Crypto firm Paxos was recently compelled to stop issuing the dollar-pegged Binance token BUSD and is now facing a hefty lawsuit by the United States Securities and Exchange Commission (SEC) over the issuance of the stablecoin. The US watchdog considers the stablecoin a security.
As the court session continues, Binance’s CEO Changpeng Zhao explained the impacts of the courts siding with the SEC. He believes that in case the court rules BUSD as a security, considerable impacts can be expected on the future developments of the crypto sector. The areas where such a decision would affect are expected to feel the greatest impact, according to Zhao.
5/ 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. But personally, I agree with Mile’s logic here (not that it means much): https://t.co/b8H3bjLAoy
— CZ 🔶 Binance (@cz_binance) February 13, 2023
In a Twitter thread where he addresses this issue, Changpeng Zhao said that he agreed with Miles Deutscher, who highlighted that BUSD failed to satisfy the Howey Test criteria for it to be considered a security.
The CEO of alternative asset investment manager Lumida Wealth, Ram Ahluwalia, also expressed the same view. He reminded that the Securities and Exchange Commission had issued a No Action Letter to Pocketful of Quarters, a blockchain gaming token, in 2019.
In that document, the watchdog declared there was no ‘expectation of profit’ for Pockets of Quarters, which had a fixed value similar to a stablecoin, leading him to ask:
“How can the SEC treat the Paxos-issued token as a security and remain consistent?”
The Securities and Exchange Commission (SEC) has confirmed that it plans to sue Paxos Trust Company, a regulated New York-based company that issues a variety of popular stablecoins.
This threat of a lawsuit from the SEC came in the form of a letter sent to Paxos. The letter, known as a Wells notice, is used by the regulator to notify firms of imminent enforcement action executed against them.
Paxos issues the popular Binance USD (BUSD) and the Pax Dollar (USDP) stablecoins and is regulated entirely by the New York State Department of Financial Services.
Based on a recent Wall Street Journal report that cited reliable sources “familiar with the matter,” the notice claimed that BUSD is unregistered security. This stablecoin is issued by Paxos and traded on various crypto exchanges like Coinbase.
Nonetheless, the notice is not clear whether it refers to BUSD issuance, the listing of the coin on exchanges, or both.
BUSD Funds Are Considered ‘SAFU’
Concurrently, the Binance CEO said that all funds were ‘SAFU,’ and Paxos has already been ordered to stop minting new BUSD by the New York Department of Financial Services (NYDFS). Zhao said that the latest move would make the BUSD market cap drop over time.
6/ "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 🔶 Binance (@cz_binance) February 13, 2023
“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.”
In the meantime, BUSD and Paxos are the most recent victims of the extensive crypto onslaught executed by the United States government in recent days, as the Kraken crypto trading firm was earlier compelled to stop its staking services in the nation. In this instance, SEC chair Gary Gensler announced the decision to stop staking using “all means available” to “protect the investing public” from all the crypto risks.
Paxos also faces an extensive probe by the New York State Department of Financial Services, based on a report published by Bloomberg. But, the scope of that investigation was not known.
Growing Anti-Crypto Campaign
Based on the Wall Street Journal, the SEC’s move is believed to be part of an intensifying campaign against crypto firms in the United States.
In the last several days, regulators in the United States have cracked the whip on Kraken exchange for supposed securities violations, including providing unregistered securities to the users. This action resulted in a settlement agreement, where Kraken paid a $30 million fine for failing to register its crypto staking-as-a-service program.
Kraken in response to this situation confirmed the closure of its on-chain staking services for United States users on February 9.
Kraken CEO Jesse Powell reacted to this situation sarcastically via Twitter, stating that if it was only required to “fill out a form on a website” he would have filled it out ages ago.
Oh man, all I had to do was fill out a form on a website and tell people that staking rewards come from staking? Wish I'd seen this video before paying a $30m fine and agreeing to permanently shut down the service in the US. How dumb do I look. Gosh. ⛽️💡https://t.co/UPdQdnI6xN
— Jesse Powell (@jespow) February 10, 2023
Before then, Coinbase CEO Brian Armstrong also talked about the situation. He said that he had heard rumors that the SEC “would like to get rid of crypto staking” in the United States.
Armstrong said at the time:
“I hope that’s not the case as I believe it would be a terrible path for the U.S. if that was allowed to happen.”
He believes that staking is a crucial innovation within the cryptocurrency sector.
1/ We're hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers. I hope that's not the case as I believe it would be a terrible path for the U.S. if that was allowed to happen.
— Brian Armstrong 🛡️ (@brian_armstrong) February 8, 2023
Amid all these incidents, some blockchain lawyers explain that while stablecoins are designed to have a fixed value, the holders can profit via different means of arbitrage, including staking and hedging. For now, crypto proponents insist that the BUSD versus SEC issue is only meant to destabilize the crypto sector in the United States.