legislation to follow, so it is using something called “Guidance by Enforcement.” This is the assumption on the part of the agency that making some pay will cause others to fall in line. And all will accept whatever rules the agency comes up with later. The SEC is counting that the vagueness of the language will deter future ICOs from continuing current practices.
New regulations forces developers to follow current securities mechanisms when raising funds. In other words, ICOs in its current format will cease to exist. This is a major setback and returns control to existing financial firms. ICOs allow individuals to pursue innovation using public funds. Without them, creativity will remain a rarity afforded to the few that can persuade investors. In the end, crypto will become a second market, regulated, and managed by the SEC. As legacy security products, they will trade in leverage and fractional reserves by major banks.
The introduction of regulation is a direct threat to the Bitcoin ecosystem. And the unexpected assault on Etherdelta, AirFox and Paragon coincides with the start of the current price decline. And to make things worse enforcement is brutal and retroactive. In an formal announcement the SEC cited the exchange was in violation for 18 months dating back to 2017. And the 1Broker case revealed that location offers no protection; enforcement can occur online even if the company is based outside the US.
The speed and resolve of regulators came as a reality check for all retail investors. And current prices are a result of the fear created by the SEC’s actions. It is safe to say that the government managed to undo a decade of change. And in a matter of days it returned the world back to living with the uncertainty of another financial crisis.