US crackdown mounts pressure on crypto market

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US authorities have started the year with a crackdown on crypto companies and their products at such a pace that executives fear the industry could be forced out of one of its biggest markets.

In recent weeks, US regulators, led by the Securities and Exchange Commission, have launched 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 rely on for payments and safekeeping of assets are also coming under scrutiny.

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

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

I suspect this is just the start of the United States single-handedly trying to divide the system between those who meet its standards and those who don’t, said Tom Keatinge, founding director of the Center for Financial Crime and Security. Studies from the British think tank. RUSI.

Since the start of the year, the SEC has sued trading group Genesis and exchange Gemini for failing to register a crypto lending program as a securities offering, and ordered rival exchange Kraken to ending a program that the regulator said offered more than 20% returns to customers.

Crypto advocates argue that an authoritarian approach risks stifling innovation in the industry by relying too heavily on regulation by enforcement rather than creating a bespoke crypto regulatory framework for the crypto industry. industry.

This kind of regulatory uncertainty will ultimately lead to access to crypto, innovation and overseas jobs, where customers are not guaranteed the same level of protection, said Paul Grewal, Chief Legal Officer of Coinbase. . In the meantime, America and Americans are being left behind.

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

This regulation by enforcement phrase is just a cryptographic slogan designed to obfuscate and deflect, he said. There is no insider trading law, there is no derivatives fraud law. It is a broad framework intended specifically not to be specific.

In a further escalation of the regulatory blitz, authorities in New York have targeted one of the largest dollar-pegged tokens known as stablecoins which act as a crucial entry and exit point for crypto investors. -currencies.

This week, the New York Department of Financial Services halted issuance of BUSD, the widely used stablecoin on Binance, and branded as the world’s largest crypto exchange. Following the order, the amount of BUSD in circulation plummeted by around $1 billion within days as investors moved their money elsewhere.

The US crackdown on crypto has become much 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 the SEC believes its actions are in the long-term interests of consumers and is prepared to tolerate the short- to medium-term consequences of a capital flight from the United States, he said. declared.

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

Last month, the Federal Reserve rejected an application from Custodia Bank, a crypto-focused institution, to join its payments system because its planned crypto activities are highly likely to be inconsistent with safe and sound banking practices.

Silvergate, another crypto-focused bank, has come under scrutiny from US lawmakers for its role as a service provider to FTX. Traditional lenders may increasingly seek to sever ties with the crypto world to avoid any potential regulatory difficulties, lawyers say.

If you have a bank that is supervised in the United States and the Fed questions its exposure to the crypto industry, it can trigger a serious evaluation internally within the bank, said James Greig, partner in financial regulation of the law firm Addleshaw Goddard. in London. It is a nudge rather than a coercive action.

Earlier this month, Binance suspended US dollar payments without giving a reason. One of its banking partners, Signature Bank, previously said it would no longer allow crypto exchange clients to buy or sell amounts below $100,000. Signature is a member of the federal scheme that insures deposits held with domestic lenders.

During a Q&A session on Twitter this week, Binance CEO Changpeng Zhao said it’s likely regulators have asked banks not to work with crypto firms altogether or be very careful when working with crypto companies.

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

I think 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 are a big project, you better be prepared for the incoming impact.

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