Recent News Recap: Cryptocurrency Market Faces Crisis and Uncertainty Surrounding Ethereum's Future Increases
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Recent News Recap: Cryptocurrency Market Faces Crisis and Uncertainty Surrounding Ethereum's Future Increases
The article will discuss the current state of the cryptocurrency market, the ongoing crypto market crisis, increasing uncertainty surrounding Ethereum, and the impact of FedNow.
Navigating Web3 tides with focused insightsWritten by: Revelo Intel
Compiled by: TechFlow
This podcast primarily discusses the current state of the crypto market, including the cryptocurrency market crisis, increasing uncertainty surrounding Ethereum, and the impact of FedNow. Please see below for details.
Cryptocurrency Market Crisis
The USDC stablecoin became depegged after Circle confirmed that $3.3 billion in assets were trapped in Silicon Valley Bank, causing USDC's price to drop to $0.89.
Silicon Valley Bank collapsed because it did not have enough liquidity to meet customer withdrawal demands. The bank had used some customer funds to purchase U.S. government bonds, which had depreciated due to the Federal Reserve's continuous interest rate hikes.
Many other banks are facing similar challenges as Silicon Valley Bank.
On Sunday evening, the U.S. Treasury Department, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve issued a joint statement agreeing to fully reimburse all depositors at Silicon Valley Bank. They stated that even deposits exceeding the FDIC insurance limit of $250,000 would be accessible by Monday morning. As a result, the price of USDC partially recovered.
Signature Bank was also shut down under orders from its state chartering authority. Signature Bank was one of the few banks in the United States that served the cryptocurrency industry. Within less than a week, the U.S. crypto industry effectively lost access to banking services, which will have significant implications for the sector.
In this context, the only safe option is storing money in Bitcoin—but this is far from ideal due to Bitcoin’s price volatility.
Growing Uncertainty Around Ethereum
The impact of the USDC depegging event on the Ethereum ecosystem has been overlooked.
In fact, USDC is widely used across most DeFi protocols on Ethereum and is held by the majority of DAOs. Additionally, U.S. regulators may classify Ethereum as a security, further increasing uncertainty around the network.
The New York Attorney General (NYAG) views $ETH as a speculative asset similar to $LUNA and $UST, dependent on third-party developers to generate profits. Against this backdrop, KuCoin exchange was sued for selling unregistered securities. Shortly after the press release, the price of $ETH dropped by 8%. Meanwhile, the SEC stated that $BTC is the only cryptocurrency that is not a security, while CFTC Chairman Rostin Behnam said Ethereum is a commodity and that the CFTC has jurisdiction over $ETH.
FedNow
Using Ethereum scaling solutions combined with stablecoins for payments was a topic frequently discussed by Vitalik Buterin last summer. Circle is also shifting toward payment services and developing a suite of products to support this transition, such as digital identity verification.
There is widespread speculation that the crackdown on cryptocurrencies is occurring because these payment systems directly compete with the Federal Reserve’s upcoming FedNow real-time payment system, expected to launch between May and July this year. FedNow is functionally close to being a CBDC system.
Almost every country, including the United States, is developing digital identity systems. According to Caitlin Long, CEO of Custodia Bank, the ability to transfer funds 24/7 means banks must hold substantial assets to ensure they can always meet withdrawal requests. Smaller banks will need to be more cautious about whom they serve and where they invest customer deposits.
Smaller banks will fail because larger banks can always offer better terms. One way large banks can remain profitable in this environment is by acquiring all remaining small banks.
This could mark the beginning of a banking consolidation process, potentially leading to the collapse of all commercial banks and eventual central bank takeover. The U.S. government will attempt to control cryptocurrencies and then eliminate any elements it cannot regulate.
Wealth Tax
ESG investors are not particularly concerned about Bitcoin’s environmental impact because they know it is negligible.
The Biden administration’s proposed 2024 budget includes a 30% tax on electricity costs associated with BTC mining, including off-grid power usage.
The total value of the proposed 2024 budget is $6.8 trillion. Other controversial provisions in the budget involve tax changes related to different activities, specifically capital gains.
Capital gains refer to the profit earned when selling cryptocurrencies or stocks. The budget proposes raising the capital gains tax rate from 20% to 40% for individuals earning over $1 million annually.
U.S. politicians are beginning to recognize public frustration toward the upper class. Other proposed taxes include increasing the corporate tax rate from 21% to 28% and raising the stock buyback tax from 1% to 4%.
It’s Not Over Yet…
Since last spring, central banks have been withdrawing liquidity from the financial system through higher interest rates, with no signs of slowing down.
Last week, Powell made it clear that the central bank will continue raising interest rates for the foreseeable future and plans to keep them elevated over the long term. The Federal Reserve continues to sell its assets, primarily U.S. government debt. Selling U.S. government debt causes bond prices to fall and interest rates to rise.
If the debt ceiling is not raised before the Treasury’s June deadline, the U.S. government could face default risk, triggering a market crash and a downgrade in U.S. sovereign credit ratings.
As long as the Federal Reserve continues selling assets from its balance sheet, banks may continue experiencing unrealized losses, which could worsen once the Treasury resumes issuing more government debt.
With inflation still too high, the Federal Reserve is unlikely to stop hiking rates. Higher-than-expected inflation data could lead to further market declines amid expectations of continued rate hikes.
Benjamin Cowen’s Market Analysis
The more difficult aspect of crypto lies in time-based capitulation. In 2014, the market simply oscillated between rising and falling, and during those periods, you ended up losing either way.
The market remains in a time-based capitulation phase and could stay in this stage for much of this year. This is the hardest phase, as people begin to grow indifferent and disengage from cryptocurrency.
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