US crackdown turns up the heat on crypto market

US authorities have begun the year with a crackdown on crypto companies and their products at such a pace that executives fear that the industry is being pushed out of one of its biggest markets.

In recent weeks, American regulators, led by the Securities and Exchange Commission, have fired off a series of enforcement actions against some of the biggest digital asset companies and their tokens. At the same time, many of the banks on which these companies rely for payments and custody of assets are also coming under fresh scrutiny.

The newly forceful approach has hit a crypto industry still reeling from a bruising year of plunging prices and a crisis of confidence that led to the collapse of some of the sector’s biggest players, including exchange FTX and lenders Voyager Digital and Celsius Network.

Observers say that the spate of actions amounts to a co-ordinated effort to rein in an industry that until now has largely existed outside the strictures of traditional financial regulation.

“I would suspect this is just the beginning of the US trying single-handedly to divide the system between those who meet their standards and those who don’t,” said Tom Keatinge, founding director of the Centre for Financial Crime and Security Studies at UK think-tank RUSI.

Since the start of the year the SEC has sued trading group Genesis and exchange Gemini for failing to register a crypto lending scheme as a securities offering, and ordered rival exchange Kraken to discontinue a scheme that the regulator said offered more than 20 per cent returns to customers.

Crypto advocates argue that a heavy-handed approach risks stifling innovation in the industry by leaning too heavily on “regulation by enforcement” rather than creating a bespoke crypto regulatory framework for the industry.

“This type of regulatory uncertainty will ultimately drive access to crypto, innovation, and jobs overseas, where customers aren’t guaranteed the same level of protection,” said Paul Grewal, chief legal officer at Coinbase. “In the meantime, America and Americans are getting left behind.”

However, former chief of the SEC’s office of internet enforcement John Reed Stark said the agency’s approach was consistent with how it handled rule-breaking in traditional finance.

“This ‘regulation by enforcement’ phrase is just a crypto catchphrase designed to obfuscate and deflect,” he said. “There is no insider trading statute, there is no derivatives fraud statute. It’s a broad framework intended specifically to not be specific.”

In a further escalation of the regulatory blitz, New York authorities have taken aim at one of the biggest so-called stablecoins — dollar-pegged tokens that act as a crucial entry and exit point for investors in cryptocurrencies.

This week the New York Department of Financial Services shut down issuance of BUSD, the stablecoin widely used on Binance, and which carries the branding of the world’s largest crypto exchange. Following the order, the amount of BUSD in circulation fell by roughly $1bn in a matter of days as investors shifted their cash elsewhere.

“The US’s crackdown on crypto has become far more aggressive than what we have seen from regulators in many other major jurisdictions,” said Ilan Solot, co-head of digital assets at Marex Solutions.

“It appears the SEC thinks their actions are in the long-term interest of consumers, and they’re willing to tolerate short- or medium-term consequences of capital moving away from the United States,” he said.

There are also signs that US regulators are turning their attention to the links between the world of crypto and the traditional financial system.

The Federal Reserve last month rejected an application 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 crypto-focused bank, faces scrutiny from US legislators for its role providing services to FTX. Mainstream lenders may increasingly look to sever ties with the crypto world to head off any potential regulatory difficulty, lawyers say.

“If you’ve got a bank which is being supervised in the United States, and the Fed questions their exposure to the crypto industry, that can trigger some serious evaluation internally at the bank,” said James Greig, a partner in financial regulation at law firm Addleshaw Goddard in London. “It’s a nudge, rather than an enforcement action.”

Earlier this month Binance suspended US dollar payments without providing a reason. One of its banking partners, Signature Bank had previously said it would no longer allow crypto exchange customers to buy or sell amounts of less than $100,000. Signature is a member of the Federal scheme that insures deposits held at the nation’s lenders.

In a question-and-answer session on Twitter this week, Binance chief executive Changpeng Zhao said it was likely that banks had been asked by regulators to “either not work with crypto businesses completely, or be very cautious about working with crypto businesses”.

But whether enforcement is direct or indirect, industry insiders say they can already feel the chilling effect of the recent regulatory crackdown.

“I feel we’re going to see more action from the SEC in the coming months, and this is just the beginning,” said Charles Storry, head of growth at crypto platform Phuture. “If you’re a large project, you best brace for incoming impact.”