Bull market's last hope? Former legal advisor for Compound: Market contraction helps alleviate regulatory pressure, supporting long-term development

Last night, due to the Federal Reserve's previous interest rate hike hints and the potential inflation outlook in the market, all four major U.S. stock indices saw declines ranging from 0.8% to 1.8%. In addition, with the stock market correlation, and the SEC chairman's interview not taking a stance on whether Ethereum is a security, Bitcoin briefly fell below $40,000.

However, Jake Chervinsky, the former legal counsel for Compound and current head of policy at the Blockchain Association, believes that a market contraction can help alleviate regulatory pressure, which could be the last hope for the cryptocurrency market.

1/ A small silver lining of a crypto bear market is that it may relieve some regulatory pressure.

For good reason, regulators with limited resources focus attention on issues with widespread impact & systemic importance.

To a degree, shrinking markets = lower risk = less focus.

— Jake Chervinsky (@jchervinsky) January 9, 2022

1. A glimmer of hope in the cryptocurrency bear market is that the bear market may ease some regulatory pressure. There are good reasons to believe that regulatory authorities with limited resources will focus on issues of broad impact and systemic importance. To some extent:

Market contraction = Reduced risk = Decreased scrutiny.

2. Regulatory authorities have been closely monitoring the cryptocurrency market over the past 12 to 18 months, seeing a high-risk speculative frenzy built on unrealistic, false promises.

They fear that, for most participants, the cryptocurrency market will end as badly as the 2017 ICO bubble, and they want to reduce investor losses.

3. They are particularly concerned because they see a large number of retail investors participating in the 2022 version of the speculative frenzy, and the 2017 bubble did not enter the mainstream view before it burst, except for a few exceptions, such as Katy Perry's crypto nails.

The 2022 speculative frenzy continues to expand into various areas and move forward.

4. Can we really blame the regulators for this? This bull market kicked off in mid-2020 with "Degens" and other food coins mining, and fast forward 18 months, billions of dollars are invested in dog-themed tokens and jpegs NFTs, not to mention a bunch of hackers and rug pull incidents. You can clearly understand where the regulators' motivations come from.

5. Regulatory authorities had no reason to worry about systemic risks in 2017, perhaps because they had great confidence in their own control capabilities.

However, 2022 seems different from that year, as the significant growth in DEX and stablecoin trading volumes makes stablecoins a "big deal" for regulatory authorities.

6. Placing all of the above in the context of the global monetary system and financial instability due to the COVID-19 pandemic, combined with increasingly tense geopolitical situations and widening domestic partisan divisions, it is easy to see why regulators want to control cryptocurrencies. To them, the cryptocurrency market is the embodiment of irrationality in 2022.

7. Regardless, the SEC received high praise in Washington for ending the 2017 bubble period through active investigations and enforcement actions. There is a conspiracy theory that the SEC will intervene in the 2022 speculative frenzy in unexpected ways, not as a repeat of past regulatory approaches, but as a move to crush the cryptocurrency market.

8. Regulatory authorities will surely begin to see the true value and potential of cryptocurrencies, but I believe they have more important matters to address in 2022, which is to redefine the overall financial regulatory framework based on decentralized ecosystems. This is not a top priority at the moment.

9. Therefore, from the regulators' perspective, a temporary cooling of the market is not necessarily a bad thing.

Price and trading volume decrease = Fewer retail participants = Reduced systemic roles = Decreased risk = Fewer members of Congress saying "regulate this or that" = Breathing space.

10. In any case, we need some major policy issues to clarify the future of cryptocurrencies.

Ideally, we would achieve this through a thoughtful process rather than hastily regulating or enforcing to burst the bubble. Based on this, the short-term pain of a bear market can support long-term progress.