NEW YORK (Legal Newsline) - When the world’s biggest stablecoin, Tether, lost its peg to the U.S. dollar last year, some $3 billion worth was sold off by investors.
Tether’s supply dropped to $79.5 billion from $82.9 billion in just 24 hours, according to media reports.
Although Tether coin has regained its dollar peg, the consensus at the time was that the temporary collapse could have spread like fire to other cryptocurrencies resulting in stringent regulation by the Securities Exchange Commmission (SEC).
Some experts say that SEC involvement would likely lead to flight out of the U.S. for the entire stablecoin exchange.
“Imposing securities law onto stablecoins through enforcement instead of guidance or dialogue with the industry will simply push innovation offshore and weaken our global role,” Coinbase stated on Twitter on Feb. 14.
SEC regulation may be imminent since the crypto exchange FTX filed for bankruptcy last year,
FTX, once valued at $32 billion, filed for bankruptcy in November as the crypto exchange’s founder, Sam Bankman-Fried, resigned amid accusations of financial misdeeds and fraud.
In response, the SEC ordered the blockchain platform Paxos Trust Company to halt its issuance of Binance USD (BUSD) arguing that BUSD is not registered as a security but should be.
The New York State Department of Financial Services (DFS) also ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.
In a consumer alert posted online, DFS stated, “It is important to note that the Department authorized Paxos to issue BUSD on the Ethereum blockchain. The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.”
Paxos replied with a statement online assuring users that existing tokens remain fully backed and redeemable through February 2024.
"All BUSD tokens issued by Paxos Trust have and always will be backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts," the press release said. "BUSD reserves are fully-backed and the instruments held by Paxos in reserve as of close of business February 10, 2023, are also available here."
Currently, the crypto space is the Wild West where innovation can flourish but insiders are fearful that an SEC crackdown will drive innovation out of the U.S. and into foreign arms like Singapore and Hong Kong, which only permits asset-backed, not algorithmic stablecoins.
“We need leadership in a handful of States instead of Washington DC,” said Jon West, founding board member of the Texas Blockchain Council (TBC). “State legislatures need to step up and innovate and create something the Feds can later copy.”
TBC is an industry association that works to promote the interests of its member companies by advocating for blockchain-centric public policy initiatives and educating members of government about the benefits of bitcoin, cryptocurrency, and blockchain technology.
Because nearly 90% of all stablecoins are pegged to the USD and represent a global benchmark in the exchange of crypto assets, a sell-off could undermine the U.S. economy.
Time Magazine reported that already Decentralized Finance (DeFi) companies are excluding U.S. users from products that are being offered to investors abroad.
“Overall, the interest of investors looking to finance development in the space is certainly waning,” Blockchain Association CEO Kristin Smith told Time Magazine. “Developers have to be thinking twice about starting something here in the United States.” The Blockchain Association is a crypto lobbying group based in Washington, D.C.
West, who led the blockchain/crypto research and development arm at Thomson Reuters for two years before becoming an independent consultant for Bitcoin and blockchain, views cryptocurrencies as a new type of security.
"They try to claim that cryptos aren't securities instead of pointing out that the regulations are stifling," he said. "Maybe they would be much better off inundating the SEC with filings to expose that the SEC is broken and stifles innovation."