- Investors are awaiting inflation data this week, which could affect risk appetite.
- The cryptocurrency market has halted its rally and portends increased regulatory restrictions in the US.
- The ban on issuing the Binance BUSD token ordered by a New York agency has only added to the doubts.
The US regulators’ crackdown on the cryptocurrency sector has made major market players nervous, which has kept a lid on digital asset prices in recent days.
Investors and cryptocurrency trading platforms are keenly watching the aggressive regulatory stance in the U.S. and the implications this could have on the future of the cryptocurrency market.
So far, they are trying to digest the decisions lately made by the U.S. Securities and Exchange Commission (SEC) and other regulators against various companies offering digital financial services.
Tightening the grip on the crypto market
It is clear that the U.S. authorities are moving forward in controlling the cryptocurrency market, after all that has happened in the past year. The collapse of several cryptocurrency projects and lending companies set off alarm bells in Washington.
Early Tuesday in Tokyo, Bloomberg reported that an index of the market’s 100 largest tokens barely rose 1%. It was recovering after falling the previous day after the New York State Department of Financial Services ordered Paxos to end the issuance of Binance’s BUSD stable coin.
Meanwhile Bitcoin (BTC), the world’s largest cryptocurrency by market capitalization, was up just 1% at 09:16 (-GMT) and was trading at USD 21,869.99. Meanwhile, Ethereum (ETH) was trading slightly better at 1,536.25 USD with about 2% gain.
Binance Coin (BUSD), the native token of the world’s largest cryptocurrency exchange, managed to stabilize after suffering a loss of about 8% on Monday.
BUSD ban raises doubts
The New York agency’s action against BUSD only increased doubts about the future of the stablecoin and about Binance which has faced serious problems in recent days. A week ago, the platform confirmed the temporary suspension of dollar withdrawals. Another sequel to the collapse of the FTX mega exchange last year.
Fear has gripped the market that any regulatory decision or event could end up hurting Binance further and cause a run on the banks. Something similar to what happened with FTX, after Binance CEO Changpeng Zhao launched a tweet warning about its financial state.
According to what was explained by the New York State Department of Financial Services, the agency informed Paxos Trust Co, Binance’s partner of partner, to stop issuing BUSD due to certain unresolved issues about the supervision of that company and its relationship with Binance.
On the other hand, the SEC is also considering taking action on the issuance of BUSD as it considers it to be an unregistered security. Something similar was decided by the agency last week when it fined Kraken for allegedly violating securities laws.
Since the collapse of the terra USD stablecoin, regulators and politicians in Washington have raised questions about the development of these assets that are exchanged for a fixed value against the dollar. Stablecoin are used for the purchase and sale of other cryptocurrencies.
It is not known whether the regulatory wave will also affect Tether and USD Coin, the largest stablecoin in the world. Some 342 million BUSD were exchanged in the last 24 hours, according to a report by research firm Nansen.
Liquidity in decline
“Falling market capitalization of stablecoins means falling liquidity and leverage for cryptocurrencies,” explained Morgan Stanley strategists led by Sheena Shah.
“Without Paxos creating a new BUSD, we need to assess whether current BUSD holders will convert to other stable coins,” Shah added. In her view this “will have a neutral impact on liquidity, or whether concerns about further regulatory actions will reduce overall market demand for stable currencies.”
The aggressive regulatory policy unleashed by the U.S. government against digital assets portends further repression going forward. Since the White House issued the executive order to create a cryptomarket regulatory strategy, regulators have accelerated the pace in this direction.
In parallel, government agencies have been working on the development of a digital dollar or central bank currency (CBDC), which could be issued sooner than expected, according to estimates from Bank of America strategists.
This week, the SEC could propose changes to legislation that would make it more difficult for hedge funds to be able to trade cryptocurrency instruments.
Binance’s dragging problems led to net outflows of stablecoins totaling $587 million on Monday, according to data from CryptoQuant. In the past 24 hours the stampede has been about USD 600 million from the exchange platform. One of the highest, including about 20 platforms, according to Coinglass data.
Confidence erodes
The blow dealt to the BUSD issue “has shaken confidence in the Binance ecosystem,” said the CEO of social trading platform Alpha Impact, Hayden Hughes.
Trying to do damage control, Binance CEO Changpeng “CZ” Zhao tried to convey confidence to its customers. On Tuesday he tweeted that “FUD is temporary.” He was referring to the English acronym that translates to “fear, uncertainty and doubt.”
Bitcoin, which had been experiencing a bullish streak of more than 30% during the month of January, halted its rally. For now, investors are waiting for the U.S. government to release inflation data. Such data is key to further clarify the outlook on interest rates and make projections on risk appetite.
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