The U.S. financial regulators’ crackdown on the cryptocurrency industry started to intensify this week as the New York Department of Financial Services (NYDFS) ordered Paxos Trust Company to stop the issuance of the Binance USD (BUSD) stablecoin. The U.S. Securities and Exchange Commission (SEC) added to the finance company’s woes by issuing a Wells notice, alleging that the BUSD stablecoin is an unregistered security.
Paxos’ legal woes followed the SEC’s shutdown of cryptocurrency exchange Kraken’s on-chain on-chain staking service for failing to register the program.
Earlier in February, India, the current holder of the G20 presidency, said it is working with the International Monetary Fund and the Financial Stability Board to develop a regulatory approach for cryptocurrencies.
Forkast spoke to crypto industry participants to gather their reactions to recent regulatory developments.
- “Stablecoins are the bridge for moving the money from fiat to crypto. Regulators want to burn that bridge. BUSD (or for that matter any stablecoin) cannot and should not be classified as a security. This is akin to saying that USD is a security and not a currency. If BUSD does end up getting classified as a security, it would completely change how the crypto world operates, maybe even kill it,” Dinesh Goel, founder of play-to-earn ecosystem One World Nation, said.
- “Demand for the dollar is the single most important factor allowing the government to influence global and domestic policy. Any store of value that undermines its demand can be seen as destabilizing, and stablecoins can fall into that camp – unless they’re backed 1:1 by U.S. dollars… If the assets backing them are considered securities, the tokens are too. If those assets are at risk of price fluctuations, the SEC argues, we can end up with something like the mortgage-backed securities crisis of 2008. Any stablecoin issuers who are beholden to U.S. regulations are likely to find themselves in the crosshairs, although USDC is safer than most having played by the book with a 1:1 cash reserve backing,” Colin Johnson, chief executive officer and co-founder of Freeport, an on-chain fine art investment platform, told Forkast.
- “The reserves behind centralized stablecoins are similar. If BUSD is recognized as a security, USDC and USDT may also have this risk in the future… There are also speculations that it is a kind of revenge from Wall Street capital against Binance after the collapse of FTX,” James Wo, founder and CEO of blockchain investment firm Digital Finance Group, said.
- “I don’t expect to see other stablecoin issuers jump into action immediately. Paxos has made it very clear that they disagree with the SEC’s position. I expect to see this issue litigated to the extent we’ve seen Ripple litigate their position on XRP. Other stablecoin issuers should closely monitor the development of this litigation to see what arguments are being made by both parties and take a close look at the workings of their stablecoin offering,” Yamina Sara Chekroun, senior legal counsel at non-custodial payment infrastructure Ramp, said.
SEC: Kraken down
- “More U.S. exchanges could certainly be in the SEC’s crosshairs – most notably Coinbase with their Earn product – although Brian Armstrong is likely to make any action less appealing to the SEC by voicing his willingness to dig in for the legal fight… Other staking service providers in the U.S. will need to decide whether or not they shut down staking or risk an expensive legal battle with the SEC. For users, the likely outcome is that their assets get moved offshore – perhaps to Binance, using a VPN – or they simply lose access to these opportunities. A lose/lose for everyone,” said Freeport’s Johnson.
- “What the SEC is coming to define as an investment contract requiring registration is a vastly expanding pool – and digital asset service providers should take a close look at their offerings – whether it is a staking service or a service that provides any form of yield that could lead a consumer to reasonably expect to receive a profit from that service,” Chekroun of Ramp said.
- “The allegations in the SEC’s publicly filed complaint have little to do with staking itself and everything to do with how Kraken managed user funds. Specifically, it alleges that Kraken paid users out an arbitrary yield determined in its sole discretion rather than the actual staking returns, that Kraken did not segregate funds for staking, and that participants were unsecured creditors of Kraken. The only substantive takeaway from the SEC’s action is that if you are going to offer staking services, you should make sure to offer actual staking services,” said Mark Lurie, CEO and co-founder of Shipyard Software, a DeFi tools developer.
- “This could mean the start of a more uniform set of guidance for digital asset businesses that could make cross border compliance more seamless, potentially more cost efficient, and provide the same level of consumer protection on a cross-jurisdictional basis. That being said – there is always the risk that the adoption of one large-scale approach could hurt the industry overall if the regulations that come out of that collaborative approach are unduly restrictive. Balance is key – we want uniformity to make compliance easier but we also don’t want to stop blockchain ingenuity and broad socio-economic participation, said Chekroun.
- “Even in the U.S, it’s unlikely that any bills will pass under the current administration. While we’re seeing enforcement action based on existing securities law, congress is in no mood to cooperate on something this divisive… On the plus side, the move by India indicates one of the world’s largest economies is ready to take crypto seriously. A likely regulatory landscape is one where individual countries adopt different levels of enforcement, and participants in the crypto market – being inherently global and decentralized – will move to establish a footprint in the less regulated ones,” Johnson said.
- “The current G20 countries have huge differences in their own economic systems and legal systems, and the supervision of crypto assets is quite different, and it involves many issues, such as the relationship with their own currencies, taxation, and even crime,” wrote One World Nation’s Goel.