Operation Choke Point 2.0: US goes after crypto amid confusion and uncertainty

Crypto is in the crosshairs of the US Securities and Exchange Commission (SEC), which is on the attack. The agency is planning to prosecute cryptocurrency company Paxos for producing BUSD, a stablecoin created in collaboration with Binance, the largest cryptocurrency exchange in the world, according to a report published over the weekend in The Wall Street Journal.

The SEC declined to comment, but Paxos, which has offices in Singapore and New York, stated today that the agency believes BUSD should have been registered as a security in the US, which is subject to stringent requirements. The company issued a statement in which it said it “categorically disagrees” with the notion that BUSD is a security, but added that it has agreed with a directive from the New York Department of Financial Services to stop minting new BUSD, thereby killing the coin.

A request for comment from Paxos was not answered. Patrick Hillmann, chief strategy officer at Binance, declined to comment on the impact of the SEC’s action on the exchange but said the company will be “reviewing other projects to ensure customers are protected from future undue harm.”

Conflicts with regulators are nothing new for the cryptocurrency sector, but the Paxos issue is unique and has caused some angst and misunderstanding. A decision that forbids the creation or usage of BUSD raises concerns that it could serve as a precedent for all stablecoins, destroying a key component of the market architecture in many crypto markets. The crypto economy would collapse, according to economist Frances Coppola, a former employee of HSBC and other banks, if the supply suddenly dried up.

Stablecoins, which are designed to adhere to a particular value, typically $1, are a crucial foundation of the cryptocurrency system. The majority are anchored to the target value by a combination of bonds and cash, which backs the tokens in circulation.

Stablecoins are “simple and fast,” according to cryptocurrency expert Noelle Acheson, formerly of CoinDesk, unlike cash, which can be challenging to move around, especially across borders, enabling traders to seize opportunities as they present themselves. According to Ram Ahluwalia, CEO of wealth management company Lumida, they have “opened up an economy on-chain,” enabling money to “flow into and stay in the ecosystem.”

According to the SEC,

Securities are contracts that are an investment of money in a common business, with a reasonable expectation of benefit, to be gained from the labor of others.

There are a number of regulatory and disclosure requirements that come with the classification. Stablecoin issuers would be obliged to register their tokens with the SEC in the event that stablecoins were ultimately deemed to be securities, providing the SEC the opportunity to reject the tokens. Existing stablecoins could be the target of enforcement action.

Changpeng Zhao, CEO of Binance, and other puzzled members of the cryptocurrency community are now wondering how stablecoins could possibly meet the SEC’s requirements. They are also wondering how digital coins that are designed not to fluctuate in value could be said to be sold with a reasonable expectation of profit.

Action against a significant stablecoin issuer, however, shouldn’t come as a surprise, according to Acheson, considering the SEC has previously stated that it thinks some stablecoins qualify as securities. Acheson anticipates the regulator will contend that stablecoins like BUSD, which are backed by their issuer’s holdings of reputable securities like corporate and government bonds, are hence securities themselves and must be subject to the same regulations as other securities.

The consequences of a future lawsuit are not yet evident because neither the SEC nor Paxos have made clear the details of the regulator’s complaint, claims Ahluwalia. However, that can’t be good for stablecoin issuers and might be a foreshadowing of worse things to come.

The SEC’s action against Paxos is the most recent in a slew of enforcement measures it took after the collapse of the cryptocurrency exchange FTX in November. After the SEC accused the company of failing to register a security, the agency stated last week that cryptocurrency exchange Kraken will stop offering one of its services in the US. Additionally, in January, the agency filed charges against cryptocurrency lenders Genesis Global Capital and Gemini over various services they provided to US customers.

Looking to push crypto underground or offshore

In the crypto community, this crackdown is being referred to as Operation Choke Point 2.0, which is a reference to a program started by the Obama administration, under which US officials were allegedly responsible for pressuring banks to cut ties with unpopular sectors like pornography and payday lending.

According to Coppola, it appears that the SEC wants to “push crypto totally offshore” and out of the US. “The SEC aims to stop US people from using cryptocurrency. It is highly probable that other nations will take note and do the same.

Acheson, Coppola, and Ahluwalia all believe the SEC is focusing on Paxos as a way to acquire some control over Binance and that it does not indicate a hostility towards stablecoins generally, despite concerns that the agency may target stablecoins more broadly. Despite being by far the biggest cryptocurrency exchange in the world, Binance only offers a limited service in the US. However, according to Reuters, Binance has long been suspected by the US of aiding in money laundering.

According to Coppola, the SEC can effectively cut off Binance from a supply of US cash by targeting BUSD, the stablecoin that powers much of the exchange’s business. Ahluwalia concurs and claims the SEC is attempting to “defang” Binance in novel ways. “You pull the levers at your disposal if you’re a regulator with suspicions but no jurisdiction,” he advises. Binance has consistently insisted that it is crucial to helping law enforcement combat financial crime.

But the crypto business must wait until the SEC announces its plans. Ahluwalia claims, “We’re all just speculating.” The repercussions would be severe if the SEC pursued other stablecoin issuers like Circle or Tether. According to Coppola, trade would become more expensive and risky without stablecoins serving as a “bridge” between volatile coins, and the decentralized finance industry as a whole might collapse. She claims that this may potentially bring down the entire crypto structure.

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