WEBVTT - Binance Enters The Regulatory Fray

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<v Speaker 1>This is Bloomberg Crypto, a daily Bloomberg I Heard podcast,

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<v Speaker 1>and I'm Stacy Marie Ishmael, Managing editor of Crypto for

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<v Speaker 1>Bloomberg News. It's Thursday, February sixty. Allow me to quote

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<v Speaker 1>my colleague Matt Levine for a second. In a recent

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<v Speaker 1>column about the Great Crypto Crackdown, Matt wrote, at some

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<v Speaker 1>emotional level, the debate is we need to stop fraud

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<v Speaker 1>stars versus we need to allow for innovation, and the

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<v Speaker 1>fraud innovation balance has shifted a lot in recent months.

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<v Speaker 1>It's true, over the past several months, regulators have what

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<v Speaker 1>crypto company after crypto company file for bankruptcy, freeze withdrawals.

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<v Speaker 1>Some crypto founders have become fugitives from the law, and

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<v Speaker 1>others have been arrested for allegedly breaking laws. Customers have

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<v Speaker 1>lost a lot of money, and the prospects for recovery

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<v Speaker 1>are in some cases pretty bleak. And now, after what's

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<v Speaker 1>been criticized as months spent on the sidelines, regulators have

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<v Speaker 1>begun fighting back. In just the first two months of

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<v Speaker 1>this year, we've seen a couple of pretty significant escalations,

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<v Speaker 1>and today we're going to talk about one of them.

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<v Speaker 1>What's happening with stable coins, you know, those crypto tokens

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<v Speaker 1>that are supposed to hold their value and that are

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<v Speaker 1>typically backed by some real world financial asset like the

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<v Speaker 1>US dollar or U S treasuries. In addition to stable coins,

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<v Speaker 1>we're going to talk about finance, the largest crypto exchange

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<v Speaker 1>in the world by any measure. It's been particularly affected

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<v Speaker 1>by some of these post FTX regulatory moves. So what's

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<v Speaker 1>at stake for binance and what could all of this

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<v Speaker 1>mean for the industry, Bloomberg reports to Emily Nicole joins me. Now, Emily,

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<v Speaker 1>welcome back to the show. Happy to be here. What's

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<v Speaker 1>going on? Just as a macro level, you know, big picture,

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<v Speaker 1>what's happening? Why are people so stressed? Because people are stressed.

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<v Speaker 1>So one of the biggest parts of crypto is stable coins.

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<v Speaker 1>They're really cool to the way that trading operates. It's

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<v Speaker 1>how traders and investors move money between FIAT into crypto

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<v Speaker 1>and then also just moved between cryptocurrencies without letting their

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<v Speaker 1>value diminishing between. A stable coin is a cryptocurrency designed

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<v Speaker 1>to have a relatively stable price. This means it can

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<v Speaker 1>be backed by FIAT, a commodity, other cryptos or even algorithmically,

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<v Speaker 1>and one of the three biggest of those, the finance

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<v Speaker 1>usd coin, which is issued by packsos and branded by

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<v Speaker 1>crypto exchange binance Um, was told by regulators to stop

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<v Speaker 1>issuing new tokens and essentially will now slowly wind down

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<v Speaker 1>over the course of the next year, which is about

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<v Speaker 1>sixteen billion dollars about to leave the market at least

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<v Speaker 1>in terms of it being in bust. So in any

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<v Speaker 1>ordinary markets in finance, you know, say foreign exchange, save

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<v Speaker 1>US treasuries, say commodities, gold, frozen concentrates at orange juice,

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<v Speaker 1>sixty billion dollars isn't really that much, Like, wouldn't be

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<v Speaker 1>unmanageable if somebody had to unwind a position like that

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<v Speaker 1>over time? Can the crypto market absorb that? Right now?

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<v Speaker 1>In terms of the overall size of the stable coin sector,

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<v Speaker 1>it's not huge, but it's still pretty big. So there's

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<v Speaker 1>about a hundred and thirty billion dollars worth of stable

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<v Speaker 1>coins out there at the minute. It used to be higher,

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<v Speaker 1>but thanks to the recent routing crypto prices, it's now

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<v Speaker 1>about a dtilli, So sixteen million out of that not

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<v Speaker 1>too huge UM, But in the broader scale, of things

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<v Speaker 1>in terms of how volumes are happening at the minute.

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<v Speaker 1>With everybody basically not that keen on crypto, nobody's really

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<v Speaker 1>doing any buying or selling. Um, that's a lot to

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<v Speaker 1>hit the market at once. So things like being told

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<v Speaker 1>that sixteen billion dollars whether stable coins is going to

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<v Speaker 1>have to go, and also the fact that it's attached

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<v Speaker 1>to one of the biggest players, if not the biggest

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<v Speaker 1>player in crypto binance UM that then send everybody into

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<v Speaker 1>a little bit of a panic. Digital currency prices are

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<v Speaker 1>taking a hit following more US regulatory pressure on the industry.

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<v Speaker 1>The coins slumped by more than Ether meanwhile was slashed

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<v Speaker 1>by more than four and Salana sunk. What does this

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<v Speaker 1>have to do with finance, Like, what's the relationship between

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<v Speaker 1>finance and the stable coin issuer? And why do who

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<v Speaker 1>has a problem with it? So? B u s D

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<v Speaker 1>is also known as Binance USD. It's issued and managed

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<v Speaker 1>and wholly operated by a company called Paksos, which is

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<v Speaker 1>regulated in the state of New York. But it is

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<v Speaker 1>branded in conjunction with finance, and so that means that

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<v Speaker 1>it for example, it is the main way that you

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<v Speaker 1>can convert Fiat money into crypto sets on Finance the

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<v Speaker 1>biggest crypto exchange, It is the one that has the

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<v Speaker 1>most pairs on that exchange, So it's basically the core

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<v Speaker 1>of the way that entire exchange operates. And so even

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<v Speaker 1>though there's only about sixteen billion circulation, it probably does

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<v Speaker 1>a whole lot more in terms of volume every day.

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<v Speaker 1>And that is part of the reason why this is

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<v Speaker 1>such a big deal, because it means that Finance itself

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<v Speaker 1>as an exchange has to change the way it operates

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<v Speaker 1>on a daily basis, on an hourly basis, on a

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<v Speaker 1>second basis, it's going to have to think about can

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<v Speaker 1>we find a new issuer to help us keep the

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<v Speaker 1>stable coin alive? Can we convert into another stable coin

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<v Speaker 1>and make that our stable coin? Do we have to

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<v Speaker 1>think about leaving the US dollar ecosystem entirely and think

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<v Speaker 1>about like non U S dollar stable coins that we

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<v Speaker 1>could use as the basis of our exchange from now on.

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<v Speaker 1>Um And so these are all the conversations that are

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<v Speaker 1>happening at the minum. That seems like a lot of

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<v Speaker 1>conversations at a time when, as you know, people are

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<v Speaker 1>kind of freaked out anyway, So how did this all unfold.

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<v Speaker 1>You know, it's like February. Things are bumping along, and

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<v Speaker 1>now finance and pack those are getting out of the

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<v Speaker 1>branded stable coin business for the morments like what were

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<v Speaker 1>the triggers here? So over the last few years, stable

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<v Speaker 1>coins have been a very big target for regulators because

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<v Speaker 1>they look the most like a regular financial instrument. I

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<v Speaker 1>guess if you if you were a regulator and thinking

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<v Speaker 1>about how do I tackle the world of crypto, first

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<v Speaker 1>thing you're going to go for us the thing that

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<v Speaker 1>looks like what you're used to um and stable coins

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<v Speaker 1>themselves are generally backed by regular things like cash, bank

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<v Speaker 1>deposits like money market funds, treasuries, that kind of stuff,

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<v Speaker 1>so again relatively easy for regulators to understand. And in

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<v Speaker 1>that vein like the reserves backing stable coins have become

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<v Speaker 1>very important for regulators. They've been paying a lot of

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<v Speaker 1>attention to exactly what is making up the reserves support

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<v Speaker 1>each stable coin. If a stable coin says it's worth

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<v Speaker 1>a dollar, it needs to have a dollar in store

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<v Speaker 1>somewhere in some form in a traditional format, not not

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<v Speaker 1>a cryptocurrency, so cash whatever. And for finance in particular,

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<v Speaker 1>it's handling of those reserves have been has been called

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<v Speaker 1>into question in terms of how it does its own

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<v Speaker 1>stuff on its exchange. It's not been super transparent. It needs,

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<v Speaker 1>you know, to present audits, especially after the collapse of

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<v Speaker 1>a big crypto exchange called fd X last year. And

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<v Speaker 1>so in that current environment as we head into February,

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<v Speaker 1>you can think that PASOS on the one hand, has

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<v Speaker 1>been giving statements ever since bus started saying here is

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<v Speaker 1>exactly what's in the bank account holding everything for that token.

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<v Speaker 1>But the other side of the equation, the branded partner,

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<v Speaker 1>has not been as transparent, has not been very clear,

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<v Speaker 1>and so the New York regulator said it had been

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<v Speaker 1>asking questions of Paxsos the issuer, to say, you know,

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<v Speaker 1>how are you managing this relationship, and it said in

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<v Speaker 1>February that Paxos had not responded to those questions in

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<v Speaker 1>a sufficient manner within the time frame that they had

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<v Speaker 1>asked it needed to rectify some issues. It hadn't done

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<v Speaker 1>those either, and so that's why b USD has to

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<v Speaker 1>be wound down. But remember this is not about PASOS,

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<v Speaker 1>a US regulated New York a Department of Financial Services

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<v Speaker 1>as regulated entity. It's about the relationship between PASOS and

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<v Speaker 1>Finance so if you look at the Department Financial Services

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<v Speaker 1>statement on this, they note they say, it's important to

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<v Speaker 1>note that Paxos and bust was authorized to be issued

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<v Speaker 1>on the ethery and blockchain, but was not authorized by

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<v Speaker 1>the Department of Financial Services. Was the binance PEG. It's

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<v Speaker 1>a form of feed So that is on the kind

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<v Speaker 1>of the PASO side and the regulator there is, you know,

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<v Speaker 1>based based in New York. It's kind of like the

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<v Speaker 1>one that's like, you are one of the companies that

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<v Speaker 1>we have oversight over. We've asked you these questions. We

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<v Speaker 1>are not satisfied with your answers. We're going to take

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<v Speaker 1>action simultaneous to that, though, Pasos also got an inquiry

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<v Speaker 1>from a federal regulator, the u S Securities and Exchange Commission,

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<v Speaker 1>which is from Paxos's perspective, ridiculous because as far as

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<v Speaker 1>the public statements from PASO so concerned, they do not

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<v Speaker 1>believe that stable coins like b USD should be considered

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<v Speaker 1>a security, which means by definition the sc he shouldn't

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<v Speaker 1>have jurisdiction. I feel like we talk about this on

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<v Speaker 1>the show all the time. The idea that the you know,

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<v Speaker 1>from the SECS perspective and again to go back to

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<v Speaker 1>our colleague on Bloomberg opinion, Matt Levine. You know, as

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<v Speaker 1>far as the SEC is concerned, if you're in crypto,

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<v Speaker 1>you're probably doing something that should have been registered. You're

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<v Speaker 1>probably transacting in some kind of security. From the crypto

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<v Speaker 1>community's perspective, absolutely not. Is this a reconcilable position. I mean,

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<v Speaker 1>there's there's two schools of thought here, right, is that

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<v Speaker 1>a stable coin is something that you are giving a

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<v Speaker 1>dollar to an issue and they're giving you the equivalent

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<v Speaker 1>of a dollar back, and there's no real interest earning

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<v Speaker 1>or anything like that happening in the meantime. And so

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<v Speaker 1>that's why in the eyes of crypto stable coins are

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<v Speaker 1>not securities. But there's also other schools of thought that say, well,

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<v Speaker 1>for example, if if these instruments that stable coin issues

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<v Speaker 1>are investing in, like US treasuries, those are classes securities,

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<v Speaker 1>then um, what a stable coin is as a security derivative,

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<v Speaker 1>and therefore that should be regulated. We're not entirely clear now,

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<v Speaker 1>for example, what the SEC's reasoning is in this case,

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<v Speaker 1>and Paxo said that it received a well's notice from

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<v Speaker 1>the SEC, which is just like a notice to say

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<v Speaker 1>that the regulator is looking at you very very keenly,

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<v Speaker 1>and that basically implies the rest of us that there

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<v Speaker 1>is a potential argument here that stable points could be

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<v Speaker 1>considered security in the SEC's eyes. Until we learn more

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<v Speaker 1>from the SEC, though, it's all a little bit of

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<v Speaker 1>guesswork as to what they're reasoning exactly is. We'll be

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<v Speaker 1>right back with more from Bloomberg reporter Emil Nicole. If

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<v Speaker 1>I were a lawyer at a crypto company like I

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<v Speaker 1>would be charging more for whatever my rates are, and

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<v Speaker 1>I would probably be be having kind of, you know,

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<v Speaker 1>tough and serious conversations with the various exacts around. Okay,

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<v Speaker 1>here are the risks, here's the reality. One of those exacts,

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<v Speaker 1>the CEO of Finance CZ as he's commonly known, did

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<v Speaker 1>a Twitter spaces to talk about what he thinks this

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<v Speaker 1>regulatory crackdown could mean for stable coins, and I was

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<v Speaker 1>intrigued to hear him suggest that it could mean algorithmic

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<v Speaker 1>stable coins. Come back, Could you just remind our listeners

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<v Speaker 1>what algorithmic stable coins are. So for regular stable coin

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<v Speaker 1>as we call them regular um are ones that are

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<v Speaker 1>backed by stores of reserves filled with traditional assets like

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<v Speaker 1>cash and and uer strguries and money market funds um.

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<v Speaker 1>Some stable coins try to use other methods to make

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<v Speaker 1>sure that their token remains worth a dollar or whatever

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<v Speaker 1>set values they've chosen. Some stable coins, like make Adows

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<v Speaker 1>Die use stores of crypto. Actually those reserves are mostly

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<v Speaker 1>full of stable coins themselves, so it's a little bit

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<v Speaker 1>like a crypto reserve of crypto dollars. But others try

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<v Speaker 1>to use a complex system of algorithmic and center if so,

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<v Speaker 1>incentivizing traders to use their stable coin and a sister token,

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<v Speaker 1>usually like another cryptocurrency, is to basically try and use

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<v Speaker 1>the two different assets to keep them in balance and

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<v Speaker 1>make sure that one stay is a dollar while the

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<v Speaker 1>other stays attractive enough to keep traders using those incentives

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<v Speaker 1>and make everything work accordingly. Famously, the strategy employed by

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<v Speaker 1>Terror with its sister coin Luna, which and that didn't

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<v Speaker 1>work out so well so great as outcomes got dollars lost,

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<v Speaker 1>Terror USB and its sister token Luna lost their peg

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<v Speaker 1>to the dollar. In the last few weeks, they had

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<v Speaker 1>a spectacular meltdown, sending prices to near zero when they're

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<v Speaker 1>now why would algorithmic stable coins, According to you know,

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<v Speaker 1>folks in crypto not necessarily be subject to the same

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<v Speaker 1>kinds of regulatory scrutiny, purely, I guess, because of the

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<v Speaker 1>fact that they don't have any real dollars in them,

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<v Speaker 1>so to speak. So there's something that exists entirely outside

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<v Speaker 1>of any kind of regulats you reach in terms of

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<v Speaker 1>being able to say that, oh, well, there's a dollar

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<v Speaker 1>and account there and I can probably regulate that, and

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<v Speaker 1>so therefore I can regulate your stable coin too. And

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<v Speaker 1>the issue is there, though, that there are also plenty

0:13:15.800 --> 0:13:19.360
<v Speaker 1>of regulatory rules out there for four Code in financial services,

0:13:19.480 --> 0:13:21.760
<v Speaker 1>and there's no real argument, I guess to say that

0:13:22.000 --> 0:13:24.400
<v Speaker 1>our growthic stable coins couldn't fall under that too. We've

0:13:24.440 --> 0:13:27.000
<v Speaker 1>definitely had a lot of communication from regulators in the

0:13:27.080 --> 0:13:30.120
<v Speaker 1>last six months after the collapse of Terror to say

0:13:30.120 --> 0:13:32.560
<v Speaker 1>that our growthic stable coins are something that should definitely

0:13:32.600 --> 0:13:35.800
<v Speaker 1>be be regulated and frowned upon in it some instances,

0:13:36.559 --> 0:13:39.840
<v Speaker 1>I mean. In that same Twitter spaces, c z also

0:13:39.960 --> 0:13:45.000
<v Speaker 1>said that he specifically identified that the regulatory crackdown around

0:13:45.000 --> 0:13:49.079
<v Speaker 1>stable coins was triggered in part by the collapse of Terror.

0:13:49.920 --> 0:13:52.559
<v Speaker 1>So you know, it's this it's this kind of hilarious

0:13:52.679 --> 0:13:57.360
<v Speaker 1>loop of this totally different kind of stable coin goes

0:13:57.480 --> 0:14:02.280
<v Speaker 1>poorly in two, so now in three, we're looking at

0:14:02.520 --> 0:14:05.080
<v Speaker 1>a totally different set of stable coins that may or

0:14:05.120 --> 0:14:07.960
<v Speaker 1>may not go poorly. Because this is this is what

0:14:08.040 --> 0:14:10.480
<v Speaker 1>krypto is like. It's sometimes very confusing. But the other

0:14:10.520 --> 0:14:13.560
<v Speaker 1>thing that he said, which I thought was interesting, is,

0:14:13.920 --> 0:14:16.960
<v Speaker 1>you know, given that so much of this regulatory scrutiny

0:14:17.000 --> 0:14:21.200
<v Speaker 1>is coming from US entities, that folks might start moving

0:14:21.320 --> 0:14:24.120
<v Speaker 1>into stable coins that are backed by the euro, or

0:14:24.160 --> 0:14:27.360
<v Speaker 1>the Japanese yen or the Singaporean dollar. We don't yet

0:14:27.440 --> 0:14:31.640
<v Speaker 1>have any indication from regulators in those places that they're

0:14:31.640 --> 0:14:34.840
<v Speaker 1>planning a similar crackdown on stable coins. But what we

0:14:34.960 --> 0:14:38.520
<v Speaker 1>do know is that global regulators have all been saying

0:14:39.000 --> 0:14:41.400
<v Speaker 1>that they need to be united on aligned on anything

0:14:41.440 --> 0:14:44.400
<v Speaker 1>to do with crypto and enforcement. Yeah, as I said

0:14:44.440 --> 0:14:46.400
<v Speaker 1>earlier on in this episode, stable coins have been the

0:14:46.440 --> 0:14:49.040
<v Speaker 1>first go to for regulators all around the world because

0:14:49.040 --> 0:14:51.280
<v Speaker 1>it's the thing they would understand the most. And so

0:14:51.440 --> 0:14:54.640
<v Speaker 1>actually we've had stable coin regulation and consideration in some

0:14:54.800 --> 0:14:58.720
<v Speaker 1>jurisdictions for several years at this point. Obviously Tara Luna

0:14:59.440 --> 0:15:01.760
<v Speaker 1>Escalate did the need for that to come into force,

0:15:01.840 --> 0:15:04.680
<v Speaker 1>but the conversations have been going for a while, and

0:15:04.720 --> 0:15:07.960
<v Speaker 1>that's why if you look at a regulation in Europe,

0:15:08.000 --> 0:15:10.880
<v Speaker 1>for example, there's a Markets in Crypto US. It's directive

0:15:10.920 --> 0:15:13.720
<v Speaker 1>that's due to be finalized in April. There's some pretty

0:15:13.720 --> 0:15:16.040
<v Speaker 1>big rules in there for stable coins, is particularly those

0:15:16.080 --> 0:15:19.040
<v Speaker 1>that denominated in the euro. Actually, the rules that they're

0:15:19.040 --> 0:15:23.520
<v Speaker 1>suggesting will favor europeg stable coins over those that are

0:15:23.560 --> 0:15:26.440
<v Speaker 1>denominated in other currencies, so they'll try and actually attract

0:15:26.440 --> 0:15:29.200
<v Speaker 1>people who are investing in crypto to use those over

0:15:29.240 --> 0:15:31.920
<v Speaker 1>the others. It's very likely that that will create the

0:15:31.960 --> 0:15:36.440
<v Speaker 1>situation that CZ predicted, but it doesn't necessarily mean that

0:15:36.480 --> 0:15:38.920
<v Speaker 1>there would be you know, I guess more regulatory freedom

0:15:38.960 --> 0:15:42.640
<v Speaker 1>in those stable coins. If anything, some jurisdictions like Europe,

0:15:42.680 --> 0:15:45.960
<v Speaker 1>like Japan, like the UK a more further ahead with

0:15:46.000 --> 0:15:48.960
<v Speaker 1>plans to regulate stable coins and those currencies. You know,

0:15:49.280 --> 0:15:52.200
<v Speaker 1>like we keep saying, banner time for lawyers in crypto.

0:15:52.480 --> 0:15:54.080
<v Speaker 1>Thank you as always, Emily, really good to have you

0:15:54.120 --> 0:15:57.400
<v Speaker 1>on the show. Thanks for having me. That was Bloomberg

0:15:57.440 --> 0:16:00.280
<v Speaker 1>reporter Emelina Colet. You can find more of her posing

0:16:00.280 --> 0:16:03.160
<v Speaker 1>on the Bloomberg terminal and on Bloomberg dot com, and

0:16:03.200 --> 0:16:06.840
<v Speaker 1>she also regularly contributes to our twice weekly newsletter, Bloomberg Crypto,

0:16:06.960 --> 0:16:14.320
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0:16:14.400 --> 0:16:17.400
<v Speaker 1>is Bloomberg Crypto, a daily podcast from Bloomberg and I

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0:16:33.600 --> 0:16:37.200
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0:16:37.240 --> 0:16:41.040
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