Analysis: Stablecoin regulatory action sends a warning to the industry

22 February (Reuters) – The US Security and Exchange Commission’s warning shot at Binance’s stablecoin over whether or not it is a security could provide a hint as to what type of dollar-pegged tokens could provide regulatory scrutiny, critical information for other digital asset providers a less volatile way to trade crypto.

Stablecoins, with a market value of over $137 billion according to CoinGecko, are digital tokens typically backed by traditional assets such as the US dollar or US Treasury bonds designed to hold constant value.

But the use raises concerns among regulators who have raised concerns about the disclosures stablecoin issuers are providing, as well as the tokens’ potential instability during periods of stress.

Last week, the SEC told Paxos Trust Company, the company 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 that has partnered with Binance to issue the token, said it disagreed with the SEC’s position. The company is now in talks with regulators, according to an internal company email.

While the crypto industry has criticized the SEC’s crackdown on the broad sector, the move against Binance USD, the third-largest stablecoin with about $16 billion in circulation, may provide some guidance for the stablecoin business to fall under. can be scrutinized.

SEC Chairman Gary Gensler has previously said he believes some stablecoins are in fact securities, requiring registration and additional regulatory oversight.

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

Unlike Tether and USD Coin (USDC), the two largest stablecoins, Binance offers Binance USD holders certain benefits on its platform, including zero transaction fees when exchanging Binance USD for certain other tokens, providing an incentive for Binance customers to keep the token.

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

An SEC spokesman said the agency is not commenting on whether or not a possible investigation exists.

The New York Department of Financial Services also last week ordered Paxos to stop minting Binance USD.

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

Some argue that stablecoins should be regulated because they track other assets such as gold or the US dollar, similar to an exchange-trade fund.

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

But the specifics of tokens like Binance USD have prompted 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 with each of the cryptocurrencies circulating around the world,” said Dante Disparte, chief strategy officer and head of global policy. . at Circle, USDC’s main operator.


Stablecoins are used to trade between volatile tokens such as bitcoin and, in some emerging economies, as a means of protecting savings against inflation.

Today, stablecoins operate under a wide variety of policies under a patchwork of state regulations regarding disclosures, what assets are held in reserve to back the coins, and redemption rights.

The Biden administration has called on Congress to regulate issuers of stablecoins similar to banks and subject them to strict scrutiny by banking regulators.

While lawmakers have yet to pass legislation regulating stablecoins, senior U.S. House lawmakers made substantial progress last year on a draft that would subject stablecoin issuers to certain prudential banking standards.

The crypto industry has gained more attention 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 fines to settle SEC charges that the program was not registered.

“Within the broader enforcement trends that we’re seeing, the SEC is really claiming a lot of jurisdiction and trying to bring as much of this activity under its control as I think it can reasonably do at this point,” Allegrante said.

Reporting by Hannah Lang in Washington; edited by Pete Schroeder, Megan Davies and Anna Driver

Our Standards: The Thomson Reuters Principles of Trust.

Hannah Lang

Thomson Reuters

Hannah Lang covers financial technology and cryptocurrency, including the companies that drive the industry and policy developments that govern the industry. Hannah previously worked at American Banker, where she covered banking regulation and the Federal Reserve. She graduated from the University of Maryland, College Park and lives in Washington, DC.

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