About: Investoom Weekly is the newsletter by the market intelligence company Investoom that provides AI-powered investment insights through social sentiment data, onchain data and financial data. Investoom democratizes the access to hedge fund insights.

Overview of the topics

• Crypto Highlights: Japan’s Financial Services Agency has urged global regulators to subject crypto exchanges to regulations.
• Social Data: A poll conducted by the Crypto Council for Innovation revealed that 52% of US investors want further regulation.
• Onchain Data: Thanks to regulation, transactions involving illicit addresses represented just 0.15% of 2021 crypto transactions.
• Financial Data: Bitcoin has fallen more than 70% and was trading below $20,000 on Wednesday.
• Deep Dive: Despite the FTX crisis, the crypto regulatory events of 2022 might rise investors’ optimism for the future.

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Crypto Highlights

The FSA urges global crypto regulations

Japan’s Financial Services Agency (FSA), the main financial regulator of the country, has urged worldwide regulators to subject crypto exchanges to bank-level regulations. With this respect, the deputy director of the FSA’s Strategy Development and Management Bureau stated “If you implement effective regulation, you have to do the same as you supervise traditional institutions”.

The FSA has required stronger crypto regulation after the crisis involving the crypto exchange FTX and the fraud files attributed to Sam Bankman-Fried. Indeed, the collapse of FTX has caused a meltdown of the whole market.

As a consequence, Japan’s regulatory framework for cryptocurrencies has provided many measures of protection for local investors. Thanks to the actions of the FSA, in fact, national investors will be able to withdraw their funds from two Japanese crypto exchanges linked to FTX.

Social Data

52% of investors requires richer regulation

The rise in crypto usage has led worldwide governments to increase their regulation. However, since the crypto landscape is constantly evolving, the rules in the different global territories are continuously changing.

Considering the US, cryptos have no legal tender and even if exchanges are legal, their regulation varies by State. However, despite the differences that exist among its territories, the US has continued to develop its legislation on cryptos at the federal level. In particular, the Financial Crimes Enforcement Network (FinCEN) considers exchanges as money transmitters on the basis that tokens are “other value that substitutes for currency”.

Crypto exchanges are regulated by the Bank Secrecy Act. According to US legislation, each crypto exchange service provider must register with FinCEN, implement an AML/CFT program, maintain appropriate records, and submit reports to the authorities. In the meantime, the SEC declared that it considers cryptos as securities and that it applies securities laws toboth digital wallets and exchanges.

What will happen in the future? Up to now, the US Treasury has emphasized an urgent need for crypto regulations to face criminal activities. Going back to December 2020, FinCEN proposed a crypto regulation in order to impose data collection requirements on exchanges and wallets. The rule requires exchanges to submit “suspicious activity reports” for transactions that reach $10,000. Furthermore, according to the act, crypto wallet owners have to identify themselves in case they send more than $3,000 per transaction.

Moreover, a national poll conducted by the Crypto Council for Innovation in October revealed that 52% of the 1,200 voters want the industry to be more regulated. Only 7% of the respondents declared that the market should be less regulated, whereas the other 41% thought that cryptos were sufficiently regulated and didn’t need richer legislation.

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Onchain Data

Is criminal activity pervading cryptos?

According to 2021 data, when the total transaction volume within the crypto market reached $15.8 trillion and increased by more than 567% with respect to 2020, the usage of cryptos among cybercriminals rose by 79%.

In 2021, transactions involving illicit addresses represented just 0.15% of the total volume, despite the illicit transaction volume reaching its highest level ever. The trends suggest that with the exception of 2019, an outlier year for crypto-based criminals, crime is becoming a smaller part of the ecosystem. This, however, is largely due to law enforcement’s ability to combat these phenomena.

Even if the share of total transactions represented by criminal activities is relatively low, criminal abuse of cryptos has created huge impediments to its adoption. Because of the fear of an increase in crime, some governments have prohibited the use of cryptos. Among the States that have completely banned such tokens, there are Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar, and Tunisia.

One promising development in the fight against crypto crime is the growing ability of law enforcement to seize illicitly obtained cryptos. In November 2021 the IRS Criminal Investigations declared that it had seized over $3.5 billion worth of cryptos, representing 93% of all funds seized by the division.

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Financial Data

Technology can’t erase all financial risks

According to the Bank of England’s deputy governor for financial stability Jon Cunliffe, a broader regulation won’t only help to eradicate criminal activities but even support investors in the risks connected with volatility.

From its record high hit in November, Bitcoin has fallen more than 70% and was trading below $20,000 on Wednesday, its lowest level since December 2020. As a consequence, the market capitalization of cryptos fell below $1 trillion, down from $3 trillion at its peak in November.

“Cryptocurrencies may not be integrated enough to the rest of the financial system to be an immediate systemic risk” Cunliffe stated, but he suspects that the boundaries between the crypto world and the traditional financial system will “increasingly become blurred”. For this reason, regulators need to “get on with the job” of bringing the use of crypto technologies within the regulatory perimeter.

However, the Bank of England declared that in order to have an effective approach, regulation needs to be carried forward across international standards and incorporated into domestic regulatory regimes.

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Deep Dive

The crypto regulatory events of 2022

Despite the crisis provoked by FTX, the crypto regulatory events of 2022 might rise investors’ optimism for the future. The main one is represented by the “European Markets in Crypto Assets bill” as it has passed the voting stages in the European Parliament and will become law in 2024.

Indeed, the comprehensive crypto framework was first proposed by the Commission in 2020. According to Binance CEO Changpeng Zhao, it will however become a worldwide standard. Invite 3 friends and gain access to the full deep dive!

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News of the week

• BTC: Bitcoin price corrected, but bulls are positioned to profit in Friday’s $580M BTC options expiry. [Read more]
• FTX: New FTX Chief Says Crypto Exchange Could Restart. [Read more]
• Crypto: Justice Department Announces Major International Crypto Enforcement Action. [Read more]
• Law: Finnish Minister Calls for EU Law to Recognize DAOs. [Read more]

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About

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