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Paxos Trust Co., the issuer of the world’s third-largest stablecoin - Binance’s BUSD - is currently being investigated in the United States by the New York State Department of Financial Services (NYDFS).
In the latest development, the NYDFS has asked Paxos to stop issuing the BUSD stablecoin, as part of the government’s extended regulatory action. As reported by the Wall Street Journal, NYDFS has asked Paxos to stop creating any more BUSD tokens. In the meanwhile, Paxos will continue to manage the redemptions of the product.
Binance chief Changpeng Zhao took it to Twitter to clear the air on the matter. He said that BUSD is stablecoin wholly owned and managed by Paxos. However, he ensured that for existing holders, the funds are “SAFU” and fully covered by the reserves in the banks.
A WSJ report on Sunday evening, February 12, noted that the U.S. Securities and Exchange Commission (SEC) is preparing to sue Paxos for violating investor protection laws. Dubbed Wells notice, the SEC’s enforcement staff has issued a letter to Paxos alleging that Binance BUSD, a stablecoin issued by Paxos is an unregistered security.
Back in 2019, Paxos entered into a partnership with Binance over issuing the BUSD stablecoin pegged 1:1 to the U.S. Dollar. Currently, it is not clear whether the SEC notice relates to Paxos issuing the coin, listing the coin, or both.
The firms receiving Wells notices are allowed to communicate and explain the SEC why the agency shouldn’t proceed with a lawsuit. Wells notices are not the final call that the enforcement action will take place. All five SEC commissioners need to vote and authorise any enforcement settlement.
If the SEC proceeds with an enforcement action, it would be the first time against any major stablecoin issuer. Commenting on this matter, the Binance CEO said: “On the alleged SEC vs Paxos lawsuit, I have no information about it, other than public news articles. The lawsuit is between the US SEC & Paxos.I am not an expert on US laws. 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”.
CZ added that crypto exchange Binance will continue to support the BUSD stablecoin in the foreseeable future. Besides, CZ also agrees to the argument that a stablecoin cannot be a security since it doesn’t meet the Howey Test criteria set by the SEC. Thisis because no one will buy a stablecoin with the “expectation of a profit”.