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Monthly Market Review - September 2021

Updated: Mar 8

In this note, we look at the large regulatory events that happened within the digital asset ecosystem and their even bigger implications.


Three major regulatory events happened in late August and early September. The first was a broad crackdown on Binance by several jurisdictions. The US, UK, Cayman Islands, Netherlands, Japan, Hong Kong, Malaysia, Singapore, and Thailand all warned consumers about the safety and vague legal status of the Binance platform. Since 2017, Binance has developed a very complex corporate structure to stay ahead of any regulatory changes. This spiderweb of related companies is now being called into question by a broad cross-section of regulators. The UK and European banks have used these consumer warnings to prevent depositing or withdrawing GBP or EUR from the Binance Platform.


These regulatory actions are concerning, but ultimately, we believe Binance will still keep operating after being reprimanded. It is a highly profitable exchange that processes close to $100 billion of volume daily. Its profitability has boosted its balance sheet, which it can use to endure any short-term pain or restructuring required by regulators. The actual cost for Binance will be conceding market share as investors are unable to access the platform. Its market share has already dropped from 59% in January to 52% in September. This trend, which is a function of the negative regulatory pressures, is a much more significant concern for Binance than any fine or regulatory pain. Binance has reacted by beefing up its compliance and regulatory teams.


The US has had a mixed month in terms of regulation. The new SEC chairman Gary Gensler knows digital assets intimately. He taught classes on blockchain at the MIT Sloan School of Management. So, many assumed he would be friendly to the digital asset space. However, US Congress is currently deciding how best to regulate digital assets. Are they commodities, technologies, or securities? As the head of the SEC, Gary argues that many are securities and that investors would have the best protection under the SEC (which has the strictest regulations). Crypto's legal standing is especially relevant as Congress debates taxing crypto gains to fund Biden's new infrastructure plan.


The devil is in the detail regarding how the tax regime is implemented. There is a high risk that tax requires overly harsh reporting requirements that are difficult to implement practically for crypto. For example, in Decentralised Finance, how can smart contracts report transactions. Overly restrictive reporting requirements will drastically affect the long-term viability of the digital asset space. US crypto holders are aware of this - so the industry has started forming and funding lobbying groups. These lobbyists ensure that Congress understands how it can best protect the digital asset industry within the US.


On a positive note, Jeremy Powell, the Fed chair, indicated that he had no intention of banning Bitcoin during a questioning session on September 30th; however, he believes that stablecoins need more regulatory oversight. As we've discussed before, we agree with the Fed chair on the need to regulate stablecoins.


The significant regulatory action was China reconfirming and extending its ban on digital assets. On September 24th, it confirmed that all digital asset transactions were illegal. The ban caused the broad market to plunge by nearly 10%. Huobi is the most significant exchange that serves mainland Chinese clients and has a token that users can hold to access lower transaction fees, vote on new coin listings, and of course, speculate on the exchange's success. The below chart shows the price action of the Huobi token during September. One can see the immediate negative impact of the announcement on its price.

The chart of the Houbi token as it traded during September 2021. Source: CoinMarketCap

Overall, it's been a bearish month of regulatory action. However, we believe that the US's position will soften over time as Congress understands digital assets. Historically, Congress does not like restricting a new innovative industry from thriving within the US. The dichotomy of supporting innovation and ensuring investor protections is one that Congress is still trying to balance. We suspect the pendulum will swing back and forth a few more times.


China's news is bearish. However, it does fit the historical pattern of China banning any technology that could threaten the ruling party before using it to the party's advantage. Elements of blockchain technology must be very tempting. For example, the digital Yuan would give the CCP even more control over the country – one could exclude dissidents from the financial system entirely.


At this stage, it is difficult to predict the final form of China's blockchain strategy and watching its actions in the following months will provide a clue on whether it intends to allow a limited digital asset industry to exist in China or not.

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