The SEC May Be Using BUSD As An Excuse To Attack Paxos

Paxos, which has been rumored since last week, is officially facing back and forth from regulators. In addition to being investigated by the New York Department of Financial Services (NYDFS), Paxos was ordered to stop issuing new BUSD tokens. It also received a “Wells notice” from the US SEC for the stablecoin BUSD. Notification for KYC verification or account closure.

For a while, stablecoins were shrouded in FUD sentiment. In this regard, Paxos announced that it would terminate its partnership with Binance on the branded stablecoin BUSD. Binance said in a statement that BUSD is issued and owned by Paxos, which only licenses its brand. Paxos also guarantees that these funds are safe and fully covered by the bank’s reserves.

So, is there a risk of a run on BUSD? Should stablecoins be considered securities? Which department should the regulatory jurisdiction of stablecoins belong to? This article will answer you one by one.

Will there be a withdrawal crisis for BUSD? Paxos Closes Some Accounts Due to SEC Warning

BUSD is a U.S. dollar-backed stable asset issued and managed by Paxos Trust Company. The supply is pegged to the U.S. dollar at a ratio of 1:1 and is regulated by the New York State Department of Financial Services.

According to Nansen data, BUSD currently has a total market value of $16 billion, ranking third among stablecoins, second only to USDT and USDC. Among them, Binance is the most encrypted trading platform using BUSD, and about 90% ($14.4 billion) of BUSD is held by Binance addresses. In the past 7 days, Binance’s net outflow exceeded 81.4 million BUSD.

But NYDFS has asked Paxos Trust Co. to stop issuing more BUSD tokens. According to Binance’s statement, Paxos will continue to manage the redemption of BUSD, and the market capitalization of BUSD will only decrease over time. Paxos will continue to service the product, manage redemptions and will provide additional information as needed.

Will there be a run crisis on BUSD? In fact, except for a small amount of U.S. dollar cash, most of BUSD’s reserve funds are composed of less risky U.S. treasury bills and U.S. treasury bond-backed reverse repurchase agreements. According to ChainEye data, the market value of BUSD’s net reserve assets is 22.65 billion U.S. dollars (as of November 2022 report), which exceeds today’s (February 15) circulation of $15.23 billion.

However, because BUSD was identified as an unregistered security, Paxos was issued a letter called “Wells Notice” by the US SEC enforcement officers. As the US dollar custodian and issuer of BUSD, as well as the issuer of the stable currency USDP and the behind-the-scenes driving force of the encrypted exchange itBit, Paxos has notified some users to re-do KYC verification or close their accounts, and stated in the email sent to users that Paxos is a regulated financial institution, and the law requires us to have a better understanding of our customers in order to maintain accurate and up-to-date records.

For those who have been asked to close their accounts, Paxos said that it is currently unable to maintain accounts because users provide the account information or account activity exceeds the company’s risk appetite.

But Paxos still has a chance to defend itself against the enforcement action. In fact, the Wells Notice is an informal reminder issued by the U.S. SEC law enforcement department before a civil lawsuit against a listed company in the United States.

Once the company receives the notice, it must respond and negotiate within 30 days, including proving why the potential defendant should not be charged. arguments, unless an extension is granted by the SEC.

If the law enforcement officers still determine that the company has violated relevant securities laws and regulations, they will propose enforcement actions to the SEC, and then the SEC committee will hold a meeting to vote whether to pass it. In other words, if Paxos cannot convince the SEC, the possibility of getting out of the case is almost zero, and in the end it often has to pay high fines to “reconcile”.

Affected by regulation, Paxos announced the termination of its cooperation with Binance on BUSD, and stated that the existing BUSD will continue to be fully supported by Paxos, and will still be fully supported and redeemed until at least February 2024 (or as part of the collateral is purchased into financial products such as treasury bonds with maturity restrictions) new and existing customers of Paxos will be able to redeem their funds in USD, or convert their BUSD tokens to Pax Dollar (USDP ), a regulated dollar-backed stablecoin also issued by the Paxos Trust.

However, Paxos also emphasized that all BUSD tokens issued by Paxos Trust have been and will always be backed by 1:1 USD denominated reserves, completely isolated and kept in a remote bankrupt account (PANews note: means that it will not be subject to corporate bankruptcy. Influence). The BUSD reserve is fully backed by reserves.

It is worth mentioning that Fox Business News reporter Eleanor Terrett revealed on Twitter that there will be more Wells notices in the next 2 to 3 weeks. Which agencies will be notified? This whetted the appetite of the crypto community.

In the eyes of some industry insiders, the SEC is targeting Paxos and BUSD on the surface, but it is actually targeting Binance. On the one hand, in addition to BUSD, among the stablecoins issued by Paxos, there are another USD stablecoin USDP (with a market value of nearly 900 million) and a gold stablecoin PAXG (with a market value of nearly 500 million), neither of which has been regulated.

And if the compliant entrance and exit of BUSD is cut off, it means that some compliant deposits and withdrawals of Binance are blocked. It is worth mentioning that Binance has also temporarily suspended deposits and withdrawals of U.S. dollars through bank accounts starting from February 8. Some people interpreted that this may be a “foreplay” against the supervision of Binance.

In response, CZ, the founder of Binance, responded that apart from public news articles, there is no relevant information on the news. The lawsuit is between the SEC and Paxos:

Are stablecoins considered securities? Or trigger a new round of regulatory battle

The SEC sued Paxos for violating investor protection laws because its BUSD was deemed an unregistered security. Pursuant to the requirements of the federal securities laws, all offerings and sales of securities must be registered in accordance with its regulations, unless an exemption from registration is granted.

The securities law itself has a broad definition of securities, mainly based on the interpretation of the Securities Act of 1933 and 1934 by the U.S. Supreme Court, including stocks, notes, bonds, other typical equity and debt instruments; any form of investment contract. As an independent quasi-judicial agency directly under the US federal government, the SEC is responsible for the supervision and management of US securities.

The Howey test is applicable to any contract, plan or transaction, regardless of whether it has any characteristics of typical securities. It mainly includes four elements: whether there is capital investment; whether there is investment in a common cause; whether there is an expectation of investment benefits; Tripartite efforts reap benefits.

In the past, many encryption projects have been sued by the SEC for illegal securities issuance, and most of them usually choose to pay huge fines to settle with them.

However, compared with other types of cryptocurrencies, BUSD, as a cryptocurrency that anchors the stable value of the U.S. dollar, does not have the possibility for investors to have income expectations, which obviously does not meet the characteristics of the Howey test, even for BUSD holders They indirectly held the securities of bonds, but they did not benefit from it.

The Howey test adopted by the SEC has always been considered to have certain limitations. For example, US SEC Commissioner Hester Peirce once said that the Howey test may not be applicable to cryptocurrencies, and the SEC needs to be more clear, because many encrypted assets have their own unique characteristics. So the SEC seems to be redefining the “Howey test” for crypto projects.

Not only that, from the perspective of past supervision, because stablecoins are regarded as currencies because they are anchored to legal tender, they are usually managed by the US version of the “Banking Regulatory Commission” – the Office of the Comptroller of the Currency (OCC) under the US Treasury Department.

The OCC has always been friendly to the regulation of stablecoins, including allowing federally regulated banks to use stablecoins for payments and other activities.

OCC Acting Director Michael Hsu once said on the need for stablecoin regulation that regulating stablecoin issuers like banks can promote the vigorous development of innovation in the encryption industry, although innovation will thrive in an uncertain environment, but a solid foundation help is available, especially when money and trust are involved. He also urged fellow regulators not to rush to regulate encryption and to strengthen cross-departmental efforts, even if they are regarded as “anti-innovators”, they cannot lower regulatory standards in order to “over-adapt” to the industry.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.

Join us to keep track of news: https://linktr.ee/coincu

Harold

Coincu News