German and US regulators focus more on booming crypto market

A crackdown on equity-type products in Germany and harsher rhetoric in Washington suggests that major financial regulators are bristling against cryptocurrency operators’ forays into tightly controlled public markets.

Crypto Industry Executives and Securities Law Experts Around the World Take a Close Look at the fray between German regulator BaFin and crypto exchange Binance, which deepened this week.

Binance, one of the world’s largest crypto firms, has asked BaFin to withdraw an allegation that it may be breaking securities laws with its new offering of “ tokens ” intended to mimic a handful of US stocks – a request the regulator rejected.

That same week, the new chairman of the US Securities and Exchange Commission Gary Gensler, known on Wall Street as a difficult operator, said at a hearing on Capitol Hill that “nearly $ 2 billion [cryptoasset] the market is the one that could benefit from better investor protection ”.

“Right now, the exchanges, which trade these crypto assets, do not have a regulatory framework in either the SEC or our sister agency, the Commodity Futures Trading Commission,” he said. “There is no market regulator around these crypto exchanges, so there is no protection against fraud or manipulation.”

At present, neither the SEC nor the CFTC has the power to oversee the activity of the cryptocurrency market because, legally speaking, bitcoin and its peers are neither a commodity nor a currency. After the meteoric rally of bitcoin and rivals like ethereum so far this year, the rapidly growing and increasingly sophisticated industry now has highly regulated securities markets in its sights, an evolution that concerns the main dogs. on call.

But regulators born out of the need to protect investors a century ago are often ill-equipped to deal with the vast array of next-generation offerings. Financial regulators work with “19th century legal concepts based on 20th century technology.” He’s outdated, ”said Timothy Spangler, partner at Dechert, a California law firm.

Binance’s decision in April to start offering tokens in stocks like Tesla without the usual documentation for stock offerings prompted BaFin to act. Binance seems unfazed. He still offers the tokens on his website more than a week after the BaFin intervention.

In the UK, the Financial Conduct Authority has only said it is in contact with Binance about its new products, which are not available in the US, mainland China or Turkey.

Gensler’s plea for more powers from lawmakers reflects the frustrations of regulators that a rulebook written for the securities markets is not suited to the goal of covering investors wishing to trade crypto assets. However, policymakers face a delicate task: crafting laws for an industry that operates across borders and with some players seeking to avoid regulation.

Many regulators have tried to interpret existing rules where they can, but that hasn’t stopped innovation from proliferating, in the same way that derivatives trading and hedge funds emerged in the 1990s. .

“This is an interesting convergence of traditional financial regulation that restricts adoption of this new asset class,” said Matteo Dante Perruccio, president of international affairs at Wave Financial, a digital asset investment manager regulated in the United States. United States. “If we are to ensure the longevity of the digital asset industry, we must applaud the stringency of regulation,” he said.

The time for decision makers to act may be short. Institutional investors are increasingly interested in the gains offered by cryptocurrencies and banks are increasingly comfortable with digital assets. And crypto firms can turn a profit by being much more agile than if they cross traditional regulatory hurdles.

Typically, exchanges such as the New York Stock Exchange or the CME Group can take months to obtain approvals for certain new products. FTX, the Hong Kong crypto exchange, said it only takes a few hours to set up trading contracts mimicking US lumber futures, where prices have risen over the past two weeks.

Soaring crypto asset prices are starting to fuel a boom in other financial products. Binance, for example, allows any registered user to “get a loan secured by your crypto assets” and also provides access to risky margin trades and savings accounts. Binance loans come with hourly interest calculations, and users can withdraw the proceeds from Binance or use them for services such as futures trading.

Derivatives in particular are fueling the boom in more speculative cryptocurrencies such as Dogecoin, Tether and PancakeSwap, as well as activity on new exchanges like FTX and decentralized funding projects like Uniswap, according to industry executives.

In a normal futures market, traders need cash or government bonds as margin collateral which can be used to amplify bet size through debt-financed or derivative transactions. But many cryptocurrency exchanges accept cryptocurrencies as collateral.

This means that only small initial hard currency expenses can be turned into cryptoassets and used to place very large bets in the crypto market, sometimes spread over a range of coins, with potential inordinate gains and losses with only a money laundering checks. This means that many pieces feed and rally in tandem.

The problem for regulators is compounded because some exchanges lack the more typical formal corporate corporate structures. This week, Coinbase, a major exchange listed in the United States, announced that it would close its headquarters in San Francisco and operate without a main office in a single city.

Binance also claims that it does not have an official world headquarters, but does have several subsidiaries around the world. A sign of the complexity of the situation for financial supervisors, Binance Markets Limited, the group’s unit based in London, is an FCA registered financial company in the United Kingdom.

The division is ultimately owned by a Malta-based entity registered in the British Virgin Islands and is primarily controlled by Changpeng Zhao, CEO of Binance.

In Germany, the company told BaFin that the regulator’s opinion on the stock tokens was based on a “misunderstanding,” according to people familiar with the matter. He told the Financial Times he was not commenting on “communications with regulators.”

Spangler at Dechert said emerging companies need to educate regulators. “You don’t want to wait long for permission, you want regulators to work with something they understand. You have to do it gradually. “

But many crypto exchanges and managers choose to be regulated rather than face possible enforcement action in the years to come.

“I think the regulators are concerned that there is a big, bad actor out there doing something and they don’t even know who’s in charge of the enforcement,” said Todd Kornfeld, lawyer at American law firm Troutman Pepper.

“It may sound like ‘free-for-all’, but in the end regulators will find laws somewhere to enforce against bad behavior. This is part of the reason why large institutions have been cautious, because they generally don’t like uncertainty and they like regulators to tell them what they can and cannot do.