The SEC has issued a Wells Notice to Paxos, alleging that its BUSD stablecoin is an unregistered security.
The notice comes after New York regulators ordered Paxos to stop issuing the BUSD.
The SEC will take legal enforcement action if Paxos continues with the issuance of BUSD.
The US Securities and Exchange Commission (SEC) has reportedly warned Paxos Trust Co. that it could take legal enforcement action against the issuer of Binance USD (BUSD) stablecoin for violating investor protection laws.
The SEC to Take Enforcement Action Against Paxos
Paxos Trust Co., the issuer of the Binance USD (BUSD), has reportedly received a Wells Notice from the SEC. A Wells notice is a letter issued by the regulator to inform companies of planned enforcement action.
As per the Wall Street Journal report, the SEC alleges that the BUSD is unregistered security. Binance and Paxos partnered to launch the stablecoin pegged to the dollar on a one-to-one ratio in 2019.
Paxos Ordered to Stop Issuing Binance USD
Shortly after the SEC issued a wells notice to Paxos Trust, the New York Department of Financial Services (NYDFS) reportedly ordered the blockchain company to stop the issuance of the BUSD stablecoin.
The New York Regulator also ordered Paxos to stop creating more of its BUSD token. However, the stablecoin issuer will continue to manage redemptions of the BUSD amidst the barrage of regulatory actions.
According to a Binance statement, the BUSD is “wholly owned and managed by Paxos.” Given the regulatory uncertainty, Binance will review “other projects in those jurisdictions to ensure our users are insulated from further undue harm.”
Is the BUSD a Security?
The SEC has been using the Howey Test to determine whether a crypto should be classified as a security. The Howey Test classifies an asset as a security if there is an investment of money with the expectation of profits derived from the efforts of others.
Business development and marketing executive Adam Cochran has argued that anything can be called a security due to the vagueness of the definition. He writes:
4/5The fact that these assets hold underlying treasuries, makes them a lot like a money market fund, exposing holders to a security, even if they don't earn from it.Making an argument (not one I agree with, but a reasonable enough one) that they can be a security.
— Adam Cochran (adamscochran.eth) (@adamscochran) February 13, 2023
He also explains that the Howey Test is not the only way to determine if an asset qualifies as a security. However, there is a general call for clearer guidelines in determining what can be called a security.
The SEC Seeks More Control Over the Crypto Industry
The Paxos Wells Notice right comes just after the SEC settled charges with crypto exchange Kraken, in a case where the regulator alleged Kraken’s staking services were an offering of unregistered securities.
The SEC has been looking to tighten its reins on the nascent crypto industry, mainly through enforcement. In 2022, the regulator filed 41 lawsuits against crypto exchanges and related firms – the most in a calendar year.
On the Flipside
Paxos has assured users that their funds are safe and fully covered by reserves in their banks and will follow up with additional information as required.
Why You Should Care
The order to stop issuing new BUSD will mean that the market cap of the stablecoin will only reduce over time as redemptions increase.
Read more about the NYDFS investigation below: New York Regulators Launch Investigation into Stablecoin Issuer Paxos
The SEC settlement with Kraken is covered in: Kraken Pays $30 Million Fine and Shuts Down Staking Service in SEC Settlement, the Crypto Mom Reacts
