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SEC Issues Wells Notice to Paxos Over BUSD Stablecoin

The SEC warns Paxos about potential enforcement action regarding its BUSD stablecoin, citing it as an unregistered security and pushing for more crypto regulation.
Published on 2023-02-13

SEC Targets Paxos Over BUSD Stablecoin

The US Securities and Exchange Commission (SEC) has issued a Wells Notice to Paxos Trust Co., highlighting potential legal enforcement actions concerning its Binance USD (BUSD) stablecoin. This notice indicates the SEC's stance that BUSD might be an unregistered security, urging Paxos to halt its issuance to comply with investor protection laws. This development follows the New York Department of Financial Services' (NYDFS) order for Paxos to cease creating new BUSD tokens, although redemptions will continue.

Regulatory Challenges for Paxos

Paxos, in partnership with Binance, launched BUSD in 2019 as a dollar-pegged stablecoin. The recent regulatory actions have prompted Binance to reassess projects in certain jurisdictions to protect users from potential legal implications. The SEC's move is part of a broader strategy to exert more control over the crypto industry, emphasizing enforcement actions to manage the sector's growth and compliance.

The Debate on BUSD as a Security

The SEC utilizes the Howey Test to determine if an asset like BUSD qualifies as a security. The test considers whether an investment is made with the expectation of profits derived from others' efforts. However, opinions vary, with some experts arguing the definition of securities is too broad and requires clearer guidelines.

SEC's Broader Crypto Regulatory Efforts

The Paxos case emerges amidst increased SEC scrutiny of the cryptocurrency market. In 2022 alone, the SEC filed 41 lawsuits against crypto-related firms, marking a record high in enforcement actions. This trend indicates the regulator's intent to tighten compliance within the burgeoning industry.

Implications for BUSD and Crypto Market

As Paxos reassures users of their funds' safety, the halt in issuing new BUSD tokens suggests a shrinking market cap over time. This situation underscores the ongoing regulatory challenges faced by stablecoin issuers and the broader crypto community as they navigate evolving legal landscapes.

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