Crypto has always been under attack from the day it was created. It has survived despite the odds due to the support of users who believe in financial freedom. The U.S. government is currently using several tactics in its arsenal in an apparent bid to mitigate risk from crypto and digital assets.
Retail and institutional investors lost a lot of money due to the collapse of several crypto projects and companies in 2022. This prompted several regulatory agencies to put digital assets in their crosshairs. The Whitehouse issued a roadmap on how to mitigate risk from cryptocurrencies. The executive branch tasked several regulatory agencies to ramp up enforcement. These include the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
The Banking Regulators Raised the Alert Level
On January 3, 2003, The Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) have jointly issued a statement that tackles the risk of crypto to the banking industry,
The three-page statement highlighted the risk of dealing with crypto assets based on events in 2022. No specific event was named in the report, but the previous year saw the collapse of Terra (Luna), Celsius, and FTX to name a few. The mismanagement and fraud which caused the implosions were one of the reasons why dealing with crypto-related is deemed to be risky.
It was clarified that banking organizations are not prohibited from providing service to customers of any specific type or class. But the tone of the statement gives a hint that crypto-related transactions should go through extra scrutiny.
“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”FDIC, et al.
The following events happened after the joint statement:
- A few days later, the Metropolitan Bank announced that it will exit all cryptocurrency-related assets.
- On February 8, Binance temporarily suspended all USD bank transfers.
OG Crypto Exchange Kraken settled with SEC
Kraken is one of the first crypto exchanges. It was founded in 2011 and is based in California. It is the 3rd largest exchange in the world, with $333 million in daily trading volume.
The SEC scored a win over crypto when Kraken settled to pay $30 million in fines and to stop offering staking services to US clients.
Gary Gensler created a YouTube video explaining why staking should be regulated under the SEC and Federal law.
The SEC Commissioner Hester Pierce gave a refreshing opinion on the matter. She is advocating for putting out well-thought guidelines instead of speaking through enforcement.
“We have known about crypto staking programs for a long time…, I should have called for us to put out guidance on staking long before now. Instead of taking the path of thinking through staking programs and issuing guidance, we again chose to speak through an enforcement action…”Pierce, 2023
She further said:
“Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating”Pierce, 2023
The commissioner’s opinion on the matter is something that the crypto community can agree on. She might be the regulatory champion the industry has been looking for.
PAXOS is Battling Two Fronts
Paxos is probably one of the most transparent and regulated crypto companies. It is registered under the New York State Department of Financial Service (NYSDFS). Binance USD (BUSD), its flagship product, is also NYSDFS registered and is also 100% backed by reserves. A monthly audit report is published to attest to the validity of the underlying assets.
Despite obeying regulations, Paxos is now in hot water because of a notice from SEC. The company is about to be sued for issuing BUSD. The SEC is arguing that BUSD is unregistered security. This caused an uproar in the crypto community. The community is arguing that stablecoins, like BUSD, do not meet the criteria of the Howie Test. The test is used to determine if a transaction qualifies as an investment contract or security.
Aside from the SEC, Paxos is being investigated by the NYSDFS. According to a WSJ article, Paxos has failed to conduct periodic risk assessments and due diligence of Binance and clients holding the BUSD stablecoin. The New York regulator has already asked PAXOS to stop minting BUSD due to the alleged infractions.
Chokepoint V2 – Crypto Edition
In 2013, the U.S. Department of Justice implemented Operation Chokepoint. It investigated banks that were allegedly doing business with entities that are believed to be at high risk for fraud and money laundering. The program was designed to disrupt businesses that were believed to be engaged in illegal activities, such as telemarketing fraud, online poker, and payday lending.
The operation was allegedly mired in multiple missteps. The FDIC and the OCC allegedly threaten banks with regulatory pressures if they don’t cut services to suspects. These actions trample upon fairness and due process. It was ended in 2017 by the Trump Administration.
It seems like Operation Chokepoint is back in business. This time it is a war against crypto and digital assets. The crypto community is closely monitoring this siege to the industry.
This development if proven true and left unhampered will make it hard for crypto to flourish in the U.S.
Who will Win the Crypto War?
The U.S. government and all of its resources are without a doubt a force to reckon with. No entity nor country can go toe-to-toe with Uncle Sam. And those resources are being used to lay siege on crypto.
Is crypto doomed to fail? Regulators are making it hard to do business with crypto, but there are still proactive officials whom we can count on. The dissenting opinion of SEC Commissioner Pierce is something that should be adopted. She is correct in saying that “…Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating”.
Pro-crypto Politicians include Senator Cynthia Lummis who introduced a bill to treat crypto as a technology at par with AI or biotechnology. We also have Senator Ron Wyden, who has raised concerns that strict regulations can impact future innovations. Senator Pat Toomey owns crypto and has introduced the stablecoin TRUST act.
The staunches crypto allies are the millions of Americans who believe in this new technology. This battle can still be won with the support of the worldwide crypto community. Hopefully the government will soon realize that crypto and blockchain are the future. It is the not the enemy, but rather a tool that can be used for the good of all.
Featured image from Pixabay