Crypto Winter

Was 2022 the turning point for crypto? Values hit all-time highs early in the year, and remember the 2022 Super Bowl ads? Then by May, values nose-dived as the Fed started to raise interest rates, and the failures followed. In October, FTX went bankrupt and the founder charged with fraud. Did the winter ease in 2023?  (NPR)

The winter continued into 2023. Crypto related firms (platforms, banks, news aggregators) cut staff or went bankrupt too, due either directly or indirectly to FTX fallout. (Investopedia) By March, Silvergate (a crypto-bank) voluntarily liquidated. (Coindesk)

A draft bankruptcy proposal from FTX was announced this month that would have FTX selling assets from elsewhere in the business to pay some of its creditors/account holders at the time of bankruptcy with cash. (InvestmentNews)

Fraud, Taxes, and Regulation

Calls for regulation, breaking securities laws, and uncovering fraudulent schemes were the themes of 2023.

• The SEC sued Coinbase in June, alleging the exchange violated federal securities laws by operating as an unregistered broker, exchange and clearing agency for cryptocurrencies that were securities, naming 13 tokens as examples of coins it believed met those requirements. (Coindesk).  Coinbase pushed back in a filing on Friday, saying the SEC isn't claiming there are investment contracts involved in any of these examples. (Al Jazeera)
• The SEC alleged that Binance violated US law by operating as an unregistered securities exchange. They further alleged that Binance diverted customer funds and combined them with investor assets and sending them to a third party company owned by the Binance owner. (PBS)
• Richard Heart, also known as Richard Schueler, and three entities he controls are accused of selling unregistered securities, namely crypto assets that raised $1 billion from investors who were told claiming it was the first high-yield “blockchain certificate of deposit.” Investors were told to expect returns of 38% on these“Hex” (Investment News)

The Investment and Infrastructure Jobs Act called for the issuance of crypto tax documents akin to the 1099 forms financial firms issue for other investments. However, the proposal has not been finalized and another tax year will go by without such reporting. It appears that the holdup at the moment is with the administration, and the fear may be that finalizing these plans somehow “legitimizes” cryptocurrency. It may also be difficult for the variety of firms that handle cryptocurrencies to actually implement the law, as it could require new infrastructure. However, many crypto investors would be happy to see it implemented and take the confusion and worry out of tax implications of their crypto transactions. (Coindesk)

A bi-partisan bill, led by senators Lummis and Gillebrand, has been worked out that would regulate many aspects of the crypto industry in order to protect consumers and prevent another FTX debacle from happening. (NBC News)

• Their proposal would, for the first time, draw a clear line between a security and a commodity, and allocate enforcement authority to the agencies that oversee them. 
• The legislation also looks to empower the Securities Exchange Commission to play more of an aggressive role in ensuring consumer protections.
• Under the bill, companies would be required to disclose cryptocurrency risks to consumers by proving reserves and communicating with customers using clear, plain language.
• The bill also grants the Commodities Futures Trading Commission jurisdiction over nonsecurities crypto assets, and requires all crypto asset exchanges to register with the commission.

New Players/Products

There were two recent announcements of new cryptocurrencies.

PayPal issued a US dollar-based Stable Coin (PayPal USD) this week.

PayPal said the stablecoin’s function is to reduce friction for in-experience payments in virtual settings and allow direct flows to developers. It’s redeemable for dollars and backed by dollar deposits, short-term U.S. Treasurys and similar cash equivalents. (CNBC)

ChatGPT’s makers launched Worldcoin this week. The novelty of Worldcoin is that ownership of these tokens requires an iris scan.

Worldcoin has no problem attracting eyeballs. More than 2.2 million people have signed up, getting their irises scanned in exchange for a digital ID and, in some countries, free crypto.

The new project from ChatGPT founder Sam Altman aims to create a blockchain-based "identity and financial network". Its native coin WLD has kept a steady price between $2 and $2.50 since its launch on July 24, thus far spared the "pump-and-dump" trajectory of many new crypto tokens. (Reuters)

A description of the launch party for Sam Altman’s new crypto firm, Tools for Humanity, included an array of golf ball-sized orbs that contained the cameras to capture those iris scans. (NY Times)

In case you care, Elon Musk has proclaimed he will not be entering the crypto space. (Decrypt)

Future of Crypto—Predictions and Warnings

Investopedia explains what might be expected for crypto in the second half of 2023. Analysts were fairly optimistic following a rough 18 months for crypto, citing the increased participation by traditional financial firms in crypto. Upcoming legislation will be of great interest to the industry and could have some impact.

In an op-ed published on Blockworks, Lars Seier Christensen looks at other asset bubbles in history and provides counterarguments to the optimistic forecasts of many in the industry who are expecting a bounce back from crypto winter.   He argues:

The projects that will drive the next rally will be projects that support compliance, not avoid it. 

Projects that will focus on adding real value to data security, processes and privacy protection. Projects that enable the tokenization of real-world assets, provide trust between actors and cut out inefficient middlemen and single points of failure in the economy as we know it today. 

Early in the year, the BBC reported that the US Federal Reserve, the FDIC and the Office of the Comptroller of the Currency were going to be closely monitoring the crypto activities of banking institutions following the FTX bankruptcy and fallout.

More recently, the SEC once again urged caution when it comes to investing in crypto, warning of conflict of interest (firms offering a menu of services to the investor that are usually offered by separate companies) and to be wary of any “proof of reserves” offered by the crypto firm. (Investopedia)

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.