Markets

The Unintended Consequences of the FIT21 Crypto Market Structure Bill

Published

8 months ago

24 May, 2024

The Unintended Consequences of the FIT21 Crypto Market Structure Bill

There is no doubt that bipartisan approval of the Financial Innovation and Technology for the 21st Century Act (FIT21) of the Chamber is a monumental development for the US crypto industry, bringing much-needed regulatory clarity into view. However, despite its good intentions, FIT21 is fundamentally flawed from a market structure perspective and introduces issues that could have far-reaching unintended consequences if not addressed in future Senate negotiations.

Joshua Riezman is deputy general counsel at GSR.

Note: The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

One of the most problematic aspects of the bill is the creation of a forked market for cryptographic tokens. By distinguishing between “restricted digital assets” and “digital commodities” in parallel trading markets, the bill sets the stage for a fragmented landscape that is ill-suited to the inherently global and fungible nature of cryptographic tokens and creates the first of its kind – gentle compliance complications.

This legislative initiative stems from long-running debates over the application of US federal securities laws to cryptographic tokens and the difference between bitcoin, considered a non-security, and almost all other tokens. The U.S. Securities and Exchange Commission’s (SEC) guidance on whether a cryptographic token is a security is generally based on whether the associated blockchain project is “sufficiently decentralized” and therefore not a security contract. investment, as defined by the Howey test.

FIT21 attempts to codify this impractical test by dividing regulatory oversight over spot crypto markets between the Commodity Futures Trading Commission (CFTC) and the SEC, based on, among other things, the degree of decentralization.

While the bill appears helpful in clarifying that cryptographic tokens transferred or sold pursuant to an investment contract do not inherently become securities, it unfortunately contradicts itself by giving the full SEC authority over these investment contract assets when sold to investors (or issued to developers) for the period before a project arrives in decentralized Valhalla. Only tokens airdropped or earned by end users are initially “digital commodities” subject to CFTC jurisdiction.

The most confusing thing is that FIT21 allows simultaneous trading of restricted digital assets and digital commodities for the same token on separate and distinct markets during this period (as shown in the graph below). It is likely that many projects Never meet the bill’s prescriptive definition of decentralization and therefore trade in disjointed markets in the US indefinitely.

The bill’s proposed bifurcated market for restricted and unrestricted digital assets ignores fungibility as a fundamental feature of cryptographic tokens. By creating restricted and unrestricted asset categories, the bill violates this principle, leading to market confusion and fragmentation. This could harm liquidity, complicate transactions and risk management mechanisms such as derivatives, reduce the overall utility of cryptotokens, and ultimately stifle innovation in a nascent industry.

Implementing such distinctions would likely require technological modifications to cryptographic tokens to allow buyers to know what type of cryptographic asset they are receiving so that they can meet specific market requirements. Imposing such technological marking on restricted digital assets, even if possible, would create a “uniquely American” crypto market, separate from global digital asset markets, reducing the usefulness and value of all relevant projects.

As shown in the chart above, tokens can move between the SEC and CFTC markets if decentralized projects are recentralized. The complexity and compliance costs created by such a scheme applied to the many thousands of future cryptographic tokens are dramatically underestimated and would undermine the credibility and predictability of US financial markets. There are few examples of financial products transitioning between SEC and CFTC jurisdictions and it is almost always a tire fire (for examplethe 2020 transition of KOSPI 200 futures contracts from CFTC jurisdiction to joint CFTC/SEC jurisdiction).

The bill further underestimates the international nature of crypto token markets. Cryptographic tokens are global assets traded as the same instrument globally. Attempting to restrict certain assets within the US would likely lead to regulatory arbitrage, where the return of international markets would undermine the intent of the bill while also eroding the competitiveness of the US crypto industry.

Developers and investors outside the US are unlikely to impose similar restrictions on restricted digital assets. Therefore, new projects and investors will be encouraged to move development and investment outside of the US to avoid these requirements. This would make it extremely difficult to prevent the US digital commodities market from being flooded with non-US tokens that would have been restricted digital assets if they had been “issued” in the US.

Lastly and ironically, the law intended to protect US consumers may end up harming them due to poor market structure. Early CFTC-regulated markets for end users will be full of sellers who typically received tokens for free. These unbalanced market dynamics will most likely lead to depressed prices and increased volatility compared to narrow and international markets, with professional arbitrageurs benefiting at the expense of US retail.

This system will be further manipulated by insiders and professionals as arbitrageurs capitalize on the disjointed prices and discontinuities of price jumps caused by the transition between centralized and decentralized designations. At best, US retail markets will be a noisy signal of fundamental value and end users will be the last to receive institutional liquidity.

While FIT21 is a crucial step towards addressing the regulatory challenges posed by crypto-tokens, the current proposed market structure could have unintended consequences. To protect customers and ensure the smooth functioning of U.S. digital asset markets, lawmakers must refine the bill to unify spot markets for fungible cryptographic tokens that would otherwise not be securities into a coherent regulatory framework.

Source

Related Topics:CFTC FIT21 Opinion Regulation SEC

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FinCrypt Staff

We are the editorial team of FinCrypt, where seriousness meets clarity in cryptocurrency analysis. With a robust team of finance and blockchain technology experts, we are dedicated to meticulously exploring complex crypto markets with detailed assessments and an unbiased approach. Our mission is to democratize access to knowledge of emerging financial technologies, ensuring they are understandable and accessible to all. In every article on FinCrypt, we strive to provide content that not only educates, but also empowers our readers, facilitating their integration into the financial digital age.

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Markets

Crypto Markets Rebound as Spot Bitcoin ETFs Attract Massive Inflows

Published

6 months ago

17 July, 2024

FinCrypt Staff

Crypto Markets Rebound Ahead of Early Ethereum ETF Approval

This week saw $722 million worth of Bitcoin spot ETF inflows, including the largest daily inflow in a month.

Cryptocurrency markets rallied on Wednesday, driven by inflows into spot Bitcoin exchange-traded funds (ETFs).

The price of Bitcoin (BTC) is up 3% over the past 24 hours to last change hands at $65,200, according to CoinGecko. Ethereum (ETH) is up 2% and is trading at $3,471. Solana (SUN) and Polkadot (POINT) increased by 4%.

Bitcoin spot ETFs saw $422 million in daily inflows on Tuesday, the highest in the past 30 days, according to Far side data, . The all-time record for a single day was $1.05 billion on March 12.

Among Tuesday’s top contributors, BlackRock’s IBIT led with $260 million in inflows, followed by Fidelity’s FBTC with $61 million. This week has already seen more than $722 million in inflows.

Among the top 100 cryptocurrencies by market cap, Worldcoin (WLD) led with a 28% increase, followed by Helium (HNT) with 20% and Lido DAO (LDO) with 15%.

Worldcoin, a decentralized identity project led by OpenAI CEO Sam Altman, announced is extending the lockups for early investors and team members. This means that tokens will be gradually released through 2029, instead of the original 2027 plan. Token unlocks are generally seen as a negative because they increase supply and early investors can sell their tokens for profit.

Meanwhile, XRP, the token of the XRP Ledger network, jumped 8% after the CME and CF benchmarks introduced new indices and reference rates for XRP.

U.S. stocks faced a downturn on Wednesday. The S&P 500 fell 1%, while the Nasdaq Composite and Dow Jones Industrial Average both fell 2%.

Source

Markets

Altcoins on the cusp of a major breakout – WLD, AR, and INJ prices could surge by 20% in the coming days

Published

6 months ago

17 July, 2024

FinCrypt Staff

Altcoins on the cusp of a major breakout – WLD, AR, and INJ prices could surge by 20% in the coming days

Crypto markets appear to have been taken over by the bulls as major tokens have surged above their crucial resistance zone. Bitcoin surged above $65,000 while Ethereum was above $3,500, and XRP, which had remained passive for quite some time, surged over 40% in the past few days to hit $0.6. The uptrend has been captured in most altcoins, with Worldcoin (WLD), Arweave (AR), and Injective (INJ) leading the rally. Here’s what to expect for these tokens in the coming days.

Worldcoin (WLD) Price Analysis

O Worldcoin Price has been trading inside a descending wedge since it marked a new ATH near $12 in the final days of Q1 2024. The recent price action helped the price break out of the upper resistance of the wedge, breaking above the crucial resistance zone between $2.21 and $2.39. Market sentiments have changed, but technicals suggest that the bulls may remain passive for a while, which could offer some room for a bearish pullback.

The price broke out of the wedge with a significant increase in volume, but the current volume suggests that the bulls have taken a step back. Meanwhile, the RSI is about to reach the upper boundary, which could attract bearish forces. Additionally, the DMI has undergone a bullish crossover, but the decline in the ADX suggests that the rally may remain consolidated above the gains. Therefore, the WLD price is expected to maintain a horizontal consolidation between $3 and $3.3 and trigger a fresh rally to $4.4 during the next bullish rally.

Arweave (AR) Price Analysis

Arweave formed a strong base around $25, which helped the rally trigger a recovery during the bearish attack. Mt. Gox and German terror forced the price to fall below $20. However, the recent price action has brought the altcoin within the bullish range and raised expectations of maintaining a decent uptrend for a few more days.

AR price has hit one of the major resistances around $30 to $31.5, which could act as a strong base once overcome. The buying volume is slowly increasing, which could keep the bullish hopes for the rally high. Moreover, the supertrend has just flashed a buy signal, indicating a clean reversal of the trend. Therefore, AR price seems primed to maintain a healthy uptrend and rally above $40. However, if the bulls maintain a similar trend, making new highs above $50 may not be a tedious task for the bulls.

Price Analysis of Injective (INJ)

Injective price has been showing sharp strength since the beginning of the year and hence, the recent turnaround is expected to revive a good uptrend going forward. The bears engulfed the rally to a large extent, but the recent price action suggests that the bulls have regained their dominance. Therefore, INJ price is expected to maintain a strong uptrend with a bearish interference on the way down.

INJ price has surged above the lower support zone and has registered consecutive bullish candles. Although the volume is below the required levels, the OBV is maintaining a sharp uptrend. Furthermore, the Ichimoku cloud lead span B is heading towards the lead span A and a healthy crossover indicates the start of a new uptrend. However, INJ price may be out of the bears’ reach once it secures the resistance zone between $30.77 and $32.12, which seems to be on the horizon.

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Markets

Ethereum at $3.5K, Exchange Supply Hits 34-Month High

Published

6 months ago

17 July, 2024

FinCrypt Staff

Ethereum at $3.5K, Exchange Supply Hits 34-Month High

Ethereum (ETH) supply on exchanges has hit a 34-month high as the asset’s price surpassed the $3,500 mark.

ETH has risen 2.3% over the past 24 hours and is trading at $3,490 at the time of writing. The second-largest cryptocurrency — with a market cap of $419 billion — briefly touched an intraday high of $3,517 earlier today.

ETH Price, Whale Activity, RSI, and Exchange Supply – July 17 | Source: Santiment

Ethereum’s daily trading volume also increased by 7.6% to reach $19.8 billion.

According to data provided by Santiment, the supply of Ethereum on exchanges has reached $19.52 million ETH. This level was last seen in September 2021, when the asset was trading around the same price.

On the other hand, data from the market intelligence platform shows that the number of whale transactions has fallen by 12% in the last day — falling from 8,730 to 7,629 unique transactions per day.

The move shows that the supply of Ethereum on exchanges has been increasing with small deposits rather than large transactions from whales.

Additionally, the ETH Relative Strength Index (RSI) is currently hovering at the 60-mark, per Santiment. The indicator shows that Ethereum is slightly overbought at this price point, but it may not be in a critical position due to its large market cap.

One of the main drivers of Ethereum price increase is ETH spot expectations ETFs in the US Investment products are scheduled to start trading on July 23rd.

Source

Markets

Bits + Beeps: How to Play the ‘Trump Trade’ in Cryptocurrencies After the Assassination Attempt

Published

6 months ago

17 July, 2024

FinCrypt Staff

Bits + Bips: How to Play the ‘Trump Trade’ in Crypto After the Assassination Attempt

Also, how much will the Fed cut rates (and when)? What will be the inflows into ETH ETFs? And what is the near future for Bitcoin?

Posted on July 17, 2024 at 12:00 PM EST.

Listen to the episode at Apple Podcasts, Spotify, Capsules, Source, Podcast Addict, Pocket molds, Amazon Musicor on your favorite podcast platform.

In this episode of Bits + Bips, hosts James Seyffart, Alex Kruger and Joe McCann, joined by guest Jack Platts, dive into the market reaction to the recent assassination attempt on former President Donald Trump, analyzing how this event will influence the 2024 US presidential election and the cryptocurrency markets.

They also cover potential rate cuts: Could there be a cut in July? How big could the September rate cut be? Could the decision be influenced by the upcoming election?

They also give their predictions on what percentage of BTC ETF inflows the ETH ETFs will reach, and James talks about what he expects for Grayscale’s ETHE (hint: his outlook would be positive for ETH).

Finally, they delve into what’s next for Bitcoin as the German government runs out of BTC and Mt. Gox distributions begin. Just now?

Program Highlights:

Whether Trump’s shooting decided the election and whether the event caused a “flight to safety”
How election markets are becoming a place to watch election probabilities and whether cryptocurrencies “lean right”
Whether rate cuts will occur in July or September and by how much they will cut: 25 bps or 50 bps
How Joe sees the relationship between global liquidity cycles, rate cuts, and the potential rise of Bitcoin
What are the new updates about Ethereum ETFs and their expected launch?
Why Solana Hasn’t Performed Significantly Better Since Trump News
What Market Breadth Indicates About the Current Market Rally and the Impact of Rates on Small Caps
Everyone’s predictions on ETH ETF inflows and how much outflow we’ll see on Grayscale’s ETHE
What’s Next for BTC After German Government Exits Bitcoin and Mt. Gox Giveaways Starting This Week