Following the collapse of FTX, the crypto industry has been plunged into a period of intense scrutiny, prompting some to refer to it as the “Dodd-Frank moment” of the crypto world. This reference is made in relation to the financial regulations that were implemented after the Lehman Brothers collapse.
In the United States, the regulation of crypto firms falls under the jurisdiction of various agencies, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), as well as numerous state bodies. Throughout 2022, these regulatory bodies have been ramping up enforcement actions against crypto businesses, following the explosive growth of the industry in 2020 and 2021.
However, the pace of regulatory action has now accelerated, as moves to curb various crypto activities gain momentum. While the crypto industry has often been characterized by its members’ self-confidence and sense of importance, the current period of regulatory scrutiny is causing many to reassess their outlook.
The collapse of FTX in November 2022 was a significant event for the cryptocurrency industry. The event was widely referred to as the “Lehman moment,” and it held true in broad strokes. Just like the Lehman Brothers’ collapse in 2008, an industry giant came tumbling down, contagion spread, and regulators who had been reluctant to act suddenly had a clearer target and a wave of public outrage to bolster their cause.
The cryptocurrency market has exploded into a trillion-dollar industry, and industry proponents are grappling with a regulatory infrastructure ill-equipped to handle it and broadly suspicious of its fundamental pitch as the future of finance. In the three months since FTX filed for bankruptcy, state and federal regulators have escalated both their rhetoric and their actions to keep the fast-growing digital asset industry in check.
On Tuesday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing pointedly titled “Crypto Crash: Why Financial Safeguards are Needed for Digital Assets.” During the hearing, the committee’s chairman, Sen. Sherrod Brown, stated in his opening remarks, “While crypto contagion didn’t infect the broader financial system, we saw glimpses of the damage it could have done if crypto migrated into the banking system. These crypto catastrophes have exposed what many of us already knew: Digital assets – cryptocurrencies, stablecoins, and investment tokens – are speculative products run by reckless companies that put Americans’ hard-earned money at risk.”
This hearing came a day after a regulatory crackdown on one of the world’s most popular stablecoins. New York regulators ordered blockchain firm Paxos to stop issuing BUSD, aka Binance USD, citing “several unresolved issues” related to Paxos’ oversight of its relationship with crypto exchange Binance. Stablecoins are digital tokens that maintain a one-to-one backing with US dollars or other fiat currency. Investors typically buy them to store money and facilitate deals within the cryptocurrency infrastructure, making them a bedrock of the crypto ecosystem.
The New York Department of Financial Services didn’t immediately respond to CNN’s request to comment. Paxos told customers they would be able to redeem their BUSD through February 2024, with options to redeem funds in US dollars or to convert their tokens to Pax Dollar, another stablecoin issued by the company. At the same time, the Securities and Exchange Commission plans to sue Paxos, alleging that BUSD should have been registered under federal securities laws.
Paxos “categorically disagrees” with the SEC, as stated in a statement released on Monday, “because BUSD is not a security under the federal securities laws.” The firm said it would “engage” with the SEC on the issue and is prepared to “vigorously litigate if necessary.” The firm declined to comment beyond its statement. The news of the crackdown on BUSD and Paxos has clearly unsettled investors. Binance, which partnered with Paxos to launch the stablecoin in 2019, on Monday suffered one of its worst-ever days in terms of withdrawals with $873 million in net outflows, according to data provider Nansen.
In the wake of the collapse of FTX, the cryptocurrency industry has come under intense regulatory scrutiny, prompting some to refer to it as the “Dodd-Frank moment” of the crypto world. The regulatory bodies responsible for overseeing the industry in the United States, including the SEC and the CFTC, have ramped up enforcement actions against crypto businesses throughout 2022, as moves to curb various crypto activities gain momentum. The collapse of FTX in November 2022 was a significant event for the cryptocurrency industry, with regulators who had been reluctant to act suddenly having a clearer target and a wave of public outrage to bolster their cause. As the industry grapples with a regulatory infrastructure ill-equipped to handle its explosive growth and broadly suspicious of its fundamental pitch as the future of finance, the recent regulatory crackdown on one of the world’s most popular stablecoins has clearly unsettled investors. The crypto industry is facing a critical moment, and its future depends on its ability to navigate these challenges and work constructively with regulators to build a more stable and secure financial system for all.