The biggest risk factor for many projects in 2021: unavoidable SEC regulation

On December 29, the long-rumored news in the market was finally settled. Coinbase officially announced that it would suspend XRP transactions from January 20, 2021.

So far, under the wielding of the SEC (U.S. Securities and Exchange Commission), mainstream trading platforms such as Coinbase, Bitstamp, and Binance US have announced that they will remove XRP transactions. XRP seems to have entered a difficult time.

01 XRP is targeted by the SEC and the delisting trend is coming

The domino effect is still ongoing. The storm all started on December 22, when the SEC sued Ripple and its executives for violating securities laws - illegally issuing securities.

Since 2013, more than 14.6 billion XRP coins have been sold in unregistered offerings, worth $1.38 billion, without ever being registered with the SEC. Although it has not yet entered the litigation stage, the SEC's investigation is definitely a clear negative for the market, and Ripple has responded strongly to this.

In a statement regarding the lawsuit filed against it by the U.S. Securities and Exchange Commission (SEC), it said it would respond within a few weeks to address the unproven allegations: it will defend itself in court to ultimately bring more clarity to the U.S. cryptocurrency industry.

This action by the SEC is not only related to Ripple, but also an attack on the entire crypto industry in the United States, affecting countless XRP retail holders who have no connection with the company and bringing more uncertainty to the market.

Even though the SEC’s first pre-trial conference against Ripple for illegally selling XRP and making a profit is scheduled for February 22, 2021, the incident is still brewing, and Coinbase has even been sued by its customers for “illegal” sales of XRP.

It is also due to this influence that mainstream trading platforms such as Coinbase, Bitstamp, and Binance US have successively announced that they will remove XRP transactions. Bitwise Asset Management's Bitwise 10 Crypto Index Fund and other crypto asset management companies have also liquidated their XRP positions.

If the "war" between the SEC and Ripple continues in the future, more trading platforms will inevitably remove XRP. Therefore, XRP has fallen all the way from its previous highs in the secondary market, once falling below $0.2, showing a hopeless situation.

So, after being targeted by the SEC, is there really no solution?

02 XRP is not the first, and it is not destined to be the last

In fact, among many digital currency projects, XRP is not the first to be targeted by the SEC, and it is destined not to be the last.

The most familiar one is undoubtedly last year's EOS incident, which was also targeted by the SEC. However, unlike the terrible situation of XRP that was eventually removed from the shelves by multiple trading platforms, EOS adopted an extremely flexible approach, allowing the problem to be resolved before it could ferment on a large scale.

On September 23, 2019, the SEC reached a settlement with Block.one, in which Block.one agreed to resolve the SEC's allegations of unregistered token financing by paying a civil penalty of US$24 million (the fine amount accounted for 0.58% of its total token financing), while granting it important exemptions for future business.

This not only means that Block.one and EOS have come to a successful conclusion on the road to compliance, and the hanging policy "Sword of Damocles" has been temporarily lifted, but also provides ideas from another perspective for a number of projects caught in similar accusation dilemmas - take a positive attitude and admit the punishment .

Tezos made another confirmation of this, announcing on March 23, 2020 that it had chosen to settle the lawsuit it was facing for $20 million after a two-year court battle.

As the first public token financing project in history and the largest before EOS, Tezos achieved $232 million in revenue through a sensational first token financing issuance in the fall of 2017.

"The SEC will be very short of money next year (2020)." EOS and Tezos' "spending money to buy peace" seems to confirm the SEC's law enforcement thinking - the project party's historical financing and other behaviors have legal regulatory handles, and the market basically has a consensus.

As long as they make more moves, they can hit the target with one shot. At the same time, once they choose to make a move, it must be a well-known (rich) project that can be heavily punished. Therefore, it makes sense that Ripple, whose founder sold tokens to become the richest man, is being targeted.

From this perspective, there don’t seem to be many projects on the market that meet the requirements of “problematic + rich” at the same time. Who will be the next target of the SEC?

Just recently, the SEC issued an asset freeze order to the crypto hedge fund Virgil Capital, accusing the fund's founder Qin of misleading investors into investing their money in a crypto trading algorithm that profits from price differences between trading platforms. The trading algorithm is used for RenVM "dark node" network fragmentation to process cross-chain transaction orders.

With the SEC wielding its big stick, more project parties are bound to be targeted in 2021, and many "Zhou Yu vs. Huang Gai" scenes are bound to be repeated.

03 “Regulating” blockchain

However, when it comes to dealing with regulators in a “tug of war”, Tether is undoubtedly an experienced “veteran” with a “good record”.

As "one of the biggest gray rhinos in the crypto world", Tether received a subpoena from the U.S. Commodity Futures Trading Commission (CFTC) in 2017, but it did not stop issuing new USDT.

Later, the New York Attorney General's Office (NYAG) released the actual results of the investigation, stating that Bitfinex used Tether to provide loans to itself to cover up its $850 million financial hole, but USDT continued to be "issued, issued, and issued."

Even after experiencing the crisis of trust on October 15, 2018, when “even short positions were cut”, USDT still survived by virtue of its “too big to fail” attitude, and even issued additional shares crazily in 2020, further deeply binding with the market.

On December 30, the CEO of crypto data website CryptoQuant said that if the SEC’s next target is Tether, it will deal a serious blow to the current bull market.

At present, the market relies heavily on USDT. In this context, the recently popular algorithmic stablecoin seems to provide another idea:

Stablecoins with collateral-anchored models like USDT ultimately rely on centralized issuers (even the second-generation stablecoin DAI has to sacrifice decentralization to a certain extent and introduce centralized assets into the collateral assets to ensure stability).
This means that it is destined to be vulnerable to regulation. For the decentralized crypto market, stablecoins that can be "regulated" to a certain extent are gradually becoming a necessity.
The biggest difference between algorithmic stablecoins and traditional different types of stablecoins such as USDT, USDC, DAI, etc. is that they completely abandon the mortgage anchoring model and only establish a monetary system through market supply and demand, without a specific centralized issuer.

For this reason, algorithmic stablecoins may also represent a specific market demand from the perspective of "deregulation" - outside the mainstream market currently occupied by USDT and others, the long-tail effect will gradually erode the vacant market share.

However, ESD currently has a market value of less than US$400 million, and the overall market value of algorithmic stablecoins is very small. It is still just a niche experiment, and it remains to be seen whether it can truly challenge centrally issued stablecoins.

04 Summary

As a technological innovation with financial attributes, encrypted digital currency projects are inherently high-risk behaviors from an investment perspective due to their own characteristics such as unlicensed and high liquidity.

But to be honest, up to now, the entire market is still in a chaotic and unruly state, and the identification and investment of projects are completely a "betting on the size" game - not only is the project vision free to play, but even the progress of subsequent development depends almost entirely on the "character" of the project party, and there is no effective supervision and control.

This is also the root cause of the rampant scams and scams in the industry. However, it is understandable in the early stages, after all, many disruptive innovations are on the edge of the gray area in the early stages.

The cryptocurrency market and blockchain will continue to expand in size and gain wider recognition and participation in the future. It is only a matter of time before a certain degree of supervision and regulation is required. "Regulating" blockchain may become the norm in the future.

Due to the rampant industry runaways and scams, "regulating" blockchain will become a matter of sooner or later. What do you think of this view?