SEC takes aim at Paxos and (annoyingly) it’s good for Bitcoin

Score another point for regulators as the crypto onslaught continues. I hate to make this about Bitcoin, but I want to. Because in a way this is about Bitcoin.

And while it seems bad for BUSD and Paxos, it is good for Bitcoin. Leave that to the Bitcoin maximalist, I guess.

Never mind that it makes a shred of sense that something with no expectation of profit can be considered a value (US dollar stablecoins are non-interest bearing and they are pegged to $1), Paxos still decided to stop minting stablecoin as of 21 February at the direction of the New York Department of Financial Services (NYDFS). Paxos has since said it “categorically disagrees” with the SEC that BUSD is a security and is “prepared to take vigorous legal action if necessary.”

Again, never mind if the regulation makes a shred of sense. There is still regulation.

What’s missing from regulators’ recent push is anything that represents a direct attack on Bitcoin. Sure, there are warnings about market volatility, and many of Bitcoin’s most widely used trading pairs have the stablecoins regulators focused on. But putting Bitcoin in a stranglehold is not a priority. That’s mostly because it would be quite difficult to do so.

For all the problems Bitcoin’s decentralized design presents, there is no central company or individual that a government can single out for a targeted regulatory push, as it can for stablecoins (e.g. Paxos, Circle) or staking providers (e.g. Kraken , Coinbase). And for the Bitcoin-related companies or individuals it could pick off and somehow buffet, the network is decentralized enough that it will take the fray in stride. It would take a widespread, highly coordinated and costly attack to meaningfully slow down the Bitcoin network.

As such, Bitcoin as a network will be largely unfettered by this regulatory push.

That said, Bitcoin regulation may not be completely off the table after the Biden administration published a call to action to thoroughly regulate the industry, titled “Administration’s Roadmap to Mitigate Cryptocurrency Risk” on January 27. Looking back on this, no one really should have been surprised with new crypto regulatory action.

The White House’s relatively short web post notes stablecoins twice: First, it’s wrapped in what must be scare quotes in reference to terraUSD, which collapsed; and secondly, it linked to a (very long) Financial Stability Oversight Council (FSOC) report from October 2022 on financial stability risk and regulation of digital assets. The FSOC report specifically argues for robust regulation of stablecoin issuers’ reserve funds and banks’, credit unions’ and trust companies’ interactions with crypto — using the term “stablecoin” over 170 times in its 124 pages.

Now regulators are taking direct action against the providers of stablecoins they deem to have non-transparent reserve practices – the providers of escrow services like Kraken and the banks that want to serve crypto companies like Custodia before they get too big and intertwined with the non-cryptic financial system.

Still, while the astute observer should not be surprised by the latest regulatory moves, they need not be pleased or satisfied with the regulation.

From the same White House blog post:

I will put aside the conversation with the stake provider to focus on the consequences of policies aimed at Paxos and stablecoins instead. With stablecoins as the focus, the White House’s sentiment encapsulated in the quote above is perfect, and you’d be hard-pressed to find anyone who could argue against it in good faith. Expanding access to solid financial services empowers people, which raises the quality of life across the board. But emotions must be met with action to mean anything.

Forcing stablecoin issuers like Paxos to operate with almost disturbing transparency would be a good thing as long as it doesn’t burden the issuer.

Right now, we generally have to trust that stablecoin issuers such as Paxos (USDP, BUSD), iFinex Inc. (tether) and Circle (USDC) maintain sufficient US dollars or dollar equivalents in reserve to survive an increase in withdrawals by looking at ” Trust”. and Transparency” blog posts or one-page PDF uploads when we should have other ways to verify their claims. If it’s not clear, this is where a blockchain should have value.

So policies that edge the stablecoin ecosystem away from where it is now with its “Do not verify. Trust.“dogma to the exact opposite would be a net improvement for the aforementioned “many.” Especially since it is the “many” who could benefit the most from stablecoins.

Just ask the Lebanese citizens who choose to use US dollar stablecoins to pay for groceries as the country’s sovereign currency tanks and economic crisis continue to unfold. Regulation that reduces the likelihood of yet another bank driven experience for people is a good thing. And don’t think for a second that the situation of the Lebanese is not at least similar to that of some Americans.

If the US government instead intends to heavily regulate stablecoins in an attempt to introduce its own central bank digital currency (CBDC) with equal or worse transparency and strong arms to select it from a menu of only one option, what do we have actually achieved here? The attitude that “Uncle Sam knows best” is exactly why our institutions are the way they are now. US stablecoins would not exist if the current banking infrastructure expanded access to financial services like permissionless stablecoin protocols instead of excluding half the world’s population.

Don’t get me wrong, I maintain that stablecoin regulation is good for Bitcoin. Bitcoin is the escape hatch. In a world where regulators continue to pile on stablecoins and other crypto-related things to the point of becoming toothless, Bitcoin will be there.

Limitless, censorship-resistant, peer-to-peer money will be open to you then as now. Even if payments aren’t your thing and you live in the world of crypto trading, Bitcoin can fill in admirably as a base for trading pairs as it did in the early days of crypto if US dollar stablecoins are regulated out of existence.

Still, while this may be good for Bitcoin, cheering it on by calling for regulation is uncomfortable and in extremely bad shape. Freedom of choice is central to the Bitcoin ethos. Even if Bitcoin is the best choice, regulation should not force anyone to have to make the best choice.