In crypto’s wild west, one week can make or break a business – or dream for that matter.
Just ask Grayscale Investments, whose CEO Michael Sonnenshein held closed-door meetings with U.S. regulators in early May to persuade the Securities and Exchange Commission (SEC) approve its long-awaited wish to convert its Grayscale Bitcoin Trust (GBTC) fund into a bitcoin (BTC) spot ETF. The move, Sonnenshein argued, would unlock $8 billion in value for investors, CNBC reported him as saying.
With 19 billion in assets, GBTC was hoping Washington would approve the conversion by a July 6 deadline, arguing that the SEC “is discriminating against issuers by approving bitcoin futures ETFs and denying bitcoin spot ETFs.”
Then a bomb fell. On May 12, reports emerged that high-flying stablecoin TerraUSD was imploding, with sister coin Luna crashing to zero after recently soaring as high as $100, sending the $1.2 trillion crypto market into a tailspin. Terra, which claims to be pegged one-to-one with the U.S. dollar, has struggled as bitcoin has plummeted 36% this year. This is because unlike other stablecoins backed by dollars, bonds, gold or other assets, it’s hedged against bitcoin reserves.
In its heyday, Luna’s algorithm system matching supply and demand aimed at proving the networks’ 1-to-1 crypto-fiat reserves was seen as innovative compared to shoddier stablecoins such as Tether which greenback reserves have never been fully proven.
But as its price fell and investors ran for the exits, the meltdown sent shivers across the crypto space, prompting U.S. regulators to sound fresh alarms against the space and warning investors about the danger of stablecoins.
Indeed, Treasury Secretary Janet Yellen warned Luna’s woes underscore the risks of coins purportedly pegged to the U.S. dollar, adding that her team is working on new regulations. She added stablecoins “present the same kind of risks we have known for centuries in connection with bank runs.’”
Spot ETF to See Delays
That’s bad news for Grayscale or rivals such as Bitwise, Fidelity or Ark 21 Shares, which are also jockeying to launch the hotly-anticipated U.S. bitcoin ETF, analysts said, adding that Luna’s troubles and the prolonged crypto meltdown will likely delay an SEC decision for at least another year.
“There are large problems in the crypto space right now and the regulations that will hit stablecoins will likely derail this BTC spot ETF,” said Ed Moya, analyst at Oanda. “There has been hope that it would be approved in the latter part of the year but that’s now less certain. Traders are going to be very skeptical about trading this. You really need to see Bitcoin regain some of its momentum.”
Echoing others, Moya said regulators remain wary that many stablecoins don’t have enough reserves (or can’t prove them) for their claimed dollar pegs, putting their livelihood at risk when tougher regulations emerge to ensure they do. Underscoring investors skittishness for the assets, the ProShares Bitcoin Strategy ETF (BITO), the first to trade BTC futures in the U.S., has also struggled this year, closing at $18.62 on Thursday, down from a $44 high.
Sam Stovall, strategist at CFRA, agreed chances for a U.S. bitcoin spot ETF, at least this summer, look dim. “We need to regain confidence in these stablecoins,” he said. “It [Luna] showed these coins can still be manipulated and the algorithm technology needed to guarantee stability is not there yet.”
Crypto is also not the inflation hedge or safe haven many supporters have bragged about as traders have increasingly sought refuge in treasuries or the dollar, dumping digital assets. “It’s too volatile and not like commodities such as chemicals, gold and even defensive sectors such as tobacco, alcohol or packaged foods,” Stovall added.
Chris Matta, U.S. president of 3iQ, a crypto investment firm in Canada where several bitcoin spot ETFs trade, countered the Luna fiasco will fuel new regulation in the nascent space, boosting prospects and accelerating the introduction of a spot ETF, though the conceded it likely won’t be in the near term.
“There have been a bunch of moments like this in crypto history, including the Mt Gox hack (among a string of others involving Binance or Axie Infinity…) or Covid selloffs,” said Matta. “This is what happens when you have new, cutting-edge technology that is not completely tested. But these events will make the ecosystem stronger and fuel more thoughtful governance going forward.”
Added Matta: “This situation may prompt regulators to put more regulatory frameworks in place, a key requirement for the FED to approve a bitcoin ETF. Assuming that happens and is not heavy handed, that could bring a spot ETF faster than expected.”
Matta also expects digital currencies will bounce back sooner than growth stocks when the market recovers. “Crypto continues to innovate and there are so many use cases in the Web 3 ecosystem and in NFTs and DeFI that are very exciting,” he enthused. “When you look at equity markets, I do think it will be difficult to break out of this macro environment.”
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