SEC Creates A Stand-Alone Office to Conduct Investigations into Crypto and Other Digital Assets: Report

“Crypto is the new shadow bank,” says Senator Elizabeth Warren, who says regulators should consider banning the banks in the US from holding cash deposits backing up stablecoins to effectively end the growing market.

Regulators have intensified their scrutiny of the crypto sector, with the US Securities and Exchange Commissioner (SEC) calling for more power to regulate the sector.

They are targeting interest-paying crypto firms, according to Bloomberg, and seeking information because they appear to be unregistered securities that aren't disclosing their risks to investors.

BlockFi is one of them which has received warnings from five states that have accused it of violating local securities laws. Founded in 2017, the crypto lending firm claims to have more than 450,000 retail clients and more than $10 bln in assets.

According to a New York Times report called “Crypto’s rapid move Into banking elicits alarm in Washington,” from the weekend, the SEC has created a stand-alone office to coordinate investigations into cryptocurrency and other digital assets. Reportedly, the agency is also recruiting academics with related expertise to help it track the fast-moving changes in the sector.

We have already started to see the agency in action as last week came the reports that SEC is investigating Uniswap Labs, the startup behind the popular DEX. NYT also mentioned PancakeSwap, talking about its experimental offering of “syrup pools,” allowing users to earn a 91% annual return on crypto deposits.

Decentralized finance (DeFi) is a fast-growing sector whose market cap has gone past $143 billion and has more than $178 billion of total value locked (TVL) in it.

Stablecoins are an integral part of DeFi, whose overall market has ballooned to nearly $120 bln and one for the area Gensler is focused on.

“These things are effectively treated by users as bank deposits,” said Lee Reiners, a former supervisor at the Federal Reserve Bank of New York.

“But unlike actual deposits, they are not insured by F.D.I.C., and if account holders begin to have concerns that they cannot get money out, they might try and trigger a bank run.”

Regarding these fiat-backed stablecoins, Senator Elizabeth Warren, Democrat of Massachusetts, said banks in the US should be banned from holding cash deposits backing up stablecoins, which according to her, could effectively end the growing market, the report said.

Warren, who has said that crypto is not a good investment that it is going to end badly, has initiated dialogue with both Gelser and Treasury Secretary Janet Yellen and called for “a coordinated and cohesive regulatory strategy to mitigate the growing risks that cryptocurrencies pose to the financial system.”

Seeing the entire sector as some kind of a shadowy marketplace, back in late July, Warren said, crypto puts the financial system in the hands of “Shadowy Super-Coders.”

“Crypto is the new shadow bank,” Warren said in an interview, reported NYT.

“It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system.”

“It’s like spinning straw into gold.”

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