Crypto Rebound Can Extend Despite Governance Headwinds: Analysts

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The resurgence in the value of crypto assets amidst improving global sentiment has been checked by strengthening regulatory headwinds, but analysts say the gains can continue.

Crypto assets have rallied in value as global liquidity conditions have improved but the advance has been challenged by actions at the U.S. Securities and Exchange Commission (SEC), and most recently, the New York Department of Financial Services (NYDFS).

The NYDFS said on Monday it has ordered stablecoin issuer, Paxos, to stop issuing BUSD, the world's third largest stablecoin.

The move follows the SEC's settlement with Kraken over allegations that the exchange's staking service was an illegal sale of securities.

"The move from the SEC has weighed on the crypto markets," says Dalvir Mandara, a Quantitative Researcher at Macro Hive. "Notably, it paints a potentially bleak outlook for proof-of-stake (PoS) based blockchain tokens, including Ethereum."

The SEC dubbed the enforcement action as "another step in protecting retail investors".

2023 is expected to be characterised by further regulatory muscle as authorities aim to protect users and minimise crpyto's utility to bad actors.

A challenge facing regulators is the fragmented global regulatory approach.

For instance, some northern European countries have a relatively relaxed attitude to the usage of cryptocurrencies for online transactions.

Latvian authorities allow the use of crypto payments to fund online gambling (for example, on this site) whereas the UK and other EU countries demand a strict KYC approach that all but precludes the ability to use crypto for such activities.

The UK, EU and U.S. are all expected to bring forward further industry-wide regulations over the coming months that aim to create closer alignment but would nevertheless create additional volatility in the crypto space.

"Although the asset class has potentially left the worst behind, advances in governance are of the essence," says Manuel Villegas, an analyst with Julius Baer.

Nevertheless, Villegas says the recent pullback in global interest rates will likely assist a further recovery in crypto prices over the coming months.

"Funding liquidity has carried a crucial role for the so-called high-growth industry," he says in a recent research note.

"Fundamentals and developer activity have defied recession fears, and unless further macroeconomic-driven headwinds emerge, cryptos are in pole position to recover lost grounds," he adds.