Well, no sooner had Bitcoin just rallied some $700 to a new all-time high early Sunday morning than it’s now careened sharply lower, falling more than $1,000 at one point over the space of just an hour and a half:
So that looks like a quick $17b vanished into thin air:
The culprit here is a UK regulatory crackdown as described in the Telegraph this evening. To wit:
Ministers are launching a crackdown on the virtual currency Bitcoin amid growing concern it is being used to launder money and dodge tax.
The Treasury has disclosed plans to regulate the Bitcoin that will force traders in so-called crypto-currencies to disclose their identities and report suspicious activity.
Until now, anybody buying and selling Bitcoins and other digital currencies have been able to do so anonymously, making it attractive to criminals and tax avoiders.
But the Treasury has now said it intends to begin regulating the virtual currency, which has a total value of £145 billion, to bring it in line with rules on anti-money laundering and counter-terrorism financial legislation.
The new rules, which will be applied across the European Union, are expected to come into force by the end of the year or early in 2018, the minister in charge has said.
Needless to say, this just underscores the regulatory risk involved with cryptocurrencies and you’re encouraged to note that this comes just days after Coinbase was ordered by a judge to comply with an IRS request to turn over data on some 14,000 users. For those who might have missed it, the information Coinbase is now ordered to produce for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period is as follows:
- the taxpayer ID number,
- birth date,
- records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and
- all periodic statements of account or invoices (or the equivalent).
Clearly, the latest news out of the UK is just further proof that Bitcoin and other digital currencies are in fact vulnerable to regulatory crackdowns no matter what proponents will tell you. That doesn’t mean sentiment won’t prevail in the interim and drive prices higher still, but what it does mean is that ultimately, you are not safe from the heavy hand of the government in cryptocurrencies.
Who knows, maybe you should “diversify” into some of Maduro’s new “petros”.
And on that note, we’ll leave you with Goldman’s summary of the challenges facing this industry as delineated last week in the wake of the “Consensus: Invest conference”:
- Futures, hedging, and liquidity: One of the most frequently cited impediments to institutional investment in cryptocurrencies is the lack of available futures and hedging instruments that would allow for broader market-making activity, ultimately driving greater market liquidity. CME Group outlined its Bitcoin futures listing, which it plans to offer as one of the first solutions available to the market in December (subject to regulatory approval). CME has also introduced its Bitcoin Reference Rate index, which it believes could address some of the pricing challenges faced by the market today. However, there was broad consensus among panelists that it could take several iterations before available solutions satisfy the requirements of institutional investors.
- Clearing and settlement: We have previously written extensively about the early-stage application of blockchain technology to the post-trade environment across traditional asset classes. Ironically, blockchain’s application to the clearing and settlement of cryptocurrency assets is far less mature today, with relatively few solutions available in the market.
- Custody: Given the importance of “possession” for cryptocurrencies (in other words, the bearer of private cryptographic keys is considered the “owner” of the assets), panelists expect custodians to play a critical role in the development of the institutional cryptocurrency market. In the long run, custody solutions may rely on diverse protocols involving hot/warm/cold storage, physical security mechanisms (secure environments in specific legal jurisdictions), and technical solutions combining hardware and software. In any event, there was consensus that large institutional investors will eventually expect to see capabilities for custody solutions that are not being offered by custody vendors today.
- Regulation: The regulatory obstacles to large-scale institutional investment in cryptocurrencies are numerous, and include significant differences by geography (for example, US, Japan, Switzerland, China), jurisdiction (for example, among US states), and regulator (for example in the US between SEC, OCC, and other regulators). Although most panelists noted a constructive attitude among U.S. regulators thus far, many believe that it may be some time before there is sufficient clarity to allow participation by large institutional investors.