SEC to Charge Paxos Over BUSD Offering

Jimmy Aki
Last Updated:

Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.

The United States Securities and Exchange Commission (SEC) is preparing to file a suit against Paxos Trust Co. over its issuance of the BUSD stablecoin, which it considers a security. 

Are Stablecoins Securities? 

Over the weekend, the Wall Street Journal reported that the SEC had informed Paxos Trust Co., one of the foremost stablecoin issuers in the market, about an incoming lawsuit relating to violations of investor protection laws. Citing people familiar with the matter, the Journal reported that a Wells Notice has already been served to Paxos, meaning that the stablecoin issuer will now need to gear up for the coming lawsuit. 

The lawsuit itself is related to Binance USD (BUSD) – the third-largest stablecoin by market capitalization, which crypto exchange Binance and Paxos developed. According to the Journal, the SEC believes that BUSD is a security and that Paxos failed to register it with the agency before offering it for sale in September 2019. 

Although none of the parties involved has made any comment so far, it is rather interesting that the SEC has chosen Paxos and BUSD as its target in this salvo. The company also issued Paxos Dollar (USDP) in 2018 and has had other inroads in the crypto space. What exactly motivated the SEC to select BUSD as its target?

Ted Talks Macro, a crypto and macroeconomic analyst and YouTuber, explained that the action appears to be more of a concerted effort against Binance than anyone else. In a tweet, the analyst explained that the SEC uses its popular Howey Test to determine whether an asset is a security. 

Based on the test’s requirements and the asset’s nature, BUSD doesn’t seem to fit this description. Nevertheless, the SEC appears to be going on with this action, with Binance as its main target.

The SEC’s Anti-Crypto Crusade

On the flip side, FOX Business journalist Eleanor Terrett believes that this is more of a massive effort by the SEC and other regulators, including the Office of the Comptroller of the Currency (OCC) and the New York Department of Financial Services (NYDFS), to “blitz crypto.” 

Terrett noted in a tweet that there is a significant chance more Wells notices will be sent out to crypto industry players in the coming week. 

Whatever the angle is, Paxos now has 30 days to respond to the SEC’s Wells Notice with a Wells Submission of its own. The submission will offer the company a chance to argue its position and potentially prevent the lawsuit from the SEC, and as many would expect, it could easily prove consequential in this case. 

The action against Paxos is the latest in enforcement moves by the SEC. The securities watchdog has been swift in its desire to bring crypto players under control. Last week, it reached a $30 million settlement with major exchange Kraken after accusing the latter of offering a crypto staking service to American investors without registering with it first. 

Since then, SEC Chair Gary Gensler has also publicly warned crypto companies to come in and be compliant with the agency’s policies. 

In an interview with CNBC, Gensler explained that many crypto companies have operations that are fraught with conflict, with bundled products and little insight into how the companies operate. He added that these companies would need to follow its laws and regulations if the crypto space is to have any chance of long-term survival. 

Gensler’s comments seem to foreshadow future action against crypto companies. With names like Coinbase and Ripple Labs already in the agency’s crosshairs, it seems to be a question of who is next.

About Jimmy Aki PRO INVESTOR

Based in the UK, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning. He has honed his skills having worked cross-continental as a finance analyst, which gives him inter-cultural experience. He currently has a strong passion for regulation and macroeconomic trends as it allows him peek under the global bonnet to see how the world works.