Is Regulatory Overreach a Culprit in the Blockchain Bear Market? Investors Believe So
Regulatory overreach may have resulted in the current crypto bear market, an opinion shared by several investors, including Peter Du of Du Capital.
The past months have tested the commitment of even the most ardent blockchain enthusiasts. Around a year ago, the new technology enjoyed a peak in public attention and, consequently, market value. Today, the hype has receded as every offering on the market has declined at least 70% from its all-time high.
It’s not the first time a boom and bust cycle has hit the space. Bitcoin, in particular, has gone through several speculation bubbles since it was launched in 2009. Its resilience is often cited by many as a reason to invest. This time, however, it may not be just the usual suspects affecting the space. Regulations on Initial Coin Offerings (ICOs) are new challenges for the blockchain community’s development and have caused many to shy away.
A controversial ruling by the United States Securities Exchange Commission (SEC) deemed token sales and ICOs as sales of securities. This means that many of the virtual assets that investors had purchased as utility tokens don’t pass the Howey Test and should be registered investments. A change of affairs that has great implications for the blockchain market’s largest ICO platform and second largest contender, Ethereum.
Although the decision doesn’t affect Ethereum directly, it pushed many of its holders to take a step back. The platform’s ERC20 utility tokens are generally designed to be a type of transactional tool for use within a specific blockchain platform. An asset that is completely different in nature from securities. It was under this understanding that they were especially attractive to investors since they bypassed the bureaucratic grip of the SEC.
Some have welcomed the clarification on what used to be a regulatory grey area. Others see it as another attempt by government institutions to encroach on what are fundamentally decentralized, state-less technologies. A move similar to New York State’s notorious BitLicense framework introduced in 2015. Overall, American investors and entrepreneurs are more concerned that these attitudes will drive blockchain development out of the country.
Renowned investors, including Du Capital founder Peter Du, are of the opinion that the consequences may prove fatal to a significant amount of the once-promising projects in the space. As the head of one of Asia’s leading blockchain venture funds, Du has weighed in on the regulatory overreach as well as the speculative environment that called for it.
"The current hurdles to ecosystem development stem not only from the bear market but also largely due to the heavy-handed overregulation of the Securities and Exchange Commission, which has curbed the proliferation of many promising ICOs and blockchain projects. As a result of inadequate investments, it's unlikely that the ecosystem will develop and Ethereum is an excellent example of how overregulation stunts development. It's not likely to be the last example either."
He also added that “the previous bull run was speculative and unfortunately, did not help Ethereum's technology or ecosystem development.” Citing well-known scalability issues, Du is concerned that the platform lacks the necessary ecosystem “even if the underlying technology has strong potential.” However, he believes that previous demand does say something about the potential for public blockchains.
As the bear market continues, the main focus of firms such as Du Capital has shifted to possible workarounds to the regulatory situation, with security tokens being the most notable compromise. There are also promising outlooks on foreign investments, new technical developments, and initiatives that might lead to a future bull run. Nothing is conclusive, however. Tempered investors such as Du believe it boils down to a matter of “wait and see.”