Stablecoins Seem To Be Under Threat After Regulators Focus On Paxos

Key Points:

• According to Aaron Kaplan, co-CEO of Prometheum Inc, stablecoins pose a systemic risk to the financial system if they are not managed appropriately.
• Richard Mico, CEO and CLO of fintech platform Banxa, believed that both Paxos and Circle might prevail in court against the SEC.

Stablecoins appear to be the next component of the crypto ecosystem to face governmental scrutiny.

The Securities and Exchange Commission of the United States has sent a notice to crypto infrastructure provider Paxos regarding its role in the Binance USD stablecoin, saying it is an unregistered security.

In a consumer alert published on February 13, the New York Department of Financial Services stated that the state’s financial watchdog had “ordered Paxos to cease minting Paxos-issued BUSD due to several outstanding issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.”

In a statement, Paxos claimed that the notice it got about a potential enforcement action from the SEC only applied to BUSD, the third-largest stablecoin in terms of the total supply.

A spokeswoman for the SEC restated the agency’s policy of not commenting on the existence or nonexistence of a potential probe. The Wall Street Journal broke the news of the SEC’s inquiry into Paxos on Sunday evening.

The steps follow months of regulators’ anxiety about stablecoins, which led to many high-profile crypto market crashes last year, including the Terra/Luna collapse and FTT’s wobble, which led to FTX’s demise. Regulators in the United States and abroad have expressed reservations about the stability of stablecoins.

According to Aaron Kaplan, co-CEO of Prometheum Inc., a fintech startup, stablecoins pose a systemic risk to the financial system if they are not managed appropriately.

Stablecoins were included in a comprehensive assessment of digital assets produced by the Financial Stability Oversight Council, a subcommittee of US regulators chaired by Treasury Secretary Janet Yellen and entrusted with preventing another 2008-style financial disaster.

Richard Mico, CEO and CLO of fintech platform Banxa, identified Circle’s USDC as a potential future regulatory target but believed that both Paxos and Circle might prevail in court against the SEC.

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