Bloomberg Interview: Kaiko’s Research Director Explains the Crypto Regulatory Crackdown
[February 13th, 2023] On Bloomberg Technology’s evening show, Clara Medalie joined Caroline Hyde and Ed Ludlow to discuss the Paxos and Kraken enforcement actions and what it means for the crypto industry.
View the video clip here.
Ludlow: When we think about the Paxos issue, you believe that there will be a profound impact on stablecoins broadly. What will that be?
Medalie: I think one thing that’s interesting about the BUSD case is that today BUSD is mostly used on Binance and on Binance Smart Chain which is the blockchain operated by the exchange. BUSD doesn’t really have much use on other cryptocurrency exchanges so that’s why this regulatory action appears to very much be targeting Binance and not necessarily stablecoins as a whole, because Paxos was the one to issue BUSD. However, I don’t think this makes other stablecoin issuers immune, specifically [Circle] USDC and [Tether] USDT, although it will be very difficult to regulate Tether simply because the largest stablecoin is not actually domiciled in the United States.
Ludlow: With Binance positioning BUSD as a strong competitor to Tether, their market shares have changed proportionally over the past few years. Where does that leave us in their relationship?
Medalie: This morning we found that 35% of total trade volume on Binance is actually denominated in BUSD. This is up from 20% at the start of 2022. I think Binance has made a successful marketing push to get more users of BUSD and it seems that they were very much not expecting this regulatory enforcement action. Binance is incentivized to have their own stablecoin because stablecoins are very useful within DeFi ecosystems, and what I mean by this is Binance Smart Chain and any type of decentralized protocol that is part of the Binance ecosystem.
Now that they don’t have this lever of growth, essentially we are now left with Tether. Tether today accounts for the vast majority of all trading activity in crypto so BUSD was actually a nice counterweight to Tether’s influence. As we’ve seen in crypto, it’s never good to have all risk concentrated in a single centralized entity. But I’m afraid with Tether, we sort of have this now.
“BUSD was a nice counterweight to Tether’s influence. As we’ve seen in crypto, it’s never good to have risk concentrated in a single centralized entity.”
Hyde: Tether can’t be regulated in the US because it’s not domiciled here. Binance was using Paxos which was regulated in the US. Could they have a different issuer for BUSD somewhere else so they can ensure they will still have a stablecoin, but not under US legal oversight?
Medalie: Theoretically yes. I think that is the biggest critique with this type of enforcement action: it’s not getting to the root of the problem. Rather, what we see is actually a type of regulatory arbitrage. That’s what we see with all the exchanges that don’t have their headquarters in the United States. They are simply finding jurisdictions where they can operate and do what they want.
Hyde: Is there going to be an overall global means of regulating in the near future? Is anyone talking with other countries?
Medalie: In Europe, they’ve taken a much broader approach to regulation and actually taken the path of issuing guidance rather than enforcement actions. We can already see that there is a large difference across regions. I think for now it will be very difficult to get a global approach because there will always be jurisdictions that are trying to attract business, and that always comes with crypto actors that are looking for the friendliest jurisdictions.
Ludlow: What is your read on the Kraken situation with the SEC basically cracking down on unlicensed security offerings?
Medalie: Kraken had one of the largest centralized staking services but it was very different from what we saw on Coinbase. This doesn’t mean that Coinbase is immune from a regulatory action against their own staking service. But there are key differences in the nitty gritty of how each one is run. I think that’s what attracted the SEC to first go after Kraken’s. I also think Coinbase is likely to put up a fight. They have a lot more to lose in this case because they’ve actually successfully diversified their revenue in the staking business over the past year. I want to emphsaize that staking is not like the returns on your assets that you got with centralized lenders like Celsius. It’s a lot different. Staking is something fundamental to blockchain technology, specifically the Ethereum blockchain. It’s actually benefiting most people that are staking. There are no losers to staking today.
“Staking is something fundamental to blockchain technology, specifically the Ethereum blockchain.”
Hyde: Do crypto companies like this sort of regulation they are currently seeing?
Medalie: This is regulation by enforcement, which I don’t think anyone really likes. That doesn’t mean that the industry doesn’t like regulation. In fact, after FTX everyone is expecting this and it is much needed for any centralized service provider. After the Celsius/FTX collapse, it became clear that you can’t operate without some degree of regulation or transparency. It’s more the enforcement actions that are catching the industry off guard.
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