The New York Department of Financial Services has issued an order to Paxos Trust Company to cease production of its popular Binance USD (BUSD) cryptocurrency. BUSD is a stablecoin backed by US dollars on a one-to-one basis and is considered one of the largest dollar-pegged cryptocurrencies. The launch of BUSD was a partnership between Binance and Paxos in 2019, and had received approval from New York’s financial regulator.
The move comes amid a tightening regulatory landscape for digital currencies. The US Securities and Exchange Commission has informed Paxos that it intends to file a lawsuit for breaking investor protection laws, marking the first enforcement action by the SEC against a prominent stablecoin issuer.
According to FOX Business journalist Eleanor Terrett, the action taken by the SEC against Paxos is part of a broader effort by regulators to crack down on the cryptocurrency market. Terrett tweeted on February 12th that the move was a “unilateral effort” by the SEC and other regulators to “blitz crypto,” and she predicts that more Wells notices will be issued in the coming weeks.
Another step in the unilateral effort between the @SECGov, @NYDFS and @USOCC to blitz crypto. More Wells notices going out in the coming 2-3 weeks, I’m told.
Keep an eye on @JunoFinanceHQ. https://t.co/u4Q3pHN2lH
— Eleanor Terrett (@EleanorTerrett) February 13, 2023
Binance USD has achieved the position of the third largest stablecoin by market capitalization, with a current market value of $16 billion as of Monday. The cessation of BUSD issuance by Paxos is expected to cause a decrease in its market cap. Despite this, the stablecoin remained trading close to its $1 value during the early hours of Monday morning.
As per The Wall Street Journal, the SEC has issued a Wells Notice to Paxos, signaling its intention to initiate enforcement proceedings against the company. The SEC considers BUSD as a security, as they think Paxos started issuing BUSD without proper registration and has now granted Paxos a 30-day window to present any facts that may prevent the enforcement action.
A Binance representative stated that Binance USD, which is owned and issued by Paxos, is considered one of the most transparent dollar-pegged cryptocurrencies available, as it is backed on a 1-to-1 basis. Binance had granted Paxos the rights to use their brand for BUSD and asserts that the stablecoin is regulated and overseen by the New York Department of Financial Services.
The regulator issued guidance to stablecoin issuers, specifying that US dollar-backed stablecoins must be backed by a reserve of assets. Paxos’ latest reserve report showed that BUSD was supported by $636 million in cash, $12 billion in Treasury-secured reverse repurchase agreements, and $3.3 billion in US Treasury bills.
Approximately, 90% of Binance USD (BUSD) is stored on the Binance platform and it constitutes 21.6% of the exchange’s token holdings, as per data from Nansen. Additionally, BUSD is listed on several other cryptocurrency exchanges.
The SEC’s enforcement action against Paxos is an indication of the regulator’s growing attention towards the cryptocurrency market.
Earlier this year, the SEC issued a Wells Notice to Coinbase regarding its lending product that would have paid up to 4% interest on USDC deposits, however, the plan was abandoned shortly after. The latest move by the SEC highlights its goal of promoting clarity and stability in the sector.
On February 9th this year, the SEC announced a settlement of $30 million with the cryptocurrency exchange Kraken for not registering its crypto staking program, which the regulator considered a security. Following the settlement, the SEC Chair, Gary Gensler, warned crypto companies to “comply with the law.
The SEC received criticism for its action against Kraken from one of its own commissioners. On February 10th, SEC Commissioner Hester Peirce criticized the agency’s conduct, calling it “not an efficient or fair way of regulating” and spoke out against shutting down a “program that has served people well.”