How will the attacks of regulators affect cryptocurrencies?

The US authorities began the year with pressure on the crypto business at such a pace that industry leaders fear being squeezed out of one of the largest markets.

Since the beginning of the year, US regulators, primarily the Securities and Exchange Commission (SEC), have filed several lawsuits against some of the leading players in the crypto market or issuers of their assets. At the same time, banks providing accounts and payment processing services for cryptocurrency platforms also came under attack, writes RBC Crypto.

The Genesis trading group and the Gemini exchange were the first to feel the pressure of regulators this year. They were accused of failing to register the general crypto asset lending scheme and the Gemini Earn user income accrual program as activities falling under securities law.

A month later, the Kraken exchange, one of the leading players in the Ethereum cryptocurrency staking niche, fell under a similar lawsuit and a $30 million fine. She was forced to scale down the staking program for US users. According to regulators, the exchange “promised” more than 20% per annum in the form of income from the service.

“The working process”

Such active regulation of the industry is a natural workflow for its reorganization. Since it touched on many spheres and people, it may be “given too much emotional significance,” notes crypto expert and author of the GFiSchannel Telegram channel Taisiya Romanova.

“It is the natural function of the state to control and regulate. The trend towards “putting things in order” in the field of cryptocurrencies did not appear yesterday, the process has been going on for several years, but quite slowly,” Romanova notes.

In her opinion, the tools for this are already outdated, and the sphere itself, as well as the processes in society, have become too dynamic. At the same time, accusations against the SEC that they “do not know what they are doing” are groundless. The department has a sufficient level of knowledge to understand the nuances, but they use broad and controversial interpretations of laws and regulations.

In a further escalation of regulation, the New York State Department of Financial Services banned Paxos from issuing BUSD, the third largest stablecoin in terms of capitalization and widely used and branded on Binance, the largest crypto exchange. The amount of BUSD in circulation dropped by more than $2 billion in a matter of days as investors opted to shift funds to other assets.

The channels for converting cryptocurrencies into fiat funds also did not go unnoticed by regulators. In January, the Federal Reserve (Fed) rejected Custodia Bank’s application to join its payment system because the bank’s expressed positive attitude towards the cryptocurrency business “is very likely not consistent with safe banking practices.” Silvergate, another cryptocurrency-focused bank, is under scrutiny from U.S. lawmakers for its role in providing services to the bankrupt FTX exchange.

Binance in February, in principle, suspended the ability to buy cryptocurrency for dollars without explanation. One of its banking partners, Signature Bank, previously stated that it would no longer allow crypto exchange customers to buy or sell assets worth less than $100,000. Responding to questions from subscribers during a recent Twitter Spaces broadcast, Binance CEO Changpeng Zhao suggested that, most likely, regulators asked banks to “either not work with cryptocurrencies at all, or approach working with them with increased caution.”

Not very stable

The ban on the issuance of the stablecoin BUSD has become perhaps the most resonant decision of the SEC, and the exclusion of Paxos from the list of issuers of the top three stablecoins inevitably provokes shifts in the market. As Zhao noted, about $2.45 billion of the capitalization of BUSD went to other stablecoins, in particular, to USDT from the issuer Tether, which is less subject to the actions of US lawmakers. According to the observations of the head of Binance, “the landscape of stablecoins is changing markedly.”

The exchange itself is already introducing alternatives to BUSD, for example, turning to the less popular stablecoin TUSD (TrueUSD), which at the time of publication has a capitalization of about $969 million, according to CoinMarketCap. However, answering questions on the same broadcast, Zhao noted that, given the mounting pressure from US regulators, dollar-pegged stablecoins may eventually lose market share in favor of “stablecoins” backed by the euro or other world currencies.

In such a scenario, the exchange’s retail clients are likely to be able to quickly adapt to the euro, Turkish lira or other currencies, but large investors will obviously need significant liquidity to move capital. The inability of Binance to work with the most liquid and capitalized stablecoins pegged to the dollar may become an obstacle to the platform’s institutional transactions.

“Sandwich Position”

The lack of clear rules regarding cryptocurrencies and the openly hostile attitude of regulators in the long term will lead to the fact that America will lose its status as a financial center, Brian Armstrong, head of the second largest cryptocurrency exchange Coinbase, said, adding that “cryptocurrencies are open to everyone” and leadership in the industry is being pulled over the EU and Hong Kong.

In Hong Kong, trading in crypto assets is being introduced into the legal field, despite the ban on cryptocurrency circulation and mining in mainland China. It is this information that Armstrong refers to, and he is not the only one from the industry in the United States who sees the actions of Hong Kong and Asia as a whole as a trigger for the expansion of the legal crypto market.

“I don’t think it’s possible to talk about some serious confrontation between the US and Asia, positioning the latter as more liberal,” comments Taisiya Romanova, referring to even stricter rules for the Asian segment of the crypto market.

The possibility of legally buying cryptocurrency in Hong Kong, in her opinion, “has a double bottom.” Access will be strictly through licensed venues and subject to strict Know Your Customer (KYC) rules and asset listing requirements. At the same time, the authorities of both Hong Kong and China openly declare that they are in favor of the development of the blockchain technology itself and the implementation of Web 3.0. The ban does not apply to the technologies themselves, but to “potentially dangerous for the people” activities.

European regulators are also trying to speed up the withdrawal of the crypto industry into the legal field. The ECB urges EU banks to apply the rules developed by the Basel Committee on Banking Supervision when working with crypto assets, even before they officially come into force. As a representative of the Central Bank told CNBC reporters, in matters of the introduction of digital currencies, the regulator is afraid of being “in the position of a sandwich” between the United States and China, not having had time to introduce its own market regulation rules.

According to Romanova, Europe’s desire to join the digitalization race is understandable. This is necessary both to “preserve reputation”, and from an economic and political point of view, opening up opportunities for alternative interaction with other countries.

The activities of both European and Asian regulators are “desperate attempts to keep up with the new spirit of the times”, to maintain control and maintain power and authority over the population of their countries in the international arena, Romanova said. In her opinion, if you do not change the methods, in the medium term, such actions are likely to lead to failure.


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