US Government

Unwinding the hyperbole: Are US-based crypto firms really being ‘choked’?

Are U.S. agencies conspiring to “un-bank” crypto and put Binance out of business?

An extended market price drawdown (crypto winter) throughout 2022 has tested the crypto industry’s mettle, and more recently, a crackdown by United States regulators on some prominent entities like Coinbase, Binance and Kraken has further shaken the sector.

So maybe it’s only natural for the industry to employ colorful, vivid language to describe what’s been happening. There’s a notion making the rounds that the U.S. government is out to “un-bank” or “de-platform” the crypto sector. This process even has a name: “Operation Choke Point 2.0.”

U.S. President Joe Biden’s administration is using the financial rails “as an extra-judicial political cudgel” to crack down on the crypto industry, wrote Castle Island Ventures’ Nic Carter, who described it as a coordinated, multi-agency effort to discourage banks from dealing with crypto firms.

According to Carter, this alleged strategy follows a template used earlier by the Obama and Trump administrations. In 2018, under federal pressure, “Bank of America and Citigroup de-platformed firearms companies, and BoA began to report client firearm purchases to the federal government,” he wrote.

In late March, Quantum Economics’ Mati Greenspan told Cointelegraph that this so-called un-banking could “already be underway,” particularly in light of the recent collapses of crypto-friendly banks like Silvergate, Silicon Valley Bank and Signature Bank. In Greenspan’s view:

“Crypto is seen as a ‘threat’ to the U.S. dollar’s dominance in global trade — a significant and long-standing benefit to the U.S.”

In that same article, attorney Michael Bacina warned that the “regulation by enforcement model” being practiced in the U.S. would simply “drive crypto-asset innovation offshore,” and on April 1, the CEO of a French digital assets data provider told The Wall Street Journal that U.S. agency actions could “shift the center of gravity of crypto assets trading and investments” toward Hong Kong.

A coordinated effort by regulators?

It’s time to step back and ask: Are these fears justified? It is sometimes difficult to separate the truth from the tight knot of hyperbole in the crypto space, but are U.S. regulators really seeking to “de-platform” crypto?

“I don’t think there’s necessarily a concerted or intentional effort by regulators to ‘de-platform’ crypto,” David Shargel, a partner at the Bracewell law firm, told Cointelegraph. “But, the crypto ecosystem has moved from a niche product to the mainstream, and regulators are playing catchup.” Regulators also recognize that crypto isn’t going anywhere, he added.

Does the suggestion that cryptocurrencies represent a threat to the U.S. dollar’s dominance in global trade provide a further incentive to ban them?

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Crypto may indeed have the potential to disrupt global trade flows — at least to some minor degree — but the dollar is more threatened by other geopolitical factors “such as the U.S.’ own waning influence on the global stage, the rise of China, and Western sanctions on Russia,” Zhong Yang Chan, head of research at CoinGecko, told Cointelegraph.

Recently, International Monetary Fund experts said, “Crypto assets, including stablecoins, are not yet risks to the global financial system.”

“The general consensus seems to be that the dollar remains well entrenched as the world’s dominant currency, and that the use of cryptocurrency, standing alone, won’t change that — barring some other major political or economic shift,” Bracewell’s Shargel added.

“A perfect storm brewing”

Still, the administration in Washington may be getting nervous about the U.S. dollar, said John Deaton, a managing partner at Deaton Law Firm, who also runs the CryptoLaw website, and has supported Ripple in its litigation with the U.S. Securities and Exchange Commission (SEC). Speaking to Cointelegraph, he said there is a convergence of issues at play here:

“China and Russia have agreed to trade oil and gas in the Chinese yuan, not U.S. dollars. Kenya’s president has told his people to dump their USD. Saudi Arabia may agree to trade oil in non-USD denominations.”

At the same time, the U.S. government needs to print more money, adding to an already high inflationary environment, leading people to look at gold, silver and Bitcoin (BTC) as alternatives. “The fear isn’t just about crypto — it’s that a perfect storm is brewing against the U.S. dollar,” Deaton said.

Deaton deems the Operation Chokepoint 2.0 scenario plausible, but he also has a nuanced view of crypto regulation and U.S. regulators. “If we are being honest, the crypto industry has caused itself quite a few self-inflicted wounds, and the industry is to blame for giving itself a black eye when it comes to public perception.” Many in the crypto industry, like himself, “don’t oppose regulation; we seek it,” he said, adding:

“We just want smart, tailored legislation that protects investors from fraud but provides entrepreneurs with clear rules and guidance, and fosters innovation.”

Dealing Binance a ‘fatal blow’?

Deaton was asked about another suggestion heard last week that the U.S. Commodity Futures Trading Commission (CFTC) is “attempting to strike a fatal blow to Binance” with its recently announced lawsuit against the world’s largest cryptocurrency exchange. Is that really the commission’s end game?

“If you look at the CFTC’s case against Binance in a vacuum, I would agree that it is hyperbole to suggest that it is a regulatory attempt to cause a death blow to Binance,” said Deaton. “Binance, like many other entities that grew very fast and very quickly, may have cut corners. If so, they will pay a big fine and move on.”

The problem is that the Binance suit comes after Coinbase received a Wells notice from the SEC, and the government’s seizure of Signature Bank, with reports that the Federal Deposit Insurance Corporation wanted all crypto depositors out before it would allow a sale of that bank. “When you add those things together, it appears like coordination, not coincidence,” Deaton told Cointelegraph.

“Hyperbole seems to drive the crypto news cycle,” commented Bracewell’s Shargel when asked about the industry’s response to the recent CFTC action against Binance. “The CFTC’s lawsuit is certainly serious, but it’s probably too soon to call it a fatal blow.”

In its complaint, the CFTC asked the court to impose several penalties, including a permanent bar on Binance and its CEO, Changpeng Zhao, from the commodities markets. “But, for now, the complaint is just a complaint, and the outcome of the case — whether through settlement or otherwise — remains to be seen,” said Shargel.

The view from abroad

Viewed from overseas, recent U.S. regulatory actions are sometimes difficult to fathom. Syren Johnstone, executive director of the compliance and regulation program at the University of Hong Kong — and author of the book Rethinking the Regulation of Cryptoassets — has been disappointed with the U.S. SEC’s seeming attempt to label everything a security.

“None of the regulatory approaches I’m seeing globally truly promote innovation,” Johnstone told Cointelegraph. “Dumping everything crypto into a financial markets context is straight-jacketing the greater potential for the technology.”

Other countries are closely following recent U.S. regulatory actions, though not necessarily approvingly. “Overseas regulators are looking at the U.S. approach to crypto assets as a situation they want to avoid,” Johnstone noted.

“Globally, there are concerted efforts to bring greater regulatory oversight to crypto,” added CoinGecko’s Chan. “However, each country has its own legal system, and different countries may take different paths toward regulating crypto activities. This may include placing crypto under the ambit of securities, but there may also be other possible paths such as classifying crypto as payments instruments, or commodities.”

Time to cool down the hype?

If the industry continues to use the language of persecution, could it potentially hurt — rather than support — crypto adoption? Shargel commented:

“I’m not sure if hyperbole serves the wider cause of crypto or blockchain adoption, but it might help to coalesce the crypto community, especially as regulators seem to be expanding their enforcement dragnet.”

“I do not believe it is hyperbole to say the U.S. government has initiated a war or campaign against crypto,” opined Deaton. “Operation Chokepoint 2.0, which Nic Carter warned people about, has been proven accurate. Some said he was a conspiracy theorist or engaging in hyperbole. He wasn’t either. The regulators protect the status quo, which means they protect the incumbents in power from the disrupters who are gaining traction or market share. That’s what we are witnessing.”

A downbeat President’s report

Elsewhere, many in the crypto community were disappointed by the Biden administration’s recent economic report, which devoted 35 of its 507 pages to digital assets. Dan Reecer, chief growth officer at decentralized finance platform Acala Network, called it “an attack on crypto,” adding that it was released “just days after Operation Chokepoint 2.0 was executed on crypto-friendly banks.”

Admittedly, the report wasn’t exactly a ringing endorsement of cryptocurrencies. “Crypto assets currently do not offer widespread economic benefits. They are largely speculative investment vehicles and are not an effective alternative to fiat currency,” it declared.

However, there is nothing in the report that describes crypto as threatening U.S. dollar dominance in global trade or about a pressing need to “de-platform” crypto entities.

On the contrary, the report acknowledged that cryptocurrencies “underlying technology may still find productive uses in the future as companies and governments continue to experiment with DLT [distributed ledger technology].” It conceded that “some crypto assets appear to be here to stay.”

The eighth chapter of the report, which focuses on digital assets, is primarily a rehash of things that people working in the field have known for years — how Bitcoin is mined, the risks of algorithmic stablecoins, the crypto sector’s role in ransomware, its volatility and its unsuitability as a medium of exchange, etc. But one major shortcoming is that it fails to recognize the technology’s future possibilities.

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All in all, U.S. regulators face a balancing act. The government has every right to crack down on bad actors, but it shouldn’t kill innovation in the process. The SEC can’t expect to regulate everything in the crypto space — not everything is a financial security.

For instance, if the agency declared Ether (ETH) a security — because the Ethereum network uses ETH in its staking consensus mechanism — then that would rightly be considered regulatory overreach.

“In the aftermath of FTX, it’s no surprise that regulators are inclined to act,” Chris Perkins, president of crypto venture firm CoinFund, and a member of the CFTC’s Global Market’s Advisory Committee, told Cointelegraph. “And, they should be empowered to pursue enforcement actions to prevent other ‘FTXs.’ But, it’s important that we don’t throw the baby out with the bathwater.”

Stress test? What Biden’s bank bailout means for stablecoins

A major stablecoin depegging event raised concerns about the stability of these assets amid a U.S. banking crisis. The result may have been an improvement in their position in traditional finance.

The collapse of Silicon Valley Bank (SVB), which suffered a bank run after revealing a hole in its finances over the sale of part of its inflation-hit bond portfolio, led to a depegging event for major stablecoins in the crypto sector, leaving many to wonder whether it was a simple stress test or a sign of weakness in the system.

The second-largest stablecoin by market capitalization, the Centre Consortium’s USD Coin (USDC), saw its value plunge to $0.87 after it was revealed that $3.3 billion of its over $40 billion in reserves was held at SVB and was, as a result, possibly lost. Coinbase seemingly exacerbated the crisis when it, a member of the Consortium, announced it was halting USDC-to-dollar conversions over the weekend.

As USDC lost its peg, so did decentralized stablecoins using it as a reserve asset. The most notable of which is MakerDAO’s Dai (DAI), a cryptocurrency-backed stablecoin that has well over half of its reserves in USDC.

Stablecoins restored their peg after the United States government stepped in and ensured depositors at SVB and Signature Bank would be made whole, in a move meant to stop other entities from suffering irreparable damage. According to United States President Joe Biden, taxpayers did not feel the burn of the bailout, and the traditional finance system was safe after the intervention.

The crisis, however, did not end there. While the U.S. government stepping in helped stablecoins recover their peg, many quickly pointed out that taxpayers would ultimately suffer the depositors’ bailout.

The banking crisis’ effects on digital assets

Financial institutions have since banded together to protect other banks, with investors and depositors raising questions about the stability of a number of other institutions, including Deutsche Bank.

Credit Suisse collapsed after investments in different funds went south and an unsubstantiated rumor on its impending failure saw customers pull out over 110 billion Swiss francs of funds in a quarter from it, while it suffered a loss of over 7 billion CHF.

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The collapse saw the Swiss government broker an “emergency rescue” deal where Credit Suisse was acquired by rival UBS at a steep discount. Speaking to Cointelegraph, Jason Allegrante, chief legal and compliance officer at blockchain infrastructure company Fireblocks, said that the banking crisis was partly caused by rising interest rates exposing banks with large portfolios of low-interest-rate bonds to risk.

Per Allegrante, the role of the liquidity coverage ratio, a regulatory requirement forcing banks to hold a certain amount of “high-quality liquid assets” to prevent these liquidity crunches, is not being openly discussed.

He said it’s “entirely possible we are in the early stages of a nationwide run on regional banks.” If this happens, he said, there will not only be widespread regional bank failure but there will “likely be further consolidation and concentration of deposits in a handful of large, systematically important banks.”

He added that such a crisis would put pressure on regional banks to sell assets to meet liquidity needs and could ultimately lead to more bank failures. Allegrante added that this would have “far-reaching consequences for the digital asset industry in the United States and abroad.”

Becky Sarwate, spokesperson and head of communications at cryptocurrency exchange CEX.io, told Cointelegraph that the crisis could be a boon for digital assets, saying:

“One thing is clear: Similar to how Bitcoin blossomed from the wreckage of the 2008 financial crisis, the failure of institutions like SVB and Signature Bank is compelling evidence for diversification across multiple investment verticals.”

Sarwate added that when “traditional pathways prove equally volatile from the perspective of a crypto curious participant, it throws the inherent risk of any market participation into relief.” She added that while digital assets lack some of the protections seen in traditional finance, they “offer an alternative set of benefits that, in our current climate, could be appealing to nervous investors.”

Investors holding onto stablecoins and earning yield through them, however, may have believed they were already diversifying and sidestepping the market rout that was occurring. Circle, the issuer of USDC, suggested the depeg event was a “stress test” that the system weathered.

Mitigating risk for stablecoins

If the Federal Deposit and Insurance Corporation (FDIC) were to extend insurance to crypto-related institutions, it could alleviate concerns about the security of digital assets under their custody. That same insurance helped USDC and other stablecoins recover their peg after the collapse of SVB, making a strong case for FDIC insurance to boost crypto adoption.

While that insurance typically only goes up to $250,000, the FDIC opted to make every depositor whole, essentially protecting Circle’s $3.3 billion in reserves held at the bank. Speaking to Cointelegraph, a spokesperson for the stablecoin issuer said that the events highlighted “how there’s a co-dependency — not a conflict — in banking and digital finance.”

The spokesperson added that just as the 2008 global financial crisis led to comprehensive banking reforms, it may be “well past time that the U.S. acts on federal payment stablecoin legislation and federal oversight of these innovations.” The spokesperson added:

“The emphasis here is the importance of shoring up markets and confidence, protecting consumers and ensuring that outcomes, in the long run, prove that the stress test could have been weathered by traditional financial firms and Circle.”

To Circle, a stable U.S. banking system that ensures deposits are safe and accessible is essential to the financial system, and the U.S. government’s actions to make depositors whole demonstrated their “recognition of this fact.” The safety and soundness of the banking system are critical to dollar-backed stablecoins, the firm added.

Circle has revealed that it has since moved the cash portion of USDC’s reserve to Bank of New York Mellon, the world’s largest custodian bank with over $44 trillion in assets under custody, with the exception of “limited funds held at transaction banking partners in support of USDC minting and redemption.”

The firm added it has “long advocated for regulation such that we can become a full reserve, federally supervised institution.” Such a move would insulate its “base layer of internet money and payment systems from fractional reserve banking risk,” the spokesperson said, adding:

“A federal pathway for legislation and regulatory oversight allows for the U.S. to be represented and have a seat at the table as the future of money is being discussed around the world. The time to act is now.”

Commenting on the depeg, Lucas Kiely, chief investment officer of Yield App, noted that what happened can be “largely attributed to fears around liquidity,” as most stablecoins are “essentially an IOU note backed by securities that holders don’t have a lien on.”

Per Kiely, stablecoins have “been sold as asset-backed instruments, which like any other asset carry investment risk.” Danny Talwar, head of tax at crypto tax calculator Koinly, said that USDC and Dai may “temporarily suffer from a lack of confidence over the short to medium term following the mini-bank run.”

CEX.io’s Sarwate, however, said the confidence in these stablecoins “has gone unchanged,” as both Dai and USDC “retreated back to their reflections of the U.S. dollar and resumed all prior uses they enjoyed before the depegging event.”

To members of the decentralized autonomous organization (DAO) that governs Dai, MakerDAO, confidence was seemingly unaffected. A recent vote has seen members of the DAO opt to keep USDC as the primary collateral for the stablecoin over diversifying with Gemini Dollar (GUSD) and Paxos Dollar (USDP) exposure.

Given USDC’s move of the cash portion of its reserves to a stronger custodian, the depegging event may have simply strengthened both stablecoins after a short period of panic.

Leveling the playing field

That strengthened position, according to Koinly’s Talwar, could also come as cryptocurrency startups and exchanges search for alternative banking providers, although the “de-banking of crypto businesses could seriously harm the sector and innovation in blockchain-based technologies” if they fail to find alternatives.

In the medium term, Talwar said, the collapse of cryptocurrency-friendly banks “will compound with the more crypto-native collapses from the past year, resulting in a challenging environment for blockchain innovation to thrive within the United States.”

Yield app’s Kiely said that the U.S. government’s recent bailout was different from the one seen in the global financial crisis, although it raises “questions over whether there needs to be an adjustment in the supervisory guidelines to address interest rate risk.”

The Fed’s bailout, he said, could be removing incentives for banks to manage business risks and send a message they can “lean on the government’s support if customer funds are mismanaged, all with no alleged cost to the taxpayer.”

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As for stablecoins, Talwar said he sees a need for more stablecoin options, even though the launch of euro-backed stablecoins helped in this regard. CEX.io’s Sarwate noted that the U.S. banking and stablecoin crisis helped “level the playing field between traditional finance and crypto.”

While crypto is still a nascent industry, she said, there’s “potential within the space for visionaries to lead by example and carve out an alternative to speculative investing. In the long term, this could help yield a more balanced system.”

In the typical crypto ethos, players in the space are already finding ways to mitigate risks associated with the traditional financial system. While U.S. regulators warn against crypto, the sector moves to strengthen its position in the financial world.

Binance vs. CFTC: Latest court battle could alter crypto landscape in US

The CFTC lawsuit against Binance could prove to be the beginning of the end for the crypto exchange in the United States, according to many market pundits.

Regulatory trouble is nothing new for Binance, and on many occasions, in the past, it has managed to overcome or bypass such roadblocks and eventually work with regulators. 

However, when it comes to the United States, the exchange has found itself in the cross-hairs of multiple agencies.

A number of United States financial regulators have ongoing investigations against the crypto exchange. Some of these investigations date back to 2018, and now, one of the primary derivatives market regulators in the U.S. has filed a lawsuit in conjunction with its investigation that started in early 2021.

The U.S. Commodities Futures Trading Commission filed a lawsuit against Binance along with its CEO, Changpeng Zhao, and former chief compliance officer Samuel Lim on March 28.

The lawsuit alleges that Binance violated U.S. derivatives laws by offering its derivative trading services to U.S. customers without registering with appropriate market regulators. The CFTC accused Binance of prioritizing commercial success over regulatory compliance.

The lawsuit also made headlines because the CFTC has not only levied charges against the exchange but also against Zhao and Lim. The U.S. regulator has also accused Binance and its CEO of seven violations of the Commodities Exchange Act and controlled foreign company rules.

David Waugh, managing editor of the Daily Economy at the American Institute for Economic Research, told Cointelegraph that the CFTC lawsuit isn’t surprising considering the U.S. government’s overarching approach toward cryptocurrency enterprises — regulators seem to be employing every conceivable measure to curb the industry’s expansion.

“Significant regulatory action could prompt Binance to increasingly shift its business operations beyond the United States. Moreover, considering Binance.US’s sizable share of U.S. Bitcoin trading volume, the potential closure of the exchange’s American operations could lead to a decline in domestic trading volume unless traders transition to alternative platforms.”

The CFTC has actively gone after large companies, having previously opened regulatory enforcement actions against Tether and Bitfinex, which resulted in major shifts in the crypto landscape. The lawsuit against Binance looks to be no different.

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The CFTC has demanded a ban on Binance, Zhao, Lim and all affiliates from trading on registered entities, holding any commodity interest, registering or exempting with CFTC or acting as a principal, officer or employee of a registered entity. It has also demanded that Binance pay back the trading profits, revenues, commissions and fees derived from U.S. customers, as well as pay civil penalties assessed by the court and stand a jury trial on this matter.

Binance’s fate in the U.S. looks uncertain at present

The CFTC lawsuit has amassed evidence, including internal chat records of Zhao with Binance’s executives. Some market pundits believe it could very well seal the fate of the global crypto exchange in the United States.

Mark Fidelman, the founder of SmartBlocks, told Cointelegraph that the lawsuit has the potential to undo years of progress made by Binance’s sister firm in the U.S., Binance.US, which the global exchange has claimed functions as an independent entity. Fidelman said, “Charges against Binance are stiff, and the penalties could be business-ending.”

In addition to the regulatory infractions, the lawsuit specifically mentions Binance.US trading subsidiaries Merit Peak as well. The CFTC alleged that Zhao directly controls Binance and all of its connected companies.

An excerpt from the CFTC lawsuit. Source: CFTC

The lawsuit also specifically ties in Trust Wallet, Binance Labs (due to U.S. exposure) and many Binance employees with U.S. exposure, including exchange-employed community builders called “Binance Angels” as grounds for a U.S. filing.

The most daunting accusation could be that Binance had nearly 300 accounts directly or indirectly linked to Zhao that traded against customers.

An excerpt from the CFTC lawsuit. Source: CFTC

CFTC’s lawsuits against crypto companies have been settled with hefty fines and orders to cease operations in the past. Terrence Yang, a Harvard Law JD and the managing director of Bitcoin-focused firm Swan Bitcoin, told Cointelegraph that it seems unlikely that Binance.US will continue to operate much longer, depending on what the CFTC proves in court. 

“On the one hand, Binance.US offered fewer products than Binance and has customers who identify as U.S. and Binance.US recognizes as U.S. customers. On the other hand, if the CFTC can prove to a judge that Binance.US helped Binance siphon U.S. customers who wanted to do more exotic products and use VPNs to hide their U.S. identity, then Binance.US may not be viable going forward.”

Binance did not directly respond to Cointelegraph’s request for comment.

The firm did release a public response to the lawsuit, in which Zhao said that the complaint appears to contain an incomplete recitation of the facts, and they “do not agree with the characterization of many of the issues alleged in the complaint.”

Many see the lawsuit as critical for Binance’s future in the U.S., with some further classifying it as a political move among regulators.

Adam Cochran, a decentralized finance developer and angel investor, in a Twitter thread explained the end scenario of the lawsuit. He said that if Binance and other mentioned executives fail to engage with U.S. courts or don’t appear to defend themselves in a trial, then the CFTC would win. However, if they engage, “then the discovery process will be opening all their books internationally to U.S. regulators from all entities including those personally owned by Zhao to churn up other issues.”

Possible effects on the crypto market

The CFTC’s accusations against Binance are serious, and the crypto exchange has more to worry about than just the CFTC. The exchange is also currently under investigation by the SEC, Department of Justice and Internal Revenue Service.

At the end of 2022, Binance had a 92% market share of the total volume of Bitcoin (BTC) transactions. The exchange’s market share was a mere 45% at the beginning of the last year, but the removal of trading fees in June and the downfall of rival exchange FTX in November helped it attract consumers.

Binance is a significant market liquidity source. Key market makers use Binance to execute trades and obtain liquidity. The market’s capacity to find prices and sources of liquidity will be impacted by any disruption to Binance’s operations. Retail customers and institutional traders would ultimately suffer as a result of this.

While the majority of these ongoing investigations and CFTC allegations are mere accusations at this point and haven’t been proven in court, Jason Allegrante, chief legal and compliance officer at digital asset bank FireBlocks, told Cointelegraph that the outcome of the CFTC lawsuit could accelerate the trend of businesses exiting the U.S. market.

“Depending on how Binance is ultimately impacted, this may send shockwaves through global digital asset markets. For better or worse, Binance is now akin to a critical financial market infrastructure given the volume of global trades that pass through it. An interruption of service at Binance will result in a serious impairment of liquidity sourcing in the marketplace,” he explained.

He added that, in the long run, alternative sources of liquidity will emerge in the form of new entrants, including traditional financial market participants, such as Nasdaq, which just announced plans to enter digital asset markets.

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Allegrante said that U.S. regulators are working to “push out crypto by creating legal adversity and also legal uncertainty.” He cited the example of Coinbase, a U.S.-regulated public crypto exchange that recently received a Wells notice from the SEC.

He stated, “Now, you have a different exchange that’s received an enforcement complaint from the commodities regulator for basically being in the same business. For crypto, this is the worst of both worlds — one company having an SEC allegation, Coinbase, and one having a CFTC allegation, Binance.”

Binance has been walking on a regulatory tightrope around the globe, and over the years, it has received numerous compliance complaints from countries, such as the United Kingdom, Japan, Germany, Australia and many more. However, the CFTC lawsuit, according to many experts, could become an albatross around the exchange’s neck.

A friend in need: How the crypto industry reacts to recent bank bailouts

With a focus on sovereignty and creating an alternative to traditional financial systems, how is the crypto community reacting to government intervention in the recent bank crisis?

In its early days, crypto enthusiasm was fuelled by the promise to cut the rigged banking system out of the people’s basic need to exchange goods and funds. To some degree, it still is. But as digital assets become more and more intertwined with a larger financial market, this tension gradually fades away. 

The recent wave of partial bailouts of failed institutions such as Silvergate Bank, Signature Bank and Silicon Valley Bank (SVB) has not raised any concerns among the crypto community. Moreover, the United States Federal Reserve System came as a savior, at least in regard to USD Coin (USDC) issuer Circle, which kept a significant portion of its reserves in Signature Bank and SVB.

If the Fed decided to let the banks fail, we would probably have witnessed another sharp dip in the crypto market and not the optimistic resurgence of the last two weeks.

Does this mean that the crypto industry has come to a point where it is highly dependent on traditional banking and cannot contrapose itself as an alternative anymore? Is that kind of interconnectedness desirable for digital assets or should the industry create some distance from traditional finance (TradFi)?

Was it a bailout?

Technically, both SVB and Signature were bailed out, but economists are highlighting the major difference between the current solution and the U.S. government’s actions during the economic crisis in 2008.

“During the [2008] financial crisis, there were investors and owners of systemic large banks that were bailed out,” as Treasury Secretary Janet Yellen explained, but this time, it was depositors who got their back covered by the Deposit Insurance Fund, supplied by the banks, not taxpayers.

The Federal Deposit Insurance Corporation (FDIC) has effectively guaranteed all deposits at both banks beyond its normal limit of $250,000 per account. Still, it was only due to the FDIC’s support that Circle was able to withdraw the whole $3.3 billion deposit from the SVB and save USDC from further depegging.

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Still, isn’t there something odd about an industry with a strong anti-establishment and even anti-Fed background taking federal backing for granted, if not outright advocating for it?

Maybe not, as no speaker Cointelegraph has reached out to sees any ethical contradictions here. There’s an overlap between the crypto community and the startup community, so there’s naturally been a lot of support for the bank bailouts, Daniel Chong, CEO and co-founder at Harpie, explained:

“I personally don’t see a dissonance here: You can be a TradFi skeptic and still be in favor of startups having a way to continue operations and make payroll. We don’t need thousands of employees missing paychecks to prove that DeFi is a viable financial system.”

Although the DNA of the crypto community would oppose a bailout, Tony Petrov, chief legal officer at risk management platform Sumsub, told Cointelegraph that, sometimes, it is very important to at least attempt to save valuable institutions on the border of crypto and fiat — especially given the obvious scarcity of such institutions.

Then-Senator Barack Obama argues in favor of the Emergency Economic Stabilization Act of 2008 before the Senate in December of that year.

Of course, bailouts have gained a negative connotation not only within the crypto community. In some cases, a bailout looks like billionaire executives getting taxpayer-funded handouts in exchange for their own poor decisions. The philosophy of “too big to fail” is helping utterly ineffective and ill-governed banks to stay where they are, even if they don’t provide real value to the society where they exist. But, Petrov continued, it’s hard to deny that what happened to SVB, Silvergate and Signature was not a clear example of mismanagement solely on the side of the banks’ executives:

“After all, they invested in governmental notes, not in some shady digital coins, the value of which can hardly be predictable even within one day. Taking this topic very softly, it can be claimed that a part of the blame for the consequences should be borne by the U.S. government.”

Is crypto really to blame?

Although the panic among crypto investors following the FTX debacle played a role in depleting the bank’s crypto deposits, Signature’s problems were much more deep-rooted, Ahmed Ismail, CEO of liquidity aggregator Fluid, told Cointelegraph.

The bank served a tightly knit set of customers, including a group of startups and their investors. Ismail said that it aimed for rapid growth without adequately diversifying its business or clientele:

“Truth be told, businesses dealing with such tightly knit customer circles always face the risk of experiencing a domino effect.”

Petrov also doesn’t buy into the hypothesis that crypto is to blame for the banks’ collapse. Speaking to Cointelegraph, he highlighted the common problem of Silvergate and SVB, which was, ironically, their faith in U.S. Treasurys. By raising interest rates, the Federal Reserve naturally dropped their value, and the simultaneous turmoil at SVB provoked a bank run.

Some posit that it is the crypto industry itself whose financial stability is being undermined by interconnectedness with the banking system: more specifically, by the extreme limitations of that connection. The crypto market has been backed into a corner of the traditional banking system, Chong claimed.

Even before the collapse of Signature, SVB and Silvergate, there were only a handful of entities willing to bank crypto companies. It’s impossible for a crypto company to diversify its assets across many different institutions since there aren’t 20 banks that will have it:

“The idea that ‘crypto is too risky to bank’ has become a self-fulfilling prophecy. The few institutions willing to bank with crypto companies face very high demand from a market that has nowhere else to go. They become ‘crypto banks’ by default, and all the risks inherent in these fast-moving markets end up concentrated in a few institutions.”

What is to be done?

What can the crypto industry do to escape the sudden dangers of relying upon banks? Not much. The paradox is obvious: Cryptocurrencies won’t need banks if they somehow become the major means of exchange and accumulation, but the only way for them to get to this utopian point lies through their interchangeability with fiat money. To Petrov, because of that exchangeability demand, building a fence against TradFi looks like a counterintuitive idea.

An independent world of crypto remains a great libertarian promise, but nothing more, he explained, “In the background of the meltdown of three huge crypto-friendly banks, we saw the surge of BTC for more than $8,000 in 10 days. This is evidence that there is no distance between fiat and crypto: They communicate as the venous circuit and the arterial circuit in a human organism.”

Oliver Chapman, CEO of supply chain specialists OCI, also doesn’t see how crypto can escape TradFi. All in all, it is TradFi that has stepped in to support a bank that was crucial for the crypto industry, he told Cointelegraph. 

The crypto industry may or may not distance itself from TradFi, but if it does, it will either be tiny and unimportant or pose a systemic risk, Chapman said, stating, “Finance is either important or we return to the caves. And whether that finance is traditional, crypto or a combination, when things go wrong, a systematic crisis that could precipitate a disastrous global recession remains a danger.”

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The crypto economy can continue improving its performance without directly conflicting with banks and similar traditional finance institutions, Ismail stated. It has already made finance more accessible and cost-optimized by cutting out cost-bearing intermediaries. Moreover, using cryptography and smart contracts in decentralized finance has enhanced the system’s security without compromising efficiency. But there’s nothing inevitable about the conflict between the two systems, Ismail said:

“I don’t see why traditional finance and the crypto economy should be pitted against each other. Both can coexist without the cost of the other.”

Chong doesn’t take this conviction for granted. In his opinion, we’re going to see a lot of value moving on-chain exactly as a result of such collapses within the traditional finance system. The question is whether the crypto market, with its own wave of devastating collapses in 2022, is ready to serve as a safe alternative to banks. In order to be the alternative to TradFi, the crypto community needs to come up with some standards for how to manage corporate assets. 

Chong added, “In the current environment, you need to be a crypto-native engineer to have any chance of keeping your blockchain assets secure. That’s not scalable.”

Crypto reform coming to US in 2023, says former White House chief of staff

SVB’s epic failure occurred “at a bank that happened to deal with crypto customers” but “was not a crypto-induced problem,” said Mick Mulvaney.

In the United States, crypto reform legislation isn’t the province of a single political party, and that’s why a former U.S. Congressman, who also played a prominent role in the Trump administration, believes that passage of a federal “digital assets” law this year is a real possibility.

“Democrats aren’t all on one side; Republicans aren’t all on the other side,” said Mick Mulvaney — budget director and later acting White House chief of staff from January 2019 to March 2020 — further explaining:

“I do think in this Congress, which has got functionally about 14–16 months left before it sort of shuts down before the next election cycle, you will get a meaningful piece of legislation on blockchain/crypto — what we’re referring to collectively as digital assets.”

Mulvaney’s government resume is long and varied. In addition to six years in the U.S. House of Representatives, he was also director of the Office of Management and Budget from February 2017 until March 2020, as well as special U.S. envoy to Northern Ireland — a post from which he resigned on Jan. 7, 2021 — the day after protesters inspired by President Donald Trump attacked the U.S. Capitol Building. Mulvaney is now a strategic adviser to Astra Protocol, a Switzerland-based Web3 Know Your Customer (KYC) platform.

Centralized versus decentralized finance

Mulvaney has an interest in Bitcoin (BTC) and blockchain technology going back nearly 10 years. In 2016, he co-founded the Congressional Blockchain Caucus. Today, he says decentralized finance (DeFi) protocols have some key advantages over their centralized counterparts. Moreover, it’s now possible to integrate key compliance processes like KYC and Anti-Money Laundering into DeFi platforms — something that would reassure regulators.

“There’s a weakness in the system when it comes to the centralized and a strength that comes from decentralized finance,” he said. Much of the fraud commonly associated with the crypto space can be attributed to centralized entities, from Mt. Gox to FTX. DeFi, in his view, brings additional layers of transparency that make engaging in fraudulent activities more difficult, “and over the past decade has proved that it is the better system […] Even regulators are beginning to understand this,” he told Cointelegraph.

‘Regulators dropped the ball’

When speaking with one of the Trump administration’s leading financial managers, it would be hard not to ask about the current banking crisis. Silicon Valley Bank (SVB) was arguably ground zero in this upheaval, with some critics — most notably Senator Elizabeth Warren — criticizing the Trump administration for loosening banking regulations that might have averted SVB’s bankruptcy.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted in response to the financial crisis of 2007–2008, introduced the idea of “stress testing” large U.S. banks deemed too big to fail. However, the testing threshold was revised in 2018, which meant SVB and Signature Bank (also troubled) were no longer considered “systemically important financial institutions” subject to stress testing. As Warren wrote in The New York Times:

“Had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks.”

Is Warren correct that the previous presidential administration was at least partly to blame? “It would have happened anyway,” answered Mulvaney. “The changes in 2018 were relatively narrow in scope. Essentially, it took banks under $250 billion [in balance sheet assets] out from the very highest level of regulation.”

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Silicon Valley Bank was still subject to bank regulation, just not the very highest. Meanwhile, duration risk, marked by taking short-term deposits and investing them in long-term assets — arguably the key factor in SVB’s downfall — “is one of the simplest, most basic things that the SEC [Securities and Exchange Commission], the FDIC [Federal Deposit Insurance Corporation] and the Fed are supposed to look at,” said Mulvaney. “The very lowest levels of regulation should have caught this.”

“The regulators dropped the ball,” he stated, emphasizing that this was a management failure “at a bank that happened to deal with crypto customers. This was not a crypto-induced problem, and I think that’s important to note.”

Crypto has bipartisan support

Why is Mulvaney so optimistic about the prospects of federal crypto or blockchain legislation this year? Despite everything one hears about political polarization in Washington DC, especially in Congress, some issues remain “fairly bipartisan,” he explained. One is antipathy to China. Another is suspicion of Big Tech. But a third is “an interest in crypto and blockchain.”

Take the House Financial Services Committee, on which Mulvaney once served. Its Digital Assets Subcommittee is chaired by Republican French Hill, a crypto and blockchain supporter, but the subcommittee also includes crypto supporters on the minority (Democrat) side, including Ritchie Torres, who spoke with Cointelegraph earlier this year about the prospects for digital assets reform legislation.

Mulvaney’s official portrait. 

Bipartisanship extends to the U.S. Senate, too, where Republican Cynthia Lummis and Democrat Kirsten Gillibrand jointly introduced the Responsible Financial Innovation Act in 2022, which aims to create a regulatory framework for digital assets. Mulvaney explained:

“You have a group of people in both parties who just want to know more; they’re interested in the topic, they want to educate themselves.[…] That’s where we are right now with crypto and blockchain.”

Next generation of compliance

Astra Protocol, where Mulvaney now serves as a strategic adviser, bills itself as the next generation of compliance — a decentralized KYC Platform for Web3 that “brings the financial regulatory standards for 155+ countries and over 300 sanctions and watchlists to the crypto industry without sacrificing anonymization.” KYC is a process that many banks and businesses use to verify the identity, suitability and risks of potential customers.

But how can one ensure anonymity when trying to verify identities and conduct background checks?

“I think everyone has come to realize that there are different levels of it [anonymity],” said Mulvaney. “For example, I can tell you who I am. And once you know who I am, you can prove to me who you are so that we can deal with each other with a certain level of trust without telling the whole rest of the world who we are.”

Astra Protocol states that its “patented technology” calls upon experts from major global firms to verify a user’s credentials and perform KYC checks of prospective DeFi users. This enables DeFi protocols to adhere to data privacy regulations without accessing investors’ personally identifiable information. The idea is something like zero-knowledge proofs.

“Astra Protocol has no idea what transpired between a DeFi protocol and a regulatory delegate,” the project states. A DeFi project or exchange will be able to know that you are who you say you are and, importantly, that “you’re not on a sanctions list. You’re not a drug dealer. You’re not a child pornographer, you’re not a bot,” added Mulvaney.

Coming to grips with new technology

So far, the Biden administration hasn’t identified itself as a great friend of cryptocurrencies and blockchain technology. Were things different in the previous administration? What, if anything, was being said about crypto inside the White House?

“It was pretty much what you would see in the general public at the time,” answered Mulvaney: “‘We’re not really sure what it is. It’s a new piece of technology […] What are the opportunities,’” and so on.

He recalled conversations on the subject with then-Comptroller of the Currency Joseph Otting, “trying to figure it out.” For instance, which agency should take the lead in regulating digital assets: The Commodity Futures Trading Commission (CFTC), the SEC or a banking agency? “It was unsettled,” recalled Mulvaney. “It was unknown because it was so new.” But that was appropriate for the time. “You don’t want ironclad positions,” especially when adjusting to new technology.

Anyone but Gensler

“I hope that’s what the current [Biden] administration is doing,” i.e., engaging in open-minded discussion. “I get the impression that [SEC chairman Gary] Gensler is sort of dominating the debate. He’s clearly a [crypto] skeptic. I don’t think that’s particularly healthy. I don’t want my regulator taking sides.”

Which government department or commission should take point on crypto? Mulvaney leans toward the CFTC, which would regulate crypto more like a commodity, not a security. Many in the crypto community would probably favor CFTC primacy too. He added:

“I just don’t think Gary Gensler has the mindset to do that [act objectively]. So right now, put me down as supporting anybody other than the SEC because Gensler is still there.”

Remaining obstacles

What does the former acting White House chief of staff think about crypto and blockchain’s long-term prospects? Does the technology have an Achilles heel that will hinder global adoption?

It will not fail because it is (allegedly) being misused by criminals and terrorists, he stated. Lawmakers are slowly learning something that law-enforcement agencies have known for a while. “Crypto is actually a lot better for law enforcement than cash — because while it’s anonymous, it’s still traceable,” said Mulvaney.

The biggest resistance will likely be from “countries that are worried about their own currency being replaced.” He doesn’t include the U.S. in this group, but European Union countries might be candidates. “The Europeans may worry that eventually the euro may be replaced by a digital currency because the euro is sort of held together with needle and thread.”

What about the International Monetary Fund (IMF), which has warned its 190 member countries against making Bitcoin and other private money “official currency?” Is that a responsible position for the world’s lender of last resort?

“No, I think they’re way out of their lane,” answered Mulvaney. The IMF was set up to do a certain thing, “which is to lend money to countries to help them to develop.” Whatever a country wants to adopt as its official currency “is really not the IMF’s business.”

He believes in the “competition of ideas” and “if you get a certain country that wants to adopt Bitcoin or any particular cryptocurrency, I think that’s fine. It’s helpful and could spur more innovation.”

Bitcoin and gold

Mulvaney’s interest in Bitcoin goes back almost a decade and came about “by accident.” He was attending a conference on the gold standard, and “there was a young lady there, talking about something I’d never heard about before, which was Bitcoin, and explaining how it was fixed in total number,” and so on.

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“I remember turning to her at the end of the conference and saying, you know, it’s not exactly the same as the gold standard, but it’s got some interesting parallels. I’d like to know more about it.” They spent some time discussing the new technology, its history, how it worked, and where and how it was being adopted. “I was just fascinated.”

What specifically drew him to Bitcoin? “The value is set by technology.” Later on, as head of the Office of Management and Budget, he saw firsthand “what we’ve done to the currency. I’m very much aware of how much of it [U.S. dollars] we’ve printed over the course of the past ten years.”

“That scares me to death. So to have something that the government cannot, at least in theory, change the value of unilaterally by fiat — that appealed to me, and I think it appeals to a lot of people.”

SBF shilled FTX risk model to FDIC chairman Gruenberg prior to collapse

The invitation was mediated by former CFTC Commissioner Mark Wetjen, who joined FTX US as the head of policy and regulatory strategy in November 2021.

Before crypto exchange FTX and its founder Sam Bankman-Fried (SBF) got tied down with allegations of misappropriation of users’ funds, SBF was among the most influential crypto entrepreneurs. Before FTX collapsed, a leaked email exchange with a top regulator allegedly showed SBF’s intent to get the exchange federally regulated.

On May 28, 2022, nearly six months before FTX filed for bankruptcy and SBF resigned as the CEO, Federal Deposit Insurance Corporation (FDIC) chairman Martin Gruenberg received an invitation to meet SBF on June 13, 2022, the Washington Examiner reported. The email was mediated by former CFTC commissioner Mark Wetjen, who joined FTX US as the head of policy and regulatory strategy in November 2021.

Sam Bankman-Fried’s meeting invitation to FDIC Chairman Martin Gruenberg. Source: The Washington Examiner

In the latter half of the email, Wetjen told Gruenberg that FTX is in the “unusual position of begging the federal government to regulate us.” He further added:

“We have an application before the CFTC that lays out for the agency how to do so. All the CFTC has to do is approve it. Once the CFTC does, the others will follow — the other major US exchanges also have CFTC licenses.”

In response to the SBF’s request, Gruenberg agreed to meet the duo, as shown in the leaked email below.

FDIC chairman Martin Gruenberg accepts Sam Bankman-Fried’s meeting invitation. Source: The Washington Examiner

Following the collapse of FTX, SBF’s political ties were uncovered amid parallel investigations. An FDIC spokesperson confirmed that the FDIC chairman met SBF as part of “routine courtesy visits with leaders of financial firms and institutions.”

Related: Sam Bankman-Fried to propose revised bail package ‘by next week’

Alongside federal investigations, FTX’s new management started conducting internal investigations to track missing funds.

Recent court documents revealed that SBF and five other former FTX and Alameda Research executives received $3.2 billion in payments and loans from FTX-linked entities. SBF reportedly received the lion’s share of the funds, receiving $2.2 billion.

Peter Schiff blames ‘too much gov’t regulation’ for worsening financial crisis

Finding the right balance between regulations and banking institutions is important for Schiff, considering that Puerto Rico regulators closed down Schiff’s bank due to non-compliance.

The recent fall of major banks in the United States and the need for federal intervention reignited discussions to identify the most effective ways to safeguard the crumbling economies. Comparing the episode to the financial crisis of 2008, prominent economist Peter Schiff found that increasing banking regulations contribute to the worsening economic crisis.

A deeper analysis of Silicon Valley Bank (SVB) by a group of economists revealed that nearly 190 banks in the United States are at risk of a depositor-driven collapse. It was highlighted that the monetary policies penned down by central banks could hurt long-term assets such as government bonds and mortgages, creating losses for banks.

The 2008 financial crisis was primarily driven by the collapse of the housing market. However, Schiff believed the crisis was caused by “too much government regulation.”

Schiff highlighted how the U.S. government introduced new banking regulations after the 2008 financial crash while promising “what is happening right now would never happen again.” He added:

“But one reason we had the 2008 Financial crisis was too much Govt. regulation. That’s why this crisis will be worse.”

Finding the right balance between regulations and banking institutions is important for Schiff, considering that Puerto Rico regulators closed down Schiff’s bank not too long ago, on July 4, 2022.

At the time, Crypto Twitter reminded Schiff why millions of people worldwide vouch for Bitcoin (BTC) adoption in the quest for financial freedom.

Related: SVB mixup forces India’s SVC Bank to issue a notice of clarification

On the other end of the spectrum, crypto entrepreneurs have started to double down on Bitcoin’s epic comeback. Former Coinbase chief technology officer Balaji Srinivasan predicted that Bitcoin would reach $1 million in value within 90 days.

As Cointelegraph reported, pseudonymous Twitter users James Medlock and Srinivasan made the wager based on their different views of the U.S. economy’s future amid ongoing uncertainty regarding the country’s banking system.

Srinivasan’s bet circles around an impending crisis that will lead to the deflation of the U.S. dollar and take the BTC price to $1 million.

Marathon Digital: Deposits held at Signature Bank are secure and available

The company disclosed that it has approximately $142 million in cash deposits at Signature Bridge Bank, which was set up by the FDIC after the shutdown of Signature Bank.

Crypto mining firm Marathon Digital Holdings has assured investors that the firm’s cash deposits at Signature Bank are secure and available for use as of March 13.

In a statement following the closure of New York’s Signature Bank, Marathon disclosed that it has approximately $142 million in cash deposits at Signature Bridge Bank.

The Signature Bridge Bank was set up by the United States Federal Deposit Insurance Corporation to manage customer accounts at the recently shuttered Signature Bank. The bridge bank is aimed at ensuring the flow of funds is not interrupted while the regulator searches for a buyer to acquire the assets of Signature Bank.

Marathon also confirmed that it has access to its funds for treasury management purposes, and is conducting its usual business transactions and paying all invoices as usual. Moreover, Marathon still holds over 11,000 Bitcoin (BTC), which the company views as a financial asset that provides flexibility beyond the conventional banking system.

The company also clarified that it has no direct business ties with Silicon Valley Bank, which shut down on March 10. 

Signature Bank, a crypto-friendly bank based in New York, was closed down on March 12 and taken over by the New York Department of Financial Services.

The Federal Reserve said on March 12 that the decision to close the bank was made in collaboration with the FDIC to protect the U.S. economy and bolster public confidence in the banking system.

Related: Gemini says no funds at Signature Bank backing GUSD

Former U.S. Representative and Signature Bank board member Barney Frank has since suggested that the bank was closed to send an anti-crypto message, a March 13 CNBC report revealed.

According to Frank, there was no indication of problems at the bank beyond a deposit run of over $10 billion, which he attributed to contagion from the fallout of Silicon Valley Bank.

Signature Bank’s shutdown makes it the third bank with ties to crypto to collapse in a week, following the closure of Silicon Valley Bank and Silvergate.

Is the SEC’s action against BUSD more about Binance than stablecoins?

The SEC’s enforcement action against BUSD raises questions about whether the regulatory body is focused on the stablecoin market or the crypto exchange Binance.

Binance branded stablecoin, Binance USD (BUSD), is a dollar-backed stablecoin issued by blockchain infrastructure platform Paxos Trust Company, and is the third largest stablecoin after Tether’s (USDT) and Circle’s USD Coin (USDC).

Paxos has claimed in the past that BUSD is fully backed by reserves held in either fiat cash or United States Treasury bills. BUSD was reportedly authorized and regulated by the New York State Department of Financial Services (NYDFS).

Paxos partnered with crypto exchange Binance in 2019 and launched the stablecoin, which received approval from the NYDFS. Binance CEO Changpeng Zhao has stated that the exchange licensed the Binance brand to Paxos, and BUSD is “wholly owned and managed by Paxos.”

However, on Feb. 12, the U.S. Securities and Exchange Commission (SEC) issued a Wells notice to Paxos — a letter the regulator uses to inform companies of planned enforcement action. The notice alleged that BUSD is an unregistered security. After receiving a Wells notice, the accused is allowed 30 days to respond via a legal brief known as a Wells submission — a chance to argue why charges should not be brought against prospective defendants.

One day later, the NYDFS ordered Paxos to stop minting new BUSD, citing specific unresolved issues around Paxos’ oversight of its relationship with Binance regarding BUSD. Paxos then decided to cut ties with Binance due to regulatory scrutiny, saying they are working with the SEC to resolve the issue constructively.

Binance, on the other hand, hopes the SEC won’t file an enforcement action based on the BUSD saga, telling Cointelegraph:

“The U.S. SEC, hopefully, will not file an enforcement action on this topic. Doing so is not justified by the facts or law. Furthermore, it would undermine the growth and innovation of the U.S. financial technology sector.”

Paxos refused to comment on the issue, citing ongoing talks with the SEC. The company directed Cointelegraph to an internal email with Paxos co-founder Charles Cascarilla reiterating their earlier stance that BUSD is not a security.

The statement from Cascarilla noted that the precedents used to identify securities in the U.S. are known as the Howey test and the Reves test. He stated that BUSD does not meet the criteria to be a security:

“Our stablecoins are always backed by cash and equivalents–dollars and U.S. Treasury bills, but never securities. We are engaged in constructive discussions with the SEC, and we look forward to continuing that dialogue in private. Of course, if necessary, we will defend our position in litigation. We will share more information when we can.”

Tether — issuer of the largest stablecoin by market capitalization — didn’t directly respond to specific questions about stablecoins being classed as securities. However, a spokesperson from the firm told Cointelegraph that “Tether has good relationships with law enforcement globally and is committed to operating securely and transparently in compliance with all applicable laws and regulations.”

Are stablecoins the focus or are there bigger fish to fry?

Many crypto community members were baffled by accusations of BUSD being a security, and to see enforcement action against it. This is because BUSD is “stable,” maintaining a 1:1 peg to the U.S. dollar, limiting its usage for speculation.

Just days after the SEC action against BUSD, rumors started circulating about a similar Wells notice being sent to other stablecoin issuers, including Circle and Tether. Circle’s chief strategy officer, Dante Disparte, quashed such rumors and said that the stablecoin issuer had not received such a document.

Speaking to Cointelegraph earlier this month, some legal experts explained how stablecoins might be considered securities. Although stablecoins are supposed to be stable, Aaron Lane, a senior lecturer at RMIT’s Blockchain Innovation Hub, said buyers might benefit from various arbitrage, hedging and staking opportunities.

He further explained that, while the answer isn’t obvious, a case could be made regarding whether the stablecoin was developed to produce money or is a derivative of a security.

Some crypto community members have stated that the issue might not be just about stablecoins as much as it is about Binance, indicating that the SEC didn’t take action against Paxos’ gold-backed stablecoin called Pax Gold (PAXG.)

Carol Goforth, a university professor and the Clayton N. Little professor of Law at the University of Arkansas, told Cointelegraph that the issue might be more about Binance than the stablecoin itself:

“There are unique issues with regard to that particular crypto asset because of its ties to and relationship with Binance. It is possible that some of those unusual features are what the SEC is focusing on, but because part of that is a lack of transparency and accuracy in reported information.”

Goforth added that the price of the stablecoin is designed to be stable, which would appear to be the antithesis of an expectation of profits.

Nonetheless, “I can see a potential argument that stablecoins make fast transactions in other forms of crypto possible and this is, in fact, the biggest use of stablecoins to date, accounting for a disproportionately high trading volume as compared to market capitalization” Goforth said, stating:

“‘Profit’ could be argued to include the extra value obtained from the ability to make such trades, although that seems to be a bit of a stretch. (Expectation of profits is important because it is one of the elements of the Howey investment contract test).”

Just weeks after enforcement action against BUSD, the SEC filed a motion to bar final approval of Binance.US’ $1 billion bid for assets belonging to bankrupt crypto lending firm Voyager Digital. The SEC flagged the potential sale of Voyager Token (VGX), issued by Voyager, which “may constitute the unregistered offer or sale of securities under federal law.“

The series of enforcement actions by the SEC against various aspects of Binance’s business led many to believe that the regulator was going after the exchange rather than the stablecoin industry.

SEC’s jurisdiction under question

Amid the ongoing increase in enforcement actions in the crypto market, the SEC’s jurisdiction has also been questioned, especially regarding stablecoins. In a recent interview, Jeremy Allaire, the CEO of USDC issuer Circle, said that “payment stablecoins” are payment systems, not securities.

Allaire argued that SEC is not the suitable regulator for stablecoins and said, “there is a reason why everywhere in the world, including the U.S., the government is specifically saying payment stablecoins are a payment system and banking regulator activity.”

Coinbase — the first publicly listed crypto exchange on the Nasdaq — is fighting a securities battle of its own related to its staking products. It also questioned the SEC’s decision to get involved with stablecoins and claim they are securities.

2022 was a disastrous year for the crypto industry, seeing most crypto assets lose more than 70% of their valuation from their market highs. Outside the crypto winter, the collapse of crypto lending giants, exchanges and asset funds became a more significant concern. Many then questioned regulators for not ensuring investor security and enforcing regulations. In 2023, the tables have turned, with regulatory agencies coming out in full force against crypto firms. However, their approach and intentions are being questioned now that they have sprung into action.

Bitcoin retirement plans elicit caution from regulators

Some investment experts believe adding digital assets to retirement funds could make sense when the market becomes more stable, but not right now.

Even as the crypto market continues to forge an impressive recovery from the 2022 bear market, the industry continues to attract the wrath of regulators worldwide, especially in the United States. Three U.S. financial watchdogs recently issued stern warnings to individuals looking to invest in retirement funds offering exposure to digital assets.

The U.S. Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy, the North American Securities Administrators Association and the Financial Industry Regulatory Authority (FINRA) warned investors that individual retirement accounts (IRAs) that include cryptocurrencies could potentially be classified as “securities,” unless they are registered with the SEC or have a valid exemption certificate.

Moreover, in the past year, many policymakers have continued to aim at cryptocurrency investment vehicles, such as retirement accounts, citing the string of insolvencies witnessed last year. For example, New York Attorney General Letitia James has repeatedly called for a ban on all crypto-inclusive contribution plans and IRAs.

Regulators are understandably cautious, with one Canadian teacher’s pension fund, the Ontario Teacher’s Pension Plan, taking a $95 million loss on its substantial stake in the FTX crypto exchange.

However, some prominent crypto proponents in the U.S. Senate, like Wyoming Senator Cynthia Lummis, believe that Bitcoin (BTC) should be a part of 401(k) retirement packages.

Are crypto retirement funds a good idea?

To better understand whether including cryptocurrencies in pension funds makes investment sense, Cointelegraph reached out to Ilan Sterk, CEO of Altshuler Shaham Horizon — an Israeli cryptocurrency custody and trading provider — one of the few crypto firms in the country approved to deal with banks.

According to Sterk, minimal exposure to digital assets can be a good fit for long-term retirement-centric investments. He added, “For pensioners, an investment portfolio can be allocated between various assets like securities, bonds, hedge funds, digital assets and private equity. Blockchain and digital assets are considered a relatively new field but with high utilization and a wide ecosystem, so allocating a conservative portion to such investments might be fruitful.”

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That said, he does agree with the warnings issued by the SEC and FINRA, especially since they pertain to retirement accounts containing the hard-earned savings of many people. Sterk said that crypto is a “very volatile investment for a retirement account” and, therefore, people investing in such offerings should take the time to understand the inherent risks associated with digital assets. He added:

“I believe that regulators are crucial to organizing new investment fields like digital assets as well as for laying out clear guidelines, especially for pension accounts, so investors won’t find themselves penniless upon reaching retirement.”

In 2021, the Israeli Capital Market, Insurance and Savings Authority published similar guidelines for local institutions — including provident funds and pension funds — telling institutions that should they decide to invest in Bitcoin, they must detail and explain their decision to the regulatory body.

Extreme volatility of crypto

Wade Wang, the founder and CEO of Safeheron — a digital asset self-custody provider that recently integrated its multi-party computation multisignature security solution with MetaMask — told Cointelegraph that it is “not recommended” that retirement funds seeking long-term returns be exposed to cryptocurrencies, at least in the near future. He added:

“Investing in digital assets comes with high uncertainty and severe volatility. So far, any coins or tokens within the crypto landscape are circulated within their own individual markets. The circulation between these different ecosystems, especially traditional ones like pension funds, requires considerably greater development.”

Wang highlighted that crypto should not be viewed differently from other investment forms. As the industry matures and novel Web3 applications emerge, many traditional funds — including family offices and retirement funds — will continue to eye digital assets.

Zoomers wants crypto in their retirement funds

According to a survey conducted by U.S. asset manager Charles Schwab during Q4 2022, almost 50% of zoomers and millennials want to see crypto become a part of their 401(k) retirement plans. Millennials were born in the early 1980s to mid-1990s, while zoomers were born in the mid to late 1990s and early 2010s.

Analysts for Charles Schwab found that 46% of zoomers and 45% of millennials would like to invest in cryptocurrencies as part of their retirement plans. Moreover, the survey found 43% of zoomers and 47% of millennials had already put a portion of their savings into digital assets outside their retirement plans.

Younger investors want a wider range of investment choices, like cryptcurrencies. Source: Charles Schwab

These results lay in stark contrast to another survey conducted by the investment manager, which found that just 31% of Gen X’ers and 11% of boomers — those born anywhere between the mid-1940s to late 1970s — were keen on investing in digital currencies through their 401(k) retirement plans.

Bill to remove roadblocks

On Feb. 15, Alabama Senator Tommy Tuberville announced he would reintroduce the Financial Freedom Act to allow American 401(k) retirement plans to gain cryptocurrency exposure. The bill, first tabled in the Senate in May 2022, seeks to reverse a policy from the U.S. Department of Labor (DOL) directing the type of investments allowed in 401(k) plans, including crypto.

In Tuberville’s words, the bill seeks to prevent the DOL from pursuing enforcement actions for individuals utilizing brokerage windows to invest in digital assets. “The federal government shouldn’t choose winners and losers in the investment game. My bill ensures that everyone who earns a paycheck has the financial freedom to invest in their futures however they see fit,” Tubernille added.

The bill’s co-sponsors include several prominent pro-crypto senators, including Cynthia Lummis, Rick Scott and Mike Braun. In a December 2022 interview, Senator Lummis stated that despite the recent market meltdown, she is still quite comfortable with the idea of Americans incorporating Bitcoin into their pension funds.

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Similarly, on Feb. 14, Florida Representative Byron Donalds said he wanted to table a bill similar to Tuberville’s in the House of Representatives. Both Donalds and Tuberville are likely to face stiff resistance from members of the Democratic party, as Senator Elizabeth Warren has repeatedly expressed her concerns about crypto being included in 401(k) plans. Senator Roger Marshall also shares a similar stance.

What lies ahead?

Since the beginning of 2022, the DOL has warned pension fund owners about crypto, asking them to exercise extreme caution when dealing with cryptocurrencies, citing the risk of fraud, theft and loss of funds. Other regulators have also adopted similar stances across the globe. As crypto adoption grows, time will tell how legislators come to view this novel asset class, especially from a long-term investment perspective.