Crypto markets fell today as Bitcoin and altcoins corrected interest rate hikes after the Fed FOMC minutes hinted at higher inflation.
Crypto markets today indicated that interest rates may be higher than many investors expected, as market volatility increased and investors absorbed minutes from the Federal Reserve.
The drop came after the February 14 consumer price index (CPI) showed higher-than-expected inflation amid tightening regulatory measures from the US Securities and Exchange Commission (SEC).
A crackdown in the US will lead to more crypto outflows
Investor concern over the actions against the crypto industry was the main negative catalyst for the day. More recently, Paxos and Binance, the centralized exchange services operated by the SEC and law enforcement agencies, followed the February 20 outflow of $32 million worth of digital assets.
The SEC launched its latest enforcement action on February 9 following Kraken’s profiteering program. In the $30 million settlement announcement, the SEC said it accused Kraken of “failing to register the offering and sale of crypto-assets.” “As a Service Program” the commission qualified as a sale of securities. In addition to the fine, Kraken agreed to cease operating the revenue program.
Nexo recently decided to discontinue its centralized staking program. Some argue that the staking ban is another nail in the crypto coffin, and Coinbase CEO Brian Armstrong has vowed to fight the move if sued.
On February 13, the Securities and Exchange Commission issued a notice to stablecoin issuer Paxos, stating that BUSD is an unregistered security. Following the SEC announcement, on the same day, New York regulators ordered Paxos to stop issuing BUSD, the third-largest stablecoin in the crypto market.
Binance has expressed its intention to continue supporting BUSD despite Paxos’ counter order. US lawyers argue that the argument against BUSD on securities is complicated by profits from arbitrage, hedging and stacking.
Some centralized staking protocols may benefit from recent enforcement efforts, but the crypto regulatory environment is still unclear and uncertainty often leads to market volatility. The Total Locked Value (TVL) of the DeFi market exceeded $50 billion for the first time in 6 months on February 17th, with unknown consequences for the crypto industry.
Over the past few years, the cryptocurrency industry and regulators have been plagued by various misunderstandings or doubts about the practical uses of digital assets. After the FTX implosion, some believe that US lawmakers are upset with the crypto industry. The most recent battle revolved around how centralized exchanges (CEX) handle client funds.
On February 13, SEC Chairman Gary Gensler issued the following warning.
“If this sector has any chance of survival and success, it is time-tested rules and regulations to protect the investing public. Don’t put your hand in the customer’s pocket by using the customer’s money for your own platform.
Lack of clarity and transparency on this issue is hampering growth and innovation in the sector, and many analysts believe that cryptocurrency adoption will not be possible until a universally agreed set of rules is in place. The Financial Stability Board (FSB) believes that many stablecoins will not be able to meet the upcoming stringent regulations.
The Commodity Futures Trading Commission (CFTC) has called for more stringent regulation, but the pace of these changes is unclear. On January 28, the Biden administration released a roadmap for cryptocurrencies that could prevent pension funds from investing in high-risk investments.
Rising interest rates and the prospect of a softening economy are weighing on riskier assets
Crypto prices are still closely related to the Dow and S&P 500. After January’s CPI print showed inflation was better than expected with a 0.5% increase, FOMC minutes confirmed that the Fed will raise interest rates as soon as it deems necessary.
In addition to the bearish sentiment around inflation, most major banks still expect the US to experience a deep recession at some point in 2023.
According to Bank of America’s analysis, further interest rate hikes are likely and investor sentiment remains low in the current economy:
“The U.S. consumer price index and producer price index rose more than expected in January, reinforcing the view that the Fed will continue to tighten monetary policy to return inflation to its long-term target of 2%. December