The U.S. Securities and Exchange Commission (SEC) has its sights set on Paxos, a company that issues a type of cryptocurrency called stablecoin, in a move that could have major implications for the $137 billion stablecoin market. Stablecoins are a type of cryptocurrency designed to mirror real-world assets, such as the U.S. dollar, and are often backed by real assets such as bonds or cash in reserve. They have become the backbone of the crypto market as they allow people to trade in and out of different coins quickly without having to convert in and out of fiat currency.
Paxos issued a digital currency called Binance USD (BUSD), which is a stablecoin associated with Binance, one of the world’s biggest cryptocurrency exchanges. BUSD is pegged one-to-one with the U.S. dollar. Last week, New York state’s financial regulator ordered Paxos to stop issuing BUSD.
Separately, Paxos announced that the SEC had issued it a notice stating that the regulator is considering recommending an action alleging that BUSD is a security. The notice suggests Paxos should have registered the offering of BUSD under federal securities laws. While the SEC has not yet come out with specific charges, the notice to Paxos focuses on the question of whether stablecoins are securities or not.
If BUSD is deemed a security by the SEC, the regulator would have oversight over the stablecoin. Whatever company issues BUSD would need to register with the SEC and accept more stringent regulation. The same would be true for other stablecoins that would be given the same label.
“The basis for that action will necessarily be fact-specific to the Paxos BUSD structure but will likely have wide ranging implications for other stablecoin issuers selling coins into the U.S.,” said Townsend Lansing, head of product at CoinShares.
If the SEC charges Paxos, any other issuer of stablecoins should register or prepare for a court fight with the SEC. Renato Mariotti, a partner at law firm BCLP, believes that it is likely that the SEC reaches a settlement with Paxos in which Paxos concedes that BUSD is a security, leading other stablecoins to follow suit and register.
However, another outcome, according to Mariotti, is that the SEC may regulate what assets are used to back stablecoins and the requirements for issues of the digital currency to make disclosures to the market.
CoinShares’ Lansing said that what the SEC considers a security or investment contract actually extends beyond just the Howey test, and the agency has “extensive knowledge of how to apply both the law and judicial precedent.”
“Absent a successful fight, it is most likely BUSD will no longer be sold into the U.S. or be available on U.S.-based digital asset exchanges,” Lansing said. “It is very possible that other stablecoins will have to follow suit.”
It is still unclear what the SEC’s allegations against Paxos and BUSD are, so it is uncertain to what extent those allegations will extend to other industry participants. Carol Alexander, a professor of finance at Sussex University, said the U.S. regulator’s action is “more a move against Binance than stablecoins.” She said Tether and Circle, the company that issues USDC, are “close to the U.S. government.” Circle CEO Jeremy Allaire previously called for more regulation around stablecoins.
Alexander said “Binance is causing increasing concern for regulators around the world” in areas ranging from money laundering to violating securities laws. That could be one reason the SEC has targeted BUSD. The Justice Department is investigating Binance for suspected money laundering and sanctions violations, and U.S. officials were looking into whether Binance employees engaged in insider trading.