Bitcoin faces regulatory scrutiny after record-breaking rally

[NEW YORK] It's been a tough year by all accounts. But for Bitcoin, 2020 has been a marvelous time.

The cryptocurrency almost quadrupled, surpassing US$20,000 for the first time as it notched record after record.

The diehards cheered it as an inflation hedge in an era of unprecedented central bank largesse. Wall Street veterans from Paul Tudor Jones to Stanley Druckenmiller blessed it as an alternative asset, adding to the rally. And companies like MicroStrategy and Square moved cash reserves into crypto in search of better returns than near-zero interest rates deliver.

While none of those reasons for buying Bitcoin comport with its origins as an alternative to fiat currencies, they do point to a growing acceptance of crypto as an asset class of its own. And that has the zealot-like community taking yet another victory lap in their quest for legitimacy.

"What's happening now - and it's happening faster than anyone could ever imagine - is that Bitcoin is moving from a fringe esoteric asset to the mainstream," said Matt Hougan, chief investment officer of Bitwise Asset Management.

"If it's going mainstream, there is just so much money on the sidelines that is going to have to come in and establish a position that it leaves me very bullish for 2021."

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But with Bitcoin capturing greater attention, it could also garner further scrutiny from regulators, says Guy Hirsch, managing director for the US at online-trading platform eToro.

"Despite this meteoric rise, there are some storm clouds on the horizon," he said, including the fallout from several last-minute actions by the outgoing Trump administration, among others.

Devotees say that in some ways, the pandemic-ravaged year proved the perfect environment for the digital coin.

Warnings of rampant money-printing by global central banks - some of which started to reveal their own interests in digital assets - sparked fears of eventual inflation, while interest rates dipped to rock-bottom lows. That's thrust some investors to chase returns and hedge with cryptocurrencies, pushing its price past US$28,000 from around US$7,200 at the start of January.

Predicting where it will go is a fraught exercise. Many left the coin for dead after its 2017 rally resulted in a crash the following year, a stretch of time sometimes referred to as the "crypto winter." But it's surged more than 300 per cent in 2020 and many investors say it could continue to gain next year.

A Deutsche Bank survey found a majority see it ending 2021 higher, with 41 per cent of participants projecting a target between US$20,000-US$49,999 and 12 per cent seeing it crossing above US$100,000, according to Jim Reid, a strategist at the firm.

WHAT ELSE IS ON THE RADAR?

To Meltem Demirors, chief strategy officer at digital-asset manager CoinShares, there are some concerns about what the incoming Joe Biden administration might mean for the crypto space.

"Generally, I think we have had challenges with the Dems - they prefer more regulation, more oversight," Ms Demirors said.

"I am a bit worried about the direction things are trending," especially around antitrust lawsuits and an erosion in internet privacy. Still, the industry has some allies, said Ms Demirors, including North Carolina's Patrick McHenry and Ohio's Warren Davidson, who she says have been advocates for the preservation of consumer financial privacy.

Going forward, many strategists and investors say, the industry could see more scrutiny and tighter regulation with Mr Biden in the White House.

A lot will, of course, depend on who fills key positions within the administration.

Janet Yellen, who's been nominated to serve as Treasury secretary in Biden's administration, has in recent years cautioned investors over Bitcoin, saying it was a "highly speculative asset" and "not a stable store of value." A representative didn't immediately return a request seeking comment.

Meanwhile, Bloomberg News reported that Gary Gensler could be nominated to replace Jay Clayton at the US Securities and Exchange Commission.

Mr Clayton's exit from the regulator is welcome news for crypto fans who saw him take a hard line over the years, suing to halt initial coin offerings, rejecting applications for Bitcoin exchange-traded funds and launching a last-minute lawsuit against Ripple Labs Mr Gensler, who served as a Commodity Futures Trading Commission chairman during the Obama administration, is a senior advisor to the MIT Media Lab Digital Currency Initiative and teaches about blockchain technology and digital currencies.

According to eToro's Hirsch, there is uncertainty around how the Biden administration will approach cryptocurrencies, but the appointments are notable "because Yellen is famously anti-crypto and Mr Gensler is known for being pro-crypto."

"Without knowing how authorities will seek to more robustly regulate crypto in the coming years, it is hard for the markets to continue growing at the same rate they are now, especially if, as some fear, regulations aimed at curbing innovation rather than fostering it are enacted," said Mr Hirsch. "Once again, clarity is the name of the game."

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