German and US regulators are stepping up their focus on the growing crypto market

A setback against stock-like products in Germany and more intense discussion in Washington suggest that key financial regulators are attacking the incursions of cryptocurrency traders into strictly controlled public markets.

Cryptographic industry executives and securities law experts from around the world are examining closely the fight between German regulator BaFin and Binance, which deepened this week.

Binance, one of the world’s largest cryptocurrency companies, has asked BaFin to retract an allegation that it could breach securities laws with its new offering of “tokens” designed to mimic a clutch of US securities, a request that the regulator has rejected.

The same week, the new chairman of the U.S. Securities and Exchange Commission, Gary Gensler, known on Wall Street as hard operator, told a hearing at Capitol Hill that the “about $ 2 million [cryptoasset] the market can benefit from greater investor protection ”.

“Right now, the stock exchanges, which are listed on these cryptographic 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 cryptographic exchanges and therefore no protection against fraud or manipulation.”

Currently, neither the SEC nor the CFTC have powers to oversee the activity of the cryptocurrency market because, in legal terms, Bitcoin and its peers are neither a commodity nor a currency. After the strong concentration of bitcoins and rivals like ethereum so far this year, the fast-growing and increasingly sophisticated industry now has its highly regulated stock markets, a development that has to do with the main dogs of surveillance.

But regulators born of the need to protect investors a century ago are often poorly equipped to cope with the large supply of next-generation deals. Financial regulators are working with “nineteenth-century law concepts based on twentieth-century technology. It’s not up to date, ”said Timothy Spangler, a 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 the stock offering has caused BaFin to go into action. Binance looks fearless. He still offers a listing on his website more than a week after BaFin’s 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 request for more powers from lawmakers reflects regulators ’frustration that a rulebook written for the stock markets is not adequate to cover investors who want to trade cryptocurrencies. However, policymakers are faced with a complicated task of drafting laws for an industry that operates across borders and that some agents try to circumvent.

Many regulators have tried to interpret existing rules where they can, but it has not stopped innovation from evolving, in the same way that derivatives trading and hedge funds arose in the 1990s.

“It’s an interesting convergence of traditional financial regulation that restricts the adoption of this new asset class,” said Matteo Dante Perruccio, president of international business at Wave Financial, a regulated digital asset investment manager in the United States. Units. “If we want to ensure the longevity of the digital assets sector, we need to embrace rigor in regulation,” he said.

The time available for policy makers to act may be short. Institutional investors are increasingly interested in the gains that cryptocurrencies offer and banks are becoming more comfortable with digital assets. And cryptographic companies can reap benefits if they are much more agile than if they go through traditional regulatory hurdles.

Typically, exchanges such as the New York Stock Exchange or the CME Group can spend months obtaining permits for some new products. Meanwhile, FTX, Hong Kong’s cryptocurrency exchange, said it took a few hours to establish trading contracts that mimicked U.S. timber futures, where prices have risen in the past two weeks.

Rising prices for cryptocurrencies are starting to fuel a boom in other financial products. Binance, for example, allows any registered user to “get a secured loan for your cryptographic assets” and also provides access to risky trading and margin savings accounts. Binance loans include hourly interest calculations and users can withdraw Binance profits or use them in services such as futures trading.

Derivatives, in particular, are driving the boom of more speculative cryptocurrencies like Dogecoin, Tether and PancakeSwap, as well as activities in new exchanges like FTX and decentralized financing projects like Uniswap, according to industry executives.

In a normal futures market, traders need cash or government bonds as a margin guarantee that can be used to amplify the size of bets through debt-financed transactions or derivatives. But many cryptocurrency exchanges accept cryptocurrencies as collateral.

This means that only small initial hard currency expenditures can be made on cryptocurrencies and used to make very large bets in the cryptocurrency market, sometimes spread across a wide range of currencies, with oversized potential gains and losses only with knowledge. simple and anti money laundering checks. This means that many coins feed off each other and come together in tandem.

The problem of regulators is compounded by the fact that some exchanges do not have the formal corporate structures of the more typical companies. This week, Coinbase, a large U.S.-listed stock exchange, said it would close its San Francisco headquarters and operate without a head office in any city.

Binance, too, says it has no formal global headquarters, but has several subsidiaries around the world. As a sign of the complexity of the situation for financial supervisors, Binance Markets Limited, the group’s London-based unit, is a financial company registered with the FCA in the UK.

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

In Germany, the company told BaFin that the regulator’s view on the securities was based on a “misunderstanding,” according to people familiar with the matter. He told the Financial Times that he does not comment on “communications with any regulator.”

Spherler of Dechert said emerging companies needed to educate regulators. “You don’t want to wait too long to get permission. You want regulators to work with something they understand. You have to do it incrementally.”

But many exchange managers and cryptographic assets choose to be regulated rather than face possible enforcement actions in the coming years.

“I think regulators are worried that there’s a big bad actor somewhere doing something and they don’t even know who’s in charge of the application,” said Todd Kornfeld, a lawyer with the U.S. law firm Pepper troutman.

“It may seem like a free action for everyone, but in the end regulators will find some statutes somewhere to enforce them against misconduct. That’s part of the reason big institutions have been prudent, because they generally don’t they like uncertainty and they like regulators telling them what they can and can’t do. “