A New York regulator has instructed Paxos to stop issuing the fiat-backed stablecoin Binance USD (BUSD), and the U.S. Securities and Exchange Commission (SEC) has reportedly notified Paxos that enforcement action is coming under the premise that BUSD is an unregistered security. Crypto analysts and experts are questioning how stablecoins could meet the definition of a security, arguing that stablecoins do not pass the Howey Test. Changpeng Zhao (CZ), the Canadian CEO and founder of Binance, the world's largest crypto exchange, assured users that their funds are safe and they can still redeem BUSD.
Coin Telegraph reported that the New York Department of Financial Services (NYDFS) has instructed Paxos to stop creating and issuing BUSD, which is the third largest stablecoin by market cap. The NYDFS said in a statement, "DFS has ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD. In response, on Feb. 13, 2023, Paxos notified customers of its intent to end its relationship with Binance for BUSD."
"In summary, BUSD is issued and redeemed by Paxos. And funds are #SAFU!" CZ wrote in a Feb. 13 Twitter post. SAFU refers to the Secure Asset Fund for Users. "We were informed by Paxos they have been directed to cease minting new BUSD by the New York Department of Financial Services (NYDFS). Paxos is regulated by NYDFS. BUSD is a stablecoin wholly owned and managed by Paxos. As a result, BUSD market cap will only decrease over time. Paxos will continue to service the product, and manage redemptions. Paxos also assured us the funds are #SAFU, and fully covered by reserves in their banks, with their reserves audited many times by various audit firms already... 'IF' BUSD is ruled as a security by the courts, it will have profound impacts on how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such. Binance will continue to support BUSD for the foreseeable future. We do foresee users migrating to other stablecoins over time. And we will make product adjustments accordingly. eg, move away from using BUSD as the main pair for trading, etc. Given the ongoing regulatory uncertainty in certain markets, we will be reviewing other projects in those jurisdictions to ensure our users are insulated from any undue harm."
The SEC has sent a Wells Notice to Paxos, indicating that the SEC intends to bring enforcement action against the blockchain company, Coin Telegraph reported. Paxos has 30 days to respond to the notice with a brief arguing why charges should not be brought against it. Binance partnered with Paxos in 2019 to create the dollar-backed stablecoin. A Binance spokesperson said, “Stablecoins are a critical safety net for investors seeking refuge from volatile markets and limiting their access would directly harm millions of people across the globe. We will continue to monitor the situation. Our global users have a wide array of stablecoins available to them.”
In a Feb. 12 Twitter post, Fox Business journalist Eleanor Terrett called the notice a "unilateral effort" between the SEC, the NYDFS and the Office of the Comptroller of the Currency (OCC) "to blitz crypto."
Tree of Alpha, a pseudonymous trader with more than 136,000 Twitter followers, said in a Feb. 13 tweet, "How on earth does BUSD register as a security? Where is the expectation of profit? Are y'all buying BUSD because it's going to $2? Gary Gensler is on an unhinged, unchecked crusade against crypto and will keep doing so as long as he is permitted to."
The SEC is responsible for regulating securities, which include stocks and bonds but were given a broader definition by the 1946 Supreme Court case Howey vs. SEC, according to Investopedia. The court case led to the "Howey Test," which lays out four criteria an investment must meet to be regulated as a security: Money must be invested; the money must be invested into a "common enterprise"; the investment is expected to result in a profit; and the profit is a result of the actions of a third party.
Crypto analyst Miles Deutscher said in a Feb. 12 tweet, "The SEC has labelled BUSD as an 'unregistered security,' and is suing its issuer, Paxos. But how on earth is a STABLECOIN considered a security, when it clearly doesn’t meet the Howey Test criteria? No one has ever had 'the expectation of profit' when buying $BUSD."
Kristin Smith, CEO of the Blockchain Association, said, "It certainly feels, from an industry perspective, like there’s a crypto carpet bombing going on right now."
Other industry experts have said that the recent actions from the SEC and other regulatory agencies indicate attempts at a wider crackdown aimed at industry pillars, including stablecoins and staking services, the Wall Street Journal reported. In the wake of the collapse and bankruptcy filing of crypto exchange FTX in November, the SEC has stepped up its regulatory efforts.
"There is a political incentive to bring bigger cases post-FTX to be viewed as the responsible cop on the beat," former regulator Coy Garrison said of the SEC.
