Latest SEC Actions Have Major Implications for $137 Billion “Stablecoin” Crypto Market

The U.S. Securities and Exchange Commission might be ready to take action against Paxos which is a company that issue a cryptocurrency called stablecoin.

Experts told CNBC that the move would have significant implications for the market worth $137 billion.

Stablecoins, a type cryptocurrency, is designed to reflect real-world assets like the U.S. Dollar.

These stablecoins can often be backed by real assets like bonds or cash in reserve. These stablecoins have been the backbone of crypto markets because they allow users to quickly trade in and off different coins without needing to convert to or out of fiat currencies.

Paxos has issued Binance USD, a digital currency. BUSD. It is a stablecoin that is associated with Binance. Binance is one of the largest cryptocurrency exchanges in the world. BUSD is equal to the U.S. Dollar.

Last week, New York state’s financial regulator Paxos ordered to stop issuing USD.

Separately, Paxos It had received a notice from the SEC that it was considering recommending an enforcement action alleging that BUSD may be considered a security. Paxos stated that the notice suggests Paxos should register the offering of BUSD in accordance with federal securities laws. 

Official action has not been initiated by the SEC. However, the agency’s actions will be closely watched as it could have significant implications for all stablecoins if it begins an official process. Tether USDCThese two largest companies are worth $110 trillion each.

“If the SEC charges Paxos, any other issuer of stablecoins should register or prepare for a court fight with the SEC,” Renato Mariotti is a partner at BCLP and spoke to CNBC.

The SEC has not yet issued any specific charges. However, Paxos sent a notice to Paxos that focuses on whether stablecoins could be considered securities.

Paxos for its part said so “categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws.”

The SEC uses The Howey test To determine what is considered a security. “investment contract.” Four criteria can be used to determine whether something is an Investment Contract.

The SEC would consider BUSD a security and have jurisdiction over the stablecoin. Any company that issues BUSD must register with the SEC, and agree to stricter regulation.

The other implication is that stablecoins may also receive the same label.

“The basis for that action will necessarily be fact-specific to the Paxos BUSD structure but will likely have wide ranging implications for other stablecoin issuers selling coins into the U.S.,” CNBC spoke with Townsend Lansing from CoinShares’ head of product.

There are many scenarios that could play out. It will all depend on the allegations made by the SEC against Paxos, and how both sides proceed.

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

“It’s possible that Paxos aggressively litigates against the SEC, but the cost of doing so would be significant,” Mariotti said. 

“Litigation would take years and the risk of losing to the SEC would be significant. The mere fact that Paxos was fighting against the SEC would create risk and potentially make BUSD less attractive to the marketplace.”

Mariotti said that there may be another outcome: the SEC could regulate which assets are used for stablecoin backing and the requirements to issue digital currency to make market disclosures.

According to CoinShares’ Lansing, the definition of a security contract or investment contract by the SEC goes beyond the Howey test. The agency has a different definition. “extensive knowledge of how to apply both the law and judicial precedent.”

“Absent a successful fight, it is most likely BUSD will no longer be sold into the U.S. or be available on U.S.-based digital asset exchanges,” Lansing added. “It is very possible that other stablecoins will have follow suit.”

It will depend on how the SEC claims against Paxos or BUSD are handled.

“We still don’t know the exact basis on which the SEC is alleging the violations, so we don’t know the extent to which those allegations will extend to other industry participants,” Lansing added.

Professor of Finance at Sussex University, Carol Alexander, stated that the U.S. regulators’ action was unacceptable. “more a move against Binance than stablecoins.”

She claimed that Tether and Circle, which issue USDC, are Tether and Circle. “close to the U.S. government.” Circle CEO Jeremy Allaire previously Several people have called for stricter regulation of stablecoins.

Alexander spoke “Binance is causing increasing concern for regulators around the world” In areas such as money laundering and violations of securities laws. She said that this could be why the SEC targeted BUSD.

Binance is under investigation by the Justice Department, suspected of money laundering and sanction violations. Reuters reported Last year. Bloomberg In 2021, it was reported that U.S. officials were investigating whether Binance employees had engaged in insider trading.

CNBC did not reach Binance immediately for comment.

Binance spokeswoman said that the firm had a “zero-tolerance” Policy for insider trading and a “strict ethical code” Bloomberg says this is to prevent misconduct.