Paxos Faces SEC Charges for Minting BUSD

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he U.S. Securities and Exchange Commission is targeting the crypto world's stablecoins with a regulatory crackdown, having issued notice to Paxos for its role in Binance USD. This serves as an indicator of wider SEC action against the rapidly evolving industry—one that could have far-reaching consequences. Stablecoin technology stands at risk of facing serious impediments in order to ensure adherence to securities regulations set forth by financial authorities.

On Monday, the New York Department of Financial Services warned consumers that it had ordered Paxos to stop minting BUSD due to various issues concerning its relationship with Binance. This included a lack of appropriate oversight by Paxos regarding the production and circulation process for these coins. Consumers should be aware that trading or exchanging this digital currency may expose them to certain risks.

On Sunday evening, the Wall Street Journal reported that Paxos had received a possible enforcement action from the SEC related to its third-largest stablecoin by total supply, BUSD. Although Paxos "categorically disagrees" with this statement, an SEC spokesperson refused to comment on whether an investigation is currently taking place.

After months of apprehension voiced by legislators regarding stablecoins, last year's tumultuous crypto market saw multiple dramatic drops, such as the Terra/Luna drop and FTT's stumble leading to FTX's downfall. Regulatory bodies across the U.S., as well as other countries worldwide, have expressed doubt over these "stable" cryptocurrencies. Therefore, government entities are taking proactive approaches to mitigate further turbulence in this space.

"Stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits, and raise important policy issues," Last September, SEC Chair Gary Gensler divulged to an assemblage of legal professionals in Washington. "Depending on their attributes, such as whether these instruments pay interest, directly or indirectly, through affiliates or otherwise; what mechanisms are used to maintain value; or how the tokens are offered, sold, and used within the crypto ecosystem, they may be shares of a money market fund or another kind of security."

“We welcome the commissions’ vigorous enforcement of existing statutes, rules and court decisions that apply to cryptocurrency,”Bartlett Naylor, an advocate of financial policies at the consumer advocacy group Public Citizen, expressed in an email.

Aaron Kaplan, co-CEO of Prometheum Inc., a fintech company, declared that the U.S. government has just cause to be worried; if stablecoins are not managed cautiously, they may bring about systemic risk in the financial sector.

In October last year, the Financial Stability Oversight Council - a supercommittee of US regulators chaired by Treasury Secretary Janet Yellen and designed to avoid another financial meltdown akin to 2008 - published an extensive report covering digital assets. This document also addressed stablecoins with particular scrutiny.

The report included a warning that, "if stablecoins were to become widely adopted without adequate regulations in place, serious financial stability risks could arise." These dangers include runs on the asset - much like what happened with FTT which caused FTX's collapse. It is vital to ensure proper regulatory oversight of these cryptocurrencies.

According to The Block Pro Research, Circle's USDC is the second-largest stablecoin by market capitalization. Kaplan suggested that if BUSD has been classified as a security then it follows logically that other fully reserved stablecoins such as Circle’s USDC might be too.

Richard Mico, the CEO and Chief Legal Officer of FinTech platform Banxa, postulated that Circle's USDC could possibly be a possible target for regulatory action. Yet, he believed confidently in both Paxos and Circle's successful litigation against the SEC.

The SEC's move against Paxos has significant implications due to the company proactively pursuing regulation and branding itself as "the first regulated blockchain firm". With Sheila Bair, former FDIC Chair, and Bill Bradley, retired Senator of New Jersey serving on their board of directors, this enforcement action could indicate that other stablecoin issuers will face similar examinations.

Mico viewed the organization's decision as yet another demonstration of“how the regulatory body appears to have escalated its regulation-by-enforcement campaign."

The congressional work on a regulatory framework for stablecoin issuers in the US stalled due to divisions between legislators and the Treasury Department, giving the Securities and Exchange Commission (SEC) continued latitude to decide how it will deal with digital assets.

Jack Solowey, a policy analyst at Cato Institute's Center for Monetary and Financial Alternatives, asserted that Paxos is emblematic of the difficulty faced by crypto projects due to current regulations.

“One of the reasons for that concern is that there has not been adequate guidance,”According to Solowey. “It does contribute more evidence and more data points for why we need regulatory clarity in the U.S. and that could come and frankly should come through Congress acting through legislation."

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