The Crypto Crisis Becomes Existential – POLITICO

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With help from Derek Robertson

The logo of cryptocurrency site Binance is seen on a cellphone, in New York, Tuesday, Jan. 31, 2023. (AP Photo/Richard Drew) | PA

After the disastrous cryptos of 2022, US regulators kicked off the new year by going on the offensive in a flurry of state and federal enforcement activity that has intensified in recent days, raising questions about the viability at long term of the industry in its current form. .

This morning, the New York Department of Financial Services announced that it had ordered Paxos, the issuer of the world’s third-largest stablecoin, Binance USD, to stop minting new units of the crypto token. The Securities and Exchange Commission also told Paxos that it intends to sue the company for Binance USD, according to the Wall Street Journal, alleging the token is an unregistered security.

Last week, the target was crypto exchange Kraken: On Thursday, it settled $30 million for its provision of staking services that help clients earn some form of interest on deposited tokens. And that same day, the IRS filed a motion to enforce an unanswered 2021 subpoena requesting information about Kraken customers to determine their tax liabilities.

The Justice Department, meanwhile, is expanding its criminal investigations into crypto, according to a Bloomberg report earlier this month detailing a fraud investigation by crypto-friendly bank Silvergate Capital over its dealings with FTX. And the Federal Reserve is also pushing back, rejecting the cryptocurrency-enabled depository bank application for a primary account late last month.

No evidence has emerged that the repression is centrally coordinated. But to industry insiders with a particularly suspicious and adversarial view toward regulators, the wave of enforcement action looks like a big wave, and they’re dubbing it Operation Choke Point 2.0.

It’s a reference to an Obama administration initiative to stifle access to the financial system for industries deemed exploitative or otherwise undesirable, such as payday lenders and arms dealers. (POLITICO’s Morning Money points out that, unlike the current crackdown, the Obama-era agenda took place in secret.)

One of Washington’s top crypto watchdogs, SEC Chairman Gary Gensler, suggested on Friday that the stakes in crypto-finance were existential: If the field has any chance of survival and success, a he told CNBC, his proven rules and laws to protect the public investment

He also warned that crypto firms were running out of time to proactively comply with the securities law commissions’ vision by registering their products, such as staking services and stablecoins, as securities products. securities with the agency. The track, he says, is getting awfully short.

Clearly, crypto firms can no longer treat regulators as a nuisance to be avoided, just as they like to see themselves as a counterpoint to the establishment. But they also make an argument that would be familiar to many legacy industries: that an overbearing regulator (in this case, the SEC) takes too broad a view of its mission and that the real problem is that Washington needs to adopt new rules. to accommodate innovations that had not been anticipated when the existing laws were drafted. In the absence of those rules, they brace for regulatory changes week to week, almost piecemeal.

So where could things go from here? Industry participants and observers see a few possibilities:

Exodus. A startup DeFi developer I spoke to over the weekend shrugged off the crackdown, saying that although his small team is based in San Francisco and New York, they would simply offer its product overseas while limiting US users.

For regulatory reasons, many decentralized financial products are already only available outside of the United States. Thus, the industry could thrive abroad even if it shrivels up here. (Although Americans sometimes find ways to access these products anyway.)

Similarly, the limping of crypto firms could entice more users to switch to DeFi services that run on decentralized software without the need for a centralized service provider.

Replacement. On Friday, Gensler reiterated his position that the SEC has nothing against blockchain technology itself. The blows to crypto-native finance could give slower incumbent financial operators an opening to pursue their own forays into blockchain, a path that would integrate technological upgrades into the existing financial order with less disruption.

The current crackdown on dollar-pegged stablecoins, meanwhile, could pave the way for the Federal Reserve to issue its own digital dollar. Already, the scrutiny of the New York Department of Financial Services has prompted PayPal to halt the impending release of its stablecoin, according to a report in Bloomberg on Friday.

In this case, much of the financial and technological innovation associated with crypto could survive, even if many of the companies that started them are squeezed out.

Ex Machina Congress. The industry has invested heavily in lobbying and political donations in pursuit of new laws that would supersede regulators’ interpretations of those already in place. Could Congress dismiss the executive?

Lobbyist Alexander Grieve of Tiger Hill Partners said he expects regulatory proposals from the GOP-controlled house in the second quarter of this year.

But Grieve admitted that given growing mistrust of crypto in the wake of FTX’s collapse, pro-industry measures will struggle to pass through the Democratic-controlled Senate, limiting short-term prospects for legislative relief.

Grieve has made industry setbacks a catalyst for legislation that will better serve both industry and consumers. Any substantive legislation that materializes will be much more carefully considered than that of a year or even six months ago, he said. The opposition forces you to really refine the messages and the legal arguments.

Reconciliation. Finally, crypto upstarts and their regulators could come together, find common ground, and sing the kumbaya.

Then again, here’s how Krakens CEO Jesse Powell responded to Gensler’s explanation of the settlement last week: Oh man, all I had to do was fill out a form on a website and to tell people that staking rewards come from staking? I wish I had seen this video before paying a $30 million fine and agreeing to permanently shut down the service in the US. How stupid I look. My God.

So it seems even more unlikely than the rise of magic money on the internet.

A few weeks ago, we covered an awesome generative music composition AI model from Google.

The music being quite fancy, why couldn’t the AI ​​make a variety of other sounds like: Two space shuttles fighting? A group of UK researchers recently released a demo (read the preprint here) for AudioLDM, a generative model that lets users use text prompts to generate audio, much like models like Stable Diffusion create Visual art.

Just the replies to researcher Haohe Liu’s tweet announcing the demo are already full of never-before-seen, if not very faithful, examples, like a sample of Golden Age jazz and underwater church bells. The projects GitHub page features a litany of other examples, along with a technical explanation of its approach to sampling.

More relevant to non-programmers and audiophiles: how such technology could bring the same thorny questions about copyright, creativity, and misinformation to the audio world that it raises for text and video. Derek Robertson

A host of Hollywood and sports celebrities, including Larry David and Brady, have been named as defendants in a class action lawsuit against cryptocurrency exchange FTX, arguing their celebrity status made them guilty of promoting the failing business model. of the company. | AP/Matthias Schrader

If you were probably among the more than 100 million people who watched the Super Bowl last night, you might have particularly noticed what wasn’t on screen this year: Crypto.

After crypto ads were totally and controversially ubiquitous during last year’s competition, they were virtually absent from last night’s TV broadcast. So what happened to all these companies and their celebrities? Slates Nitish Pahwa crunched the numbers and determined exactly how much money viewers could have lost had they shopped at the Super Bowl last Sunday, inspired by the flurry of ads.

A few key takeaways: 1 ETH token was worth $2,782.80 on game day. Now its value is $1,522.23 a 45% drop; 1 SOL was worth $92.86 on game day. NOW? A paltry $20.48, resulting in a 78% drop; and your new bitcoin holdings reportedly fell 48% over the ensuing year. Oh yeah, and then there was that FTX company? You know, the one that Larry David didn’t really get? Well, let’s assume you know what happened to them, but as for David himself, he’s now the subject of a lawsuit targeting him, Tom Brady, and a host of other famous crypto endorsers. Derek Robertson

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Keep in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]Mohar Chatterjee ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). Follow us @DigitalFuture on Twitter.

Ben Schreckinger covers technology, finance and politics for POLITICO; he is a cryptocurrency investor.

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