When FTX collapsed in November, it was a seismic event for the crypto industry. Many called it the “Lehman moment.”
The comparison holds true in broad strokes: An industry giant came tumbling down, the contagion spread, and regulators who’d been reluctant to act suddenly had a clearer target and a wave of public outrage to bolster their cause.
As the crypto market has exploded into a trillion-dollar industry, proponents are grappling with a regulatory infrastructure ill-equipped to handle it and broadly suspicious of its fundamental pitch as a 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 — a shift that is, unsurprisingly, not going over great with crypto companies.
The hearing came a day after a regulatory countdown on one of the world’s most popular stablecoins. On Monday, 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.
So-called 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.
The BUSD news 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.
The crackdown on BUSD and Paxos is just the latest instance of regulatory muscle-flexing in recent months actions that are sowing confusion and frustration among crypto’s proponents, many of whom have sought regulatory clarity for years.
In recent weeks, the SEC has leaned on a whack-a-mole enforcement strategy that critics say is unfairly targeting the nascent industry.
Last week, the SEC reached a $30 million settlement with crypto platform Kraken that will force the firm to unwind its “staking” practice, which allows investors to make a passive yield on their crypto holdings.
The settlement immediately raised questions about other exchanges that offer to the stake, which crypto advocates say is vital to supporting the healthy function of some virtual currencies.
In January, regulators warned US banks and other market participants about the risks of fraud, volatility, and shoddy risk management in the crypto world.
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