The Policy Pulse: 19 February 2023

Could stablecoins be securities?

This week, stablecoin issuer Paxos was sent a notice by the US Securities and Exchange Commission (SEC). The notice informed Paxos that the SEC is considering bringing charges against the blockchain company. The SEC alleges that BUSD, a stablecoin issued by Paxos for crypto exchange Binance, is actually a security and that Paxos should have registered the offering of BUSD under federal securities laws.

Paxos issued a response to the allegations stating that:

“Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws. This SEC Wells notice pertains only to BUSD. To be clear, there are unequivocally no other allegations against Paxos. Paxos has always prioritized the safety of its customers’ assets. BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts. We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.“

SEC proposes new rules for custodians of cryptocurrency

Earlier this week, the SEC also voted to propose amendments to federal custody rules, including for crypto.

In an official statement, which was released on February 15th, SEC Chairman Gary Gensler specifically called out crypto exchanges, stating that many trading and lending platforms are not qualified custodians, and their commingling of investors’ crypto assets with their own or other investors’ assets could lead to significant losses for investors in the event of the platform’s bankruptcy.

Read the full article here.

SEC goes after Terraform and Do Kwon

On Thursday, the SEC announced that they charged Terraform Labs and Do Kwon with multi-billion dollar securities fraud.

The SEC alleges that the company and Do Kwon raised billions of dollars from investors by offering and selling an interconnected set of crypto asset securities, including “mAssets” (security-based swaps designed to pay returns by mirroring the price of stocks of US companies) and the algorithmic “stablecoin” Terra USD (UST), which was supposed to be pegged to the US dollar.

According to the SEC, Terraform and Do Kwon marketed these securities to investors, repeatedly claiming that the tokens would increase in value. The SEC alleges that Terraform and Do Kwon misled and deceived investors about the stability of UST. The stablecoin eventually de-pegged from the US dollar in May 2022, causing the price of UST and its related tokens to plummet.

As a result, billions of dollars were wiped from the crypto market in just hours and many saw their investments in UST and its associated token LUNA essentially go to zero.

The SEC’s complaint charges the defendants with violating securities registration and anti-fraud provisions. The SEC’s investigation was conducted by the agency’s Complex Financial Instruments and Crypto Assets and Cyber Units, and the litigation is being handled by the Trial Unit.

The future of digital currency discussed in the US Senate

On February 14th, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets,” to discuss the regulation of the cryptocurrency industry.

A number of digital asset experts testified at the hearing, with widely differing opinions about the future of crypto and blockchain.

Read the full article here.

European Commission launches Regulatory Sandbox for blockchain startups

In Europe this week the EU Commission announced that it will be launching a regulatory sandbox. The aim of the sandbox will be to increase dialogue between blockchain companies and regulators.

Read the full article here.

Bank of Japan to collaborate with private sector on CBDC pilot

We also reported this week that the Bank of Japan (BOJ) plans to launch a pilot program in April to test the technical feasibility of a central bank digital currency (CBDC) and to design a CBDC ecosystem in collaboration with private businesses.

Read the full article here.

ECB: Banks should start to comply right away with prudential and capital requirements for crypto exposures

Earlier this week, the European Central Bank (ECB) issued a statement informing banks that they should start complying with the new Basel prudential rules for crypto assets – even before the official implementation date in January 2025.

Read a summary of the rules banks who have exposure to digital assets or crypto will have to comply with here.

This is the web version of part of Ledgernomic’s weekly newsletter, The Policy Pulse, your go-to source for the latest developments in the crypto and blockchain industry, policy, and regulatory landscape. Every weekend, we’ll bring you an update on the most significant policy and regulatory changes affecting the industry, as well as analysis and commentary on the implications of these developments for the crypto and blockchain community. Whether you’re a crypto enthusiast, an investor, or a business leader, you’ll find valuable insights and information in every edition of The Policy Pulse.

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