•The SEC has issued a Wells Notice to Paxos, alleging that its BUSD stablecoin is an unregistered security.
•New York regulators ordered Paxos to stop issuing the BUSD.
•The SEC will take legal enforcement action if Paxos continues with the issuance of BUSD.
SEC Sues Paxos Over BUSD
The US Securities and Exchange Commission (SEC) has reportedly warned Paxos Trust Co., the issuer of the Binance USD (BUSD) stablecoin, that it could take legal enforcement action against them for violating investor protection laws. The SEC issued a Wells Notice which is a letter informing companies of planned enforcement action.
New York Regulators Order Stop Issuance
Shortly after receiving a Wells Notice from the SEC, New York Department of Financial Services (NYDFS) ordered Paxos to stop issuing their BUSD token and creating more tokens as well. However, they are still allowed to manage redemptions of the existing tokens.
Is the BUSD a Security?
The SEC has been using the Howey Test to determine whether any asset should be classified as security or not. According to this test, an asset can be classified as security if there is an investment of money with expectation of profits derived from efforts of others. Adam Cochran argued that anything can be called a security due to vagueness in definition and he made an argument (not one he agrees with but reasonable enough one) that these assets can be treated as securities because they hold underlying treasuries exposing holders to potential risk even though they don’t earn profits from it.
Binance released a statement saying that their partnership with Paxos created this issue as the BUSD is “wholly owned and managed by Paxos” and in light of regulatory uncertainty, they would review “other projects in those jurisdictions” so users are insulated from further harm due to such issues.
All in all, it remains unclear what impact this enforcement action might have on both companies involved in this situation but we can only expect some sort of regulatory clarity soon regarding crypto assets being treated as securities or otherwise.