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Paxos, the business that was in charge of creating the stablecoin known as BUSD, was apparently given instructions to halt doing so a few hours after receiving a Wells notice from the United States Securities and Exchange Commission (SEC). Paxos is ordered to cease the production of new BUSD coins by a New York regulator.The announcement was made by Changpeng Zhao, the CEO of Binance, on February 13 after he was told of it by Paxos.
Paxos is allegedly in compliance with United States legal requirements, since it is supervised by the New York State Department of Financial Services (NYDFS). According to reports, it is acting in this manner in response to a directive from New York authorities. It has come to light that Paxos was in receipt of a Wells notice earlier from the SEC. According to the agency, BUSD is a kind of unregistered security that meets all of the requirements outlined in the Howey Test. The Howey Test is a criteria list that determines whether or not an asset may be considered a security and hence subject to the laws of the SEC.
When the Wells notice was sent, the stablecoin issuer was required to provide a written explanation as to the reasons why the agency should not continue with an enforcement action, which in this instance was a lawsuit. Although the text of the Wells notification has not been made public, those who are aware of what is taking place inside Paxos are familiar with its existence. What is known to the general public is that Paxos releases BUSD under the brand name Binance. Binance is the most popular cryptocurrency exchange in the world according to the number of users, although it is not directly connected to Paxos. Paxos has full control over the production of BUSD.
Binance has said that it simply licenses its name on the BUSD token and that Paxos is responsible for the token's issuance and ownership. This exchange "will continue to monitor the situation," as the statement put it.
Circle at the center of it all
The true news from a few days ago is that Paxos, the company that issued BUSD, has been targeted by the SEC. Because of this, rumors regarding an alleged parallel SEC action against Circle, the USDC issuer, started to spread.
Stablecoins based on the US dollar, such BUSD and USDC, are not investments and do not guarantee profits, but there are intermediaries who, in exchange for stablecoin loans, offer returns that are even higher than those available on the markets for lending in fiat currencies.
Given that these stablecoins are completely collateralized and that their managers must have enough cash or assets available to cover the full aggregate value of all tokens issued, Circle itself appears to have sued Paxos recently for improper reserve management.
The NYDFS (New York State Department of Financial Services) received a complaint from Circle and actually told Paxos to halt creating new BUSD tokens in response.
How did the stablecoin market get here?
In a legal move, the SEC is planning to sue popular stablecoins emitents in the cryptocurrency market. A regulatory agency expressed concern that the token issue ran afoul of regulations meant to safeguard investors.
The SEC claims in the letter that Paxos unlawfully listed and issued Binance USD (BUSD), calling it a "unregistered security." The New York State Department of Financial Services oversees this collateralized stablecoin. Paxos claims that BUSD reserves are 100% guaranteed by fiat and US Treasury bills. The sources did not say if the expected litigation was due to the stablecoin's issuance or listing. Paxos has declined to provide any updates on the situation.
Since the SEC started war on cryptocurrencies after the demise of FTX, Paxos has become the first 'victim' to undergo investigation. It's possible the announcement is related to a comment made by SEC head Gary Gensler in 2021. Speaking to the American Bar Association in July, Gary suggested that stablecoins may be considered "securities" under US law.
What is the likely outcome of this?
The SEC's investigation and subsequent halt in BUSD minting could have several market impacts on Paxos exchange and the wider cryptocurrency ecosystem. With no new BUSD tokens entering the market, the liquidity of the stablecoin could decrease, potentially leading to increased volatility and higher bid-ask spreads.
Furthermore, if traders are unable to mint new BUSD and USDC tokens, they may switch to other stablecoins, reducing trading volume on Paxos exchange. The negative sentiment generated by the SEC's investigation could also cause a sell-off in associated tokens, potentially slowing the adoption of stablecoins in general. However, the actual market impact would depend on various factors, including the duration of the halt, the outcome of the SEC investigation, and the response of the market participants.
The introduction of stablecoins into the world of crypto currency seemed to be of profit to the ecosystem. However as time went by and the ecosystem gained more fame, the stablecoins crypto niche could as well have posed itself as a threat to central bank digital currencies (CBDCs). The recent move by the government watch dogs could be a move by the global authorities to try to regulate the sector more as they try to make CBDCs the future of crypto. However, more scrutiny on crypto serves as a necessity regardless as it helps better the ecosystem and in the end could see stablecoins become better for the crypto space.