While it’s easy to say that US regulators are trying to pigeonhole all tokens – including stablecoins – as securities, something larger is happening. Last week, the crypto community was under huge pressure as headlines about Kraken’s settlement with the US Securities and Exchange Commission (SEC) happened as the regulatory power waged war against crypto staking.
While many were anxious about how the SEC will choose to regulate crypto in the future, the SEC also had another story arc going on: the SEC alleged that the sale of Binance USD (BUSD) violates securities laws, which resulted in the New York Department of Financial Services (NYDFS) to ask Paxos to stop issuing the token.
Paxos, a regulated New-York based company that specialises in blockchain financial technologies, is in the midst of strife between the U.S. Securities and Exchange Commission (SEC) and the New York Department of Financial Services (NYDFS) over their issuing of stablecoin Binance USD.
And now, many fear that US regulators are now also going to expand the declaration of war to stablecoins.
However, a bigger question remains: is the Paxos trouble about how they have a relationship with Binance: an exchange that does not have a clearly defined headquarters, and has a reputation for not abiding by the law.
Binance has been recently met with a lot of antagonism from US regulators, which brings no surprise. But why target Paxos?
Reports as recent as last week have indicated that the NYDFS has been investigating Paxos – and suspicions were right. On Sunday, the Wall Street Journal reported that the SEC sent a Wells Notice to Paxos over their issuing of BUSD.
A Wells Notice is a formally issued letter sent to a person or a firm at the end of an SEC investigation, which states the intent that the SEC is planning to bring enforcement action against. Wells Notices typically indicate that the SEC has concluded that such investigated individuals or entities should be charged with violations of US securities laws. Persons and/or firms are generally given 30 days to file a response in the form of a legal brief to prove that no charges should be brought against them.
As such, Paxos immediately announced that it was suspending the issuance of new BUSD under the direction of the NYDFS, in a published consumer alert on Monday.
Paxos has been known as a crypto firm that has gone above and beyond to appear as regulatory compliant as possible. Although many suspect that Paxos would pay their way through to safety just like Kraken’s settlement, Paxos has indicated that they’ll choose to “vigorously litigate if necessary.”
— Paxos (@PaxosGlobal) February 13, 2023
As this may be part of a larger crypto crackdown orchestrated by many US regulatory bodies, many are anxious on what’s to come next.
What should we keep an eye out on?
As these charges against Paxos seem to be an assault on stablecoins, it actually can be more related to Binance, considering all factors at play.
How stablecoins like BUSD will be defined as a security
As per the SEC’s usual conventions, they’ll attempt to define BUSD as a security under the criteria listed under the Howey Test.
If anyone needs a recap – under the Howey Test, an investment instrument is considered a security when:
- There is an investment of money
- in a common enterprise
- with the expectation that it will give profit
- from the efforts of others.
Now, BUSD is a stablecoin. Stablecoins aren’t usually intended to generate returns from itself as they’re typically pegged to another existing currency. Also, Paxos doesn’t offer any yield-bearing products that feature BUSD. It’s only up to the SEC to clearly rationale how stablecoins like BUSD are defined as a security under the Howey Test guidelines.
Some also view that stablecoins should rather be classified as money market funds. Money market funds are a type of mutual fund that invests in liquid, short-term instruments, cash, and cash equivalents. Intended to offer investors high liquidity with very low risk, investors purchase in large volumes and can generate income but very little capital appreciation. However, special considerations may apply for this stablecoin-as-money-market-fund definition to be properly established, beyond US regulator stigma against stablecoins and crypto at large.
Strangely enough, Paxos also issues a stablecoin: USDP. So, why isn’t the SEC and NYDFS also focusing on USDP too?
How Binance will respond
Binance has been under special watch from US regulators since the collapse of its rival FTX, adding fuel to the fire since being under investigation by the U.S. Attorney’s Office for the Western District of Washington since at least 2018, alongside the US Department of Justice and the US Commodity Futures Trading Commission (CFTC).
A recent report from the Wall Street Journal has indicated that Binance expects to pay penalties to settle its existing investigations by US regulators and law enforcement, according to the firm’s chief strategy officer in an interview.
Patrick Hillmann, Binance’s chief strategy officer, says that Binance is “working with regulators to figure out what are the remediations we have to go through now to make amends for that,” Hillmann said Wednesday. The outcome will be “likely a fine, could be more.…We just don’t know. That is for regulators to decide.”
While Hillmann says that Binance can’t anticipate how much the fines will be, it still is a “very confusing time for us”, in understanding how US regulators want to oversee the crypto market. Meanwhile, the SEC has been quite power-happy, stepping up its enforcement game and cutting off access to popular crypto products and services.
Binance however is remaining positive, as the exchange is “highly confident and feeling really good about where those discussions are going,” referring to conversations with the DoJ, the CFTC, and the SEC.