Stablecoin Issuer Paxos Ceases BUSD Issuance After SEC Reportedly Threatens Lawsuit

Stablecoin Issuer Paxos Ceases BUSD Issuance After SEC Reportedly Threatens Lawsuit

In what will be seen as a major escalation in its crypto enforcement agenda, the Securities and Exchange Commission (SEC) is preparing to sue Paxos for selling Binance USD (BUSD) as an unregistered security.

The news comes shortly after the New York Department of Financial Services (NYDFS) reportedly ordered the cryptocurrency issuer to stop issuing BUSD, crypto’s third-largest stablecoin by market cap.

Paxos will stop minting new BUSD tokens following the threat of legal action from the regulators.

Paxos Facing SEC Lawsuit Over BUSD

The SEC is suing Paxos for violating investor protection laws in relation to BUSD.

According to a Feb.12 report by the Wall Street Journal citing anonymous people with knowledge of the matter, the SEC’s staff have sent a Wells Notice to Paxos, which the commission uses to inform companies of potential enforcement action. The notice alleges that BUSD is an unregistered security. 

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BUSD is a stablecoin from the world’s largest crypto exchange, Binance, issued by Paxos. Paxos is regulated by the New York Department of Financial Services, and it also enjoys a provisional charter from the Office of the Comptroller of the Currency.

Paxos has 30 days from the day it received the Wells Notice to respond through a legal brief called Wells Submission. This is a chance for it to argue why it believes the charges should not be brought against it by the SEC.

In the meantime, Paxos has confirmed it is suspending the minting of BUSD and will “end its relationship with Binance” for the stablecoin, per a press release shared with ZyCrypto.

The NYDFS instructed Paxos to cease minting BUSD owing to several unresolved issues related to Paxos’ oversight of its relationship with Binance. A Paxos spokesperson maintains that BUSD is backed 1:1 with US dollar-denominated reserves. The Binance-branded token boasts a market cap of over $16 billion, making it the third-largest stablecoin in the market.

Regulators Are Increasing Enforcement; Will Crypto Sector Improve As A Result?

The news of Paxos locking horns with the SEC and the NYDFS comes as various federal agencies are further tightening oversight on the budding crypto industry.

The SEC on Feb. 9 announced it had reached a $30 million settlement with Kraken in which the exchange agreed to discontinue its crypto staking services in the U.S. for failing to properly register the program. Shortly after the Kraken action, SEC chair Gary Gensler issued a warning to crypto firms to “come in and follow the law”.

FOX Business journalist  Eleanor Terrett noted that the latest move is a “unilateral effort” between the SEC and other U.S. regulators to “blitz crypto”. She also suggested that more Wells Notices for crypto companies should be expected in the next 2-3 weeks.

This presents crypto enthusiasts with a mixture of good and bad news.

Tighter oversight of the crypto sector could be seen as a protective safeguard for retail investors and allow institutional investors to become more comfortable with the market.

However, there’s also a concern that heightened restrictions will impede the industry’s growth, making it harder for honest crypto-focused businesses to operate in the world’s largest economy.