Paxos, a New York-based technology and financial company, is in a pickle after the Security and Exchange Commission (SEC) stated that it plans to sue the company for regulatory violations over its issuance of a stablecoin. This seems to be in line with the recent ramping up of crypto enforcement by U.S. government agencies.
According to a WSJ report, the SEC enforcement staff issued a Wells notice to Paxos. A Wells Notice is a formal notification from the SEC to inform the recipient that the government agency is about to bring an enforcement action against them. The enforcement action is about Paxos’ issuance of the stablecoin BUSD, which according to the SEC is an unregistered security.
About BUSD Stablecoin
Binance USD (BUSD) is a stablecoin jointly developed by Paxos and Binance. It is the third-largest stablecoin by market cap. At the time of writing its market capitalization is estimated to be around $16 billion.
It is also a fiat-backed stablecoin and designed to be exchanged one is to one with the U.S. Dollar. BUSD is 100% backed by reserves held in either fiat cash or U.S. treasury bills. These reserves are audited monthly by a third-party auditing firm. This allows users to exchange their BUSD for fiat at any given time.
Paxos and BUSD are both regulated by the New York State Department of Financial Services. This gives customers assurance that a regulatory agency is monitoring the company.
Do the Allegations Hold Water?
The SEC is not known to be friendly with the crypto community. For the agency, it is only doing its mission to protect investors and the market. But what could have initiated the allegations against Paxos? According to WSJ sources, BUSD stablecoin is allegedly unregistered security.
But will the allegation flourish in court? Let us look at the Howie test for answers. The four-pronged Howey Test is used to determine whether a transaction constitutes an investment contract and therefore may be considered a security under US law. The test was established by the US Supreme Court in the case of SEC v. W.J. Howey Co. in 1946.
The four prongs that define securities are:
- An investment of money
- In a common enterprise
- With the expectation of profit
- To be derived from the efforts of others
These four should all be satisfied before any asset can be labeled as security. The third condition alone is hard to prove. A stablecoin can be used to purchase any crypto with the expectation that the purchased crypto asset will increase in value, but holding BUSD by itself won’t yield profit. It is designed to be pegged 1:1 to the U.S. Dollar, so it is hard to get returns from it.
Effects for all Stablecoins and the Crypto Space
The crypto market is still trying to recover from the 2022 implosions of several crypto companies. The failure of the UST stablecoin and LUNA started a domino effect which eventually wiped out billions of assets. These pitfalls prompted the government to tighten up regulations. The Legislative is now tackling the Stablecoin Trust Act, which aims to promote competition and protect customers.
Labeling the BUSD stablecoin as an unregistered security will not only affect Paxos and Binance. Binance is synonymous with crypto trading around the world and any negative publicity towards it will hamper the space.
This is not the first time the SEC has brought actions to a crypto asset. Kraken has recently settled with the SEC and paid $30 million in fines. The Ripple (XRP) lawsuit which started in 2020 is still under litigation. Paxos is possibly walking the same path as Ripple.
The SEC is just doing its job, but where was the agency before the LUNA and FTX collapse? Instead of launching a crypto witch hunt, it might be a better idea to sit down with all the stakeholders and try to understand the direction of this new technology. Instead of placing roadblocks, it might be better to educate consumers and let them decide what to do with their own money. Regulation when implemented properly is a good thing but regulating for the sake of stifling the sector will not yield anything good.
____
Image from Pixabay
