Original Author: Wu Shuo
In the early morning of February 13th, Beijing time, the Wall Street Journal reported that the US Securities and Exchange Commission (SEC) had informed the stablecoin company Paxos that it planned to sue the company for violating investor protection laws. The notice stated that Binance USD, a digital asset issued and listed by Paxos, is an unregistered security. Companies that receive Wells' notice can respond in writing and tell the SEC why the lawsuit should not proceed. The Wells notice is not the final sign that the SEC will take enforcement action. The agency's five commissioners must vote to authorize any enforcement settlement or lawsuit. The SEC has not previously taken enforcement action against major stablecoin issuers.
https://www.wsj.com/articles/crypto-firm-paxos-faces-sec-lawsuit-over-binance-usd-token-8031 e 7 a 7? mod=business_minor_pos 4
On the afternoon of February 13th, Beijing time, Bloomberg released news and published a Binance statement: The New York State Department of Financial Services (NYDFS) has instructed Paxos to stop minting new BUSD. BUSD is a stable currency wholly owned and managed by Paxos. will decrease over time. Paxos will continue to service the product and manage redemptions. Paxos also guarantees that funds are safe and fully covered by its bank's reserves.
https://www.bloomberg.com/news/articles/2023-02-13/binance-says-stablecoin-partner-been-told-to-stop-minting-busd? srnd=cryptocurrencies-v2
Effective February 21, Paxos will cease issuing new BUSD tokens at the direction of, and in close cooperation with, the NYDFS, Paxos said. BUSD will continue to be fully supported by Paxos and will be redeemable until at least February 2024; new and existing Paxos customers will be able to redeem for USD, or convert their BUSD tokens to Pax Dollars (USDP ).
https://www.prnewswire.com/news-releases/paxos-will-halt-minting-new-busd-tokens-301744964.html
On the afternoon of the 13th, CZ issued a detailed article explaining that he has no relevant information about the so-called SEC and Paxos lawsuit except for public news articles. The lawsuit is between the US SEC and Paxos. But personally, he agrees with Mile's logic (but it doesn't make much sense): I know technically it doesn't need to pass the Howey test to be considered a security. The SEC is largely free to define investable assets as securities if it wishes. But it certainly sets a dire precedent. The SEC labeled BUSD an "unregistered security" and sued its issuer, Paxos. But how exactly is STABLECOIN considered a security when it clearly does not meet the Howey test. No one ever buys BUSD with "anticipation of profit". Xu Mingxing, CZ's old opponent, also said that he believes that the SEC may not win the lawsuit, because BUSD definitely has no profit expectations and should not be a security; but NYDFS can ask to stop BUSD or stop the license of Paxos.
https://twitter.com/cz_binance/status/1625067484368740353
CZ said that if BUSD is ruled a security by the courts, it will have a profound impact on how the crypto industry develops (or does not develop) in the jurisdictions where it is ruled as such. Binance will continue to support BUSD for the foreseeable future. We do foresee users migrating to other stablecoins over time. We will make product adjustments accordingly. For example, BUSD is no longer used as the primary currency pair for transactions, etc. Given the ongoing regulatory uncertainty in certain markets, additional programs in these jurisdictions will be reviewed to ensure our users are protected from any undue harm.
There are many speculations about the reasons. One view is that, combined with Kraken’s pledged interest-earning product being fined by the SEC, Paxos’s own stable currency USDP is not within the scope of the SEC’s warning. It is speculated that the US SEC’s crackdown on BUSD may be related to its deposit and interest-earning products. And Circle has a similar product, so it could take a similar hit.
Another view is that "securities" is a broader category defined by the Securities Act of 1933, including notes, bonds, debt obligations, interest certificates, mortgage trust certificates, deposit certificates, etc. test. Stablecoin issuers hold underlying T-bills, which makes them much like money market funds, giving holders exposure to securities even if they don’t profit from them.
Frank, the editor-in-chief of TheBlock, said that he would not be surprised if the US SEC is reviewing USDC. A few days ago, a senior exchange executive told him that the SEC was working on implementing regulations for cryptocurrencies."Night of the Nazi Long Knives". VanEck strategic consultant @gaborgurbacs said that Coinbase provides USDC users with a "reward" program, pays in USDC and uses terms such as "APY" and "yield rate". Such issues are being investigated. Paying forward returns can be regulated like some kind of fund. And Tether CTO also liked this tweet.
https://twitter.com/gaborgurbacs/status/1625139444326998016
At the end of 2022, Reuters reported that the U.S. Department of Justice’s investigation of Binance began in 2018, focusing on whether Binance violated U.S. anti-money laundering laws and sanctions. At least six federal prosecutors were involved, some of whom believed enough evidence had been gathered to take positive action against Binance, and others who believed time was needed to review more evidence. Binance has met with Justice Department officials in Washington in recent months. The parties discussed a possible out-of-court settlement, with the option to plead guilty or pay a fine.
But it is worth noting that CZ emphasized that this incident is a lawsuit between the SEC and Paxos, not a lawsuit with Binance. As a result, the redemption process has begun, and the BUSD with a market value of tens of billions seems to have been completely abandoned, and the possibility of future reconciliation is not great. In response to "suggesting that Binance next make their own DAI-like decentralized stablecoin", CZ responded that at this juncture, we would prefer others to do it to make it more... decentralized. We can't do everything. This statement seems to have some hidden meaning.
Subsequent reports by NYDFS and Bloomberg explained more reasons. The reason why NYDFS requests to stop BUSD seems to have nothing to do with the securities identification and pledge of stablecoins. The real reason seems to be Binance-Peg BUSD, Circle complaints and poor response from Paxos.
The NYDFS statement states that Paxos has been ordered to stop minting Paxos-issued BUSD because of several unresolved issues with Paxos overseeing its relationship with Binance regarding Paxos-issued BUSD. NYDFS emphasized that it authorized Paxos to issue BUSD on the Ethereum blockchain, but the department has not authorized Binance-Peg BUSD on any blockchain.
https://www.dfs.ny.gov/consumers/alerts/Paxos_and_Binance
According to Bloomberg, Circle complained to the NYDFS last fall about Binance’s mismanagement of reserves for its own tokens, suggesting that Binance did not store enough crypto reserves to back its tokens. NYDFS determined that Paxos was unable to operate BUSD in a safe and sound manner "based on extensive regulatory engagement, recent inspections, and Paxos' failure to remedy in a timely manner significant issues related to Paxos-issued BUSD."
"Paxos' failure to address critical deficiencies requires further action by the Department to order Paxos to cease minting Paxos-issued BUSD. The Department is closely monitoring Paxos to verify that the company is able to facilitate redemptions in an orderly manner and in compliance with enhanced, Risk-Based Compliance Protocol".
https://news.bloomberglaw.com/securities-law/stablecoin-issuer-circle-warned-ny-watchdog-about-binance-token
According to the interpretation of lawyer Collins Belton, it seems that the real motive of NYDFS is actually Binance Pegged BUSD, which believes that it is not backed by comprehensive reserves. The clearest disclosure of Peg BUSD’s relationship with Paxos wasn’t until late last year. The SEC will likely approach the issue from the same angle. So a better outcome would be less impact on other crypto stablecoins (probably not subject to knock-on effects).
