Paxos ordered to stop issuing Binance stablecoin: Here’s what’s going on with BUSD

It provides users with a digital asset that is pegged to a stable asset such as the US dollar, thus avoiding the volatility that is often associated with other cryptocurrencies like Bitcoin.

The SEC’s action against Paxos stems from its belief that BUSD should be classified as a security, and therefore subject to regulation under US securities laws. The SEC has long been grappling with the question of whether or not stablecoins should be considered securities, and it appears that it has now taken a more aggressive stance on the matter.

The regulatory scrutiny of BUSD has raised concerns among members of the cryptocurrency community. Some argue that the allegations of BUSD being an unregistered security are unfounded, as stablecoins are not intended to appreciate in value. “Nobody expects profit when purchasing a stablecoin," said crypto analyst Miles Deutscher in a Feb 13 tweet.

However, the SEC's allegations against BUSD are not without merit. While stablecoins are designed to maintain a stable value, holders can still profit from them through various means, such as arbitrage, hedging, and staking. The potential for profit means that stablecoins could meet the criteria for being considered securities.

The Howey Test is a legal benchmark used by the SEC to determine whether a digital asset is a security. The test consists of four prongs: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) solely from the efforts of others. If an asset meets all four prongs of the Howey Test, it is considered a security and subject to regulation under securities laws.

Stablecoins may meet the first three prongs of the Howey Test, as investors typically invest money in a common enterprise (the stablecoin issuer). The expectation of profits could come from activities such as staking, hedging and arbitrage trading. The fourth prong, however, is less clear.

Despite the potential for stablecoins to be considered securities, there is currently no clear regulatory framework for them. The SEC has not yet provided clear guidance on how it intends to regulate stablecoins, leaving issuers and investors in a state of uncertainty. The lack of regulatory clarity may also be a reason why some community members have dismissed the SEC's allegations against BUSD as "FUD" (fear, uncertainty, and doubt).

In addition to the SEC's allegations, the NYDFS has ordered Paxos to halt the issuance of BUSD. The NYDFS is responsible for regulating financial services in the state of New York, including cryptocurrencies. The order to halt the issuance of BUSD may be related to concerns about Paxos's compliance with New York's BitLicense regulations.

The BitLicense is a regulatory framework that requires cryptocurrency companies operating in New York to obtain a licence from the NYDFS. BitLicense is known for being one of the most stringent regulatory frameworks for cryptocurrency companies, and many companies have been hesitant to apply for the licence due to the high compliance costs and strict requirements.

The SEC’s ruling and the NYDFS’s order to stop the issuance of BUSD have taken a toll on the stablecoin’s valuation. BUSD has been trading at a marginal discount to the U.S. dollar since Feb 13. The coin even dropped to a low of $0.9992 earlier today. Paxos has also burnt a large amount of BUSD to support customer redemptions.

As per a report by Wu Blockchain, nearly $350 million BUSD has been burnt over the last 24 hours. This has resulted in BUSD’s market cap shrinking from $16.15 billion on Feb 12 to $15.71 billion at the time of writing.

Binance has also suffered losses after regulators cracked down on BUSD. BNB, the native cryptocurrency of the Binance network, fell nearly 8 percent after the announcements. The token plunged from $319.16 on Feb 12 to $291.65 at the time of writing. FUD around BUSD has also caused users to withdraw funds from Binance. As a result, the exchange saw outflows worth $900 million on Feb 13, according to DeFiLlama.

All this is despite a statement from Binance CEO Changpeng Zhao (CZ) stating that the exchange would continue to support BUSD for “the foreseeable future.” Paxos has also reassured users saying that BUSD will be fully supported” and “redeemable” until February 2024. Paxos has also given users the option to convert BUSD into Pax Dollar (USDP), another dollar-backed stablecoin that it issues.

As the debate over whether stablecoins like BUSD should be classified as securities continues, it remains to be seen what impact the SEC's actions against Paxos will have on the wider crypto community.

Some observers have suggested that the move may be part of a broader effort to regulate the crypto industry more closely, while others have criticised the SEC for overreaching and attempting to stifle innovation.

Regardless of the outcome, it is clear that stablecoins are becoming an increasingly important part of the crypto ecosystem. As investors and traders seek out digital assets with greater stability and predictability, the demand for stablecoins like BUSD is likely to continue to grow. At the same time, regulators are likely to scrutinise these assets more closely in order to ensure that they are not being used for fraudulent or illegal activities.

Overall, the controversy over the SEC's lawsuit against Paxos highlights the ongoing tensions between the crypto community and regulators, as well as the challenges of navigating a rapidly evolving industry with complex and often unclear regulations.

As the crypto industry continues to mature, it will be important for all stakeholders to work together to find a balance between innovation and responsible oversight, in order to create a more stable and secure financial system for all.