Bitcoin rallies even as regulators crack down on crypto

Bitcoin traded near $25,000, a 10% gain from the day before, even as the stock market wobbled. Wall Street investors appear increasingly convinced that more interest rate increases will be needed to rein in inflation, which has stoked volatility in markets over the past week.

But crypto investors seem to be operating in a different reality, and their optimism comes as signs of a regulatory crackdown grow in the aftermath of the collapse of the crypto exchange FTX in November.

On Wednesday, the Securities and Exchange Commission proposed a new “custody” rule that would, among other things, limit asset managers’ ability to put customer money into crypto assets. The proposal follows a series of recent moves by regulators to give investors added protections in a market notorious for wild price swings.

A similar issue was front and center on Capitol Hill on Tuesday, when the Senate Banking Committee held a hearing to discuss new safeguards for crypto investors, a possible first step toward legislation. “It’s time now to consider how to protect consumers from unregulated digital assets, and ultimately, who we want our financial system to serve,” said Sen. Sherrod Brown, D-Ohio, the committee chair.

On Monday, New York’s Department of Financial Services ordered Paxos, a crypto firm, to cease creating BUSD, a so-called stablecoin, because of “unresolved issues” over its relationship with the crypto exchange Binance, which carried the coin’s branding.

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Last week, the SEC charged the crypto exchange Kraken with securities violations, arguing its “staking” practice – in which users pledge crypto holdings to companies in exchange for hefty returns – was akin to selling an unregistered investment contract. And then there is the shadow of the spectacular implosion of FTX, which left investigators on a global hunt to recover billions in missing assets. Amid attempts to claw back funds to repay FTX’s customers, attention has recently turned to $400 million that’s sitting in an interest-bearing bank account.

So what’s behind the bitcoin rally? Some say that it’s a so-called short squeeze, in which those who have bet against bitcoin have to cover their positions by buying more. Another explanation is tax-loss harvesting, in which investors sell at a loss at the end of the year to reduce their tax hit, and then add to their holdings again when the calendar flips. A third potential factor: Crypto investors appear to be selling their holdings in so-called altcoins and putting that money into the relatively more established bitcoin.

Whatever it is, market watchers are already questioning how long the rally can last.

This article originally appeared in The New York Times.