Stablecoin issuer Paxos has been instructed to cease minting BUSD, the dollar-pegged cryptocurrency developed for premier cryptocurrency exchange Binance, by the New York Department of Financial Services (NYDFS).
The order comes after the Securities and Exchange Commission (SEC) announced legal action against Paxos for issuing what it deems unregistered securities in the form of various stablecoins, including BUSD.
BUSD is the third-largest stablecoin by market capitalisation. Stablecoins are fiat-pegged cryptocurrencies used for engaging in decentralised finance (DeFi) without the burden of unpredictable price fluctuations.
Binance stated that it will continue to support BUSD for the “foreseeable future”, though the company expects users to migrate to other stablecoins over time. The exchange will also move away from using BUSD in its trading pairs.
According to Binance, all issued BUSD coins are fully backed by audited reserves.
Around US$14mln worth of BUSD was redeemed in the hours following the NYDFS’s announcement.
PayPal stablecoin on ice
Paxos was also working with PayPal Holdings Inc (NASDAQ:PYPL) on the latter’s stablecoin offering, but the payment processor last week shelved the project after New York regulators commenced their investigation into Paxos.
PayPal was hoping to launch its stablecoin in the coming weeks.
“If and when we seek to move forward, we will, of course, work closely with relevant regulators,” spokeswoman Amanda Miller said in an emailed statement.
Binance chief Changpeng ‘CZ’ Zhao took to Twitter to discuss the situation, stating: “‘IF’ BUSD is ruled as a security by the courts, it will have profound impacts on how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such.”
CZ also questioned the validity of the SEC’s claims by sharing a Tweet from popular crypto influencer Miles Deutscher.
Under the Howey Test, a financial product qualifies as a security only if there is an expectation of profit, which “no one has ever had… when buying BUSD”, said Deutscher.
The SEC has labelled BUSD as an “unregistered security”, and is suing its issuer, Paxos.
But how on earth is a STABLECOIN considered a security, when it clearly doesn’t meet the Howey Test criteria.
— Miles Deutscher (@milesdeutscher) February 13, 2023
The news comes amid renewed regulatory scrutiny in the cryptocurrency space after a tumultuous 12 months of large-scale industry failures, from the collapse of another stablecoin, Terraform Labs’ UST token last May, to November’s shock implosion of FTX, formerly the world’s second-largest crypto exchange.
The US Securities and Exchange Commission (SEC) handed prominent cryptocurrency exchange Kraken a US$30mln fine for offering what the regulator deemed unregistered securities through its staking programme.
There are concerns among stakeholders that the SEC may target other brokers, including Nasdaq-listed Coinbase Global Inc (NASDAQ:COIN), in the coming weeks and months.
It;s worth noting that while the collapse of UST was disastrous, it was fundamentally different in nature to BUSD.
As an algorithmic stablecoin, UST was not backed by fiat or any other form of collateral, instead relying on smart contracts to maintain its peg.