US debacle turns up the heat on the crypto market

US authorities have started the year cracking down on crypto companies and their products at such a pace that executives fear the industry is being squeezed out of one of its biggest markets.

In recent weeks, US regulators, led by the Securities and Exchange Commission, have fired a series of enforcement actions against some of the biggest digital asset companies and their tokens. At the same time, many of the banks that these companies depend on for payments and safekeeping of assets are also under new scrutiny.

The newly forceful approach has hit a crypto industry still reeling from a torrid year of falling prices and a crisis of confidence that led to the collapse of some of the sector’s biggest players, including exchange FTX and lenders Voyager Digital and Celsius Network.

Observers say the wave of actions represents a coordinated effort to rein in an industry that has until now largely existed outside the strictures of traditional financial regulation.

“I suspect this is just the beginning of the US trying to single-handedly divide the system between those who meet their standards and those who don’t,” said Tom Keatinge, founder of the Center for Financial Crime and Security Studies at the British think tank RUSI.

Since the beginning of the year, the SEC has sued trading group Genesis and exchange Gemini for failing to register a crypto-lending scheme as a securities offering, and ordered rival exchange Kraken to suspend a scheme the regulator said offered more than 20 percent returns to clients.

Crypto advocates argue that a heavy-handed approach risks stifling innovation in the industry by leaning too heavily on “regulation by enforcement” rather than creating a tailor-made cryptoregulatory framework for the industry.

“This type of regulatory uncertainty will ultimately drive access to crypto, innovation and jobs overseas, where customers are not guaranteed the same level of protection,” said Paul Grewal, Coinbase’s general counsel. “Meanwhile, America and Americans are being left behind.”

However, former head of the SEC’s Office of Internet Enforcement John Reed Stark said the agency’s approach was consistent with how it handled breaches in traditional finance.

“This ‘regulation by enforcement’ phrase is just a crypto-phrase designed to obfuscate and deflect,” he said. “There’s no insider trading law, there’s no derivatives fraud law. It’s a broad framework that’s meant to be non-specific.”

In a further escalation of the regulatory blitz, New York authorities have targeted one of the largest so-called stablecoins – dollar-pegged tokens that serve as a crucial entry and exit point for cryptocurrency investors.

This week, the New York Department of Financial Services shut down the issuance of BUSD, the stablecoin widely used on Binance, which carries the brand of the world’s largest crypto exchange. After the order, the amount of BUSD in circulation fell by about $1 billion in a matter of days as investors moved their cash elsewhere.

“The US crackdown on crypto has become far more aggressive than what we’ve seen from regulators in many other major jurisdictions,” said Ilan Solot, co-head of digital assets at Marex Solutions.

“It appears that the SEC believes their actions are in the long-term interest of consumers, and they are willing to tolerate short- or medium-term consequences of capital moving out of the United States,” he said.

There are also signs that US regulators are turning their attention to the links between the crypto world and the traditional financial system.

The Federal Reserve last month rejected an application by Custodia Bank, a crypto-focused institution, to join the payment system because its planned crypto activities “are highly likely to be inconsistent with safe and sound banking practices”.

Silvergate, another crypto-focused bank, is facing scrutiny from US lawmakers for its role in providing services to FTX. Mainstream lenders may increasingly look to cut ties with the crypto world to head off potential regulatory difficulties, lawyers say.

“If you have a bank that is under supervision in the US and the Fed questions their exposure to the crypto industry, that could trigger a serious evaluation internally within the bank,” said James Greig, a partner in financial regulation at law firm Addleshaw Goddard in London. “It’s a push, rather than an enforcement.”

Earlier this month, Binance suspended payments in US dollars without giving a reason. One of its banking partners, Signature Bank, had previously said it would no longer allow crypto exchange customers to buy or sell amounts of less than $100,000. Signature is a member of the federal scheme that insures deposits with the nation’s lenders.

In a question-and-answer session on Twitter this week, Binance CEO Changpeng Zhao said it was likely that banks had been told by regulators to “either not work with crypto businesses at all, or be very careful about working with crypto businesses” .

But whether the enforcement is direct or indirect, industry insiders say they can already feel the chilling effect of the recent regulatory effort.

“I feel like we’re going to see more action from the SEC in the coming months, and this is just the beginning,” said Charles Storry, head of growth at crypto platform Phuture. “If you’re a big project, you’re best equipped for incoming impact.”