Crypto Markets Subdued by US Regulatory Crackdown Before Key Inflation Data

Investors digested the implications of an aggressive American regulatory posture on digital assets on Tuesday as the escalating American efforts to curb the crypto sector kept prices on hold.

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There was an increase of about 1% in the index of the largest 100 tokens as of 1 p.m. Tokyo time, which is a partial recovery from the swoon a day earlier that was sparked by a New York agency's order to end the issuance of Binance-branded stablecoin BUSD. 

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There was little to no change in the price of Bitcoin and Ether, the two biggest digital assets, both rising less than 1% to trade at $21,715 and $1,500, respectively. After a nearly 8% decline on Monday, Binance Coin, the native token of the world's most popular exchange, steadied after a near 8% drop on Friday. 

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There has been a shadow cast over Binance and the third-largest stablecoin because of the move against BUSD. Crypto's biggest trading platform remains a source of fear for investors, as they are wary of any events that may hurt confidence in the platform, given that the chaotic collapse of rival FTX and the ensuing chaos remain fresh in the minds of investors. 

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New York State Department of Financial Services ordered Paxos Trust Co., Binance's partner, to cease issuing BUSD due to unresolved issues regarding Paxos' oversight of its relationship with Binance. Separately, the Securities and Exchange Commission is considering taking action on an allegation that the BUSD is an unregistered security. 

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There is about $137 billion worth of stablecoins in circulation around the world, and they are designed to hold a fixed value, say $1, for example. Some of them are backed by reserves like cash and bonds while others are underpinned by a variety of different forms. Stablecoins are often used by investors to park their funds as they move between different crypto trades. 

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BUSD developments raise the question of whether we should also expect a regulatory hurdle for the two most popular stablecoins, Tether and USD Coin, as well. During the past 24 hours, about $342 million worth of BUSD has been redeemed, according to data from Nansen Research. 

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Crypto Liquidity

Morgan Stanley strategists including Sheena Shah wrote in a note that the drop in stablecoin market capitalization means falling crypto liquidity and leverage in the crypto markets. 

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“Since Paxos won't be creating new BUSD on its own, we must evaluate whether the current holders of BUSD will convert to other stablecoins, neutralizing the liquidity impact, or if concerns over further regulatory actions will cause overall market demand for stablecoins to decline,” Shah stated. 

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In the United States, the latest steps are part of a wider effort to squeeze crypto there that threatens to marginalize it. There is a possibility that the SEC is going to propose rule changes on Wednesday that could make it more difficult for the likes of hedge funds to work with crypto outfits. 

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CryptoQuant data shows that stablecoin net outflows from Binance reached a one-month high of $587 million on Monday, according to the data gathered by the company. The overall net outflows from the platform in the past 24 hours amounted to about $600 million, which is the highest in a basket of 21 platforms based on Coinglass' figures.

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‘Shaken Confidence’

Hayden Hughes, chief executive officer of social trading platform Alpha Impact, said that Binance's decision to end BUSD issuance "has shaken confidence in their ecosystem.".

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Changpeng "CZ" Zhao, Binance's Chief Executive Officer, sought to project an image of strength in front of investors. In a tweet Tuesday, he stated that the acronym FUD, which stands for fear, uncertainty, and doubt, was temporary. 

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Since last year's digital-asset rout, which resulted in a more than 30% fall in Bitcoin, the turbulence in the crypto market has set back a more than 30% rebound. Traders are looking forward to the US inflation data on Tuesday, which will have a significant impact on interest rates and risk appetite in the near future.