U.S. Regulatory Authorities Launch Actions Targeting BUSD

After the collapse of FTX, it is visible that the US is continuously increasing its regulation of cryptocurrencies.

Rumors of US crypto regulation have been confirmed in the past two weeks.

On February 9th, 2023, Coinbase CEO Brian Armstrong revealed rumors that the US SEC may ban crypto staking services for retail investors. On February 10th, the US SEC announced that crypto exchange Kraken will "immediately" end its crypto staking services to US clients and pay a $30 million fine to settle charges of offering unregistered securities.

Last week, multiple sources reported that US financial regulators are taking massive action, pressuring financial institutions to deny crypto businesses bank accounts, cutting off the connection between crypto and banks.

Today, it has been confirmed that they are targeting BUSD, the most widely used stablecoin in the crypto industry. On February 13th, according to The Wall Street Journal, the US SEC issued a "Wells Notice" to BUSD issuer Paxos, threatening to sue Paxos, while the New York Department of Financial Services (NYDFS) also ordered Paxos to stop issuing more BUSD stablecoins.

Binance also stated that Paxos Trust has informed Binance that it has been instructed to stop minting new BUSD stablecoins. This means that the market capitalization of BUSD will only decrease over time.

As early as last week, multiple industry insiders warned that US regulators are conducting a widespread "chokehold" action, restricting the connection between crypto assets and fiat currencies.

What is a "chokehold" operation?

As the name suggests, it is to squeeze the throat of an industry. Especially when there is no progress in legislation and judiciary, pressure is exerted through administrative and financial means to force relevant institutions to obey, thereby achieving the regulatory purpose and marginalizing the relevant industry.

In the crypto industry, the throat is the inflow and outflow of cryptocurrency and fiat currency.

The US government's "chokehold" action has had successful precedents. In 2011-2012, the Obama administration successfully implemented a "chokehold" action, when the US Department of Justice threatened banks that supported online poker companies, successfully marginalizing the online poker industry.

Nick Carter, a crypto KOL and partner of Castle Island Ventures, said that in that "chokehold" action, guidance was mainly informal, involving backdoors and undisclosed dialogue, while in the current "chokehold" action on cryptocurrencies, everything happens in the form of rule-making, written guidance, and blogs.

Why target BUSD instead of USDC?

Mindao, the founder of dForce, said that only Web3 Jews may know this.

Frank Chaparro, news director of The Block, said, "I wouldn't be surprised if they're particularly scrutinizing USDC. A senior executive at an exchange told me a few days ago that the US Securities and Exchange Commission is actually gearing up for its own crypto version of the Night of the Long Knives."

Review of recent major banking regulatory events

On December 6th, Senators Elizabeth Warren, John Kennedy, and Roger Marshall wrote to crypto-friendly bank Silvergate, condemning them for servicing FTX and Alameda and for failing to report suspicious activity related to these clients.

On December 7th, Signature, one of the most active banks providing services to crypto customers, announced plans to halve deposits belonging to crypto customers -- in other words, they will return customers' money, then close their accounts -- reducing their crypto deposits from a peak of $23 billion to $10 billion and exiting their stablecoin business.

On January 3rd, the Federal Reserve, FDIC, and OCC issued a joint statement about the risks banks face in engaging in crypto activities, strongly discouraging them from doing so on a "safe and sound" basis, but not explicitly prohibiting banks from holding or transacting with crypto customers.

On January 9th, Metropolitan Commercial Bank, one of the few banks providing services to crypto customers, announced the complete closure of its direct business related to crypto assets.

On January 21st, Binance announced that, according to Signature Bank's policy, they would only process fiat transactions for users worth over $100,000.

On January 27th, the Federal Reserve, citing "safe and sound" risk, rejected Custodia's two-year application to become a member of the Federal Reserve System.

On January 27th, the Kansas City Federal Reserve branch rejected Custodia's application for a master account, which would have allowed it to use wholesale payment services and hold reserves directly with the Federal Reserve.

On January 27th, the Federal Reserve also issued a policy statement discouraging banks from holding crypto assets or issuing stablecoins, expanding its authority to cover state-chartered banks that are not FDIC-insured (in response to special purpose depository institutions (SPDIs) like Custodia, which can hold both crypto and fiat currencies for bank customers).

On January 27th, the National Economic Council issued a policy statement that did not explicitly prohibit banks from providing services to crypto customers, but strongly discouraged banks from engaging in direct trading or maintaining exposure to crypto depositors.

On February 2nd, the U.S. Department of Justice's fraud department announced an investigation into Silvergate's transactions with FTX and Alameda.

On February 6th, Binance suspended USD bank transfers for retail customers (Binance US was not affected).

On February 7th, the January 27th Federal Reserve statement entered the Federal Register, turning the policy statement into a final rule, without congressional review or public notice and comment period.

On February 10th, the U.S. SEC announced that crypto exchange Kraken would "immediately" end its crypto staking service for U.S. customers.

On February 13th, the New York Department of Financial Services (NYDFS) ordered Paxos to stop issuing more stablecoin BUSD.

As of February 13th, the applications of Protego and Paxos to follow Anchorage and obtain full approval to become a national trust bank remain pending (beyond the 18-month deadline), and may be immediately rejected by the OCC.