US cracks down on crypto, India calls for regulatory cooperation

Chairman of the Securities and Exchange Commission Gary Gensler. Photo: Kevin Dietsch via Getty Images.

US financial regulators’ crackdown on the cryptocurrency industry began to intensify this week as the New York Department of Financial Services (NYDFS) ordered Paxos Trust Company to halt the issuance of the Binance USD (BUSD) stablecoin. The US Securities and Exchange Commission (SEC) added to the financial company’s problems by issuing a Wells Notice, which alleged that the BUSD stablecoin is an unregistered security.

Paxos’ legal troubles 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 was working with the International Monetary Fund and the Financial Stability Board to develop a regulatory approach for cryptocurrencies.

Discard spoke with crypto industry participants to gather their reactions to recent regulatory developments.

Busted

• “Stablecoins are the bridge to move 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 similar to saying that USD is a security and not a currency If BUSD ends up being classified as a security, it will completely change how the crypto world works, maybe even kill it, said Dinesh Goel, founder of play-to-earn ecosystem One World Nation.

• “The demand for dollars is the single most important factor that allows the government to influence global and domestic politics. Any store of value that undermines demand can be seen as destabilizing, and stablecoins can fall into that camp – unless they are backed 1:1 by US dollars… If the assets backing them are considered securities, so are the tokens. If these assets are at risk of price fluctuations, the SEC argues, we could end up with something like the mortgage-backed securities crisis of 2008. Any stablecoin issuers that rely on US regulations are likely to find themselves in the crosshairs, even though USDC is safer than most after playing by the book with a 1:1 cash reserve, said Colin Johnson, CEO and co-founder of Freeport, an on-chain art investment platform. Discard.
• “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 is also speculation that there is some kind of revenge by 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 take action immediately. Paxos has made it abundantly clear that they disagree with the SEC’s position. I expect to see this issue litigated to the extent we’ve seen Ripple litigate its position on XRP. Other stablecoin issuers should closely monitor the development of this court case to see what arguments are presented by both parties and take a closer look at how their stablecoin offerings work,” Yamina Sara Chekroun, senior legal advisor at non-custodial payment infrastructure Ramp, said.

SEC: Kraken down

• “Several US exchanges could certainly be in the crosshairs of the SEC – particularly Coinbase with their Earn product – although Brian Armstrong is likely to make any move less attractive to the SEC by expressing his willingness to dig in for the legal battle… Other staking providers in the U.S. must decide whether to close their staking or risk a costly legal battle with the SEC.For users, the likely outcome is that their assets are moved offshore—perhaps to Binance, using a VPN—or they simply lose access to those opportunities. A lose/lose for everyone,” Freeport’s Johnson said.
• “What the SEC is going to define as an investment contract that requires registration is a hugely growing pool – and digital asset providers should take a closer look at their offerings – whether it’s an escrow service or a service that provides some sort of return that could lead to that a consumer would reasonably expect to receive a profit from that service, Ramp’s Chekroun said.
• “The allegations in the SEC’s publicly filed complaint have little to do with betting itself and everything to do with how Kraken managed user funds. In particular, it alleges that Kraken paid users an arbitrary return determined at its discretion rather than the actual return on stakes, that Kraken did not segregate funds for staking, and that the participants were unsecured creditors of Kraken. The only significant takeaway from the SEC’s action is that if you’re going to offer staking services, you should make sure you’re offering actual staking services,” said Mark Lurie, CEO and co-founder of Shipyard Software, a DeFi tool developer.

Delhi rules

• “This could mean the start of a more unified set of guidance for businesses with digital assets that could make cross-border compliance more seamless, potentially more cost-effective, and provide the same level of consumer protection on a cross-jurisdictional basis. That said – there’s always a risk that the adoption of one large-scale approach could harm the industry as a whole if the regulations that emerge from 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, Chekroun said.
• “Even in the United States, any bills are unlikely to pass under the current administration. While we see enforcement action based on existing securities laws, Congress is in no mood to cooperate on something so divisive… On the plus side, the move by India indicates that a of the world’s largest economies are ready to take crypto seriously. A likely regulatory landscape is one where individual countries adopt varying levels of enforcement, and participants in the crypto market – which is inherently global and decentralized – will move to establish a footprint in the less regulated,” Johnson said.

• “The current G20 countries have huge differences in their own economic and legal systems, and the supervision of crypto-assets is quite different, involving many issues, such as the relationship with their own currency, taxation and even crime,” One World wrote Nation’s Goel.