The crypto world is sending mixed signals

On Jan 27, 2023

Layoffs abound in the crypto world, as they have since early May. The year switched anew on the calendar, yet the sector gets no “new year, new me” shift: More than 26,000 jobs were lost in crypto in 2022. By press time, the 2023 tally had numbered no less than 1,900.

It’s hard to predict when the layoff trend will subside, but one exchange is bucking it: Binance. After hiring 5,000 workers last year, CEO Changpeng Zhao told the Crypto Finance Conference in Switzerland on Jan. 11 that he hopes to increase Binance’s workforce by 15% to 30% this year.

“We will continue to build and hopefully we will ramp up again before the next bull market,” he said.

That could be a while. The average crypto winter lasts four years, according to Forbes. And given that mysterious Bitcoin inventor Satoshi Nakamoto only released it 14 years ago, that’s no small amount of time. The last crypto winter lasted for three — from late 2017 to late 2020 — before coin prices skyrocketed to historical highs by November 2021.

In traditional securities, bear markets occur when a market index drops by 20%. And although there’s no official definition for the industry’s analog crypto winter, 2022 was icy cold. In May, one of the most prominent stablecoins depegged from the U.S. dollar, causing market tumult. Throughout the year, many of the most prominent exchanges — Celsius, Voyager Digital, FTX and BlockFi — went belly up. The price of Bitcoin dropped, at least temporarily, by 77%.

But in recent weeks, Bitcoin has made a small recovery. As of Jan. 25, it sits above $23,000 for the first time since August.

Bradley Duke, co-CEO of ETC Group, said this month that the Bitcoin jump was driven mainly by “some macro fears … subsiding with positive economic data in the US, including lower inflation stats and strong job growth numbers.”

Indeed, the consumer price index posted its most significant drop since the early COVID era. However, bank CEOs have stuck to their recession predictions from the fall. Bank of America CEO Brian Moynihan told investors Jan. 13 that he’s preparing for a “mild recession,” and the bank is instituting a partial hiring freeze.

Goldman buy-in

Goldman Sachs, meanwhile, named Bitcoin the top performing asset of 2023 on Jan. 23, with 27% in total returns and a risk-adjusted ratio of 3:1. In December, it was revealed that the bank planned to spend tens of millions of dollars to purchase or invest in crypto companies following the collapse of FTX.

Mathew McDermott, Goldman’s head of digital assets, told Reuters the collapse “heightened the need for more trustworthy, regulated cryptocurrency players, and that big banks see an opportunity to pick up business.”

In his December Wall Street Journal op-ed, CEO David Solomon reflected the sentiment, at least for the technology that drives crypto. The benefit of having regulated financial institutions develop blockchain applications, he said, is that they’re “accustomed to high standards of regulatory oversight … [and] can work with regulators and policy makers to find the right balance between regulation and innovation.”

The downfall of FTX and its ensuing contagion “shouldn’t distract us from the opportunity at hand,” Solomon wrote. “Investors large and small stand to gain with blockchain innovations that are guided by established, experienced institutions.”

Other support?

Is Solomon’s support enough to keep other banks interested in crypto, despite the challenges of the past year? JPMorgan Chase CEO Jamie Dimon’s not sold. But then again, he never really was. (They do have that crypto wallet trademark, though.)

Metropolitan Community Bank announced its exit from the crypto space this month; and crypto-friendly Signature Bank is in the middle of offloading $8 to $10 billion in digital assets to significantly shrink its crypto portfolio.

Acting Comptroller of the Currency Michael Hsu told Bloomberg in December that most banks’ crypto curiosity “went away” in 2022 as the value of tokens took a tumble and that he’d be “astounded” if banks started expressing interest in the asset class now.

Yet BNY Mellon CEO Robin Vince said in an earnings call this month that since launching crypto custody services in October, digital assets have been and will remain a focus for the bank.

In a December Financial Times op-ed, Vince emphasized the importance of developing a regulatory framework for digital assets such as crypto, noting that “much of the underpinning already exists and can be extended from the regulation of traditional assets.”

“We should embrace digital asset innovation, and align it to established rules and measured regulatory principles in order to protect customers and promote resiliency,” Vince wrote. “In so doing, we also protect the most precious asset of all — confidence in our financial system.”

Regulation prospects

Crypto regulation was a hot topic before FTX faltered. The now-bankrupt exchange’s founder, Sam Bankman-Fried, testified before Congress in 2021, tweeting afterward that he was “excited” to engage the powers that be in the refining of the regulatory landscape. Though any regulatory-building legislation associated with him is almost surely a no-go at this point, now, lawmakers and consumers want crypto regulation more than ever.

Without offering anything hard and fast, regulators of late have offered plenty of guidance. In December, the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. issued a joint warning on the risks of bank-crypto ties. The Basel Committee on Banking Supervision unveiled guidelines around the same time for banks playing in the digital-asset space. The New York Department of Financial Services also announced in December that any banks it supervises must ask for prior approval before engaging in any crypto-related activities, and those already engaged must contact the regulator immediately.

NYDFS Superintendent Adrienne Harris said the new guidance “is critical to ensuring that consumers’ hard-earned money is protected, that New York-regulated banking organizations remain resilient and competitive, and that the expectations are clear for those that wish to submit proposals for virtual currency-related activity.”

Regulators continue to disagree, however, over who gets to call the shots in crypto, perhaps contributing to delays in it happening. Last week, Hester Peirce, a commissioner with the Securities and Exchange Commission, said the SEC should regulate digital assets like crypto through rulemaking.

“If we continued with our regulation-by-enforcement approach at our current pace, we would approach 400 years before we got through the tokens that are allegedly securities,” she told a conference at Duke University on Jan. 20, according to Pensions & Investments. “By contrast, an SEC rule would have universal — albeit not retroactive — coverage as soon as it took effect.”

Also at Duke, Kristin Johnson, a commissioner with the Commodity Futures Trading Commission, implored Congress to include in any new legislation “statutory authority for the CFTC to conduct effective due diligence” on businesses, including crypto firms, that want to acquire CFTC-regulated entities.

No matter what else happens in 2023, fallout from last year will be addressed, bit by bit. Bankruptcy hearings for the FTX case are scheduled through April. Claims against Celsius, which just received court approval to grant some customer withdrawals and also has scheduled court dates, must be filed by Feb. 9.

New York Attorney General Letitia James’ lawsuit against former Celsius CEO Alex Mashinsky over alleged fraud will play out.

And in October, barring a plea deal, Bankman-Fried will go to trial in federal court on charges including wire fraud and conspiracy to commit money laundering. Former FTX executives Caroline Ellison, Gary Wang and Nishad Singh are all cooperating with authorities in the case against Bankman-Fried. Bankman-Fried pleaded not guilty on eight counts.

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