The US securities and the Exchange Commission is on the warpath – and crypto in the crosshairs. Over the weekend, The Wall Street Journal reported that the agency intends to sue crypto firm Paxos for issuing BUSD, a stablecoin developed in partnership with the world’s largest crypto exchange, Binance.
The SEC declined to comment, but Paxos, which has offices in New York and Singapore, confirmed today that the agency claims BUSD should have been registered as a security in the US, requiring complex rules to be followed. In a statement, the firm said it “categorically disagrees” that BUSD is a security but has complied with an order from the New York Treasury Department to halt the creation of a new BUSD, effectively strangling the coin.
Paxos did not respond to a request for comment. Binance Chief Strategy Officer Patrick Hillmann declined to comment on how the SEC’s actions would affect the exchange, but said the firm will “look at other projects to ensure users are ahead of the game.” are protected from further undue harm”.
The crypto industry is no stranger to conflicts with regulators, but the Paxos case is different — and it has sparked a degree of panic and confusion. The concern is that a ruling against the issuance or use of BUSD will set a precedent to refer to all Stablecoins, which are destroying a crucial piece of infrastructure in many crypto markets. “If supply suddenly dried up, the crypto economy would collapse,” says economist Frances Coppola, who previously worked for HSBC and other banks.
Stablecoins, which are designed to hold onto a specific value, typically $1, are a key pillar of the crypto economy. Most are backed by a combination of cash and bonds, anchoring the tokens in circulation at the desired value.
Unlike cash, which can be difficult to transport, especially across borders, stablecoins are “simple and fast,” says crypto analyst Noelle Acheson, formerly of CoinDesk, helping traders seize opportunities as they arise. They’ve “opened an on-chain economy,” says Ram Ahluwalia, CEO of wealth management firm Lumida, allowing money “to flow into the ecosystem and stay there.”
The SEC defines securities as contracts “representing an investment of money in a common enterprise with a reasonable expectation of profits, raising it from the efforts of others.” Classification brings with it a number of regulatory and disclosure requirements. If stablecoins were generally designated as securities, issuers would have to register them with the SEC, giving the agency the ability to deny coins. Any stablecoins already on the market could be subject to enforcement action.
Confused members of the crypto industry, including Binance CEO Changpeng Zhaoare now wondering how stablecoins can possibly meet the SEC’s criteria and specifically how to say that cryptocoins designed not to fluctuate in value can be sold with a reasonable expectation of profit.
But action against a major stablecoin issuer shouldn’t come as a surprise, Acheson says, as the SEC has repeatedly said it believes some stablecoins qualify as securities. Acheson expects regulators to argue that stablecoins like BUSD, which are backed by their issuers’ holdings of established securities like government and corporate bonds, are securities themselves and need to be regulated accordingly.