Analysis stablecoin regulatory crackdown warns industry

By Hannah Lang

(Reuters) – The US Securities and Exchange Commission’s warning shot on Binance’s stablecoin as to whether it is a security or not could provide a clue as to what kind of dollar-pegged tokens might face regulatory scrutiny, important information for other digital asset companies that offer a less volatile way to trade crypto.

According to CoinGecko, stablecoins, with a market value of over $137 billion, are digital tokens typically backed by traditional assets like the US dollar or US Treasuries that are designed to hold constant value.

However, its use has raised questions from regulators, who have raised concerns about disclosures by stablecoin issuers as well as the tokens’ potential instability during periods of stress.

Last week, the SEC told Paxos Trust Company, the firm behind Binance’s stablecoin, that it should have registered the product as a security and is considering taking action against the platform, Paxos announced. Paxos, a blockchain platform partnering with Binance to issue the token, said it disagreed with the SEC’s position. According to an internal email from the company, the company is currently in talks with regulators.

While the crypto industry has criticized the SEC’s broad crackdown on the industry, the move against Binance USD, the third-largest stablecoin with about $16 billion in circulation, could provide some guidelines by which to scrutinize stablecoin activity.

SEC Chairman Gary Gensler previously said he believes some stablecoins are actually securities that require registration and additional regulatory oversight.

“Similar problems can await other cryptocurrencies, including stablecoins, linked to any system or brand,” said Grzegorz Drozdz, market analyst at Conotoxia Ltd.

Unlike Tether and USD Coin (USDC), the two largest stablecoins, Binance offers certain benefits to Binance USD holders on its platform, including no transaction fees when exchanging Binance USD for certain other tokens, which incentivizes Binance customers to hold the token.

Those incentives could be central to the SEC’s perception that the product is a security, experts said.

An SEC spokesman said the agency is not commenting on the existence or non-existence of a possible investigation.

The New York Treasury Department also ordered Paxos to stop minting Binance USD last week.

“As far as the SEC is concerned with stablecoins, I suspect it’s something along those lines [of]are these instruments possibly unregistered shares in a mutual fund?” said Jason Allegrante, chief legal and compliance officer at Fireblocks, an institutional digital asset platform.

Some argue that stablecoins should be regulated because they track other assets like gold or the US dollar, much like an exchange trade fund.

Paxos declined to comment beyond the statement previously made. Binance did not respond to a request for comment. Tether referenced a blog post published on Thursday about its reserves.

But the specific characteristics of tokens like Binance USD cause some stablecoin issuers to highlight their differences.

“Facts and circumstances surrounding any type of regulatory action like this are all different, as are the structural and regulatory considerations for each of the cryptocurrencies circulating around the world,” said Dante Disparte, chief strategy officer and head of global policy at Circle, the main operator by USDC.


Stablecoins are used for trading between volatile tokens like bitcoin and in some emerging markets as a way to protect savings from inflation.

Today, stablecoins are subject to a wide range of policies under a patchwork of government regulations governing disclosure of what assets are held in reserve to cover the coins and redemption rights.

The Biden administration has asked Congress to regulate bank-like stablecoin issuers and subject them to strict oversight by banking regulators.

While lawmakers are yet to pass legislation on stablecoins, senior lawmakers in the U.S. House of Representatives made significant progress over the past year on a bill that would subject stablecoin issuers to certain prudential banking standards.

The crypto industry came under closer scrutiny following the high-profile collapse of crypto exchange FTX in November. Earlier this month, crypto exchange Kraken agreed to shut down its US cryptocurrency staking service and pay $30 million in penalties to settle SEC fees for failing to register the program.

“Within the broader enforcement trends that we’re seeing, the SEC is really asserting a lot of jurisdiction and trying to get its control of what I believe is as much of this activity as is reasonably possible at this time,” Allegrante said.

(Reporting by Hannah Lang in Washington; Editing by Pete Schroeder, Megan Davies and Anna Driver)


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