Is there a method to the SEC’s madness?
Of all the Securities and Exchange Commission’s actions against crypto entities that have stirred the industry’s ire, the agency’s recent move forcing New York-based Paxos to cease issuing its partner Binance’s BUSD stablecoin is the most deserving of an outcry. How, critics rightfully asked, can a token that’s explicitly designed not to fluctuate in price be considered a security?
But a recent account in Fortune suggests the SEC may not have been thinking of securities law at all in that action. Binance was automatically converting competitor-issued stablecoins held by its exchange’s customers’ into BUSD. To me, that looks like an antitrust concern, not one of BUSD being a security.
Now, if there’s one area of enforcement where the crypto community, with its anti-middleman ethos of decentralization, should get behind, it’s prosecution of monopolistic behavior. But that leaves us with the question of why is the SEC getting involved here and not the nation’s trustbuster, the Federal Trade Commission?
I get two takeaways from this:
- Another reminder that, in the absence of clear legislative boundaries for crypto, the SEC is striking out wherever it can to assert authority. It’s partly turf war, partly political posturing during a post-FTX moment in which crypto is a convenient whipping boy.
- The crypto community has done a lousy job picking its friends and enemies within the U.S. government. Advocates should simultaneously work with the FTC to enforce a decentralized market structure for their own industry and with their allies in Congress to prevent the SEC from crimping mass adoption and undermining blockchain-based challenges to monopolies in other industries, such as finance and internet platforms. Instead, the industry fixates on the SEC as the bogeyman, a role in which Chairman Gary Gensler has seemed perfectly at home as his agency has launched a flurry of attention-grabbing actions against Binance/Paxos, Kraken, Terra-Luna and now the Voyager Digital creditors.
First, a look at the Binance-Paxos case.
On Feb. 13, Paxos confirmed it had received a Wells Notice from the SEC, indicating that enforcement action may be forthcoming, and separately announced that it would cease minting new BUSD tokens under order from the New York Department of Financial Services. After that, The Wall Street Journal reported the SEC intended to sue Paxos on grounds that BUSD is an unregistered security.
The SEC’s argument about the one-to-one dollar-pegged BUSD was baffling because it’s hard to see how a stable-value token meets the Howey Test, which, among other stipulations, says that, for an instrument to be a security, the buyer must have expectation of profit – i.e. that the asset is going to rise in value at some point.
Now there are scenarios where investors could profit from BUSD. If fears arose that Binance was failing to adequately maintain BUSD’s dollar reserves, its market price could fall below a dollar, allowing investors to speculate on an expected price recovery as the company moved to rejuvenate reserves and drive the token back to dollar parity.
But that scenario runs counter to Binance’s incentives. It’s never motivated to let BUSD’s price fall, since that would undermine trust in the token and reduce its market share. Paxos’ management said from the beginning that it “categorically disagrees” with the designation of BUSD as a security. And it seems hopeful it can get the SEC to back down, amid reports that its conversations with the agency are “constructive.”
But the Fortune account paints an alternative picture of alleged wrongdoing by Binance, arguing that in forcibly converting its exchange customers’ USDC and other stablecoins into BUSD tokens, it captured interest earnings on the reserves deposited against them that should have accrued to issuers of those competing coins. That sounds a bit like the issues that prompted the U.S. government’s landmark 2001 lawsuit against Microsoft (MSFT), when it accused the Redmond, Wash., giant of abusing its dominance of personal computers’ operating systems to give its own Internet Explorer browser an advantage over Netscape’s Navigator product.
Note: My point here is not to argue that Binance is guilty of monopolistic practices. It’s worth noting that in September, Binance openly announced it was converting competitors’ stablecoin to BUSD. Also, a company spokesperson told Fortune that while the company had “previously acknowledged that these processes have not always been flawless, at no time was the collateralization of user assets affected” – essentially denying the diversion of interest earnings. For the record, CoinDesk decided not to follow up on the Fortune story, which seemed more like a rehashing of those previous details than anything new.
What’s important here is whether regulators believed they had a case for action on monopolistic practices grounds. If so, once again, why was the SEC involved? That’s the question the crypto industry should strategically seize upon.
Crypto should be vehemently against monopolies
It’s a truism that in a market economy, all industry leaders are incentivized to seek monopolistic positions that hurt customers and competitors alike. It’s why the Theodore Roosevelt-era antitrust laws were so groundbreaking. They established a role for the U.S. government in asserting and protecting a public interest in market competition that, in some respects, went against the natural order of capitalism.
Crypto is no stranger to these problems – not because its business leaders are any more or less inclined to behave badly, but because, as in other industries, the biggest players are able to exploit their dominance. Where it differs from other industries is that crypto’s core foundations are built on resisting these centralizing tendencies, fostering perpetual tension between the ideal of decentralization and the reality of a tendency toward centralization. Hence the endless debates over cross-chain interoperability, trademarks, and the restrictions that some marketplaces impose on the resale of non-fungible tokens on competing platforms.
So why aren’t more crypto people engaging with government agencies such as the FTC to encourage competition?
Partly that’s because of a natural aversion to government generally. Non-interference aligns with a prominent capitalist-libertarian bent in the community, where the preference is for software developers to find disruptive, disintermediating ways of attacking monopolies without bringing in the distorting intervention of the state.
I think this is naive; as the past few months have demonstrated, the government has great power to curtail the advance of this industry. In the same vein, it has the power to help it. Crypto leaders should recognize that power and seek to harness it constructively.
Another explanation for a lack of antitrust policy engagement could be that the crypto lobbying movement is largely funded by for-profit crypto companies and their venture capitalist funders. They have an interest in protecting their dominant market positions.
Perhaps crypto lobbying needs a different funding model. Do decentralized autonomous organization structures make sense here, such that private wealthy interests are diluted by a wider body of many smaller contributors? Or is it just a case of the various representative organizations strengthening their independence charters and shifting priorities over the changes they seek and with whom they’ll work with?
Either way, something needs to change. It’s unacceptable that a single government agency is allowed to range beyond its jurisdiction and singlehandedly set this industry’s path.