Crypto Spotlight - SEC to sue Paxos, EU and France tighten crypto regulation, and Brazil allows crypto-based tax payments

We start Monday as always with a summary of digital asset inflows and outflows from last week courtesy of Coinshares. Investors showed caution with digital asset investment products seeing minor outflows of $7 million. The primary focus was on Bitcoin, which outflows $10.9 million. Investors showed selectivity as 10 altcoins saw inflows of $4.8 million. Ethereum and Cosmos performed well with inflows of $5.1 million and $1.8 million respectively. Blockchain equities remained popular with inflows of $6.7 million. Europe saw inflows of $4.7 million while the Americas saw outflows of $11.7 million.

However, the pervading story as we enter the week is not the market itself, but the rapidly evolving global regulatory landscape. As some countries, like the U.K., look to create a crypto-friendly ecosystem, others seek to impose stricter regulations and sanctions in a bid to bring the industry in line with other financial assets. Here’s all the news for today, which taken together, is a telling indicator of where the future of crypto may be heading, both geographically and legislatively.

1 - The Securities and Exchange Commission (SEC) is planning to sue Paxos Trust Co. for violating investor protection laws, according to sources. The SEC has issued a Wells notice to Paxos, which is used to inform companies of a possible enforcement action. The notice alleges that Binance USD, a digital asset stablecoin issued by Paxos, is an unregistered security. It must be noted that announcing the Wells notice does not explicitly mean the SEC will take enforcement action, as it requires a vote from the agency's five commissioners to proceed. Paxos has swiftly responded by announcing they will discontinue the minting of Binance USD.

The SEC has increased its enforcement efforts in the crypto market recently, settling with major exchange Kraken for $30 million in penalties for offering crypto staking services in the US. Stablecoin issuers, like Paxos, invest user deposits in cash-equivalent assets and have been a focus of the SEC since they resemble bank deposits or money-market mutual funds. The SEC has taken enforcement action against dozens of digital tokens in the past six years, alleging that they were unregistered investments.

2 - Leading broker Bernstein released a report stating that regulatory action in the crypto industry will result in the growth of decentralized finance apps and offshore activity. The report cites the SEC's recent charges against crypto exchange Kraken for its "staking as a service" program, leading to concerns about regulatory crackdowns in the crypto space. The industry is still debating whether staking programs classify as securities, with some firms potentially challenging the regulatory stance. Coinbase CEO Brian Armstrong has recently stated he is willing to go to court to argue that they are not securities.

Bernstein also mentions the Fed's denial of Custodia Bank's application and the SEC's notice to Paxos over the issuance of Binance USD, leading to concerns about further regulatory action restricting the connection between crypto and fiat. However, the report suggests that regulatory overreach will drive growth towards decentralized finance apps built on-chain by anonymous teams, making it challenging for regulators to enforce rules without a transparent framework. The growth is expected to continue in crypto-friendly jurisdictions such as Singapore, Dubai, Hong Kong, and London.

3 - The European Parliament has published a draft law that would require EU banks to treat cryptocurrencies as the riskiest kind of asset and disclose their exposure to them. Banks would be required to place the maximum possible risk weight of 1.250% on crypto assets, which would offer little incentive for them to hold these assets. The draft law also calls for the European Commission to propose further legislation by June 2023. The proposed legislation will only become law if agreed upon by the EU member governments and the European Parliament.

This comes on the same day as France announce a tightening of its registration rules for crypto companies starting in January 2024. The new rules will require companies to comply with internal controls, cybersecurity measures, and conflict-of-interest policies. The enhanced registration process is viewed as a more practical approach by crypto lobby groups, but smaller companies may struggle to meet the new requirements such as safe and secure IT systems.

4 - Banco do Brasil, the largest public bank in Brazil, has partnered with Bitfy, a blockchain startup, to allow customers to pay taxes using cryptocurrencies. The service is available only to customers with cryptocurrencies deposited with Bitfy, a company in which Banco do Brasil has invested. The bank has also signed agreements with public service entities, allowing other Bitfy clients, such as financial institutions and fintech companies, to allow their users to pay taxes and other obligations using the digital assets. At the time of payment, the cryptocurrencies will be instantly converted to Brazilian reals. This partnership aims to expand the use of and access to the ecosystem of digital assets with national coverage, while maintaining the security and reliability of Banco do Brasil.


5 - Wirex and Visa have announced the expansion of their partnership in 40 countries, including the UK and countries in the Asia-Pacific region. Wirex, a cryptocurrency payments app with over 5 million customers, will now be able to issue crypto-enabled debit and prepaid cards in these countries, building on their existing relationship of a crypto-linked Visa debit card in the US and Wirex's principal membership status with Visa in Europe. The London-based company was the first to develop a crypto-enabled card in 2015. This expansion will allow Visa to provide more payment options to consumers by connecting digital currencies with its network of banks and merchants.

6 - Cryptocurrency ads were absent from this year's Super Bowl after being widely present in the previous year. This change is due to the failure of previous crypto ads to bring a good return on investment. Crypto companies spent a total of $39 million on Super Bowl ads in 2022 but saw a poor performance. The only reference to the crypto industry in this year's game was from a gaming company that advertised its digital token giveaway.