Like a Bear in a China Shop: Crypto’s Crazy Freefall

• Bitcoin, Ethereum, Doge plunge after Chinese crypto crackdown…
• 2 major crypto exchanges suffer service outages…
• Regulatory pressure ramps up…

Cryptocurrencies are in a freefall with no parachute in sight. The recent selloff of digital coins like Bitcoin, Ethereum, and Dogecoin picked up steam overnight after China tightened restrictions on digital coins.

The People’s Bank of China (PBOC) issued new regulations on Tuesday, barring financial institutions from conducting crypto-related transactions.

That announcement intensified a selloff already underway in the crypto world. 

For the first time in three months, the value of Bitcoin fell below $40,000. 

As of this morning, the top cryptocurrency had plunged more than 20% in 24 hours and was briefly trading below $35,000. 

Other popular cryptos like Ethereum and Dogecoin were also dragged down by the news. 

Ethereum’s value tumbled below $2,500 while Doge fell to less than $0.35. 

China’s New Rules

The regulations announced by the PBOC on Tuesday expand upon China’s 2017 ban of crypto.

The rules bar financial institutions and payment companies from providing any services related to cryptocurrencies. 

The prohibited transactions include account openings, registration, trading, clearing, settlement, and insurance — reiterating the 2017 ban.

The latest regulations also expand upon China’s previous ban. 

Financial institutions in the country are now prohibited from accepting virtual currencies or using them as a means of payment and settlement. 

They also cannot provide exchange services between cryptocurrencies and the yuan or other foreign currencies.

Banks are now banned from providing cryptocurrency saving, trust, or pledging services, issuing crypto-related financial products, and using virtual currencies as investment targets by trust and fund products.

The institutions were also encouraged to increase their monitoring of money involved in crypto trading.

The three main industry bodies in China — the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China — said in a joint statement, “Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order.”

Crypto Plunge Intensifies

The impact of China’s regulatory crackdown was quickly felt around the world with Bitcoin’s recent plunge intensifying. 

The crypto market was already in turmoil after Tesla CEO Elon Musk raised concerns about the environmental impact of mining coins like Bitcoin last week. 

Musk then made things worse over the weekend, prompting speculation that Tesla had sold all of its Bitcoin after previously saying they wouldn’t.

A few hours later, Musk clarified the automaker was still holding its Bitcoin but the damage was already done.

The recent turmoil surrounding Bitcoin and Tesla hasn’t just hurt cryptocurrencies. 

Tesla (TSLA) has seen a steep drop in recent days and at writing was down more than 3.5% at $556 per share. 

Crypto Exchanges Suffer 

Crypto exchanges have taken a hit amid the recent selloff in the market. 

Coinbase, which became the only publicly traded crypto exchange in the U.S. earlier this year, was down as much as 11% in today’s session. 

The exchange went public earlier this year at $429 per share but is now trading around $200 per share. 

Coinbase also suffered a service outage this morning with the company confirming in a tweet they were “aware some features may not be functioning completely normal.”

Rival exchange Binance also said in a tweet that Ethereum withdrawals had been “temporarily disabled due to network congestion” before later announcing service had resumed. 

The company said in a follow-up tweet “Withdrawal fees have been temporarily raised to account for the current gas prices.”

Is This a Turning Point?

Galaxy Digital CEO and Chairman Mike Novogratz called the recent selloff in crypto a “liquidation event” in an interview with CNBC. 

But Novogratz expressed optimism this is not the end of crypto saying, “The story hasn’t gone anywhere. This crypto revolution has happened.”

He also weighed in on China’s future with digital currencies.

Novogratz said, “I think China is focused on their own Central Bank issued digital currency. I don’t think they’re going to smash blockchain because they’re kind of a pro-blockchain country, but they want to control things.”

And China isn’t the only country banning cryptocurrencies and exploring a government-backed digital coin.

In April, Turkey’s Central Bank banned cryptocurrencies in the country.

India has also proposed legislation that would create an official digital currency issued by the Reserve Bank of India and “prohibit all private cryptocurrencies” in the country.

The U.S. Federal Reserve is also said to be exploring the digital currency world. 

In an interview with CBS’ 60 Minutes earlier this year, Fed Chair Jerome Powell said, “We have a group of people who are doing different software development and that kind of thing. It’s a very, very large, complex project.”

Powell downplayed concerns that China would beat the U.S. in the digital currency space, saying, “We are the world’s reserve currency. Meaning that people use dollars even if they have no connection to the United States. They use dollars to pay for things all over the world.”

But industry executives are worried increased regulation will hurt cryptocurrencies in the long run. 

Jesse Powell, CEO of crypto exchange Kraken, told CNBC that regulation proposed by the Office of the Comptroller of the Currency (OCC) “could really hurt crypto and kind of kill the original use case, which was to just make financial services accessible to everyone.”

He also raised concern about the U.S. falling behind other countries saying, “I hope that the U.S. and international regulators don’t take too much of a narrow view on this. Some other countries, China especially, are taking crypto very seriously and taking a very long-term view.”

And the OCC may be taking another step forward on crypto. 

Acting Comptroller of the Currency Michael Hsu is set to testify in the House Financial Services Committee today. 

Hsu’s prepared remarks show he will call for a staff review of crypto-related transactions.

“My broader concern is that these initiatives were not done in full coordination with all stakeholders. Nor do they appear to have been part of a broader strategy related to the regulatory perimeter. I believe addressing both of these tasks should be a priority.”

The staff review would be focused on pending regulatory actions proposed by former Acting Comptroller Brian Brooks. 

A July 2020 interpretive letter from the OCC said, “stablecoin issuers may desire to place assets in a reserve account with a national bank to provide assurance that the issuer has sufficient assets backing the stablecoin in situations where there is a hosted wallet. For the reasons discussed below, we conclude that a national bank may hold such stablecoin “reserves” as a service to bank customers.”

Brooks said, “This opinion provides greater regulatory certainty for banks within the federal banking system to provide those client services in a safe and sound manner.”

Treasury Secretary Janet Yellen has also sounded the alarm about crypto and called for more regulation.

Speaking at a New York Times DealBook conference in February, Yellen said, “It is a highly speculative asset and you know I think people should be aware it can be extremely volatile and I do worry about potential losses that investors can suffer.”

But she also raised concerns the U.S. doesn’t have the necessary tools to efficiently regulate the space. 

Speaking at The Wall Street Journal’s CEO Council Summit on May 4, Yellen said, “I frankly don’t think we have a framework in the United States that is quite up to the task of putting in place a regulatory framework that we need in the future.”

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