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Since the start of the year, the U.S. has been waging war on crypto. It began on Jan. 3 when a trio of banking agencies issued a joint statement vowing to keep crypto the hell away from the traditional financial system. That opening salvo was soon followed by a spate of Securities and Exchange Commission lawsuits, and this week, the government’s anti-crypto campaign hit a new level of intensity when the SEC and New York regulators dropped the hammer on a pillar of the industry: stablecoins.

The blow came in the form of an order from the New York Department of Financial Services to Paxos, a little-known but important firm in the crypto world. Paxos has a variety of crypto-related businesses, but its bread and butter is stablecoins—its own coin called PAX, and those it issues under the name of other companies, including global giant Binance.

The New York order did not force Paxos to shut down but did require it to stop minting the Binance coin, called BUSD, which had a market cap of just over $16.1 billion—or did until Monday before BUSD owners dumped at least $200 million of their holdings. This was almost certainly the first drop in what is likely to be a torrent of withdrawals as BUSD liquidity dries up and traders park their money in another stablecoin.

Ironically, the biggest beneficiary so far of the regulators’ decision to cripple BUSD has been Tether, which is the world’s biggest stablecoin issuer—and one that has long had a reputation for opaque business practices and slapdash accounting. By dealing a blow to Binance, the regulators have just inadvertently given a boost to Tether, which arguably has a worse compliance track record than its rival.

It’s unclear why the government set its sights on Binance’s stablecoin, but it feels like just a matter of time until we hear about regulators, or even criminal prosecutors, turning the heat up on Tether. In the meantime, Paxos—which has long touted its record for compliance—is also facing a headache in the form of a potential lawsuit by the SEC. According to the agency, stablecoins issued by Paxos are securities. This is a curious conclusion given that nobody buys stablecoins in hopes the price will go up, but, as Matt Levine noted, U.S. regulators in 2023 are going after crypto in any way they can.

The question now is what the regulators’ decision to take down the third-biggest stablecoin means for the rest of the industry. The price of crypto has dropped in response to the Paxos-Binance news, but not significantly, and Bitcoin is still well above $20,000. But there could be other shoes to drop.

It remains to be seen, for instance, whether the banking regulators try to kneecap other stablecoins as part of their broader push to drive crypto back to the fringes of finance. If that is the case, it will likely cause broader pain across the industry and also strengthen the hand of traditional banks—which have conveniently just proposed their own version of a stablecoin.

Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts

DECENTRALIZED NEWS

Large finance firms in Singapore and elsewhere in Asia are starting crypto operations in Hong Kong, which is branding itself as a crypto hub. (WSJ)

Gemini’s former chief compliance officer, Noah Perlman, has just joined Binance as the company faces a regulatory squeeze. (Bloomberg)

More than 100 central banks are in the process of launching CBDCs, raising the prospect of both new efficiencies and privacy dangers. (Fortune)

President Joe Biden is expected to name Fed Vice Chair Lael Brainard, a regulator well versed in crypto, as his top economic adviser. (CoinDesk)

The Senate Banking Committee will conduct hearings on crypto today, which are expected to produce calls for new regulation. (Twitter)