Crypto companies 'running towards' regulation is good for bitcoin, analyst Tom Lee says

  • Moves by two major companies in the cryptocurrency space this week could be evidence that regulation is smoothing out and could bode well for struggling bitcoin prices, according to Fundstrat's Tom Lee.
  • "We believe the regulatory picture is now improving — best evidenced by Coinbase and Circle 'running towards' regulation," says Lee.
  • Coinbase announced it would acquire securities dealer Keystone Capital Wednesday in a bid to become a fully SEC-regulated broker-dealer and Goldman Sachs-backed cryptocurrency platform Circle is reportedly seeking a federal banking license.
Jack Guez | AFP | Getty Images

Moves by two major companies in the cryptocurrency space this week could be evidence that regulation is smoothing out, which could bode well for struggling bitcoin prices, according to one closely followed analyst.

"We believe the regulatory picture is now improving — best evidenced by Coinbase and Circle 'running towards' regulation," Fundstrat co-founder Tom Lee said in a note to clients Thursday. "We are basing this on the notion that Coinbase and Circle would only take these actions if such was the case."

Coinbase, known for its leading U.S. cryptocurrency exchange, announced it would acquire securities dealer Keystone Capital Wednesday in a bid to become a fully SEC-regulated broker-dealer. Goldman Sachs-backed cryptocurrency platform Circle is seeking a federal banking license and plans to register with the SEC as a brokerage and trading venue, Bloomberg reported this week.

"We believe both companies would only make these moves if their perception of regulatory risks in crypto was improving," Lee said, calling their announcements "implicit acknowledgement" that the regulatory tide is shifting.

Regulatory crackdowns and announcements from the SEC have been a headwind for bitcoin prices this year. Prices fell below $10,000 in March after the agency said it would require digital asset exchanges to register with the agency and have struggled to recover since.

Bitcoin has slumped more than 45 percent since January, according to CoinDesk. The digital currency was trading near $7,689 as of 2 p.m. ET Thursday.

Lee and others in the space have argued that uncertainty from regulators has held back demand for cryptocurrency and prevented institutional investors from entering the market.

A key debate is how to classify what cryptocurrency is, and how it should be regulated. In a CNBC interview Wednesday, SEC Chairman Jay Clayton said while bitcoin is not a security, tokens from initial coin offerings are. The CFTC, on the other hand, regulates them as commodities.

The supply-demand dynamics have changed drastically from last year, when investors flooded the market as bitcoin neared the $20,000 mark in December. Lee, the only major Wall Street strategist to issue formal price targets on bitcoin, pointed to a sharp increase in cryptocurrency supply in 2018 and lower demand after investors sold bitcoin holdings to meet tax requirements.

More than $9 billion has been raised in ICOs this year, according to data from Autonomous Next, more than 2.5 times the entire ICO market last year. Meanwhile, households sold roughly $25 billion in cryptocurrency to U.S. dollars in order to pay for capital gains taxes they owed, according to Fundstrat. Lee estimated a $37 billion net drop in demand this year.

The SEC and other U.S. regulators have been tasked with policing fast-paced innovation and protecting investors from fraud.

Robert Cohen, chief of the Cyber Unit in the Division of Enforcement at the SEC, said Thursday that while the agency is heavily focused on fraud, it is being cautious not to hurt innovation.

"We want to encourage innovation and new ways of raising capital," Cohen said at the New York Blockchain and Digital Assets Summit Thursday. "If there's a new and exciting tech people should have an opportunity to invest in it."

The agency created the website HoweyCoins.com to show investors some of the ways a site can look valid when it actually could be a scam. The agency has cracked down on ICOs this year: It has continuously warned of pump-and-dump schemes, issued subpoenas and charged multiple coin projects with fraud.

"Every time there's an exciting new technology, people are afraid of missing out they see people becoming millionaires overnight, there's a high risk of people falling victim to fraud," Cohen said.