Ray Youssef, the CEO and founder of Paxful, a peer-to-peer cryptocurrency exchange, has announced that due to the regulatory climate in the U.S., as well as several staff departures, Paxful is suspending its operations and is not sure if they will resume.
Youssef's announcement comes amidst a wave of regulation-by-enforcement from federal agencies, while the U.S. still lacks cohesive regulatory guidelines for crypto, despite members of the industry repeatedly highlighting the need for it.
"Today, Paxful will be suspending its marketplace," Youssef said in a statement. "We are not sure if it will come back. This will probably come as a big shock to many. While I cannot share the full story now, I can say that we unfortunately have had some key staff departures. Also, regulatory challenges for the industry continue to grow, especially in the peer-to-peer market and most heavily in the U.S. While we work through these issues, we have taken the most secure option and ask you to explore self-custody and trade elsewhere."
Youssef emphasized in the announcement that all customer funds are safe and available for withdrawal. He said that non-U.S. users can migrate to the platform Noones, which offers low trading fees, an "efficient" KYC (know-your-customer) process, and local moderators to handle disputes. For users in Africa, Youssef recommended migrating to Bitnob.
Last month, the U.S. Securities and Exchange Commission (SEC) sent a Wells notice to Coinbase, the largest crypto exchange in the U.S., notifying the company of an upcoming enforcement action. Paul Grewal, the chief legal officer of Coinbase, said in a blog post in response to the Wells notice that Coinbase has repeatedly asked the SEC to put out clear regulatory guidelines so that Coinbase and other crypto companies can follow them, but he said the SEC has not been communicative.
Last summer, the SEC asked Coinbase if it would be interested in registering with the SEC and laying out what a potential path for registration would look like, given that a path for crypto exchanges to register does not currently exist. Coinbase said it was absolutely interested in registering with the SEC and developed and proposed two different models for registration.
"We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none," Grewal said. "If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed. Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase, who are committed to playing by the rules. It makes even less sense to threaten enforcement actions unless an industry participant concedes that non-securities can be regulated by the SEC. That is for Congress to decide."
The U.S. Commodity and Futures Trading Commission (CFTC) recently announced a lawsuit against Binance, the largest crypto exchange in the world by volume, for allegedly allowing U.S. customers to trade crypto derivatives without proper regulatory approval. Former attorney and investment banker Matt Levine wrote in a Bloomberg Opinion column that "There are no accusations that Binance is stealing customer money, or even taking big risks with it, which makes Binance look better than some other crypto exchanges I could name...the CFTC’s case is mainly about letting U.S. customers trade crypto derivatives. It is illegal to run a crypto derivatives exchange in the U.S. without registering it with the CFTC, and it’s not exactly easy to do that either."
U.S. Bankruptcy Judge Michael Wiles wrote in a March 11 opinion that the absence of clear regulatory guidelines for digital asset issuers in the U.S. has created a "highly uncertain" environment for those companies, many of which, Wiles pointed out, have been operating for years "without being subject to clear and well-defined regulatory requirements."
"Regulators themselves cannot seem to agree as to whether cryptocurrencies are commodities that may be subject to regulation by the CFTC, or whether they are securities that are subject to securities laws, or neither, or even on what criteria should be applied in making the decision. This uncertainty has persisted despite the fact that cryptocurrency exchanges have been around for a number of years," Wiles said.
He also pointed out that the SEC and the CFTC have sometimes acted in ways that contradict each other when it comes to the crypto industry.
Lee Reiners, policy director of the Duke Financial Economics Center at Duke University, said during a Senate Banking Committee hearing in February that Congress needs to lay out clear regulations for the crypto industry and settle the debate over whether crypto is a security, a commodity or something else.
"Post-FTX, many policymakers have called on financial regulators to use their existing legal authority more aggressively to clean up the crypto industry and protect investors," Reiners said during the testimony. "I agree that regulators can, and should, do more, but I also believe that congressional action is needed to close gaps in the current regulatory framework....The debate around whether a given digital asset is a commodity, security or something else must be addressed if one agency is to have sole authority over digital asset markets...I urge Congress to carve out cryptocurrency, or a similar term like crypto-asset, from the definition of a commodity in the Commodity Exchange Act and recognize cryptocurrencies as securities under a special definition to the securities laws."
In October, SEC Commissioner Hester Peirce asked Congress to pass a bill that could provide regulatory clarity in the crypto industry, Pensions & Investments reported. Peirce said that under SEC Chairman Gary Gensler, "We haven't really done anything besides bringing enforcement actions" in the crypto sector.
"We've issued some limited relief, but I think that relief is not expansive enough to allow some traditional players, who are interested in this space, to come in. I think it is a good time for legislation. It's up to Congress to figure out how they want to allocate the regulatory responsibility," Peirce said.