The SEC takes aim at BUSD, and the uncertainty surrounding stablecoin regulation continues

Author: Mary Liu, BitpushNews

Stablecoins seem to be the next target of U.S. regulators in the cryptocurrency ecosystem.

Stablecoin issuer Paxos acknowledged on Monday that it received a Wells notice from the U.S. Securities and Exchange Commission (SEC) on February 3, 2023. The Wells notice indicated that SEC staff are considering recommending an action to charge BUSD as a security, and that Paxos should register the issuance of BUSD under federal securities laws.

Paxos issued the following statement: Paxos strongly disagrees with the SEC staff's view, as BUSD is not a security under federal securities laws. This SEC Wells notice only applies to BUSD. It is important to clarify that there are no other charges against Paxos, and Paxos always prioritizes the safety of customer assets. BUSD issued by Paxos is always backed 1:1 by reserves denominated in U.S. dollars, fully segregated and held in dedicated accounts. We will engage with SEC staff on this matter and are prepared to actively litigate if necessary.

BUSD is a stablecoin issued by Paxos under the Binance brand, pegged to the value of the U.S. dollar, and is wholly owned and managed by Paxos. Earlier that day, Paxos stated it would stop minting new BUSD in accordance with the New York Department of Financial Services (NYDFS) directive.

BUSD Faces Massive Redemptions, Binance Reserves Under Pressure

Following Paxos's announcement to stop minting new BUSD, the token saw a surge in redemptions, with CoinGecko data showing that investors redeemed 286,720,127 BUSD in about 8 hours.

During this period, BUSD trading volume also increased by 18%. Three months ago, BUSD's market capitalization was approximately $23.24 billion, and over the past 90 days, more than 30% of its supply has been redeemed. The redemptions on Monday caused slight price fluctuations, with BUSD dipping to a low of $0.992245 on February 13.

According to statistics from CryptoCompare.com on Monday, most of BUSD's trading that day was paired with Tether (USDT), followed by the Turkish lira, DAI stablecoin, and the U.S. dollar. Before Paxos's announcement on Monday morning, BUSD's trading volume was about $15 billion, but by around 3:15 PM New York time, the volume had increased by 18% to reach $17.6 billion.

Regulatory actions have once again put Binance's reserves to the test.

Nansen data shows that there is approximately $13.4 billion in BUSD on the Binance platform, making it the largest asset in Binance's reserves after Tether's USDT, accounting for 22% of Binance's $60 billion in assets. The $3 billion BNB is the native token of the Binance BNB Chain, making up about 5% of the exchange's total assets.

Walter Teng, Vice President of Digital Asset Research at market analysis firm Fundstrat, commented that the withdrawals have tested Binance and its reserve assets. He said, "If Binance does not hold customer deposits at a 1:1 ratio, they may face withdrawal pressure. The on-chain liquidity of BUSD has dried up, and redeeming BUSD for U.S. dollars or alternative stablecoins to meet customer withdrawals is the only viable option."

Kaiko research analyst Conor Ryder believes that given Binance only licenses its brand to BUSD, Paxos's decision is expected to have a limited financial impact on the exchange, but it may lead to finding another issuer for BUSD or different solutions.

Ryder said, "There are still many variables at play, but for now, we can expect traders to slowly start cashing out their BUSD holdings."

Binance CEO Changpeng Zhao also warned that if BUSD is deemed a security, it would have significant implications for the cryptocurrency industry.

He pointed out that when Paxos stops minting new BUSD tokens, the market capitalization of the BUSD stablecoin "will only decline over time," assuring investors in a tweet that customer funds are safe.

Wider Implications for the Cryptocurrency Market

Stablecoins have grown to a scale of $135 billion in the crypto space, serving as a pillar of the cryptocurrency ecosystem and seen as a "killer use case" for the industry. The actions against Paxos are significant, as the company is regulated and markets itself as "the first regulated blockchain company," with board members including former FDIC Chair Sheila Bair and retired Senator Bill Bradley.

Cryptocurrency market observers expect the SEC to intensify its investigations into stablecoins and introduce new regulatory measures, which brings previously unconsidered risks and may continue to negatively impact prices.

Bitpush previously reported that SEC Chair Gary Gensler stated at a legal conference in Washington last September, "Stablecoins have characteristics similar to money market funds, other securities, and bank deposits, and may compete with them, raising important policy issues."

The Financial Stability Oversight Council, a super committee of U.S. regulators chaired by Treasury Secretary Janet Yellen, is responsible for preventing a repeat of the 2008 financial crisis. The council included stablecoins in a comprehensive report on digital assets released last October, warning that "if stablecoins grow rapidly without adhering to and cooperating with appropriate regulation, it could pose risks to financial stability."

Aaron Kaplan, co-CEO of fintech company Prometheum Inc., stated in a tweet that the U.S. government has "reasonable grounds for concern," believing that if mismanaged, stablecoins could pose systemic risks to the financial system. He said, "If BUSD is considered a security, then other dollar-pegged stablecoins—including Circle's USDC—could also be securities, which is unavoidable."

Richard Mico, CEO and Chief Legal Officer of fintech platform Banxa, views Circle's USDC as a potential next regulatory target, but he believes both Paxos and Circle could win in court against the SEC. He stated that one reason for this concern is the lack of sufficient guidance, which indeed provides more evidence and data points on why we need clear regulation in the U.S., and frankly, it should be achieved through legislation passed by Congress."

Leena ElDeeb, a research assistant at digital asset company 21.co, stated in a report, "This headwind will lead to consolidation in the stablecoin market towards blue-chip stocks like Tether and USDC, with the likely winner being Tether, as we see millions of dollars flowing into USDT on Binance, and we may also witness the rise of decentralized stablecoins like DAI to resist censorship."