Cryptocurrency markets on edge as US regulatory crackdown intensifies

Digital currency markets are on edge after a flurry of aggressive regulatory actions from the US authorities in recent days.

Bitcoin was slightly higher at $21,826.68 around 5:31 am. ET, according to CoinDesk data.

Investors are digesting a series of major regulatory actions in the US, as authorities look to rein in the once freewheeling cryptocurrency industry.

On Monday, the New York State Department of Financial Services told Paxos to stop minting new Binance USD, or BUSD, stablecoins. A stablecoin is a type of digital currency that is linked to a real value. The BUSD is pegged one-to-one with the US dollar. Paxos issues BUSD, the third largest dollar-pegged cryptocurrency.

Stablecoins are often backed by real reserve assets, such as bonds and cash. They are used to trade in and out of different cryptocurrencies as a trader does not need to convert money back into fiat currencies.

BUSD remained relatively stable and near the $1 peg following orders from the New York regulator. Paxos said BUSD will continue to be redeemable through at least February 2024. People can redeem funds in US dollars or convert BUSD into Paxos’ own stablecoin called Pax Dollar (USDP).

Paxos confirmed that the Securities and Exchange Commission has notified that the agency may recommend an action alleging that BUSD is a security and that Paxos should have registered the token offering under federal securities law.

The market is waiting to see what the exact SEC charges are against Paxos and whether it may have implications for other stablecoins such as USD Coin (USDC) and tether (USDT). There is no official SEC action against Paxos at this time.

Last week, cryptocurrency exchange Kraken filed with the SEC over allegations that it was selling unregistered securities.

US regulatory action has clamped down on parts of the cryptocurrency industry, following a year of turmoil that saw nearly $1.4 trillion wiped off the market, along with bankruptcies, failures of projects and companies topped by the collapse of major exchange FTX.

Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, said there might not be a major collapse in coin prices after the huge selloff last year.

“The market seems to be taking the news pretty well and that sentiment remains cautiously optimistic given that we may have seen most of the selling in the market over the past year,” Ayyar told CNBC on Tuesday.

Investors are waiting to see what happens next on the regulatory front.

“We’re seeing a lot of scrutiny across different sectors in crypto in the US, with the last two areas being staking and stablecoins. This is an obvious consequence of the fallout from FTX, Luna and the general contagion in crypto over last year,” Ayyar said.

“Markets may take some time to consolidate here and wait and see if there are more events that play out in terms of regulatory breakdown, therefore we could see a couple of weeks of sideways action.”

– CNBC’s Rohan Goswami contributed to this report.