3 - 5 minute read
The lack of new laws to govern digital assets in the US has left a regulatory vacuum, which the Securities and Exchange Commission (SEC) has stepped in to fill. The agency has taken advantage of the regulatory gaps identified by the US government to enforce rules in new areas that it had previously not focused on, including stablecoins and firms that combine traditionally separate financial activities. The SEC has been proactive in its regulation of digital assets, with Chair Gary Gensler indicating that he does not see the need for new laws to regulate the space.
Stablecoins have been at the forefront of much of the recent instability in the digital asset industry. The collapse of Terra last year led to multiple bankruptcies, as did the collapse of FTX’s FTT token in the fall. Despite cooperation from key policymakers, talks stalled over reluctance from the Treasury Department. Support from the department was seen as helpful to gain support of several fence-sitting Democrats on the House Financial Services Committee and in the Senate, as well as necessary for a bill to receive a presidential signature to become law.
Multiple people familiar with those deliberations say the SEC drove Treasury’s reluctance through constant objections and last-minute revision requests. The SEC was fighting every bill in Congress, period, according to one industry advocate with previous government experience. However, another person familiar with the talks disputed the claim that the SEC actively sought to sink the bill. Though any new legislation is unlikely to completely cut the SEC out of regulating digital assets, the lack of new laws in the areas identified as “regulatory gaps” by the US government has kept an open vacuum for the SEC to fill.
In February, the agency sent a letter to Paxos informing the crypto infrastructure company of an investigation into its joint stablecoin project with Binance, BUSD. Paxos says it has since stopped minting the token. And last week the SEC took action against Beaxy due to the way the platform combined several traditionally separate financial activities under one company, another area where the Financial Stability Oversight Council recommended new laws to create guardrails.
The move highlights a longstanding criticism of the digital asset space, that ‘exchanges’ combine functions in ways that traditional stock or commodities exchanges don’t by offering investment accounts, market-making in a way that leads to trading against their own customers and providing loans. Laws and ethical considerations prevent the commingling of those activities.
Possible Market Manipulation and Violations of US Law
A Commodity Futures Trading Commission complaint against crypto behemoth Binance last week also showcased how exchanges may be engaged in activities that concern regulators. The company allegedly operated approximately three hundred undisclosed trading accounts on its own platform, in addition to owner Changpeng ‘CZ’ Zhao owning two investment firms that traded through the company’s platform, and two of his own personal trading accounts. That fact raises questions about possible market manipulation, as the company traded against its own customers with advantages in speed of execution and internal data.
The SEC has yet to publicly announce an investigation into Binance, though the charges levied by the CFTC last week could likely be applied in a securities law context. The SEC has been proactive in its regulation of digital assets and has taken advantage of the regulatory gaps identified by the US government to enforce rules in new areas. Traders need to be aware of the regulatory hurdles in the digital asset space and should consider seeking legal advice to navigate complex regulatory requirements.