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Crypto Price Check: Regulators Start New Year With a Warning

Federal banking regulators have put banking organizations on notice about their crypto activities, and bitcoin could be heading for a violent swing.

The new year got off to a shaky start for the crypto sector, with three federal agencies coming together to issue a stern warning on the very first working day of 2023.

The board of governors of the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued their first ever joint warning to banks over the risks associated with the cryptocurrency market.

The agencies said they were closely monitoring the crypto activities of banking organizations.

"It seems that crypto regulations are emerging from global markets," Winston Ma, a New York University Law School adjunct professor. "Since 2022, the European Union has been stepping up rules in this space and has pushed for a global approach. The EU’s Markets in Crypto-Assets is the most comprehensive regulatory framework to date, and it is expected to enter into force in early 2023."

In addition, he said, the collapse of trading platform FTX two months ago, which sent shockwaves through the crypto industry, may further stimulate U.S. regulators to accelerate the related lawmaking.

'Crypto Needs a Global Approach'

"Crypto is like climate change in that it needs a global approach," said Ma, author of Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse.

Sam Bankman-Fried, the founder and CEO of FTX, on Jan. 3 pleaded not guilty to a series of criminal charges including allegations of fraud, filed against him by the Justice Department during a hearing in U.S. District Court in New York.

"With the other key people at FTX/Alameda already having cut deals with prosecutors in exchange for their testimony against him as the mastermind, SBF’s lawyers probably advised that there was little advantage at this point of pleading guilty as there would be no deal offered," said David Lesperance, managing partner of immigration and tax adviser with Lesperance & Associates.

Lesperance said the next step will be pretrial discovery, which will allow SBF’s lawyers to see if there are weaknesses in the case against him ,such as a lack of documentation, email or texts, which might raise a question of reasonable doubt. 

"If such weaknesses exist, then they are in a better position to negotiate with prosecutors of a guilty plea in exchange for lesser charges or an agreed proposal to a judge for a lesser sentence," he said.

Lesperance said U.S. lawsuits against cryptocurrency exchanges, digital wallet providers, and mobile service companies following cyberattacks reached a high in 2022 as hacking victims attempted to recoup their losses 

"Most notably approximately half are claiming losses over $400,000," he said.

Bitcoin Could Break Violently Up or Down

Bitcoin  (~BTCUSD)   was up slightly to $16,852.17 on Jan. 5, according to data firm CoinGecko. Ether, the native currency of the ethereum blockchain, was flat at $1,250.21, while dogecoin was off modestly to $0.072712.

"Bitcoin has been trading like a stablecoin — mostly in the $16,000 to $17,000 range — since the collapse of FTX almost two months ago," said Frank Corva, senior analyst for digital assets at Finder. "This likely won’t be the case for much longer, as the price of bitcoin has a tendency to make significant moves to the upside or downside after consolidating in a tight range for some weeks."

"We may see the price BTC violently break up or down by Jan. 8, though," he added.

Corva said that Cameron Winklevoss, one of the owners of crypto exchange Gemini, asked Digital Currency Group CEO Barry Silbert in an open letter to help Gemini resolve the issue around the almost $1 billion in halted redemptions for 340,000 customers who were lending digital assets via Gemini’s Earn program by this date.

"Gemini had outsourced the yield generation for its Earn program to Genesis, a crypto market-making company under the DCG umbrella," he said, "Genesis is rumored to be on the brink of bankruptcy and Silbert has said very little about whether or not he has the funds to keep Genesis solvent."

[The Wall Street Journal on Jan. 5 reported that Genesis is evaluating options, including a Chapter 11 bankruptcy filing.]

Corva said that many in the crypto space are hoping that the carnage seen in crypto markets in 2022 won’t extend into 2023, "but if Silbert doesn’t keep Genesis afloat and make Gemini Earn users whole, we’ll likely see BTC stop chopping sideways and break to the downside."