Paxos has been asked by New York regulators to stop issuing stablecoin Binance USD (BUSD).
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The US Securities and Exchange Commission may be preparing to take action against Paxos, a company that issues a cryptocurrency called a stablecoin.
Experts told CNBC the move would have major implications for the $137 billion market.
Stablecoins are a cryptocurrency designed to mirror real-world assets such as the US dollar.
These stablecoins are often backed by real assets like bonds or cash reserves. They have become the backbone of the cryptocurrency market because they allow people to trade in and out of different currencies quickly without having to convert in and out of fiat currency.
Paxos has released a digital currency called Binance USD or BUSD. It is a stablecoin associated with Binance, one of the largest cryptocurrency exchanges in the world. BUSD is pegged 1-1 to the US dollar.
Last week, the financial regulator of the state of New York ask Paxos to stop issuing BUSD.
Separately, Paxos speak that the SEC has issued notice that the regulator is considering proposing an action alleging that BUSD is a security. Paxos said the announcement indicates that Paxos should apply for a BUSD offering under federal securities laws.
The SEC has not initiated formal action. But the agency’s actions are being watched closely because if it initiates a formal proceeding, it could have a huge impact on all stablecoins including fastener And USDCThe two largest companies combined are worth $110 billion.
Renato Mariotti, a partner at law firm BCLP, told CNBC: “If the SEC charges Paxos, any other stablecoin issuer should register or prepare for a court battle with the SEC.
Are stablecoins a security?
While the SEC has yet to issue specific fees, the announcement to Paxos focuses on the question of whether stablecoins are securities.
For its part, Paxos said it “completely disagrees with the SEC officer because BUSD is not a security under federal securities laws.”
SEC uses Howey test to define what is considered a security or an “investment contract”. There are four criteria for determining if something is an investment contract as part of the Howey test, such as if there is an expectation of return from an investor.
It is possible that Paxos will actively sue the SEC, but the cost of doing so will be substantial.
Renato Mariotti
BCLP’s partner
If BUSD is considered a security by the SEC, the regulator will monitor the stablecoin. Any company that issues BUSD needs to register with the SEC and accept stricter regulations.
Another implication is that other stablecoins will also be labeled similarly.
“The basis for that action is necessarily specific to Paxos’ BUSD structure but will likely have broad implications for other stablecoin issuers selling coins into the United States,” said Townsend Lansing, head of the department. product department at CoinShares, told CNBC.
What are the possible outcomes?
There are several different scenarios that could play out. It will depend on what the SEC alleges against Paxos and how the two sides move forward.
“I believe it is possible that the SEC reaches a settlement with Paxos where Paxos acknowledges that BUSD is a security, prompting other stablecoins to follow suit and sign up,” Mariotti said.
“It is possible that Paxos will aggressively sue the SEC, but the cost of doing so will be substantial,” Mariotti said.
“Litigation will take years and the risk of losing the case to the SEC will be huge. Paxos going against the SEC will create risks and potentially make BUSD less attractive to the market.”
According to Mariotti, another outcome is that the SEC could regulate what assets are used to support stablecoins and the requirements for digital currency matters for market disclosure.
CoinShares’ Lansing says that what the SEC considers a security or investment contract is really beyond the Howey test, and that the agency has “extensive knowledge of how both law and judicial precedent applies.” .”
“Without a successful fight, it is very likely that BUSD will no longer be sold into the US or available on US-based digital asset exchanges,” Lansing said. “It is highly likely that other stablecoins will follow suit.”
Are Tether and USDC in the sights?
It will depend on what the SEC charges against Paxos and BUSD are.
“We still do not know the exact basis on which the SEC is alleging violations, so we do not know the extent to which those allegations will extend to other participants in the industry,” Lansing said.
Carol Alexander, a professor of finance at the University of Sussex, said the US regulator’s action was “a move against Binance rather than stablecoins.”
She said Tether and Circle, which issue USDC, are “close to the US government.” Circle CEO Jeremy Allaire previously called for more regulation of stablecoins.
“Binance is causing growing concern to regulators around the world” in areas ranging from money laundering to securities law violations, Alexander said. She said that could be one reason the SEC is targeting BUSD.
The Department of Justice is investigating Binance for suspected money laundering and sanctions violations, Reuters reported last year. Bloomberg reported in 2021 that US officials were looking into whether Binance employees engaged in insider trading.
Binance did not immediately respond to CNBC’s request for comment.
A spokesperson for Binance said at the time that the company has a “zero tolerance” policy for insider trading and a “strict code of ethics” to prevent any misconduct, according to Bloomberg.
