Thursday, May 30, 2024

A stablecoin firm could shake up the entire $137 billion market if it is targeted by the SEC

  • The U.S. Securities and Exchange Commission (SEC) may take action against Paxos, the company that issued Binance USD (BUSD).
  • The SEC hasn’t initiated any official action. However, the agency’s actions are being closely watched since it could have huge implications for all stablecoins, including tether.
  • According to Paxos, BUSD does not qualify as a security under federal securities laws.

Paxos, which issues stablecoins, may be targeted by the U.S. Securities and Exchange Commission.

Experts told CNBC that the move will have major implications for the $137 billion market.

It is a type of cryptocurrency that mirrors real-world assets such as the U.S. dollar.

The stablecoins are often backed by real assets such as bonds or cash in reserve, and have become the backbone of the crypto market since they allow people to trade between different coins without having to convert between currencies.

In 2014, Paxos released an electronic currency called Binance USD, also known as BUSD. It is a stablecoin linked to Binance, one of the world’s biggest cryptocurrency exchanges.

New York state’s financial regulator ordered Paxos to stop issuing BUSD last week.

In a separate statement, Paxos said the SEC had informed it that it is considering recommending an action alleging that BUSD is a security.

However, the SEC’s actions are being closely monitored. If the agency initiates an official procedure, it could have huge implications for all stablecoins, including Tether and USDC, the two largest are worth $110 billion combined.

According to Renato Mariotti, a partner at law firm BCLP, anyone issuing stablecoins should register with the SEC if the SEC charges Paxos.

Stablecoins are securities, aren’t they?

The SEC has not yet announced specific charges, but the notice to Paxos asks whether stablecoins are securities.

In its response, Paxos said it “categorically disagrees with the SEC staff because BUSD is not a security.”

SEC uses the Howey test to determine whether something is a security or investment contract. There are four criteria to determine whether something is an investment contract, for example, if an investor expects a profit.

The SEC will oversee BUSD if it is deemed a security by the regulator. Whoever issues BUSD would need to register with the SEC and accept more restrictive regulations.

The label will also be applied to other stablecoins.

“This action will likely have wide-ranging implications for other stablecoin issuers selling coins into the U.S.,” Townsend Lansing, head of product at CoinShares, told CNBC.

How likely is it that the outcome will be?

It depends on what the SEC alleges against Paxos and how the two sides proceed.

“It is likely that the SEC will reach a settlement with Paxos in which Paxos concedes that BUSD is a security, leading other stablecoins to follow suit and register,” Mariotti said.

“Paxos could aggressively sue the SEC, but the costs would be high,” Mariotti said.

“Litigation would take years and the risk of losing to the SEC would be significant. Paxos’ fight against the SEC would create risk and make BUSD less attractive.”

The SEC may also regulate what assets are used to back stablecoins and what disclosure requirements must be met for digital currency issues, according to Mariotti.

In Lansing’s words, what the SEC considers a security or investment contract actually extends beyond just the Howey test, and the agency has “extensive knowledge of how to apply both the law and judicial precedent.”

Reuters reported last year that the Justice Department was investigating Binance for suspected money laundering and sanctions violations. Bloomberg reported in 2021 that U.S. officials were investigating whether Binance employees engaged in insider trading.

CNBC’s request for comment was not immediately answered by Binance.

Bloomberg reported that Binance has a “zero-tolerance” policy for insider trading and a “strict ethical code” to prevent misconduct.

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