Institutional investors are feeling the pressure as the SEC targets every facet of the US cryptocurrency market.
- The greatest withdrawals from digital asset investment products since late December 2022 occurred last week and totaled US$32 million.
- The latest week saw investments in blockchain shares exceed US$9.6 million, making it six weeks in a row.
With digital asset investment products experiencing the highest weekly outflow of 2023, institutional investors may have become uneasy about cryptocurrencies after the regulatory crackdown in the United States.
The most extraordinary weekly withdrawals for digital asset investment products since late December 2022, according to a report by institutional crypto fund management CoinShares on February 20, totaled US$32 million. Last week’s withdrawals peaked at US$62 million at the halfway point, but sentiment had improved by Friday when US$30 million in inflows occurred. With Bitcoin prices increasing by 10% over the week, total assets under management (AuM) reached US$30 billion, their highest level since August 2022, indicating that the negative attitude among ETP investors was not reflected in the broader market. According to the business, ETP investors are less bullish about recent regulatory challenges in the US than investors in the overall market.
SEC’s War against Crypto
The move comes as the Securities and Exchange Commission intensifies what market watchers have nicknamed its “war on crypto,” which has targeted everything from staking services to stablecoins to crypto custody.
Inflows peaked last week at $62 million. Still, they started to fall as sentiment rose, according to CoinShares analyst James Butterfill. $3.7 million poured into short-term bitcoin funds, and 78% of those withdrawals came from assets connected to bitcoin. The company blamed the tighter regulations for the increasing leaves. This results from ETP investors’ lower satisfaction with recent regulatory pressures in the US compared to the larger market.
Tougher Crypto Rules
A five-person panel of the United States Securities Exchange Commission (SEC) voted 4-1 to support a proposal that may make it more challenging for cryptocurrency companies to function as custodians of digital assets in the future. According to a statement made by SEC Chairman Gary Gensler on February 15, the proposal, which has not yet received official SEC approval, suggests changes to the “2009 Custody Rule” that will apply to custodians of “all assets,” including cryptocurrencies.
Gensler claimed that some cryptocurrency trading platforms now providing custody services are not legitimate “qualified custodians.” A federal or state-chartered bank, savings organization, trust business, registered broker-dealer, licensed futures commission merchant, or foreign financial institution are all examples of competent custodians, according to the SEC.
Negative Sentiment from Investors
Yet, the broader markets witnessed a 10% rise over time, indicating that they did not reflect institutional investors’ negative sentiment. Butterfill said this increased institutional product assets under management to $30 million, the highest level since August. Although inflows totaling $9.6 million for the week were reported in blockchain equities, breaking the general trend, Ethereum and mixed-asset funds also experienced outflows.
When institutions started reinvesting money in cryptocurrency funds, the last week of January saw six-month high inflows of $117 million. Contrarily, the previous two weeks have seen money departing after four weeks of inflows in January.
The regulatory enforcement initiative that led to the shift in attitude included the SEC’s accusations against Kraken for its staking services on February 9. A few days later, it brought legal action against Paxos regarding the development of Binance USD. Last week, it also published a modification proposal for cryptocurrency businesses serving as custodians.