The Crypto Cops Have Flipped On Their Sirens

In this edition of the Bloomberg Crypto newsletter, Allyson Versprille recaps a busy few weeks for US watchdogs on the crypto beat:

Buckle up

The hits keep on coming for the crypto industry — the regulatory hits, that is.

US watchdogs have been ramping up scrutiny of the sector in recent weeks following unprecedented turmoil in the market in 2022 and the collapse of several high-profile companies, including Sam Bankman-Fried’s FTX. The more aggressive posture could push digital assets back to the fringes of finance, or as many crypto firms argue, offshore entirely.

The past few weeks have been marked by several notable events: Some banks have started to pull away from the industry after regulators privately warned them of their legal obligations to vet third-party crypto partners, especially those that aren’t registered with US authorities. And the Securities and Exchange Commission has stepped up enforcement — first through a $30 million settlement with digital-asset exchange Kraken over its staking-as-a-service program, then in a notice to Paxos Trust Co. detailing plans to sue the firm over its issuance of the Binance-branded BUSD stablecoin, which the agency has deemed to be an unregistered security. Paxos, which was separately told by a New York state regulator to stop issuing the coin, has said it "categorically disagrees" with that premise. Others are taking preemptive action

These latest actions are likely just the tip of the iceberg after a year of warnings to crypto firms to either follow the law or face lawsuits, fines, or in the worst case, criminal prosecution. While many in the industry agree some action was necessary after the fallout from FTX — and even a few acquiesce that the sector, to an extent, had this coming by continually pushing the envelope with risky endeavors — the majority say a blanket crackdown is unwarranted, given that regulators have offered few pathways or clarity on how decades-old rules should apply.

The White House has encouraged a stricter approach, urging agencies to step up enforcement and issue new guidance where needed. The administration cited last year's failures and serious investor losses as impetus for more severe measures.

The escalating crackdown has thrown the crypto sector in the US into chaos, with firms anxiously awaiting the next shoe to drop. Many inside and outside the industry have increased calls for Congress to step in and set clearer rules.

The top Democrat and Republican on the Senate Banking Committee agreed at a hearing Tuesday that there needs to be a comprehensive framework to regulate digital assets. Chairman Sherrod Brown said that should be based on time-tested safeguards, such as segregation of customer funds and disclosure requirements. Ranking member Tim Scott advocated for a "bipartisan and balanced approach that protects consumers and promotes innovation and opportunity."

It remains to be seen, though, if the two parties can find enough common ground within their own chamber and with the Republican-led House to advance such a framework in the near term.

In the meantime, the crypto industry should stay buckled up. If the past few weeks are any indicator, there are likely more bumps to come

Charting it out

Counting it out

Hearing them out

What we’re reading (and writing)

• A South Korean City’s Answer to Its Aging Population: A Crypto Hub
• Billions of Tether’s Reserves Were Stored at Cantor Fitzgerald, Capital Union and Ansbacher (Forbes)
• A $92 Billion Crypto Profit Maker Is in Line for a Shake-Up
• North Korean Hackers Adopt New Crypto Mixer After Sanctions, Firm Says
• The Mystery of the Shapeshifting Crypto-VC Profit (FT Alphaville)
• Matt Levine’s Money Stuff: he SEC Cracks Down on Crypto (Bloomberg Opinion)

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— With assistance by Joanna Ossinger