US authorities have started the year cracking down on crypto companies and their products at such a pace that executives fear the industry is being forced out of one of its biggest markets.
In recent weeks, US regulators, led by the Securities and Exchange Commission, have launched a series of enforcement actions against some of the largest digital asset companies and their tokens. At the same time, many of the banks these companies rely on for payments and asset custody are also coming under new scrutiny.
The blunt new approach has hit a crypto industry still reeling from a painful year of falling prices and a crisis of confidence that led to the collapse of some of the biggest players in the sector, including swap ftx and lenders digital traveler and Celsius Network.
Observers say the rush of actions amounts to a concerted effort to rein in an industry that has until now largely existed outside the constraints of traditional financial regulation.
โI suspect this is just the beginning of the US trying to divide the system itself into those who meet its standards and those who don't,โ said Tom Keatinge, founding director of the Center for Financial Crime and Security Studies at The Group. of British experts RUSI.
Since the beginning of the year, the SEC has sued trade group Genesis and the Gemini exchange for failing to register a crypto-lending scheme as a security offering, and ordered rival exchange Kraken to discontinue a scheme the regulator said offered more than 20 percent return to customers.
Crypto advocates argue that a heavy-handed approach risks stifling innovation in the industry by relying too heavily on โenforcement regulationโ rather than creating a tailor-made cryptocurrency regulatory framework for the industry.
โThis type of regulatory uncertainty will ultimately drive access to cryptocurrency, innovation and jobs abroad, where customers are not guaranteed the same level of protection,โ said Paul Grewal, Coinbase's chief legal officer. "Meanwhile, the United States and Americans are falling behind."
However, the former head of the SEC's Internet compliance office, John Reed Stark, said the agency's approach was consistent with how it handled rule-breaking in traditional finance.
"This 'regulation by application' phrase is just a crypto slogan designed to obfuscate and misdirect," he said. โThere is no insider trading statute, there is no derivatives fraud statute. It's a broad framework specifically meant to be non-specific."
In a new escalation of the regulatory blitz, New York authorities have targeted one of the largest so-called stablecoins: dollar-pegged tokens that act as a crucial entry and exit point for cryptocurrency investors.
This week, the New York Department of Financial Services closed the issuance of BUSD, the widely used stablecoin on Binance, and branded by the world's largest cryptocurrency exchange. Following the order, the amount of BUSD in circulation fell by approximately $1 billion in a matter of days as investors shifted their cash elsewhere.
โThe US crackdown on cryptocurrency has become much more aggressive than we have seen from regulators in many other major jurisdictions,โ said Ilan Solot, co-head of digital assets at Marex Solutions.
โIt appears that the SEC believes that their actions are in the long-term interest of consumers, and they are willing to tolerate the short- to medium-term consequences of capital moving away from the United States,โ he said.
There are also signs that US regulators are paying attention to the links between the world of cryptocurrencies and the traditional financial system.
The Federal Reserve last month refused a request from Custodia Bank, a crypto-focused institution, to join its payment system because its planned crypto activities "are highly likely to be inconsistent with safe and sound banking practices."
Silvergate, another cryptocurrency-focused bank, is facing scrutiny from US lawmakers for its role in providing services to FTX. Conventional lenders may increasingly seek to break ties with the cryptocurrency world to avoid any potential regulatory pitfalls, lawyers say.
"If you have a bank that is being supervised in the United States, and the Federal Reserve questions its exposure to the cryptocurrency industry, that may trigger a serious internal review at the bank," said James Greig, a partner in financial regulation at the firm. Addleshaw Goddard Solicitors in London. "It's a push, rather than an enforcement action."
Earlier this month, Binance suspended US dollar payments without giving a reason. One of its banking partners, Signature Bank, had previously said that it would no longer allow cryptocurrency exchange clients to buy or sell amounts less than $100,000. Signature is a member of the federal scheme that insures deposits held at the nation's lenders.
In a Twitter question-and-answer session this week, Binance CEO Changpeng Zhao said it was likely regulators had asked banks to โnot work with crypto companies entirely, or be very cautious when working with crypto companies.
But whether the enforcement is direct or indirect, industry insiders say they can already feel the chilling effect of the recent regulatory crackdown.
โI think we are going to see more action from the SEC in the coming months, and this is just the beginning,โ said Charles Storry, head of growth at crypto platform Phuture. "If it's a big project, you better prepare for the incoming shock."
