I first discovered Bitcoin when studying philosophy in 2015. Back then, it was largely considered a radical new idea with an uncertain future.
I’ve seen it go through many phases throughout the last 8 years.
One thing that remained consistent throughout that time: Bitcoin was heavily influenced by events which impacted ‘crypto’, but not necessarily anything native to the Bitcoin network itself. Consider:
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The February 2014 Mt. Gox hack where over 744k bitcoins were lost. As a result, BTC’s 2014 price performance was -58%.
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On May 5th 2018, when Warren Buffett said Bitcoin was “probably rat poison squared”. BTC’s price performance for the remainder of the month was -23%.
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May 2021 when Musk announced Tesla would no longer accept BTC as payment. In the following two weeks, BTC dropped as much as -43%.
Now, we all know what happened after each event - Bitcoin subsequently rebounded. It prevailed, despite the dire warnings of naysayers. But there’s no denying that Bitcoin has a history of reacting to events which really have nothing to do with Bitcoin itself. Yet, we’re now seeing something unprecedented.
Amid increased regulatory scrutiny targeting digital assets, and several US banks closing their doors, the price of BTC is actually increasing. The asset known to have theoretical advantages to traditional banking is actually being used in practice by investors for its designated use.
I’m a firm believer that recent events show how external Fear, Uncertainty, and Doubt (FUD) and even regulatory ‘uncertainty’ are no longer threats to Bitcoin. Let me explain how.
Why Is Bitcoin Actually Worth Anything?
When faced with this question, people often respond in the theoretical. Bitcoin is valuable because it constitutes sound money. And it is sound money because Bitcoin’s supply is limited and tamper-proof thanks to its proof-of-work algorithm.
This framing of Bitcoin’s worth may be the initial motivation trigger, but what is the mechanism that delivers Bitcoin’s value? In other words, how is Bitcoin’s perceptual component materialized?
When thinking in these terms, we immediately see the inherent friction present. Satoshi created Bitcoin as an alternative to the fiat system following the bank bailouts in the 2008 Great Financial Crisis, but we gauge Bitcoin’s worth by the same fiat system. For this reason, an ideological drive had to be present in Bitcoin’s early days when most people gained BTC not by buying it, but by mining it.
Only in 2010, the first platforms began to emerge, starting with Bitcoin Market. This proto-exchange was rather clumsy - users traded bitcoins with each other by sending USD via PayPal (NASDAQ:PYPL) to Bitcoin Market, which held BTC in escrow until the seller received the dollars.
Soon after, the first real exchange popped up, Mt. Gox, backed by Japanese Mizuho Bank to process fiat-to-Bitcoin and Bitcoin-to-fiat requests. As more exchanges popped up in the subsequent years, such as Bitstamp and Bitfinex, Bitcoin’s price bloomed to $1.1k in December 2013.
Therefore, the mechanism by which Bitcoin’s theoretical value materializes in tangible value is clear:
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If the ‘sound money’ pitch is acknowledged, Bitcoin serves the function of fiat converter.
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For this function to take place at scale, fiat-to-Bitcoin must be convenient.
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Exchanges provide convenience at scale.
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Banks provide exchanges with the means to effect convenience.
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To effect even greater convenience, banks hold reserves for stablecoins issuers, as these tokenized dollars provide swift trading opportunities and deeper market liquidity.
Consequently, all talk about Bitcoin value and mass adoption stops at traditional banks. Specifically, the rules imposed by governments on banks’ interaction with digital assets. In the last decade, we have seen a systemic crypto exchange transition from loose to KYC/AML/CFT compliant.
And for good reason, as the state of looseness is often tied to the lack of standards. After all, every single aforementioned exchange had been hacked.
By the same token, as governments create rules to ‘protect consumers’, they can also use this opportunity to inhibit the growth of assets which were specifically designed to flourish outside of (and therefore weaken) governmental control.
This creates a new dynamic:
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Governments set a high threshold bar on the flow of digital assets.
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More restrictive standards not only funnel digital asset flow, but filter them by asset type.
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Crypto companies compete on which is the most regulated gateway, as a selling point.
If such a dynamic is rational to expect, one would see both stricter rules and their implementation to benefit some players more than others. One would also see a certain digital asset, Bitcoin, getting ahead of the altcoin curve.
This dynamic has been on display recently, starting with the off-shore Binance vs. the publicly traded Coinbase (NASDAQ:COIN).
What Exactly Happened with Paxos’ BUSD?
Effective February 21, 2023 Paxos was ordered to officially halt the issuance of new BUSD stablecoins at the urging of the New York Department of Financial Services (NYDFS).
For veterans of the crypto space, it was surprising to hear that Paxos would come under the regulatory hammer. Paxos has a reputation as one of the most highly regulated stablecoin issuers in the world. In 2015, the New York State Department of Financial Services (NYDFS) gave Paxos the second-ever BitLicense, preceded by Circle, the issuer of competing stablecoin USDC.
Under the BitLicense, both Circle and Paxos are regulated by NYDFS, which means they are subject to stablecoin reserve requirements, adequate cybersecurity measures, financial stability and AML/KYC compliance. So, what prompted NYDFS to issue a consumer alert against the Paxos-issued BUSD stablecoin?
First, it bears keeping in mind that Pax Standard (PAX), rebranded in 2021 as Pax Dollar (USDP), was issued by NYDFS-chartered Paxos Trust Company as a 1:1 USD-redeemable stablecoin. However, it was conditionally issued just like Binance USD (BUSD).
Binance partnered with Paxos in September 2019 to issue BUSD, but only on the Ethereum blockchain, not on Binance’s own Binance Smart Chain (BSC) which would be a BEP-20 token as opposed to Ethereum’s ERC-20 token standard.
“It is important to note that the Department authorized Paxos to issue BUSD on the Ethereum blockchain. The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.”
-NYDFS
According to a Bloomberg report, it appears that Circle, Paxos direct stablecoin competitor, alerted NYDFS to this technical distinction in 2022. The motivation behind the tip off appears to be Binance’s policy to auto-convert other stablecoins, such as USDC, USDP, and TUSD, to BUSD.
Consequently, this contributed to the USDC market cap declining by 25% in the second half of 2022, from $55.81 billion to $41.89 billion. Therefore, as joint USDC issuers, both Circle and Coinbase could benefit from ousting the world’s largest exchange from the stablecoin arena.
Will USDC Follow the BUSD Treatment?
After the news of BUSD’s wind-down on February 13th, the stablecoin’s market capitalization decreased by 18%, falling from $16.14 billion to $13.24 billion. In addition to the minting stoppage ordered by NYDFS, Paxos also faces a Wells notice from the Securities and Exchange Commission (SEC).
With this formal letter of intent, the SEC is considering treating BUSD as a security. Paxos plans to litigate the matter, refuting such claims as ‘baseless’.
“Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws. This SEC Wells notice pertains only to BUSD.”
This is similar to the SEC’s Wells notice that Coinbase received in September 2021 regarding its Lend feature. Despite arguing that Coinbase’s Lend doesn’t constitute an investment contract, CEO Brian Armstrong eventually decided to terminate it.
Interestingly, the SEC recently issued a $30 million fine against another crypto exchange, Kraken, for offering yields on staking. Simply put, the SEC views “staking-as-a-service” as subject to securities regulations. Users deposit their assets on Kraken, which then uses the funds to secure proof-of-stake networks. Therefore, users don’t have to run their own nodes to receive staking rewards.
As an intermediary, Kraken receives a cut from these staking rewards. The SEC sees this as a form of crypto lending, so the funds (investment contracts) should be registered as securities. Given the SEC’s failure to spot numerous FTX red flags, Kraken CEO Jesse Powell now theorizes that this is all planned to informally reign in the crypto space.
If regulators are indeed picking select crypto players, such as Coinbase and Circle as USDC issuers, they are likely in the clear. After all, they are both backed by BlackRock (NYSE:BLK), the world’s largest asset manager often referred to as the Fed’s Shadow Bank. For those who are unaware, BlackRock manages a portion of USDC reserves.
Coinbase was also tapped by BlackRock to provide crypto trading and custody services to its Aladdin clients. Aladdin is BlackRock’s own proprietary financial software which handles the risk management of roughly $11 trillion in assets. Moreover, Circle uses BNY Mellon (NYSE:BK) as a USDC custodian, one of the oldest banking institutions in the US, founded in 1784.
It also bears noticing that Visa (NYSE:V), the largest payment processor, picked USDC for settling blockchain transactions across its partners like Crypto.com and Wirex. Finally, USDC is audited by Deloitte, subjected to the SEC oversight in addition to the Public Company Accounting Oversight Board (PCAOB).
However, Coinbase offers the same staking-as-a-service as Kraken, so it may receive a similar Wells notice. For the time being, the market sentiment favors Coinbase however, as COIN shares are up +91% YTD.
Is the Political Sentiment Aligned with Regulatory Agencies?
For anyone following the crypto market, it has become a common refrain that the SEC effectively regulates by enforcement. On paper, there are regulators and there are legislators. The latter are supposed to give regulators the framework within which the agency is allowed to operate.
There are two relevant commissions that are largely responsible for protecting investors in the US. There’s the SEC, formed in 1934, which regulates securities such as stocks. Then there’s the CFTC, created in 1975, which regulates derivatives markets. Brokers can also take the initiative of playing a role here, and they frequently do in the US by limiting access to options trading through a tiered structure based on investor experience and risk appetite. All of this aims to facilitate a safer environment for investors.
There’s a clear regulatory framework used by these commissions in their mission to protect investors. Yet the issue is that it’s outdated and does not account for the technological capacity of modernity.
Given the novelty of digital assets, and the lack of comprehensive crypto legislation, the SEC has engaged in a creative interpretation of pre-internet rules. The present House Majority Whip, Tom Emmer, has noted such complaints against the SEC before.
Emmer is also aware of the allegations, shared with Kraken CEO Jesse Powell, that the SEC is being weaponized to artificially create the crypto landscape.
Ironically, the SEC Chair, Gary Gensler, did not seem to consider the FTX Token (FTT) as fraudulent - at least not publicly. But he did describe stablecoins as “poker chips” in September 2021. This was a reference to the Wildcat banking era where the frontier offered private forms of money backed by dubious reserves.
More than one year prior to the FTX crash, Gensler said the following, which could be seen as bolstering Powell’s theory:
“I think there’s just a lot of warning signs and flashing lights that we might have a spill on aisle three and I’d rather get ahead of it.”
-Gary Gensler to the Washington Post
As a legislative ally in that direction, Sen. Elizabeth Warren continues to build anti-crypto momentum. Specifically, by re-introducing the Digital Asset Anti-Money Laundering Act (DAAMLA), originally put forward in December.
Warren views the crypto landscape as rife with fraud. She says, “The current legal structure essentially holds up a giant sign over crypto that says, money laundering done here,”.
Therefore, the crypto market should be treated equally with other capital markets. But for the government to keep track of all crypto flows, both open-source software developers and users could be treated as financial institutions under the proposed bill. Moreover, developers would likely have their First Amendment violated as they would be compelled to register non-commercial code.
Nonetheless, the FTX crash pushed bipartisan winds into Warren’s sails. Kansas Sen. Roger Marshall already co-sponsored the bill. On the lobbying side of the equation, Paul Merski, the head of congressional relations at the Independent Community Bankers of America, views crypto as guilty until proven innocent.
“It’s up to the crypto sector to prove at this point that they’re safe, secure and superior, and I don’t think they’ve made that case,”
-Paul Merski to Politico
There is also no shortage of academic ammo to further that view. Lee Reiners, the Policy Director at Duke University, testified on February 14th before the Senate Committee on Banking, Housing, and Urban Affairs. Reiners argued that banking gateways to crypto rails, such as stablecoins, should go beyond the baseline.
“…bank regulators do have the authority to impose additional prudential requirements on such activity…”
Reiner specified further:
“That may require the bank agencies to implement more rigorous standards than the Basel Committee on Banking Supervision’s final prudential standard for crypto-asset exposures, issued in December 2022.98”
In vernacular, this constitutes cutting crypto from the US banking system, or funneling it via pre-selected crypto companies.
Why Bitcoin Is Safe(er)
Gensler has said crypto is one of the SEC’s major areas of focus in the year 2023. The Biden Administration even released a roadmap to ‘mitigate crypto risks’ in January 2023.
The hostile regulatory environment which seems to target all of crypto has had a major impact on the crypto space.
Just look at the SEC’s regulatory action targeting Kraken which resulted in a decline of more than $40 billion in crypto’s total market cap:
Image credit: CoinMarketCap
So how does this situation impact Bitcoin, the original cryptocurrency that leads the entire cryptocurrency space with 42% of crypto’s total market cap? Is Bitcoin at risk of being targeted in the ongoing regulatory onslaught?
Since it’s largely the SEC behind any recent regulatory enforcement action in the crypto space, let’s first look at what the two most recent SEC chairmen have said.
In a recent CNBC interview with Jim Cramer, Gensler suggested that Bitcoin is a commodity, meaning it would be regulated by the CFTC:
"...many of these crypto financial assets have the key attributes of a security. So some of them - they’re under the Securities and Exchange Commission. Some, like bitcoin, and that's the only one, Jim, I'm going to say because I'm not going to talk about any one of these tokens [that] my predecessors and others have said, [are] a commodity,”
-SEC Chair Gary Gensler in CNBC interview
Back in 2018, the then-SEC chair Jay Clayton said:
"Cryptocurrencies: These are replacements for sovereign currencies, replace the dollar, the euro, the yen with bitcoin. That type of currency is not a security."
Clayton added: “If you want to do any IPO with a token, come see us.”
And more recently, after the FTX crash, current CFTC chair Rostin Behnam said Bitcoin is the only cryptocurrency that should be viewed as a commodity - out of the 22,000+ cryptocurrencies in circulation.
Bitcoin Is Not a Security: Implications
In the end, we see a history of Bitcoin which:
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Consistently reacted negatively to external FUD factors
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Was clouded with regulatory ‘uncertainty’, and a looming shadow of regulations about to enter the crypto space
Do these two factors remain a threat to Bitcoin?
To put it simply, no.
When we examine the recent regulatory action taken place, and comments thus far from regulators, it is quite clear that BTC is not security. What we have here then, are actually quite clear regulatory indications concerning the status of BTC, which minimizes any regulatory risk for US investors (retail and institutional) to invest in BTC.
And while multiple US banks have recently closed their doors - Signature Bank (OTC:SBNY) with $88.6B in customer deposits and Silicon Valley Bank (SVB) with $173B in deposits - the price of BTC is on the rise. Many other large bank stocks have tanked - even the most regulated stablecoin, USDC, dipped below $0.88 after Circle revealed it had $3.3B tied up in SVB.
On March 10th, Bitcoin was trading in the mid-to-high $19,000 range. Just four days later, BTC broke $26,000, a 30%+ increase.
Let me rephrase that. While multiple US banks failed, amid a backdrop of regulatory angst in crypto, BTC gained by more than 30%.
By April 12, BTC broke $30k, its highest price point since
Bitcoin is reaching an unprecedented level of maturity. Amid macro doom and gloom, with rising interest rates, bank failures, and FUD among further ‘systemic risk’, the price of BTC is actually increasing. This means at least some investors are flocking to BTC as a safe haven amid such a dire outlook.
Bitcoin - the asset designed as an alternative to traditional banking during the 2008 Great Recession - is now being used by investors as an alternative to traditional banking which is, once again, experiencing failure.
History is unfolding. We are now watching the Bitcoin thesis play out in real-time.
. . .
Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.
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