The US Securities and Exchange Commission has advised Paxos Trust Company, the firm behind Binance’s stablecoin, that they are considering taking an action against the company, which the SEC alleges should have registered BUSD as a security. The allegation has been rejected by Paxos, who says BUSD is not a security and they are:
prepared to vigorously litigate if necessary.
Stablecoins are digital tokens that are often backed by traditional assets which are intended to hold a steady value. There is also a flavour of stablecoins known as "unbacked" or "algorithmic" stablecoins which are not backed, but BUSD is said to always have been 1:1 backed.
The Chair of the SEC, Gary Gensler appears to take the view that nearly any crypto asset is a security but there has been very few defended actions, with most issuers paying fines on a 'without admissions' basis and changing the nature of their offerings. It is curious that the SEC has only attacked BUSD, when Paxos also issues other stablecoins, which have nothing to do with Binance, and it comes a month after a report claimed that Binance had been inflating the number of BUSD which were issued on the Binance platform, potentially rendering the BUSD unbacked to some degree (if this is true).
The announcement of the action, published via a consumer alert, was made right after the New York Department of Financial Services (NYDFS) ordered Paxos to stop minting Binance USD. A NYDFS spokesperson, said that:
Paxos violated its obligations for tailored, periodic risk assessments and due diligence checks on Binance and Binance USD customers needed to stop bad actors from using the platform.
Paxos has advised customers that it would no long issue Binance USD from 21 February 2023, which is backed by traditional cash and US Treasury bills, but would still support and redeem the tokens until at least February 2024. The company said that:
Paxos has always prioritized the safety of its customers' assets
This move, according to Ivan Kachkosvi, FX and crypto strategist at UBS, represents:
a big setback for Bianance…[and that]… it remains to be seen whether (and when) Binance will be able to find a U.S.-based partner for its stablecoin. The latter appears crucial in the wake of U.S. regulation on stablecoins that is coming sooner rather than later
The question of when the US will adopt crypto-asset regulations and what form they will take remains up in the air. If Paxos defend a lawsuit, it is not clear what the SEC's arguments will be or whether they will have success, but what is certain is that it will place stablecoins under a shadow for several years. As always, regulation-by-enforcement is a poor strategy for policymakers to use when industry engagement and tailoring regulation is available.