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Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Hood podcast,

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Speaker 1: and I'm an area senior editor for Bloomberg News. In

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Speaker 1: for Stacy Murray Ishmael. It's Friday, February seventeen. After years

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Speaker 1: of inaction, regulators decided that the shortest month was the

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Speaker 1: best suited to come after. Crypto State regulators in New

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Speaker 1: York this week took aim at stable coin issuer Paxos

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Speaker 1: and its relationship with Crypto Exchange Finance. The SEC has

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Speaker 1: also moved ahead with a plan that would make it

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Speaker 1: harder for investment firms to work with cryptocurrency companies, and

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Speaker 1: of course we have an update on SPF. SO to

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Speaker 1: help me break down the latest developments in the world

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Speaker 1: of digital assets, I'm joined by Bloomberg reporters Alison Versus Brill.

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Speaker 1: I think a lot of people are a sort of

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Speaker 1: just reading the tea leaves right now, understanding that the

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Speaker 1: environment might not be very friendly and Emily Nicole. It's

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Speaker 1: very difficult for any single jurisdiction to oversee a crypto

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Speaker 1: company effectively. It's sunny in London, which is not but

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Speaker 1: it was awful again this morning and yesterday I was

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Speaker 1: like walk into the office, it was beautiful and I

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Speaker 1: was like, this is this is great, like beautiful sunny

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Speaker 1: class guys. And then this morning I was like, oh,

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Speaker 1: it's back to normal. Cool. So now that we've given

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Speaker 1: you the weather updates, we're going to actually move move

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Speaker 1: to crypto UM. I was trying to talk about things

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Speaker 1: that were a little bit more cheerful, but then I

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Speaker 1: guess it was raining. So it's been pretty intense in

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Speaker 1: your beat for crypto UM, and I guess if you're

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Speaker 1: a crypto firm, it's been even worse. But if you

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Speaker 1: want to just give us in a sentence, sort of

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Speaker 1: the mood there and in finn reg circles on crypto. Yeah,

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Speaker 1: I mean, so the mood right now is that there's

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Speaker 1: definitely this feel of sort of a crypto crackdown, if

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Speaker 1: you will. Uh. And I think everyone expected that there

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Speaker 1: was going to be a response post f t X.

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Speaker 1: You know, there was a lot of talk among regulators

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Speaker 1: and on the hill of the need to you know,

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Speaker 1: address some of the issues we saw in the industry

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Speaker 1: last year. But I think there's been some surprise a

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Speaker 1: kind of the the speed and sort of the level

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Speaker 1: of activity we've seen in just the first few months

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Speaker 1: of three. Um, you know, we've had banking regulators. The

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Speaker 1: FED recently denied Custodia Banks application to be a member,

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Speaker 1: and then the Kansas City FED denied their application to

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Speaker 1: have a master account. We've seen the SEC bringing a

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Speaker 1: number of actions. Most recently is the thirty million dollar

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Speaker 1: settlement with crack In. The SEC has sued crypto exchange

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Speaker 1: crack and Forwards Taking Service, accusing it of offering illegal,

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Speaker 1: unregistered securities with advertised investment returns as high as twenty

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Speaker 1: one now. The SEC has alleged that Krackin didn't give

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Speaker 1: investors the right disclosures. Kraken didn't admit or deny wrongdoing,

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Speaker 1: though it agreed to settle for thirty million dollars and

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Speaker 1: also stuff. So it seems like there's a lot of

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Speaker 1: activity picking up. Some have believed this to be a

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Speaker 1: coordinated effort, given that there was a White House statement

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Speaker 1: too earlier this year talking about the need to ramp

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Speaker 1: up enforcement issue new guidance. But definitely seems like there's

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Speaker 1: more to come. Let's move on to I guess the

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Speaker 1: big news at the start of the week, which was

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Speaker 1: about you know, Paksos and the coined issues, the stable

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Speaker 1: coined issues that is Finance branded BUSD, Emily, do you

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Speaker 1: want to maybe go over what happened there, what the

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Speaker 1: highlights were. So Pakos is a New York regulated company's

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Speaker 1: registered with the New York Financial Services so it is

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Speaker 1: pretty much above board in all aspects on that front,

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Speaker 1: and it operates a stable coin called Finance USD b

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Speaker 1: USD in conjunction with Finance. Pretty much everything sits underneath Paxos.

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Speaker 1: His ownership, Pacos is management. And what we saw was

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Speaker 1: first the SEC issued a well's notice to Paksas saying

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Speaker 1: that basically, we're going to be looking into you and

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Speaker 1: there may be some concerns that BUSD is an unregistered security.

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Speaker 1: And then following that, the New York DFS said to

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Speaker 1: Pacsus that we have had issues with the way that

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Speaker 1: you manage your relationship with Binance. We've raised these with you,

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Speaker 1: you haven't corrected them in the time that we set.

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Speaker 1: So therefore we're going to tell you to wind down

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Speaker 1: b USD entirely. And that's about sixteen billion dollars worth

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Speaker 1: of tokens that now have to be wound down put

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Speaker 1: back onto the market in some way, whether that's through

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Speaker 1: customers redeeming their tokens and getting dollars back or transferring

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Speaker 1: them into other kinds of stable coins and crypto assets.

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Speaker 1: So I guess this was significant because it's sort of

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Speaker 1: highlights how the US has decided to proceed. You know,

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Speaker 1: other governments have been issuing regulations or coming close fushing regulations,

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Speaker 1: having you know, more clear guidelines and rules around crypto,

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Speaker 1: but the US is regulating by enforcement. That that's what

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Speaker 1: you call it, right, Ali, Um, do you want to

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Speaker 1: tell us how that sort of differs in why some

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Speaker 1: people might not like it or the crypto firms are

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Speaker 1: crumbling now? Right? So, you know, definitely, the industry complains

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Speaker 1: that there's this regulation by enforcement approach where you know,

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Speaker 1: they claim that there haven't been clear rules up the

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Speaker 1: road set, that the SEC hasn't put out any guidance

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Speaker 1: or really any agencies in the government right now, they've

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Speaker 1: been leaning on Congress to do more, and so in

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Speaker 1: the meantime, we've seen a lot of these enforcement actions, um,

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Speaker 1: and you'll see consumer advocate groups so our markets groups

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Speaker 1: that are praising the SEC for what it's doing. So

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Speaker 1: there's somewhat of a split kind of feel right now.

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Speaker 1: I think what's especially interesting though on the stable coin

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Speaker 1: front is that, you know, there was this effort by

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Speaker 1: the by Congress in the US last year to draft

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Speaker 1: legislation that would regulate stable coins. The Treasury Department was

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Speaker 1: very involved in that, and that would specifically be you know,

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Speaker 1: reserved back stable coins what they were calling payment stable coins,

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Speaker 1: and that would essentially put them under banking regulation. UM.

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Speaker 1: So I'm very curious to see if the SEC moves

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Speaker 1: forward with this enforcement action against Paxos and says that

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Speaker 1: the stable coin is a security And I'm also interested

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Speaker 1: to see if there's any sort of backlash from you know,

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Speaker 1: maybe Treasury or from the Hill to say, you know,

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Speaker 1: we put all this work trying to set guardrails and

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Speaker 1: you're kind of preempting that by claiming these are our

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Speaker 1: security So. Um. I think it's going to be very

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Speaker 1: interesting to see how all of this shapes up. Emily,

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Speaker 1: you have been reporting a bit more on you know,

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Speaker 1: not necessarily bust, but other binance related um token, so

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Speaker 1: the tokens that finance issues that are connected to even

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Speaker 1: BUSD and so what have you sort of been finding

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Speaker 1: out on that before? And then maybe we could talk

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Speaker 1: a little bit more about sort of what an i

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Speaker 1: DFS said about sort of the action with Pasos. Yeah, so,

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Speaker 1: in the statement that the ny DFS issued about its

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Speaker 1: decision with Pasos, it pointed specifically to something that Finance

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Speaker 1: issues called a Binance peg token. It's a version of

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Speaker 1: BUSD that is actually under the auspices of Binance rather

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Speaker 1: than under Packsos. The way it works is that Finance

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Speaker 1: has a big reserve full of BUSD tokens issued by

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Speaker 1: packsas and then uses those as collateral to support Finance

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Speaker 1: issued versions of that token on other block chains. UM.

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Speaker 1: And we've previously reported throughout this year about how historically

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Speaker 1: some of the reserves for tokens like the Binance token

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Speaker 1: b usd UM have been underclasterized. They didn't have enough

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Speaker 1: of that those tokens in the reserve to back them,

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Speaker 1: and so there was essentially some level of free money

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Speaker 1: just being printed out and around and they fixed it

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Speaker 1: all later on. UM. Obviously that is concerning for a regulator,

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Speaker 1: right They New York DFS has control over what packs

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Speaker 1: us can do. But if Finance then takes to step

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Speaker 1: further and and basically puts the token on top of

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Speaker 1: that and runs wild with it. New York DFS has

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Speaker 1: no control over that, and then you know, probably there's

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Speaker 1: a little bit of a ripple effect going on. UM

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Speaker 1: and they noted that in the statement against PAXA was

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Speaker 1: saying that that's likely going to be one of the

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Speaker 1: things that would have triggered this, the concerns they had

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Speaker 1: with Paxos and its relationship with Binance and any kind

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Speaker 1: of material issues they were facing. So you also had

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Speaker 1: a scoop this week that was also tangentially related to

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Speaker 1: to regulators UM. You reported that that Circle had warned

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Speaker 1: UM and with your FS which is also UM their

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Speaker 1: own regulator tool, they share a regulator about issues UM.

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Speaker 1: Do you want to talk a bit more about that. Yes,

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Speaker 1: So what we heard is that UM last year essentially

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Speaker 1: so well before I reported anything to do with these

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Speaker 1: finance tokens being under backed, and before this action came

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Speaker 1: out against Paxles from the SEC and and y DFS

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Speaker 1: this week, Circle had discovered all of this stuff the

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Speaker 1: same way we had. You know, it's all publicly available

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Speaker 1: blockchain day, so you can see it if you know

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Speaker 1: where to look. They'd noticed that this had been going

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Speaker 1: on with finances tokens, some of these tokens that they

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Speaker 1: had weren't being backed properly, and so they as a

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Speaker 1: compliance because I notified the New York Department Financial Services

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Speaker 1: that this had been going on in case there was

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Speaker 1: anything that needs to be looked into, and then now

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Speaker 1: we have this action. There's nothing to say that, for example,

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Speaker 1: what Circle did did tip off you know, what was

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Speaker 1: happening later on, But it definitely means that the New

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Speaker 1: York Department Financial Services was at least aware of this

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Speaker 1: situation long before we reported it in in January, we

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Speaker 1: also had some news on hedge funds facing scrutiny. Why

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Speaker 1: is that? Do you want to tell us about this

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Speaker 1: other development this week? There's actually a proposal that the

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Speaker 1: SEC put out Wednesday that would essentially, you know, place

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Speaker 1: new restrictions on companies that want to act as custodians

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Speaker 1: for hedge funds, pension funds, prime equity firms. So basically,

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Speaker 1: if you you know, want to be what it's called

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Speaker 1: a qualified custodian, you have to do a couple of things.

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Speaker 1: You have to enter into a written agreement to say

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Speaker 1: that the client's assets from that hedge fund or private

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Speaker 1: equity fund are being segregated properly and that they're protected

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Speaker 1: in cases of bankruptcy and insolvency, which has obviously been

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Speaker 1: an issue with some of the crypto bankruptcies we saw

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Speaker 1: last year. UM, you would also have to you know,

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Speaker 1: potentially be subject uh to certain new requirements UM and

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Speaker 1: and turning over information to these hedge funds that you're

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Speaker 1: working with. UM. And a lot of people are viewing this.

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Speaker 1: You know, this is a much broader proposal. It doesn't

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Speaker 1: just affect crypto but a lot of people are viewing

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Speaker 1: this as as sort of targeted at crypto firms based

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Speaker 1: on the way that they operate today. UH. And even

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Speaker 1: the SEC chairman Gary Gensler, in a statement said, you know,

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Speaker 1: make no mistake, based on the way crypto firms operate,

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Speaker 1: like none would be able to qualify or be qualified

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Speaker 1: custodians UM under these new requirements. The one thing I

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Speaker 1: will say, you know, the SEC is is voting on

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Speaker 1: that proposal and then you know that would be put

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Speaker 1: out for public common and then it would have to

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Speaker 1: be you know, finalized, likely months later. So it's not

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Speaker 1: currently in effect, but it's another sign of you know,

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Speaker 1: just the headaches that are are sort of coming for

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Speaker 1: the crypto industry. Right now. We'll be right back with

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Speaker 1: more of the week's top crypto stories with Bloomberg reporters

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Speaker 1: Emily Nicole and Alison versus brul So. This brings up

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Speaker 1: another way that I guess regulators in the US are

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Speaker 1: approaching tackling sort of the risks posed by crypto because

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Speaker 1: one of the good things good in you know, quotation marks,

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Speaker 1: I guess, um good things about this this big crash

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Speaker 1: was that you know, the the major financial firms and

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Speaker 1: the mainstream financial system was really not affected, and part

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Speaker 1: was because they haven't been really dealing. And I think

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Speaker 1: there's a bit of concern that you know, if crypto

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Speaker 1: grows again, we might seem more trickling down to you know,

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Speaker 1: firms that are properly regulated by the O c C,

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Speaker 1: the FED so and firms that have more deposits from

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Speaker 1: normal people and normal citizens. So, I guess another way,

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Speaker 1: And we had a great story out this week from

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Speaker 1: firms that have you know, or fully regulated by by

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Speaker 1: the FED and the OCC are actually getting sort of,

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Speaker 1: um directly or indirectly sort of told to limit their

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Speaker 1: their interactions with with crypto firms. How is this an,

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Speaker 1: I guess an interesting development and what are the key

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Speaker 1: things you think? Ali? Yeah, so, you know, the banking

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Speaker 1: regulators in the US, that includes the Office of the

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Speaker 1: Control of the Currency, the FED, UM, the Federal Deposit

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Speaker 1: Insurance Corporation, they put out a joint statement warning banks

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Speaker 1: of the risks of engaging with digital assets. UM. I

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Speaker 1: will know in that they kind of didn't say, you know,

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Speaker 1: you can't you can't be involved in this at all.

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Speaker 1: You just have to make sure you're doing it in

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Speaker 1: a safe and sound manner. But a lot of people

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Speaker 1: have taken that as a warning of, you know, just

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Speaker 1: just don't get involved in this. UM. I think a

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Speaker 1: lot of people are sort of just reading the tea

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Speaker 1: leaves right now, understanding that the environment might not be

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Speaker 1: very friendly if you're a bank that's having these partnerships

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Speaker 1: are getting involved in digital assets. Yeah. And I guess

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Speaker 1: you know, we're seeing sort of de risking from from

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Speaker 1: crypto as banks have been de risking from other risky sectors.

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Speaker 1: I guess just taking a step back, Emily, like, what

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Speaker 1: does it mean from the rest of the world's perspective, right, Like,

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Speaker 1: you know, if you're looking at it from here, it

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Speaker 1: seems really like the US is cracking down, coming at

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Speaker 1: it full force. But as we were saying before, the

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Speaker 1: other jurisdictions have taken a completely different approach, or maybe

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Speaker 1: for now we don't know there might be action coming,

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Speaker 1: but they have stepped in with regulations. So does it

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Speaker 1: make it a little bit more welcoming here? What are

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Speaker 1: you hearing? One of the things that was a running

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Speaker 1: narrative in two, particularly when stuff started to go upside

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Speaker 1: down with crypto UM, was that it's very difficult for

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Speaker 1: any single jurisdiction to oversee a crypto company effectively. Even

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Speaker 1: with the biggest companies, they don't have their headquarters in

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Speaker 1: any specific pace. But if even if you think about

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Speaker 1: about something like coin based, it's based in the US, UM,

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Speaker 1: there's still everywhere, right, Crypto is global, and so that

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Speaker 1: means that regulators all around the world need to have

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Speaker 1: relatively similar rules if they're going to have any luck

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Speaker 1: in regulating crypto effectively. And the concern is that the

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Speaker 1: US approach is basically upending that. It means that the

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Speaker 1: US is spending more time on enforcement less time on

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Speaker 1: thinking about what a regulatory framework might look like, and

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Speaker 1: it makes it more difficult for other jurisdictions to match that.

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Speaker 1: In turn, that then means that crypto companies are thinking, Okay, well,

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Speaker 1: if I'm in the US, I'm going to get told

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Speaker 1: off for doing X y Z. But if I'm based

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Speaker 1: in the UK or Europe, or Singapore or Hong Kong

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Speaker 1: or Dubai, any of these places, there are more clear rules.

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Speaker 1: I understand what I'm doing, I'm probably not going to

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Speaker 1: get told off. I'm at least going to be able

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Speaker 1: to operate within the boundaries of something UM and therefore

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Speaker 1: it's probably a better place for me to do business.

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Speaker 1: So we've been hearing that, you know, more companies are

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Speaker 1: enquiring about that, they're thinking about where the most crypto

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Speaker 1: friendly jurisdictions are, not necessarily jurisdictions that will let them

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Speaker 1: get away with with murder, but jurisdictions that at least

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Speaker 1: just have defined rules and setting boundaries and and and

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Speaker 1: that's something that's definitely going to be becoming more clear

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Speaker 1: this year as rules are settled in places like Europe

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Speaker 1: and the UK. I think we can maybe UM go

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Speaker 1: back to a person and we've been talking about regulations before.

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Speaker 1: One of the biggest people in crypto in the news

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Speaker 1: UM over the past few months and even before that,

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Speaker 1: has been Sam bank Man Freed, the founder of FDx.

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Speaker 1: There was news this week that he won't be allowed

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Speaker 1: to use VPNs. What's going on there? So yeah, Sam

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Speaker 1: had requested that he still be allowed to use VPNs

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Speaker 1: and encrypted apps so that you could message you know,

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Speaker 1: a couple fd ex employees here and there, but mostly

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Speaker 1: do innocuous things like watch the Super Bowl using his

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Speaker 1: Bahamas based registration UM and and the judge denied that,

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Speaker 1: basically not buying the argument that that will be all

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Speaker 1: he does. Because these networks, they allow users to obscure

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Speaker 1: their activity essentially would make it much harder for the

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Speaker 1: courts to see exactly what Sam is doing with his time,

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Speaker 1: who he's talking to, what he's saying, and all of

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Speaker 1: that is very important at the minute when, for example,

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Speaker 1: the ft X, the state is still trying to find

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Speaker 1: assets all over the world that FTX might have, and

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Speaker 1: also Sam is still very heen to play his part

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Speaker 1: and help out and help help everybody get their money

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Speaker 1: back when simultaneously there are criminal charges against him. So um,

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Speaker 1: that's what's been going on with Sam big we're freedom

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Speaker 1: this week. So I guess I have to say, and

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Speaker 1: I didn't say it before, but you shouldn't be listening

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Speaker 1: to and following. Ali and Emily are both breaking lots

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Speaker 1: of great stories on both regulation and stable coins. It's

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Speaker 1: not just like a plug, it's it's actually the case.

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Speaker 1: All right, Thank you, all right, thanks so much. That

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Speaker 1: was Bloomberg reporters Emily Nicole and Alison versus Brille. You

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Speaker 1: can find more of their reporting on the Bloomberg Terminal,

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Speaker 1: on Bloomberg dot com and on Twitter. For more, be

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Speaker 1: sure to check out our twice weekly newsletter, Bloomberg Crypto.

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Speaker 1: This is Bloomberg Crypto, a daily podcast from Bloomberg and

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Speaker 1: you get your podcasts. Send us your comments, questions, or

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Speaker 1: suggestions for the show to Crypto at Bloomberg dot net.

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Speaker 1: The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our

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Speaker 1: senior producer is Janet Babin. Our producers are Mohammed Farouk

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Speaker 1: and Sharon Barrero. Our associate producers are Ty Butler and

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Speaker 1: Moses on Them Desta wonder At is our engineer. Original

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Speaker 1: music by Leo Sidron. I'm Stacy, Marie Ishmael, have a

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Speaker 1: great weekend of NATO. About that appe