Spirals of confusion in crypto as US cracks down

1 year ago
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United States securities and the Exchange Commission is on the warpath, with cryptocurrency under the gun. On the weekend, Wall Street Journal informed that the agency intends to sue crypto firm Paxos for issuing BUSD, a stablecoin developed in partnership with the world’s largest crypto exchange, Binance.

The SEC declined to comment, but Paxos, based in New York and Singapore, confirmed today that the agency contends that BUSD should have been registered as a security in the US, requiring complex rules to be followed. IN statementthe firm said it “strongly disagrees” that BUSD is a security, but complied with an order from the New York City Department of Financial Services to stop creating any new BUSD, effectively suffocating the coin.

Paxos did not respond to a request for comment. Binance Chief Strategy Officer Patrick Hillmann declined to comment on how the SEC’s actions would affect the exchange, but said the firm would be “considering other projects to ensure that users are protected from further undue harm.”

Cryptocurrency is no stranger to conflicts with regulators, but the Paxos case is different — and it has caused some panic and confusion. The concern is that a decision against issuing or using BUSD would set a precedent that could be applied to All stablecoins, destroying a critical piece of infrastructure in many crypto markets. “If supply suddenly dries up, the crypto economy will collapse,” says economist Francis Coppola, who previously worked at HSBC and other banks.

Designed to be pegged to a specific value, typically $1, stablecoins are an important pillar of the crypto economy. Most are backed by a combination of cash and bonds, which pegs the tokens in circulation to a desired value.

Unlike cash, which can be difficult to move, especially across borders, stablecoins are “simple and fast,” says crypto analyst Noel Acheson, formerly of CoinDesk, helping traders seize opportunities as they arise. According to Ram Ahluwalia, CEO of wealth management company Lumida, they “opened up the economy on the web” by allowing money to “flow into and stay in the ecosystem.”

SEC defines securities as contracts that are “the investment of money in an ordinary enterprise with a reasonable expectation of profit to be made through the efforts of others”. The classification includes a number of regulatory and disclosure requirements. If stablecoins were universally considered securities, issuers would have to register them with the SEC, which would give the agency the power to reject the coins. Any stablecoins already on the market are subject to enforcement action.

Confused representatives of the crypto industry, including Binance CEO Changpeng Zhaonow asking how stablecoins can meet the SEC criteria, and in particular, how can it be said that cryptocurrencies that do not fluctuate in value are traded with a reasonable expectation of profit.

But action against a major stablecoin issuer should come as no surprise, Acheson says, because the SEC said has repeatedly stated that some stablecoins are considered securities. Acheson suggests that the regulator will argue that stablecoins such as BUSD backed by their issuer’s assets in established securities such as government and corporate bonds are themselves securities and should be regulated accordingly.

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