Crypto Investors Brace for More Crackdowns from Regulators

Regulators have not taken action against many of the industry's biggest crypto players, but they are now restricting access to critical products and services in the digital-currency business.

Source: WSJ | Published on February 14, 2023

cryptocurrency regulation

The walls are closing in around crypto. Regulators have not taken action against many of the industry’s biggest crypto players, but they are now restricting access to critical products and services in the digital-currency business.

On Monday, New York regulators halted new issuance of the world’s third-largest stablecoin, BUSD, sending investors fleeing and raising concerns about the future of Binance, which gives the coin the “B” in its name.

Paxos Trust Co., Binance’s coin-issuing partner, is facing a Securities and Exchange Commission lawsuit. A few days earlier, the SEC fined Kraken’s parent company and forced it to stop offering a popular type of crypto-yield product to US investors. Banking regulators are quietly pressuring banks to cut ties with cryptocurrency customers, limiting their ability to participate in the real-world financial system.

The flurry of actions followed years of slow-moving investigations and debate in Washington about how to best deal with the rapidly expanding industry. Some observers noticed a shift in officials’ tone following the collapse of the FTX cryptocurrency exchange, which bolstered the hand of politicians and regulators calling for tougher enforcement.

Now, cryptocurrency executives are bracing for additional regulatory lawsuits and investigations, and investors are fleeing suspected targets.

“From an industry standpoint, it certainly feels like there’s a crypto carpet bombing going on right now,” said Kristin Smith, CEO of Blockchain Association, a crypto industry group.

According to blockchain data provider Nansen, there were $2.7 billion in outflows from Binance in a 24-hour period from Sunday to Monday. According to Nansen, $144 million in BUSD were redeemed for dollars on Monday morning. Paxos stated on Monday that it “strongly disagrees” with the SEC’s assertion that BUSD must follow federal securities laws.

According to, Binance’s in-house token, BNB, fell 8% on Monday. The coin is frequently regarded as a barometer of investor perceptions of Binance.

The breadth of such actions suggests that the SEC and other regulators want to rein in crypto market pillars like stablecoins (digital coins with a fixed price of $1) and staking (a common way for investors to earn interest on their crypto).

Fears of a crackdown appear to have taken the wind out of the sails of a rally in the digital currency market in early 2023. At 5 p.m. ET Monday, Bitcoin was trading at around $21,621, down 9% from its previous high. Feb. 1.

Meanwhile, banking regulators have expressed concern about whether lending institutions can be involved in the industry safely. Some banks have reduced their involvement in cryptocurrency.

Binance announced last week that it would suspend US dollar bank transfers. The exchange announced that its banking partner, Signature Bank SBNY -1.66%decrease; red down pointing triangle, would no longer support crypto transactions under $100,000. Signature, one of the largest banks serving crypto firms, began withdrawing from the crypto business last year.

Since the beginning of the Trump administration, when regulators expressed interest in the novel technology that underpins cryptocurrencies, the SEC has been the primary cop in the crypto market. Many of the SEC’s earlier enforcement actions targeted smaller players, giving the market the impression that the industry’s best-known brands were less risky to deal with.

Then in November, FTX, one of the world’s most well-known trading platforms, failed after a report revealed that its affiliated hedge fund, Alameda Research, was heavily exposed to an illiquid digital asset issued by FTX. The disclosure sparked a run on customer deposits, forcing the firm and its affiliates into bankruptcy.

According to Coy Garrison, a former regulator and now a partner at Steptoe & Johnson LLP who advises clients on crypto legal issues, the FTX debacle emboldened the SEC. “There is a political incentive to bring larger cases post-FTX in order to be seen as the responsible cop on the beat,” he explained.

The Securities and Exchange Commission (SEC) filed a lawsuit against crypto lender Genesis Global Capital LLC and its partner Gemini Trust Company LLC in January, alleging that their program allowing users to earn interest on their crypto tokens violated securities laws. Gemini, which operates one of the largest cryptocurrency exchanges in the United States, has stated that it intends to fight the lawsuit.

Last week’s settlement between the SEC and the parent company of the Kraken crypto exchange, in which the company paid a $30 million penalty and agreed to stop offering so-called staking services to U.S. investors, has scared crypto executives. The company denied any wrongdoing.

The case suggests that the SEC may order other companies to stop providing access to staking, which is a practice in which investors lock up their digital assets such as ether or solana in exchange for an interest-like yield. Borrowers can use the loaned assets to facilitate transactions on the assets’ underlying blockchain network.

“This should put everyone on notice in this marketplace,” SEC Chair Gary Gensler said last week on CNBC.
Lending and staking services have been available for years, but the SEC only recently took formal action against them. This has exacerbated the industry’s complaint that

Mr. Gensler is uninterested in negotiating a tailored regulatory regime for cryptocurrency. Instead, industry officials claim that the SEC wants to impose its entire Wall Street rulebook on the industry.

“You’re starting to see opportunistic and uneven actions aimed at bringing major industry players and platforms under SEC jurisdiction,” Mr. Garrison said. “They have a tenuous link to investor protection. These products have been available for quite some time.”

Binance.US, Binance’s American affiliate that also provides staking services, has stated that it is monitoring the situation. Meanwhile, Coinbase CEO Brian Armstrong has threatened to sue the SEC if the agency criticizes how the company offers staking. “We will gladly defend this in court if necessary,” he said on Sunday.

Mr. Gensler has been warning since FTX’s demise that crypto companies, including the market’s exchanges, are running out of time to voluntarily comply with investor-protection rules. Mr. Gensler dismissed claims by the cryptocurrency industry that their market is too unique to coexist with SEC rules as a “talking point.”

Bank regulators appear to have cooled on crypto after appearing more open to banks serving digital-currency companies during the Trump administration. In early January, a trio of bank regulators issued a statement expressing skepticism that financial institutions could safely hold digital assets. Within a week, Metropolitan Commercial Bank, a small New York bank that had dabbled in cryptocurrency, announced the closure of its crypto business.

Meanwhile, two companies seeking banking licenses have been left in limbo after receiving preliminary approval from the Office of the Comptroller of the Currency in early 2021. Paxos National Trust and Protego Trust Co. submitted applications to establish banks that would hold crypto assets and facilitate trading.

Protego’s conditional charter recently expired. According to people familiar with the matter, the company believes the agency’s increasingly anti-crypto stance played a role in it not yet receiving full approval.

Paxos stated that it is still in talks with the regulator. “Paxos has not been asked to withdraw its application for a national trust bank charter from the OCC, nor has the charter been denied,” Paxos said in a Twitter statement.