- The US Securities and Exchange Commission (SEC) could be preparing to take action against Paxos, a company that issued stablecoin Binance USD (BUSD).
- The SEC has not taken any official action. But the agency’s actions are being closely watched because if they initiate official proceedings, it could have a huge impact on all stablecoins including Tether and USDC.
- For its part, Paxos said it “categorically disagrees with SEC officials because BUSD is not a security under federal securities laws.”
Paxos has been ordered by New York regulators to stop issuing stablecoin Binance USD (BUSD).
Jakub Porzycki | Nurphoto | Getty Images
The U.S. Securities and Exchange Commission may be preparing to crack down on Paxos, a company that issues a type of cryptocurrency called a stablecoin.
The move will have a major impact on the $137 billion market, experts told CNBC.
Stablecoins are a type of cryptocurrency meant to mirror real-world assets like the US dollar.
These stablecoins are often backed by real assets such as bonds or cash reserves. They have become the backbone of the crypto market as they allow people to quickly trade different coins without having to convert them to and from fiat currencies.
Paxos issued a digital currency called Binance USD or BUSD. It is a stablecoin affiliated with Binance, one of the world’s largest cryptocurrency exchanges. BUSD is pegged one-to-one to the US Dollar.
Last week, the New York State Financial Services Authority ordered Paxos to stop issuing BUSD.
Separately, Paxos said the SEC issued a notice that the regulator was considering recommending a lawsuit alleging BUSD is a security. Paxos said the notice suggested that Paxos should have registered BUSD’s offering under federal securities laws.
The SEC has not taken any official action. But the agency’s actions are being closely watched because if it launches official proceedings, it could have a huge impact on all stablecoins, including Tether and USDC, the two largest, which are collectively worth $110 billion.
“If the SEC indicts Paxos, every other stablecoin issuer should file with the SEC or prepare for a court case,” Renato Mariotti, a partner at law firm BCLP, told CNBC.
While the SEC has yet to issue any specific charges, the Paxos filing focuses on whether or not stablecoins are securities.
For its part, Paxos said it “categorically disagrees with SEC officials because BUSD is not a security under federal securities laws.”
The SEC uses the Howey test to determine what qualifies as a security or “investment contract.” As part of the Howey test, there are four criteria for determining whether something is an investment contract, for example whether the investor is expected to make a profit.
It’s possible for Paxos to take aggressive action against the SEC, but the cost of doing so would be significant.
Renato Marotti
Partners, BCLP
If BUSD is considered a security by the SEC, the regulator would have oversight over the stablecoin. Whatever company issues BUSD would need with the SEC and accept stricter regulations.
Another implication is that other stablecoins will also receive the same label.
“The basis for this action will necessarily be fact-specific to the Paxos BUSD structure, but likely have broader implications for other stablecoin issuers selling coins to the US,” Townsend Lansing, head of product at CoinShares, told CNBC.
There are a number of different scenarios that could play out. It will depend on what the SEC alleges against Paxos and how the two sides progress.
“I believe it’s likely that the SEC will reach an agreement with Paxos where Paxos will acknowledge that BUSD is a security, prompting other stablecoins to follow suit and register,” Mariotti said.
“It is possible for Paxos to take aggressive action against the SEC, but the cost of doing so would be significant,” Mariotti said.
“Litigation would take years and the risk of losing to the SEC would be significant. The mere fact of Paxos fighting the SEC would create risks and potentially make BUSD less attractive to the market.”
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Another result, according to Mariotti, is that the SEC can regulate which assets are used to back stablecoins and the requirements for issuance of the digital currency to make disclosures to the market.
CoinShares’ Lansing said that what the SEC considers a securities or investment contract actually goes beyond the Howey test and the agency has “extensive knowledge of how to apply both the law and precedent.”
“Without a successful fight, BUSD will most likely not be sold to the US or available on US digital asset exchanges,” Lansing said. “It’s very possible that other stablecoins will follow suit.”
It will depend on what the SEC allegations against Paxos and BUSD are.
“We still don’t know the exact basis on which the SEC alleges the violations, so we don’t know to what extent these allegations will extend to other industry participants,” Lansing said.
Carol Alexander, a professor of finance at Sussex University, said the US regulator’s action was “more of a move against Binance than against stablecoins.”
She said Tether and Circle, the company that issues USDC, are “close to the US government.” Circle CEO Jeremy Allaire previously called for more regulation around stablecoins.
Alexander said “Binance is of growing concern to regulators around the world” in areas ranging from money laundering to securities law violations. That could be one reason why the SEC targeted BUSD, she said.
The Justice Department is investigating Binance for alleged money laundering and sanctions violations, Portal reported last year. Bloomberg reported in 2021 that US officials are investigating whether Binance employees are involved in insider trading.
Binance did not immediately respond to CNBC’s request for comment.
A Binance spokesman said at the time that the company had a “zero tolerance” policy on insider trading and a “strict code of ethics” to prevent any wrongdoing, according to Bloomberg.