The SEC’s enforcement action against BUSD raises questions about whether the regulatory body is focused on the stablecoin market or the crypto exchange Binance.
Binance branded stablecoin, Binance USD (BUSD), is a dollar-backed stablecoin issued by blockchain infrastructure platform Paxos Trust Company, and is the third largest stablecoin after Tether’s (USDT) and Circle’s USD Coin (USDC).
Paxos has claimed in the past that BUSD is fully backed by reserves held in either fiat cash or United States Treasury bills. BUSD was reportedly authorized and regulated by the New York State Department of Financial Services (NYDFS).
Paxos partnered with crypto exchange Binance in 2019 and launched the stablecoin, which received approval from the NYDFS. Binance CEO Changpeng Zhao has stated that the exchange licensed the Binance brand to Paxos, and BUSD is “wholly owned and managed by Paxos.”
However, on Feb. 12, the U.S. Securities and Exchange Commission (SEC) issued a Wells notice to Paxos — a letter the regulator uses to inform companies of planned enforcement action. The notice alleged that BUSD is an unregistered security. After receiving a Wells notice, the accused is allowed 30 days to respond via a legal brief known as a Wells submission — a chance to argue why charges should not be brought against prospective defendants.
One day later, the NYDFS ordered Paxos to stop minting new BUSD, citing specific unresolved issues around Paxos’ oversight of its relationship with Binance regarding BUSD. Paxos then decided to cut ties with Binance due to regulatory scrutiny, saying they are working with the SEC to resolve the issue constructively.
Binance, on the other hand, hopes the SEC won’t file an enforcement action based on the BUSD saga, telling Cointelegraph:
“The U.S. SEC, hopefully, will not file an enforcement action on this topic. Doing so is not justified by the facts or law. Furthermore, it would undermine the growth and innovation of the U.S. financial technology sector.”
Paxos refused to comment on the issue, citing ongoing talks with the SEC. The company directed Cointelegraph to an internal email with Paxos co-founder Charles Cascarilla reiterating their earlier stance that BUSD is not a security.
The statement from Cascarilla noted that the precedents used to identify securities in the U.S. are known as the Howey test and the Reves test. He stated that BUSD does not meet the criteria to be a security:
“Our stablecoins are always backed by cash and equivalents–dollars and U.S. Treasury bills, but never securities. We are engaged in constructive discussions with the SEC, and we look forward to continuing that dialogue in private. Of course, if necessary, we will defend our position in litigation. We will share more information when we can.”
Tether — issuer of the largest stablecoin by market capitalization — didn’t directly respond to specific questions about stablecoins being classed as securities. However, a spokesperson from the firm told Cointelegraph that “Tether has good relationships with law enforcement globally and is committed to operating securely and transparently in compliance with all applicable laws and regulations.”
Are stablecoins the focus or are there bigger fish to fry?
Many crypto community members were baffled by accusations of BUSD being a security, and to see enforcement action against it. This is because BUSD is “stable,” maintaining a 1:1 peg to the U.S. dollar, limiting its usage for speculation.
The SEC has labelled BUSD as an “unregistered security”, and is suing its issuer, Paxos.
But how on earth is a STABLECOIN considered a security, when it clearly doesn’t meet the Howey Test criteria.
No one has ever had “the expectation of profit” when buying $BUSD. pic.twitter.com/QXOlDUyvc3
— Miles Deutscher (@milesdeutscher) February 13, 2023
Just days after the SEC action against BUSD, rumors started circulating about a similar Wells notice being sent to other stablecoin issuers, including Circle and Tether. Circle’s chief strategy officer, Dante Disparte, quashed such rumors and said that the stablecoin issuer had not received such a document.
.@circle has not received a Wells notice. https://t.co/lE74zHVLka
— Dante Disparte (@ddisparte) February 14, 2023
Speaking to Cointelegraph earlier this month, some legal experts explained how stablecoins might be considered securities. Although stablecoins are supposed to be stable, Aaron Lane, a senior lecturer at RMIT’s Blockchain Innovation Hub, said buyers might benefit from various arbitrage, hedging and staking opportunities.
He further explained that, while the answer isn’t obvious, a case could be made regarding whether the stablecoin was developed to produce money or is a derivative of a security.
Some crypto community members have stated that the issue might not be just about stablecoins as much as it is about Binance, indicating that the SEC didn’t take action against Paxos’ gold-backed stablecoin called Pax Gold (PAXG.)
Carol Goforth, a university professor and the Clayton N. Little professor of Law at the University of Arkansas, told Cointelegraph that the issue might be more about Binance than the stablecoin itself:
“There are unique issues with regard to that particular crypto asset because of its ties to and relationship with Binance. It is possible that some of those unusual features are what the SEC is focusing on, but because part of that is a lack of transparency and accuracy in reported information.”
Goforth added that the price of the stablecoin is designed to be stable, which would appear to be the antithesis of an expectation of profits.
Nonetheless, “I can see a potential argument that stablecoins make fast transactions in other forms of crypto possible and this is, in fact, the biggest use of stablecoins to date, accounting for a disproportionately high trading volume as compared to market capitalization” Goforth said, stating:
“‘Profit’ could be argued to include the extra value obtained from the ability to make such trades, although that seems to be a bit of a stretch. (Expectation of profits is important because it is one of the elements of the Howey investment contract test).”
Just weeks after enforcement action against BUSD, the SEC filed a motion to bar final approval of Binance.US’ $1 billion bid for assets belonging to bankrupt crypto lending firm Voyager Digital. The SEC flagged the potential sale of Voyager Token (VGX), issued by Voyager, which “may constitute the unregistered offer or sale of securities under federal law.“
The series of enforcement actions by the SEC against various aspects of Binance’s business led many to believe that the regulator was going after the exchange rather than the stablecoin industry.
SEC’s jurisdiction under question
Amid the ongoing increase in enforcement actions in the crypto market, the SEC’s jurisdiction has also been questioned, especially regarding stablecoins. In a recent interview, Jeremy Allaire, the CEO of USDC issuer Circle, said that “payment stablecoins” are payment systems, not securities.
Allaire argued that SEC is not the suitable regulator for stablecoins and said, “there is a reason why everywhere in the world, including the U.S., the government is specifically saying payment stablecoins are a payment system and banking regulator activity.”
Coinbase — the first publicly listed crypto exchange on the Nasdaq — is fighting a securities battle of its own related to its staking products. It also questioned the SEC’s decision to get involved with stablecoins and claim they are securities.
This week the NYDFS ordered US-based Paxos to stop issuing US dollar-denominated stablecoin BUSD and the SEC issued a Wells notice to Paxos. We don’t know what aspects of BUSD might be of interest to the SEC.
What we do know: stablecoins are not securities— Coinbase (@coinbase) February 15, 2023
2022 was a disastrous year for the crypto industry, seeing most crypto assets lose more than 70% of their valuation from their market highs. Outside the crypto winter, the collapse of crypto lending giants, exchanges and asset funds became a more significant concern. Many then questioned regulators for not ensuring investor security and enforcing regulations. In 2023, the tables have turned, with regulatory agencies coming out in full force against crypto firms. However, their approach and intentions are being questioned now that they have sprung into action.
