Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Heard podcast,
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. It's Thursday, February sixty. Allow me to quote
Speaker 1: my colleague Matt Levine for a second. In a recent
Speaker 1: column about the Great Crypto Crackdown, Matt wrote, at some
Speaker 1: emotional level, the debate is we need to stop fraud
Speaker 1: stars versus we need to allow for innovation, and the
Speaker 1: fraud innovation balance has shifted a lot in recent months.
Speaker 1: It's true, over the past several months, regulators have what
Speaker 1: crypto company after crypto company file for bankruptcy, freeze withdrawals.
Speaker 1: Some crypto founders have become fugitives from the law, and
Speaker 1: others have been arrested for allegedly breaking laws. Customers have
Speaker 1: lost a lot of money, and the prospects for recovery
Speaker 1: are in some cases pretty bleak. And now, after what's
Speaker 1: been criticized as months spent on the sidelines, regulators have
Speaker 1: begun fighting back. In just the first two months of
Speaker 1: this year, we've seen a couple of pretty significant escalations,
Speaker 1: and today we're going to talk about one of them.
Speaker 1: What's happening with stable coins, you know, those crypto tokens
Speaker 1: that are supposed to hold their value and that are
Speaker 1: typically backed by some real world financial asset like the
Speaker 1: US dollar or U S treasuries. In addition to stable coins,
Speaker 1: we're going to talk about finance, the largest crypto exchange
Speaker 1: in the world by any measure. It's been particularly affected
Speaker 1: by some of these post FTX regulatory moves. So what's
Speaker 1: at stake for binance and what could all of this
Speaker 1: mean for the industry, Bloomberg reports to Emily Nicole joins me. Now, Emily,
Speaker 1: welcome back to the show. Happy to be here. What's
Speaker 1: going on? Just as a macro level, you know, big picture,
Speaker 1: what's happening? Why are people so stressed? Because people are stressed.
Speaker 1: So one of the biggest parts of crypto is stable coins.
Speaker 1: They're really cool to the way that trading operates. It's
Speaker 1: how traders and investors move money between FIAT into crypto
Speaker 1: and then also just moved between cryptocurrencies without letting their
Speaker 1: value diminishing between. A stable coin is a cryptocurrency designed
Speaker 1: to have a relatively stable price. This means it can
Speaker 1: be backed by FIAT, a commodity, other cryptos or even algorithmically,
Speaker 1: and one of the three biggest of those, the finance
Speaker 1: usd coin, which is issued by packsos and branded by
Speaker 1: crypto exchange binance Um, was told by regulators to stop
Speaker 1: issuing new tokens and essentially will now slowly wind down
Speaker 1: over the course of the next year, which is about
Speaker 1: sixteen billion dollars about to leave the market at least
Speaker 1: in terms of it being in bust. So in any
Speaker 1: ordinary markets in finance, you know, say foreign exchange, save
Speaker 1: US treasuries, say commodities, gold, frozen concentrates at orange juice,
Speaker 1: sixty billion dollars isn't really that much, Like, wouldn't be
Speaker 1: unmanageable if somebody had to unwind a position like that
Speaker 1: over time? Can the crypto market absorb that? Right now?
Speaker 1: In terms of the overall size of the stable coin sector,
Speaker 1: it's not huge, but it's still pretty big. So there's
Speaker 1: about a hundred and thirty billion dollars worth of stable
Speaker 1: coins out there at the minute. It used to be higher,
Speaker 1: but thanks to the recent routing crypto prices, it's now
Speaker 1: about a dtilli, So sixteen million out of that not
Speaker 1: too huge UM, But in the broader scale, of things
Speaker 1: in terms of how volumes are happening at the minute.
Speaker 1: With everybody basically not that keen on crypto, nobody's really
Speaker 1: doing any buying or selling. Um, that's a lot to
Speaker 1: hit the market at once. So things like being told
Speaker 1: that sixteen billion dollars whether stable coins is going to
Speaker 1: have to go, and also the fact that it's attached
Speaker 1: to one of the biggest players, if not the biggest
Speaker 1: player in crypto binance UM that then send everybody into
Speaker 1: a little bit of a panic. Digital currency prices are
Speaker 1: taking a hit following more US regulatory pressure on the industry.
Speaker 1: The coins slumped by more than Ether meanwhile was slashed
Speaker 1: by more than four and Salana sunk. What does this
Speaker 1: have to do with finance, Like, what's the relationship between
Speaker 1: finance and the stable coin issuer? And why do who
Speaker 1: has a problem with it? So? B u s D
Speaker 1: is also known as Binance USD. It's issued and managed
Speaker 1: and wholly operated by a company called Paksos, which is
Speaker 1: regulated in the state of New York. But it is
Speaker 1: branded in conjunction with finance, and so that means that
Speaker 1: it for example, it is the main way that you
Speaker 1: can convert Fiat money into crypto sets on Finance the
Speaker 1: biggest crypto exchange, It is the one that has the
Speaker 1: most pairs on that exchange, So it's basically the core
Speaker 1: of the way that entire exchange operates. And so even
Speaker 1: though there's only about sixteen billion circulation, it probably does
Speaker 1: a whole lot more in terms of volume every day.
Speaker 1: And that is part of the reason why this is
Speaker 1: such a big deal, because it means that Finance itself
Speaker 1: as an exchange has to change the way it operates
Speaker 1: on a daily basis, on an hourly basis, on a
Speaker 1: second basis, it's going to have to think about can
Speaker 1: we find a new issuer to help us keep the
Speaker 1: stable coin alive? Can we convert into another stable coin
Speaker 1: and make that our stable coin? Do we have to
Speaker 1: think about leaving the US dollar ecosystem entirely and think
Speaker 1: about like non U S dollar stable coins that we
Speaker 1: could use as the basis of our exchange from now on.
Speaker 1: Um And so these are all the conversations that are
Speaker 1: happening at the minum. That seems like a lot of
Speaker 1: conversations at a time when, as you know, people are
Speaker 1: kind of freaked out anyway, So how did this all unfold.
Speaker 1: You know, it's like February. Things are bumping along, and
Speaker 1: now finance and pack those are getting out of the
Speaker 1: branded stable coin business for the morments like what were
Speaker 1: the triggers here? So over the last few years, stable
Speaker 1: coins have been a very big target for regulators because
Speaker 1: they look the most like a regular financial instrument. I
Speaker 1: guess if you if you were a regulator and thinking
Speaker 1: about how do I tackle the world of crypto, first
Speaker 1: thing you're going to go for us the thing that
Speaker 1: looks like what you're used to um and stable coins
Speaker 1: themselves are generally backed by regular things like cash, bank
Speaker 1: deposits like money market funds, treasuries, that kind of stuff,
Speaker 1: so again relatively easy for regulators to understand. And in
Speaker 1: that vein like the reserves backing stable coins have become
Speaker 1: very important for regulators. They've been paying a lot of
Speaker 1: attention to exactly what is making up the reserves support
Speaker 1: each stable coin. If a stable coin says it's worth
Speaker 1: a dollar, it needs to have a dollar in store
Speaker 1: somewhere in some form in a traditional format, not not
Speaker 1: a cryptocurrency, so cash whatever. And for finance in particular,
Speaker 1: it's handling of those reserves have been has been called
Speaker 1: into question in terms of how it does its own
Speaker 1: stuff on its exchange. It's not been super transparent. It needs,
Speaker 1: you know, to present audits, especially after the collapse of
Speaker 1: a big crypto exchange called fd X last year. And
Speaker 1: so in that current environment as we head into February,
Speaker 1: you can think that PASOS on the one hand, has
Speaker 1: been giving statements ever since bus started saying here is
Speaker 1: exactly what's in the bank account holding everything for that token.
Speaker 1: But the other side of the equation, the branded partner,
Speaker 1: has not been as transparent, has not been very clear,
Speaker 1: and so the New York regulator said it had been
Speaker 1: asking questions of Paxsos the issuer, to say, you know,
Speaker 1: how are you managing this relationship, and it said in
Speaker 1: February that Paxos had not responded to those questions in
Speaker 1: a sufficient manner within the time frame that they had
Speaker 1: asked it needed to rectify some issues. It hadn't done
Speaker 1: those either, and so that's why b USD has to
Speaker 1: be wound down. But remember this is not about PASOS,
Speaker 1: a US regulated New York a Department of Financial Services
Speaker 1: as regulated entity. It's about the relationship between PASOS and
Speaker 1: Finance so if you look at the Department Financial Services
Speaker 1: statement on this, they note they say, it's important to
Speaker 1: note that Paxos and bust was authorized to be issued
Speaker 1: on the ethery and blockchain, but was not authorized by
Speaker 1: the Department of Financial Services. Was the binance PEG. It's
Speaker 1: a form of feed So that is on the kind
Speaker 1: of the PASO side and the regulator there is, you know,
Speaker 1: based based in New York. It's kind of like the
Speaker 1: one that's like, you are one of the companies that
Speaker 1: we have oversight over. We've asked you these questions. We
Speaker 1: are not satisfied with your answers. We're going to take
Speaker 1: action simultaneous to that, though, Pasos also got an inquiry
Speaker 1: from a federal regulator, the u S Securities and Exchange Commission,
Speaker 1: which is from Paxos's perspective, ridiculous because as far as
Speaker 1: the public statements from PASO so concerned, they do not
Speaker 1: believe that stable coins like b USD should be considered
Speaker 1: a security, which means by definition the sc he shouldn't
Speaker 1: have jurisdiction. I feel like we talk about this on
Speaker 1: the show all the time. The idea that the you know,
Speaker 1: from the SECS perspective and again to go back to
Speaker 1: our colleague on Bloomberg opinion, Matt Levine. You know, as
Speaker 1: far as the SEC is concerned, if you're in crypto,
Speaker 1: you're probably doing something that should have been registered. You're
Speaker 1: probably transacting in some kind of security. From the crypto
Speaker 1: community's perspective, absolutely not. Is this a reconcilable position. I mean,
Speaker 1: there's there's two schools of thought here, right, is that
Speaker 1: a stable coin is something that you are giving a
Speaker 1: dollar to an issue and they're giving you the equivalent
Speaker 1: of a dollar back, and there's no real interest earning
Speaker 1: or anything like that happening in the meantime. And so
Speaker 1: that's why in the eyes of crypto stable coins are
Speaker 1: not securities. But there's also other schools of thought that say, well,
Speaker 1: for example, if if these instruments that stable coin issues
Speaker 1: are investing in, like US treasuries, those are classes securities,
Speaker 1: then um, what a stable coin is as a security derivative,
Speaker 1: and therefore that should be regulated. We're not entirely clear now,
Speaker 1: for example, what the SEC's reasoning is in this case,
Speaker 1: and Paxo said that it received a well's notice from
Speaker 1: the SEC, which is just like a notice to say
Speaker 1: that the regulator is looking at you very very keenly,
Speaker 1: and that basically implies the rest of us that there
Speaker 1: is a potential argument here that stable points could be
Speaker 1: considered security in the SEC's eyes. Until we learn more
Speaker 1: from the SEC, though, it's all a little bit of
Speaker 1: guesswork as to what they're reasoning exactly is. We'll be
Speaker 1: right back with more from Bloomberg reporter Emil Nicole. If
Speaker 1: I were a lawyer at a crypto company like I
Speaker 1: would be charging more for whatever my rates are, and
Speaker 1: I would probably be be having kind of, you know,
Speaker 1: tough and serious conversations with the various exacts around. Okay,
Speaker 1: here are the risks, here's the reality. One of those exacts,
Speaker 1: the CEO of Finance CZ as he's commonly known, did
Speaker 1: a Twitter spaces to talk about what he thinks this
Speaker 1: regulatory crackdown could mean for stable coins, and I was
Speaker 1: intrigued to hear him suggest that it could mean algorithmic
Speaker 1: stable coins. Come back, Could you just remind our listeners
Speaker 1: what algorithmic stable coins are. So for regular stable coin
Speaker 1: as we call them regular um are ones that are
Speaker 1: backed by stores of reserves filled with traditional assets like
Speaker 1: cash and and uer strguries and money market funds um.
Speaker 1: Some stable coins try to use other methods to make
Speaker 1: sure that their token remains worth a dollar or whatever
Speaker 1: set values they've chosen. Some stable coins, like make Adows
Speaker 1: Die use stores of crypto. Actually those reserves are mostly
Speaker 1: full of stable coins themselves, so it's a little bit
Speaker 1: like a crypto reserve of crypto dollars. But others try
Speaker 1: to use a complex system of algorithmic and center if so,
Speaker 1: incentivizing traders to use their stable coin and a sister token,
Speaker 1: usually like another cryptocurrency, is to basically try and use
Speaker 1: the two different assets to keep them in balance and
Speaker 1: make sure that one stay is a dollar while the
Speaker 1: other stays attractive enough to keep traders using those incentives
Speaker 1: and make everything work accordingly. Famously, the strategy employed by
Speaker 1: Terror with its sister coin Luna, which and that didn't
Speaker 1: work out so well so great as outcomes got dollars lost,
Speaker 1: Terror USB and its sister token Luna lost their peg
Speaker 1: to the dollar. In the last few weeks, they had
Speaker 1: a spectacular meltdown, sending prices to near zero when they're
Speaker 1: now why would algorithmic stable coins, According to you know,
Speaker 1: folks in crypto not necessarily be subject to the same
Speaker 1: kinds of regulatory scrutiny, purely, I guess, because of the
Speaker 1: fact that they don't have any real dollars in them,
Speaker 1: so to speak. So there's something that exists entirely outside
Speaker 1: of any kind of regulats you reach in terms of
Speaker 1: being able to say that, oh, well, there's a dollar
Speaker 1: and account there and I can probably regulate that, and
Speaker 1: so therefore I can regulate your stable coin too. And
Speaker 1: the issue is there, though, that there are also plenty
Speaker 1: of regulatory rules out there for four Code in financial services,
Speaker 1: and there's no real argument, I guess to say that
Speaker 1: our growthic stable coins couldn't fall under that too. We've
Speaker 1: definitely had a lot of communication from regulators in the
Speaker 1: last six months after the collapse of Terror to say
Speaker 1: that our growthic stable coins are something that should definitely
Speaker 1: be be regulated and frowned upon in it some instances,
Speaker 1: I mean. In that same Twitter spaces, c z also
Speaker 1: said that he specifically identified that the regulatory crackdown around
Speaker 1: stable coins was triggered in part by the collapse of Terror.
Speaker 1: So you know, it's this it's this kind of hilarious
Speaker 1: loop of this totally different kind of stable coin goes
Speaker 1: poorly in two, so now in three, we're looking at
Speaker 1: a totally different set of stable coins that may or
Speaker 1: may not go poorly. Because this is this is what
Speaker 1: krypto is like. It's sometimes very confusing. But the other
Speaker 1: thing that he said, which I thought was interesting, is,
Speaker 1: you know, given that so much of this regulatory scrutiny
Speaker 1: is coming from US entities, that folks might start moving
Speaker 1: into stable coins that are backed by the euro, or
Speaker 1: the Japanese yen or the Singaporean dollar. We don't yet
Speaker 1: have any indication from regulators in those places that they're
Speaker 1: planning a similar crackdown on stable coins. But what we
Speaker 1: do know is that global regulators have all been saying
Speaker 1: that they need to be united on aligned on anything
Speaker 1: to do with crypto and enforcement. Yeah, as I said
Speaker 1: earlier on in this episode, stable coins have been the
Speaker 1: first go to for regulators all around the world because
Speaker 1: it's the thing they would understand the most. And so
Speaker 1: actually we've had stable coin regulation and consideration in some
Speaker 1: jurisdictions for several years at this point. Obviously Tara Luna
Speaker 1: Escalate did the need for that to come into force,
Speaker 1: but the conversations have been going for a while, and
Speaker 1: that's why if you look at a regulation in Europe,
Speaker 1: for example, there's a Markets in Crypto US. It's directive
Speaker 1: that's due to be finalized in April. There's some pretty
Speaker 1: big rules in there for stable coins, is particularly those
Speaker 1: that denominated in the euro. Actually, the rules that they're
Speaker 1: suggesting will favor europeg stable coins over those that are
Speaker 1: denominated in other currencies, so they'll try and actually attract
Speaker 1: people who are investing in crypto to use those over
Speaker 1: the others. It's very likely that that will create the
Speaker 1: situation that CZ predicted, but it doesn't necessarily mean that
Speaker 1: there would be you know, I guess more regulatory freedom
Speaker 1: in those stable coins. If anything, some jurisdictions like Europe,
Speaker 1: like Japan, like the UK a more further ahead with
Speaker 1: plans to regulate stable coins and those currencies. You know,
Speaker 1: like we keep saying, banner time for lawyers in crypto.
Speaker 1: Thank you as always, Emily, really good to have you
Speaker 1: on the show. Thanks for having me. That was Bloomberg
Speaker 1: reporter Emelina Colet. You can find more of her posing
Speaker 1: on the Bloomberg terminal and on Bloomberg dot com, and
Speaker 1: she also regularly contributes to our twice weekly newsletter, Bloomberg Crypto,
Speaker 1: so make sure to subscribe to that as well. This
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Speaker 1: for the show to Crypto at Bloomberg dot net. The
Speaker 1: supervising producer of Bloomberg Crypto is Vicky very Galina. Our
Speaker 1: senior producer is Janet Babin. Our producers are Mohammed Faruk
Speaker 1: and Sharon Berriro. Our associate producers are Ty Butler and
Speaker 1: Moses on Them. Desta wonder At is our engineer. Original
Speaker 1: music by Leo Sidron. I'm Stacy Marie Schml. We'll be
Speaker 1: back tomorrow. The shop were all at a bunt in
Speaker 1: ever w