Paxos has been ordered by New York regulators to stop issuing the Binance USD (BUSD) stablecoin.
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The US Securities and Exchange Commission may be preparing to take action against Paxos, a company that issues a type of cryptocurrency called a stablecoin.
The move will have a big impact on the $137 billion market, experts told CNBC.
A stablecoin is a type of cryptocurrency designed to mirror real-world assets such as the US dollar.
These stablecoins are often backed by real assets such as bonds and reserves. They are the backbone of the crypto market as they allow people to trade various coins quickly without having to convert them to fiat currency.
Paxos has issued a digital currency called Binance USD or Binance USD. BUSDThis is a stablecoin associated with Binance, one of the world’s largest cryptocurrency exchanges. BUSD is pegged 1:1 with the US dollar.
Last week, New York financial regulators Ordered Paxos to stop issuing BUSD.
Separately, Paxos Said The SEC has issued a notice that regulators are considering recommending actions to claim that BUSD is a security. Paxos said the notice implied that Paxos should have registered his BUSD offering under federal securities laws.
Renato Mariotti, a partner at law firm BCLP, told CNBC, “If the SEC prosecutes Paxos, other stablecoin issuers will have to register or prepare for a legal battle with the SEC.” rice field.
Although the SEC has yet to disclose specific charges, the notice to Paxos focuses on the question of whether stablecoins are securities.
Paxos, on the other hand, said it “strongly disagrees with the SEC staff because BUSD is not a security under the federal securities laws.”
The SEC howie test to determine what constitutes a security or an “investment contract”; As part of the Howey test he has four criteria for determining whether something is an investment contract. For example, whether there is an expectation of profit from the investor.
If BUSD is deemed a security by the SEC, regulators will oversee stablecoins. Any company that issues BUSD must register with the SEC and accept stricter regulations.
Another implication is that other stablecoins will have the same label.
Townsend Lansing, CoinShares’ head of product, told CNBC, “While the rationale for that action will inevitably be unique to Paxos’ BUSD structure, other stablecoin issuances that sell their coins to the United States are likely to continue to do so. It is likely to have wide-ranging effects on people.
There are many different scenarios that could be played out. That will depend on what the SEC claims against Paxos and how the two sides move forward.
“The SEC has settled with Paxos, and Paxos acknowledges that BUSD is a security and believes other stablecoins will likely register as well,” Mariotti said.
“It is possible that Paxos will sue the SEC aggressively, but the cost of doing so will be substantial,” Mariotti said.
“The litigation could take years and the risk of losing to the SEC would be significant. The mere fact that Paxos was fighting the SEC creates risk and could make BUSD less attractive to the market.”
Another consequence, Mariotti said, is that the SEC could regulate the disclosure to the market of the assets used to back stablecoins and the requirements for issuing digital currencies.
CoinShares’ Lansing said what the SEC considers to be a security or investment contract actually goes beyond the Howey test, and that the SEC has “extensive knowledge of how to apply both law and case law.” .
“Without a successful fight, BUSD will most likely never be sold to the US or become unavailable on US-based digital asset exchanges,” Lansing said. It is very likely that it will follow
It depends on what the SEC claims against Paxos and BUSD are.
“We don’t yet know the exact basis on which the SEC is alleging violations, so we don’t know the extent to which these allegations extend to other industry players,” Lansing said.
Carol Alexander, a professor of finance at the University of Sussex, said the actions of US regulators were “more against Binance than against stablecoins.”
She said Tether, the company that issues USDC, and Circle are “close to the U.S. government.” Circle CEO Jeremy Allaire Previously Called for More Regulation on Stablecoins.
From money laundering to securities law violations, Alexander said, “Binance is causing increasing concern to regulators around the world.” That could be one of the reasons the SEC targeted BUSD, she said.
The Justice Department is investigating Binance for alleged money laundering and sanctions violations. Reuters reported last year. bloomberg reported in 2021 that US authorities are investigating whether Binance employees engaged in insider trading.
Binance did not immediately respond to CNBC’s request for comment.
According to Bloomberg, a Binance spokesperson said at the time that the company had a “zero tolerance” policy for insider trading and a “strict ethical code” to prevent fraud.