Thread by @smdiehl

Let's talk about the mechanism by which government regulation will effectively kill cryptocurrency. 🧵

Seems inevitable at this point that the US government and EU are going to clamp down hard on cryptocurrency because of three recent developments: (2/)

1) The ransomware pandemic is starting to threaten national security

2) Elon's wake of destruction caused hundreds of thousands of citizens to lose their life savings, and they're complaining to consumer protection bodies

3) Potential systemic risk to traditional markets

(3/)

If I were to put on my speculation hat and try to predict how things will go in the next six months, I suspect it will unfold something like the following: (4/)

The largest cryptocurrency exchange Binance will be shut out of any banking access in the western hemisphere. Neither payment processors or banks will touch them and without consumer inflows of Euros or Dollars and the "company" will collapse. (5/)

The regulatory perimeter around domestic cryptocurrency exchanges will go up and inflows and outflows will be strictly monitored and controlled. The US will enforce some variant of the FATF Travel Rule and Europeans will ban private wallets. (6/)

Likely 75% of tokens listed will be classified in the US as unlisted securities and either forced to register with the SEC or banned from being sold to US persons. (7/)

Most crypto users aren't interested in trading regulated securities and demand volume will decrease 90% as people lose interest, basically making the crypto markets a place for thinly traded penny stocks in shell companies with no revenue. (8/)

The shenanigans with exchange order book manipulation will be pushed out, wash trading will be banned, they'll be strict documentation requirements on price setting and formation, and some crypto variant on National Best Bid and Offer (NBBO) will be enforced domestically. (9/)

The compliance costs of these assets in regulated jurisdictions will become inordinately high and in turn passed down to customers as high transactions costs. On top of taxable events and capital gains it's not going to make sense for the average retailer to invest. (10/)

This will gate exchanges from international asset movement and segment the small markets into geographic regions, and bifurcate the crypto assets that are traded in regulated regions vs those traded in unregulated regions. (11/)

Bitcoin will probably still be traded, but will likely trade somewhere in the thousands of dollars and considered sort of a fringe asset class for libertarian digital goldbugs to speculate on to live out their weird little fantasies in a sandbox for childish ideas. (12/)

This basically turns cryptocurrency exchanges into bucket shops where people can gamble on the momentum of dog meme tokens. Now there's probably a market for that ... but after the prospect of getting rich quick from it is removed, it's probably not a huge market. (13/)

In countries with less tight regulatory regimes crypto will probably remain effectively an unregulated dark market economy with very little connection to the real economy or global markets. (14/)

Thousands of variants of mutual aid scams (like Russian MMM Ponzi) and pyramid flash-in-the pan pyramid scheme will go digital and plague low-income and low-information investors until crypto becomes synonymous with scams globally. (15/)
en.wikipedia.org/wiki/MMM_(Ponz…

There will continue to be a dark market for illicit substances and sanctions evasion but moving large amounts of money in or out of these thinly traded pseudo-assets will become challenging for criminals. Tokens traded on dark market will be untouchable by exchanges. (16/)

Some form of it will continue to exist, basically folded into the existing financial system as a sort of quirky asset class that we tried in 2010-2020 decade that didn't really work. (17/)

Crypto's upside beyond get rich quick schemes is entirely illusory, and it doesn't provide any benefit for legal uses that isn't better provided by some traditional service or asset class. (18/)

People will go back to putting the bulk of their money in productive assets like real estate and stock in real companies and mostly it will be a historical footnote in the history of finance. The End.

/fin