Binance Enters The Regulatory Fray

It's true, over the past several months, regulators have what crypto company after crypto company file for bankruptcy, freeze withdrawals. Some crypto founders have become fugitives from the law, and others have been arrested for allegedly breaking laws. Customers have lost a lot of money, and the prospects for recovery are in some cases pretty bleak. And now, after what's been criticized as months spent on the sidelines, regulators have

begun fighting back. In just the first two months of this year, we've seen a couple of pretty significant escalations, and today we're going to talk about one of them. What's happening with stable coins, you know, those crypto tokens that are supposed to hold their value and that are typically backed by some real world financial asset like the US dollar or U S treasuries. In addition to stable coins, we're going to talk about finance, the largest crypto exchange

in the world by any measure. It's been particularly affected by some of these post FTX regulatory moves. So what's at stake for binance and what could all of this mean for the industry, Bloomberg reports to Emily Nicole joins me. Now, Emily, welcome back to the show. Happy to be here. What's going on? Just as a macro level, you know, big picture, what's happening? Why are people so stressed? Because people are stressed. So one of the biggest parts of crypto is stable coins.

They're really cool to the way that trading operates. It's how traders and investors move money between FIAT into crypto and then also just moved between cryptocurrencies without letting their value diminishing between. A stable coin is a cryptocurrency designed

to have a relatively stable price. This means it can be backed by FIAT, a commodity, other cryptos or even algorithmically, and one of the three biggest of those, the finance usd coin, which is issued by packsos and branded by crypto exchange binance Um, was told by regulators to stop issuing new tokens and essentially will now slowly wind down over the course of the next year, which is about sixteen billion dollars about to leave the market at least

in terms of it being in bust. So in any ordinary markets in finance, you know, say foreign exchange, save US treasuries, say commodities, gold, frozen concentrates at orange juice, sixty billion dollars isn't really that much, Like, wouldn't be unmanageable if somebody had to unwind a position like that over time? Can the crypto market absorb that? Right now? In terms of the overall size of the stable coin sector,

it's not huge, but it's still pretty big. So there's about a hundred and thirty billion dollars worth of stable coins out there at the minute. It used to be higher, but thanks to the recent routing crypto prices, it's now about a dtilli, So sixteen million out of that not too huge UM, But in the broader scale, of things in terms of how volumes are happening at the minute. With everybody basically not that keen on crypto, nobody's really doing any buying or selling. Um, that's a lot to

hit the market at once. So things like being told that sixteen billion dollars whether stable coins is going to have to go, and also the fact that it's attached to one of the biggest players, if not the biggest player in crypto binance UM that then send everybody into a little bit of a panic. Digital currency prices are taking a hit following more US regulatory pressure on the industry. The coins slumped by more than Ether meanwhile was slashed

by more than four and Salana sunk. What does this have to do with finance, Like, what's the relationship between finance and the stable coin issuer? And why do who has a problem with it? So? B u s D is also known as Binance USD. It's issued and managed and wholly operated by a company called Paksos, which is

regulated in the state of New York. But it is branded in conjunction with finance, and so that means that it for example, it is the main way that you can convert Fiat money into crypto sets on Finance the biggest crypto exchange, It is the one that has the most pairs on that exchange, So it's basically the core of the way that entire exchange operates. And so even though there's only about sixteen billion circulation, it probably does a whole lot more in terms of volume every day.

And that is part of the reason why this is such a big deal, because it means that Finance itself as an exchange has to change the way it operates on a daily basis, on an hourly basis, on a second basis, it's going to have to think about can we find a new issuer to help us keep the stable coin alive? Can we convert into another stable coin

and make that our stable coin? Do we have to think about leaving the US dollar ecosystem entirely and think about like non U S dollar stable coins that we could use as the basis of our exchange from now on. Um And so these are all the conversations that are happening at the minum. That seems like a lot of conversations at a time when, as you know, people are kind of freaked out anyway, So how did this all unfold.

You know, it's like February. Things are bumping along, and now finance and pack those are getting out of the branded stable coin business for the morments like what were the triggers here? So over the last few years, stable coins have been a very big target for regulators because

they look the most like a regular financial instrument. I guess if you if you were a regulator and thinking about how do I tackle the world of crypto, first thing you're going to go for us the thing that looks like what you're used to um and stable coins themselves are generally backed by regular things like cash, bank deposits like money market funds, treasuries, that kind of stuff,

so again relatively easy for regulators to understand. And in that vein like the reserves backing stable coins have become very important for regulators. They've been paying a lot of attention to exactly what is making up the reserves support each stable coin. If a stable coin says it's worth a dollar, it needs to have a dollar in store somewhere in some form in a traditional format, not not

a cryptocurrency, so cash whatever. And for finance in particular, it's handling of those reserves have been has been called into question in terms of how it does its own stuff on its exchange. It's not been super transparent. It needs, you know, to present audits, especially after the collapse of

a big crypto exchange called fd X last year. And so in that current environment as we head into February, you can think that PASOS on the one hand, has been giving statements ever since bus started saying here is exactly what's in the bank account holding everything for that token.

But the other side of the equation, the branded partner, has not been as transparent, has not been very clear, and so the New York regulator said it had been asking questions of Paxsos the issuer, to say, you know, how are you managing this relationship, and it said in February that Paxos had not responded to those questions in a sufficient manner within the time frame that they had asked it needed to rectify some issues. It hadn't done those either, and so that's why b USD has to

be wound down. But remember this is not about PASOS, a US regulated New York a Department of Financial Services as regulated entity. It's about the relationship between PASOS and Finance so if you look at the Department Financial Services statement on this, they note they say, it's important to note that Paxos and bust was authorized to be issued on the ethery and blockchain, but was not authorized by

the Department of Financial Services. Was the binance PEG. It's a form of feed So that is on the kind of the PASO side and the regulator there is, you know, based based in New York. It's kind of like the one that's like, you are one of the companies that we have oversight over. We've asked you these questions. We

are not satisfied with your answers. We're going to take action simultaneous to that, though, Pasos also got an inquiry from a federal regulator, the u S Securities and Exchange Commission, which is from Paxos's perspective, ridiculous because as far as the public statements from PASO so concerned, they do not believe that stable coins like b USD should be considered a security, which means by definition the sc he shouldn't have jurisdiction. I feel like we talk about this on

the show all the time. The idea that the you know, from the SECS perspective and again to go back to our colleague on Bloomberg opinion, Matt Levine. You know, as far as the SEC is concerned, if you're in crypto, you're probably doing something that should have been registered. You're probably transacting in some kind of security. From the crypto

community's perspective, absolutely not. Is this a reconcilable position. I mean, there's there's two schools of thought here, right, is that a stable coin is something that you are giving a dollar to an issue and they're giving you the equivalent of a dollar back, and there's no real interest earning or anything like that happening in the meantime. And so that's why in the eyes of crypto stable coins are

not securities. But there's also other schools of thought that say, well, for example, if if these instruments that stable coin issues are investing in, like US treasuries, those are classes securities, then um, what a stable coin is as a security derivative,

and therefore that should be regulated. We're not entirely clear now, for example, what the SEC's reasoning is in this case, and Paxo said that it received a well's notice from the SEC, which is just like a notice to say that the regulator is looking at you very very keenly, and that basically implies the rest of us that there is a potential argument here that stable points could be considered security in the SEC's eyes. Until we learn more from the SEC, though, it's all a little bit of

guesswork as to what they're reasoning exactly is. We'll be right back with more from Bloomberg reporter Emil Nicole. If I were a lawyer at a crypto company like I would be charging more for whatever my rates are, and I would probably be be having kind of, you know, tough and serious conversations with the various exacts around. Okay,

here are the risks, here's the reality. One of those exacts, the CEO of Finance CZ as he's commonly known, did a Twitter spaces to talk about what he thinks this regulatory crackdown could mean for stable coins, and I was intrigued to hear him suggest that it could mean algorithmic stable coins. Come back, Could you just remind our listeners

what algorithmic stable coins are. So for regular stable coin as we call them regular um are ones that are backed by stores of reserves filled with traditional assets like cash and and uer strguries and money market funds um. Some stable coins try to use other methods to make sure that their token remains worth a dollar or whatever set values they've chosen. Some stable coins, like make Adows

Die use stores of crypto. Actually those reserves are mostly full of stable coins themselves, so it's a little bit

like a crypto reserve of crypto dollars. But others try to use a complex system of algorithmic and center if so, incentivizing traders to use their stable coin and a sister token, usually like another cryptocurrency, is to basically try and use the two different assets to keep them in balance and make sure that one stay is a dollar while the other stays attractive enough to keep traders using those incentives

and make everything work accordingly. Famously, the strategy employed by Terror with its sister coin Luna, which and that didn't work out so well so great as outcomes got dollars lost, Terror USB and its sister token Luna lost their peg

to the dollar. In the last few weeks, they had a spectacular meltdown, sending prices to near zero when they're now why would algorithmic stable coins, According to you know, folks in crypto not necessarily be subject to the same kinds of regulatory scrutiny, purely, I guess, because of the fact that they don't have any real dollars in them,

so to speak. So there's something that exists entirely outside of any kind of regulats you reach in terms of being able to say that, oh, well, there's a dollar and account there and I can probably regulate that, and so therefore I can regulate your stable coin too. And the issue is there, though, that there are also plenty of regulatory rules out there for four Code in financial services, and there's no real argument, I guess to say that

our growthic stable coins couldn't fall under that too. We've definitely had a lot of communication from regulators in the last six months after the collapse of Terror to say that our growthic stable coins are something that should definitely be be regulated and frowned upon in it some instances, I mean. In that same Twitter spaces, c z also said that he specifically identified that the regulatory crackdown around stable coins was triggered in part by the collapse of Terror.

So you know, it's this it's this kind of hilarious loop of this totally different kind of stable coin goes poorly in two, so now in three, we're looking at a totally different set of stable coins that may or may not go poorly. Because this is this is what

krypto is like. It's sometimes very confusing. But the other thing that he said, which I thought was interesting, is, you know, given that so much of this regulatory scrutiny is coming from US entities, that folks might start moving into stable coins that are backed by the euro, or the Japanese yen or the Singaporean dollar. We don't yet have any indication from regulators in those places that they're

planning a similar crackdown on stable coins. But what we do know is that global regulators have all been saying that they need to be united on aligned on anything to do with crypto and enforcement. Yeah, as I said earlier on in this episode, stable coins have been the first go to for regulators all around the world because it's the thing they would understand the most. And so actually we've had stable coin regulation and consideration in some

jurisdictions for several years at this point. Obviously Tara Luna Escalate did the need for that to come into force, but the conversations have been going for a while, and that's why if you look at a regulation in Europe, for example, there's a Markets in Crypto US. It's directive that's due to be finalized in April. There's some pretty big rules in there for stable coins, is particularly those

that denominated in the euro. Actually, the rules that they're suggesting will favor europeg stable coins over those that are denominated in other currencies, so they'll try and actually attract people who are investing in crypto to use those over the others. It's very likely that that will create the situation that CZ predicted, but it doesn't necessarily mean that there would be you know, I guess more regulatory freedom

in those stable coins. If anything, some jurisdictions like Europe, like Japan, like the UK a more further ahead with plans to regulate stable coins and those currencies. You know, like we keep saying, banner time for lawyers in crypto. Thank you as always, Emily, really good to have you on the show. Thanks for having me. That was Bloomberg

reporter Emelina Colet. You can find more of her posing on the Bloomberg terminal and on Bloomberg dot com, and she also regularly contributes to our twice weekly newsletter, Bloomberg Crypto, so make sure to subscribe to that as well. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions

for the show to Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky very Galina. Our senior producer is Janet Babin. Our producers are Mohammed Faruk and Sharon Berriro. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Marie Schml. We'll be back tomorrow. The shop were all at a bunt in ever w