After helping propel Donald Trump to victory in the 2024 election, the cryptocurrency industry has pinned high hopes on new legislation, expecting a bill to establish a clear regulatory framework. This, in turn, was meant to attract massive institutional capital and mainstream investors.
The proposed bill, known as the Clarity Act, is now increasingly unlikely to pass this year. With significant uncertainty over which party will control Congress after the midterm elections, crypto firms are confronting a harsh reality: they may have missed their best window to secure permanent regulatory compliance. If the Clarity Act fails before the midterms, its chances of passing become slim should Democrats gain control of the House or Senate, creating long-term risks for the industry. While the current Trump administration's regulatory policies are relatively crypto-friendly, the industry could still face a regulatory crackdown after a future change in administration.
Where to begin
However, the lack of regulatory certainty is not the industry's biggest problem right now. Even if the Clarity Act passes, the business boost it would provide to the crypto sector is likely far lower than many initially anticipated. The core reason is that cryptocurrencies are mired in a new bear market. Bitcoin's price has fallen back to levels seen before the 2024 election, halving from its October highs. While the crypto industry has weathered several "crypto winters," the impact of this bear market could be persistent.
Last month, two established exchanges, BitMEX, co-founded by prominent Bitcoin supporter Arthur Hayes, and Bitmart, announced they were shutting down. BitMEX cited a strategic review of its business and the broader crypto industry, while Bitmart stated it was initiating a wind-down process due to its current operating conditions and market environment. Meanwhile, retail investor interest is shifting from cryptocurrency trading to prediction markets. For example, Robinhood disclosed last week that its prediction market business revenue surpassed its crypto trading revenue for the first time in the second quarter. Even if the Clarity Act is enacted, it would be difficult to reverse this investor preference. In fact, major events like elections often boost prediction market activity, a trend worth watching this autumn.
Why not just ten ASX 200 stocks?
New types of cryptocurrency hacks are constantly emerging, shaking the confidence of even the most loyal core users. Last week, hackers stole over $100 million worth of Bitcoin from thousands of hardware wallet addresses belonging to Canadian hardware wallet manufacturer Coinkite. This attack shocked the market, as many Bitcoin holders have long believed cold wallets to be the safest way to store their assets. Of course, security breaches are not new, and the public has often quickly moved on from such incidents. Last year, hackers stole a record $1.5 billion in assets from Bybit. This year, top decentralized lending platform Aave faced a bank run after hackers exploited malicious collateral. But with crypto prices persistently low and risks emerging from unexpected areas, it is increasingly difficult for investors to see a favorable risk-reward ratio for holding crypto.
Furthermore, the logic of a massive influx of institutional capital, a key catalyst for crypto price rallies, is also questionable. While major banks are indeed building on blockchain, most of their focus is on stablecoins and tokenizing traditional financial assets. Their interest in the more speculative crypto-native asset class is limited. Even if the Clarity Act passes, it remains doubtful whether it can unlock new capital flows from traditional banks, especially in the current weakening market. Oliver Wyman partner and former Federal Reserve regulator Joe Cox stated, "I don't think banks have a lot of interest in the narrow crypto asset space. The market itself is not very enthusiastic about crypto-native assets right now." Cox noted that banks' focus is on stablecoins, deposit tokens, and building on-chain capital markets. Wells Fargo announced this week that it will launch on-chain deposit services for corporate clients this autumn, supporting cross-border fund flows. The Genius Act has already established a legal framework for stablecoins, but this core banking strategy is only loosely connected to the passage of the Clarity Act.
As we reported weeks ago, a partnership between Coinbase and JPMorgan to deeply integrate cryptocurrencies with retail banking services has been delayed. The plan included features like converting credit card rewards into crypto. The two institutions also disagreed on certain stablecoin-related clauses in the bill. Even if they reach an agreement, large banks are unlikely to have a strong incentive to quickly roll out related products to ordinary users during a crypto market downturn. Additionally, some of the fastest-growing crypto sectors, such as offshore trading platform Hyperliquid's perpetual contracts, operate entirely outside the scope of the Clarity Act. Therefore, the law's passage would not immediately prompt risk-averse banks to enter these popular but regulated-ambiguous arenas. Hyperliquid's policy center head, Jake Chervinsky, commented, "Allowing Hyperliquid to be used legally by US compliant users requires regulatory agencies to issue detailed rules, not just congressional legislation."
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