Remember how the U.S. Securities and Exchange Commission’s declaration of war against crypto staking was big news for, like, two days? This week we’re looking at the other big news from last week: Paxos and the Binance USD stablecoin it issues. The SEC has apparently alleged the sale of BUSD violates securities laws, and the New York Department of Financial Services has asked Paxos to cease issuing the token.

You’re reading State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. Click here to sign up for future editions.

So … Paxos, eh? Stablecoin issuer Paxos is tussling with the U.S. Securities and Exchange Commission (SEC) and the New York Department of Financial Services (NYDFS) over the Binance USD stablecoin.

Is this the opening salvo against stablecoins? Or is this more about Binance and a U.S. company’s relationship with the exchange, which doesn’t have a clearly defined headquarters and which has often been seen as a somewhat lawless entity?

To recap: Last week CoinDesk reported that NYDFS was investigating Paxos. On Sunday the Wall Street Journal reported that the SEC had sent a Wells Notice – a formal declaration saying, “Hey we think this thing you did violated federal securities laws” – to Paxos over BUSD. Somewhere between kickoff of Super Bowl LVII and hungover Eagles fans waking up the next morning, Paxos announced it was suspending issuance of new BUSD at the direction of NYDFS, which published a consumer alert on Monday.

While some are interpreting this as an assault on stablecoins, all signs so far seem to indicate this may be more about Binance and how it’s related to BUSD.

I’ve spoken to a number of individuals over the past few days about this situation, all of whom asked to speak anonymously because of ongoing work with regulators.

What we don’t know:

What we do know is that the SEC’s so-called crypto crackdown – this week’s Wells Notice, coupled with last week’s Kraken settlement and Wednesday’s proposed rule – is escalating, and the industry is nervous.

The Senate Banking Committee held its first hearing on crypto for 2023 on Tuesday, titled “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets” and featuring Duke Financial Economics Center Policy Director Lee Reiners, Georgetown Institute of International Economic Law Adjunct Professor and Visiting Scholar Linda Jeng (who’s also general counsel at the Crypto Council for Innovation, though she did not appear in that capacity) and Vanderbilt University Law School Professor Yesha Yadav.

I live-tweeted the hearing; you can catch up here.

The two pieces of news: Senators Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kansas) plan to reintroduce a bill enhancing anti-money laundering and know-your-customer rules around crypto, and Senator Thom Tillis (R-N.C.) is working on a proof-of-reserves bill.

Beyond that, I’m not that sure we learned too much during the hearing. In many respects, it played out typically – skepticism from the committee chair, Senator Sherrod Brown (D-Ohio), a focus on the SEC from the ranking member, Senator Tim Scott (R-S.C.), and largely predictable answers from the witnesses.

The big question, as always, is whether and when Congress will actually start moving a bill. The expectation still seems to be that stablecoins will be the first area Congress actually addresses, though we didn’t hear too much about stablecoins in Tuesday’s hearing.

By Jesse Hamilton

For a brief moment in time, a former crypto executive was running one of the U.S. agencies that regulates national banks, the Office of the Comptroller of the Currency.

Under the watch of Brian Brooks, who returned to the crypto industry after he left the OCC, the regulator took an open-armed approach to digital assets. For a while, the OCC encouraged crypto firms to chase charters, and a few of them got provisional access into the ranks of trust banks. With the arrival of President Joe Biden’s more crypto-suspicious appointees, though, the door slammed shut, and since then the FTX debacle released a poisoned cloud into the offices of the U.S. banking agencies – also including the Federal Reserve and Federal Deposit Insurance Corp.

The crypto industry really wants to connect to U.S. banking. It’s the only way companies are likely to fulfill their dreams of mass adoption. But as the Federal Reserve demonstrated when it barred Custodia Bank from the list of its Fed-connected lenders, crypto isn’t yet finding a harbor in the federally regulated industry. That impasse means the wider crypto world is unlikely to soon reach the mainstream status that many hoped for, with its free and reliable flow of regulated transactions.

Crypto took a big step back in 2022, and its damaged reputation among the regulators (who are publicly breathing a sigh of relief that they made it hard for digital assets to get inside banking) and the U.S. lawmakers who have been poised to work on the first major industry legislation will be difficult to overcome by the end of this year.

Also, the federal government isn’t through with its campaign of enforcement actions and prosecutions, which the White House recently egged on. So far, 2023 is shaping up as a moment of reckoning between crypto and the U.S. watchdogs.

Read more.

Monday

Tuesday

Wednesday

Thursday