"Deep pullback + regulatory storm", where should the crypto market go?

"2021 is a difficult year for retail investors." Yu Bo, a dual player in crypto and stocks, lamented that it is really not easy to survive in this bloody and tragic market.

On March 26, the highly leveraged stocks held by Archegos Capital, a fund managed by Korean-American hedge fund manager Bill Hwang, were liquidated, with a total selling amount of US$19 billion, setting a record for the "largest single-day loss" for a single investor.

On April 18 and May 19, the crypto market collectively plunged as Bitcoin plummeted by more than $10,000. According to Hetongdi data, the total amount of contract liquidations on the entire network reached $6.9 billion and $5.2 billion respectively on these two days, and the crypto assets of hundreds of thousands of investors were instantly wiped out.

As the saying goes, "Success and failure are both due to Xiao He", high leverage is both the "ladder" for rapid wealth growth and the fatal root cause of the collapse of the wealth building. Blessings and disasters are often just a thought away.

Correspondingly, the madness in the crypto market has reached its peak. On May 20, Google Trends data showed that the number of global queries for "cryptocurrency" exceeded the peak in 2017/2018, soaring to an all-time high and heading towards another all-time high.

As a result, market concerns and regulators have been raised, and domestic strict regulatory signals have been released frequently. On May 18, the China Internet Finance Association, the China Banking Association, and the China Payment and Clearing Association jointly issued the "Notice on Preventing the Risk of Virtual Currency Trading Speculation", prohibiting financial institutions affiliated with the three associations from conducting virtual currency-related businesses; on May 21, the 51st meeting of the Financial Stability and Development Committee of the State Council pointed out that it is necessary to strengthen the supervision of platform companies' financial activities, crack down on Bitcoin mining and trading, and resolutely prevent individual risks from being transmitted to the social field.

Against the backdrop of high-pressure regulation and volatile markets, the crypto market is experiencing its most embarrassing and difficult period since 2017.

Crypto market welcomes a new round of regulation

On the surface, Bitcoin fell sharply from around $59,500 to a low of $29,000. The important triggers were: first, Tesla CEO Elon Musk "turned against" Bitcoin based on the fact that it is not environmentally friendly and the expiration of Bitcoin options; second, the surge in altcoins, especially the crazy rise of Animal Coin, and the high sentiment of new investors are important signals of market change.

However, Yu Bo disagrees. "This is determined by the game logic of the crypto market." He believes that the crypto market has experienced an 8-month rise, with too many profit-taking orders and too much leverage, and a decline is a necessary step for market cleansing and consolidation. However, due to the negative news at the regulatory level, such as the Federal Reserve's interest rate meeting and the joint announcement of three domestic associations, the crypto market has experienced a panic plunge.

On the day of the crash on May 19, the Fear and Greed Index, an indicator of the current sentiment in the Bitcoin market, has turned to an "extreme panic" level that has not been seen since April 2020. A report from Norwegian analysis company Arcane Research shows that the index is currently at 21, lower than last week's "greed" level of 73. This is evident.

It is worth noting that due to the domestic signals of strict supervision and risk prevention, investors are generally pessimistic about the future market.

On May 18, the three associations jointly issued the "Announcement on Preventing the Risks of Virtual Currency Transaction Speculation", prohibiting the financial institutions affiliated with the three associations from conducting virtual currency-related businesses.

The three associations jointly issued the "Notice on Preventing the Risks of Virtual Currency Trading Speculation"

Xiao Sa, partner of Beijing Dacheng Law Firm and director of the China Banking Law Research Association, wrote that the announcement specifically mentioned that virtual currency services should not be provided to customers "indirectly", which shows: first, penetrating supervision, superficial articles do not affect the characterization; second, be cautious about financial institutions cooperating with other companies to conduct virtual currency business to prevent the abuse of licenses; third, increase the compliance obligations of member units and screen currency-related services.

She believes that the announcement on preventing speculation risks issued by my country's three major associations has cut off the infrastructure for frequent transactions of virtual currencies by domestic residents, and has played a positive guiding role in controlling cryptocurrency speculation among mainland residents.

On May 21, the 51st meeting of the Financial Stability and Development Committee of the State Council called for "cracking down on Bitcoin mining and trading activities." The 21st Century Business Herald quoted an industry insider as saying that there are multiple possible reasons for cracking down on Bitcoin mining and trading activities, including preventing "hot money" from illegally entering and leaving the country using Bitcoin, cleaning up and standardizing the concept and scope of digital currency, and Bitcoin mining consuming too much electricity under the trend of carbon neutrality.

The 51st meeting of the Financial Stability and Development Committee of the State Council called for "cracking down on Bitcoin mining and trading activities"

According to Wu Blockchain, in response to the news that the Financial Committee cracked down on Bitcoin mining and trading, analysts pointed out that this is the first time that the State Council has publicly and clearly proposed to crack down on Bitcoin mining, which may have a great impact on China's mining industry, and the subsequent implementation measures remain to be seen. In addition, the meeting clearly proposed to crack down on trading activities, but the focus was on preventing social impact, and the focus may first be on illegal activities against retail investors outside the circle.

In fact, from a global perspective, the United States, Japan, South Korea, Switzerland, Singapore and many other countries recognize and allow Bitcoin transactions, and China is also one of the most active regions for Bitcoin transactions. At the same time, my country has defined Bitcoin as a "specific virtual commodity" since 2013, and the Civil Code implemented this year also recognizes the property attributes of Bitcoin.

However, Xiao Sa pointed out that although holding Bitcoin is not illegal, the frequent transactions between Bitcoin and legal currency have seriously affected the economic management order. The operation of non-mainstream digital currencies also threatens the property rights of ordinary people. It is necessary to intervene in time to prevent overheated speculation in Bitcoin from causing price collapse and triggering mass incidents.

Bitcoin mining may be hit by strong regulation

Since the news of the "crackdown on Bitcoin mining" by the Financial Stability and Development Committee of the State Council came out, many people in the mining circle expressed shock, and some even believed that domestic mining farms would be "finished."

Affected by this, the entire "mining circle" became extremely cautious and many mining companies responded quickly.

On May 22, Jiang Zhuoer, founder of B.TOP Mining Pool, posted on his Weibo: 1. Although B.TOP has not received any regulatory requirements from relevant departments, considering the latest regulatory spirit and the fact that B.TOP's business in mainland China only accounts for a small proportion of self-operated mining, there is no need to continue to provide mining machine purchasing services to the public in mainland China and bear additional regulatory risks for this. Therefore, B.TOP decided to stop providing mining machine purchasing services to customers in mainland China; 2. For mining machines that have been purchased and paid for but not put into operation, you can choose a full refund, please contact your counterpart business processing; 3. For mining machines that have been put into operation, although this situation falls under the force majeure "government intervention, restrictions, and bans" in the contract exemption clause, B.TOP has the responsibility to safeguard the interests of customers, and B.TOP will introduce measures to ensure that customers do not suffer losses.

BitDeer's official announcement also shows that in the near future, in order to actively cooperate with the regulatory spirit of relevant countries and regions and support the compliance development of the mining industry, BitDeer will upgrade and adjust. From 22:00 Beijing time on May 26, 2021, BitDeer will block all IPs in mainland China to further ensure that the platform does not provide services to residents in mainland China.

At the same time, local governments have also begun to take action to regulate Bitcoin mining.

On May 25, the Inner Mongolia Development and Reform Commission organized the drafting of the "Eight Measures of the Inner Mongolia Autonomous Region Development and Reform Commission on Resolutely Crack Down on and Punish Virtual Currency "Mining" Behavior (Draft for Comments)".

On May 27, the Sichuan Supervision Office of the National Energy Administration issued a notice on the convening of a research seminar on virtual currency mining. The notice stated that according to the relevant requirements of the National Energy Administration, in order to fully understand the relevant situation of virtual currency mining in Sichuan, our office decided to organize a research seminar, which will be held on June 2, 2021 from 9:30 to 11:30. Participants include relevant persons in charge of power grid companies, trading centers and power sales companies. Regarding the specific content of the meeting, State Grid Sichuan Electric Power Company and Sichuan Energy Investment Group will report on the relevant situation and related suggestions of virtual currency mining in their respective supply areas, and the impact analysis of shutting down virtual currency mining on the amount of abandoned hydropower in Sichuan this year; Sichuan Power Trading Center reports on the participation of big data companies in the hydropower consumption demonstration area in market transactions and related suggestions; power sales companies report on the participation of big data companies in market transactions and related suggestions.

In this regard, Jiang Zhuoer said on his Weibo that many cryptocurrency mining areas, such as the northwest and southwest regions, have serious local debts and power abandonment. Bitcoin mining has a significant impact on the finances, employment, and income of residents in poor areas, and it also helps new energy facilities to gain profits and further expand their scale. I believe that similar rational analysis and research will continue to be fed back by various industry professionals through various channels.

According to Securities Daily, regarding the State Council Financial Stability and Development Committee's request to crack down on Bitcoin mining and trading, Ding Feipeng, director of the criminal department of Beijing Shangguang Law Firm, said that this will have a profound impact on the virtual currency industry ecosystem. He believes that after domestic mining is completely banned, mining machine manufacturers will face the pressure of transformation or domestic sales to export. Some mining machine manufacturers of model coins may face the risk of bankruptcy or user rights protection, and a new round of "going overseas" may appear in mining farms.

Exchanges are under pressure and full of doubts

Within a week, the crypto market suffered a "heavy blow" from the three major financial industry associations and the Financial Stability and Development Committee of the State Council. In the crackdown on Bitcoin trading activities, exchanges have also become a key target.

Recently, some media reported that, judging from the screenshots of the chat between users and Huobi customer service, "Huobi contracts currently do not support Chinese users to open accounts. Users who have previously passed the authentication of Huobi accounts but have not opened contract accounts are now unable to open contract accounts." At the same time, Huobi responded that due to large market fluctuations, in order to protect the interests of investors, contracts, leverage, ETP and other services will not be opened for new users in some countries and regions for the time being.

In addition, according to Bybit's official announcement, Bybit will restrict mainland China IP addresses from accessing the API interface from 16:00 Beijing time on June 15, 2021 to conduct market and account asset inquiries, place orders, and other operations, including third-party trading tools.

Judging from the reactions of the exchanges, some trading services have been suspended or restricted for users in mainland China.

Analysts believe that this round of regulation is mainly a reaffirmation and emphasis of the "Notice on Preventing Bitcoin Risks" issued by the People's Bank of China and five other ministries in December 2013, and there is no new content.

Lawyer Sun Jun interpreted that, judging from the content of the announcements issued by the three major financial industry associations, first, we must correctly understand the essential attributes of virtual currency and related business activities. Virtual currency is a commodity and cannot be circulated and used as legal tender; second, relevant institutions must not conduct business related to virtual currency, and Internet platform enterprise member units must not provide network business venues, commercial displays, marketing promotions, paid reflux and other activities for virtual currency-related business activities; third, consumers should increase their awareness of risk prevention and guard against property and rights losses; fourth, strengthen self-discipline management of member units, otherwise they will be subject to corresponding penalties.

Ding Feipeng said that the State Council Financial Stability and Development Committee has called for "cracking down on Bitcoin mining and trading activities," which will have a profound impact on the virtual currency industry ecosystem. He believes that the issuance and financing of tokens in the name of mining may be completely stopped, and clues of crimes such as illegal fundraising, illegal issuance of securities, or illegal sale of token tickets may be transferred to judicial authorities. At the same time, contract transactions on virtual currency trading platforms may not be able to continue to operate, and there is even the possibility of further accountability.

In short, under the current high-pressure regulatory situation, exchanges are treading on thin ice and dare not slack off.

In contrast, the United States is trying to achieve better regulatory purposes by regulating crypto asset exchanges.

Recently, Gary Gensler, chairman of the U.S. Securities and Exchange Commission, told Democratic Congressman Mike Quigley that there are many crypto tokens that meet the requirements of securities laws and our agency is working hard to enforce the law. However, there are currently thousands of tokens and we can only perform 75 actions at present.

Gary Gensler wrote in his prepared testimony that the SEC has been consistent in its communications with market participants, and those who raise funds with ICOs or engage in securities transactions must comply with federal securities laws. At the same time, he also reiterated his intention to work with Congress to regulate exchanges. Gary Gensler said that in recent weeks, daily trading volumes have ranged from $130 billion to $330 billion. However, because the tokens are traded on unregistered crypto asset exchanges, these figures are not audited or reported to regulators. This is just one of the many regulatory gaps in these crypto asset markets. (Nuclear Finance)