It was a catastrophic event for the crypto fraternity when FTX folded in November. This was termed the Lehman moment, when a giant within the industry buckled, the damage spread, and reluctant regulators suddenly had an epiphany and went on a public rampage to improve their image. The crypto industry is now plunging into the twilight zone: the Dodd Frank era. (Frank is the 2010 legislation Congress passed supposedly fixing the lax oversight within the banking industry that sunk the financial world into the worst historical financial abyss ever.)
As the market burst into a mega-dollar enterprise, proponents grappled with an ill-equipped regulatory infrastructure unable to handle the crypto industry. When FTX filed for bankruptcy, federal and state officials escalated their efforts to tame the crypto industry, a move that has irked major crypto companies badly. Last week, the Senate committee on Banking held a joint meeting titled “Crypto Crash: Why there is a need for financial safeguarding of digital assets.”
Senator Sherrod Brown in his introductory remarks on the floor of the meeting reportedly said that it was fortunate that the contagion resulting from FTX’s collapse didn’t shake up the wider financial system, but such a risk was possible as the industry becomes more interwoven into the broader financial fabric of the nation. The crypto crisis exposed unsuspecting investors to possible loss because the digital assets such as cryptocurrencies, stablecoins and investment tokens are pseudo products run by “careless companies putting many Americans’ hard-earned cash to great risk,” Brown said.
Stablecoins on the Spot
The “crypto crash” hearing came after a regulatory clampdown on the BUSD stablecoin by the blockchain company Paxos. The regulator ordered Paxos to cease distributing its stablecoin, citing a number of unresolved issues. Paxos in turn told its clients to redeem their stablecoins either in U.S. dollars or any other stablecoin issued by the same company. The Securities and Exchange Commission intends to sue Paxos on the grounds that BUSD was to be registered under the federal securities laws, but this didn’t happen.
Enforcement Is Beefed Up
The latest regulatory crackdown on BUSD and Paxos has had the crypto enthusiasts in confusion, says Marcus Sotirou, a digital asset market analyst. Many view this muscle flexing by the regulators as unfair since it is targeting the nascent industry. The regulators have cautioned U.S. banks against the fraud risks and volatility of the crypto biosphere.
Needless to say, blockchain industry actors such as Bit Digital Inc. (NASDAQ: BTBT) long for an environment that has clear regulations which can guide their operations, rather than the current reality of enforcement action without industry guidelines.
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