The SEC has taken a closer look at stablecoins, and it appears that Paxos, a blockchain provider that runs the third-largest stablecoin BUSD, may be in their sights. Following a series of high-profile fines the SEC has made in the industry after the FTX crash, the regulator has allegedly ordered Paxos to stop trading BUSD and may even issue charges against them.
In spite of it all, other coins have remained surprisingly resilient with larger stablecoins absorbing more market share. This could be a significant moment for the crypto industry, as the SEC has indicated that it may be taking action against stablecoins, which could bring about a major shift in the crypto market.
SEC Considering Legal Action Against Paxos for Alleged Unregistered Security Sale
In February, the Securities and Exchange Commission (SEC) issued a Wells notice to Paxos, a blockchain infrastructure platform, indicating that they may face a charge following an investigation. The SEC believes Paxos is selling an unregistered security in the form of their BUSD stablecoin. The New York Department of Financial Services (NYDFS) has since ordered Paxos to stop issuing Binance-backed stablecoin BUSD, citing “several unresolved issues related to Paxos’ oversight of its relationship with Binance”. Binance founder Changpeng Zhao later confirmed this news on Twitter.
Paxos has made it clear that they “categorically disagree with the SEC staff” when it comes to their BUSD product, a stablecoin built on the Ethereum blockchain with $16 billion in holdings as of January 31. They have declared that they are prepared to “vigorously litigate” should the situation require it. Since 2019, when Binance and Paxos first partnered, BUSD has been available to the public. The SEC is now considering taking legal action against Paxos for potentially violating investor protection laws, which could be a major turning point in the crypto industry’s struggle with regulation.
NYDFS Holds Crypto Companies Accountable for Regulatory Compliance Violations
At the core of the discussion lies the question of whether BUSD stablecoin is a security. Paxos has claimed that it is “backed 1:1 with U.S. dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts.” The New York State Department of Financial Services (NYDFS) has been highly vigilant when it comes to crypto companies since the downfall of FTX. Just recently, the NYDFS held Coinbase accountable for its inadequate Anti-Money Laundering (AML) and Know Your Customer (KYC) standards, as well as its failure to do a thorough background check of its new customers. Coinbase settled with a penalty of $100 million in January.
Genesis Global Trading and Gemini, two crypto firms registered in New York, have recently come under scrutiny for reportedly offering securities without registering them with the SEC. Both companies deny the accusations.
Kraken, another crypto exchange, was also charged by the SEC for not registering its crypto staking-as-a-service program, leading to the company paying a $30 million penalty and discontinuing the program.
Paxos Fallout Causes Shift in Stablecoin Market; TetherUSDT Takes Top Spot
Since Paxos released a statement on February 13, investors have fled out of the stablecoin with BUSD market cap dropping from $16.1 billion to $12.9 billion. According to Changpeng Zhao, the decline was likely to continue.
The pandemonium has benefited other stablecoins. TetherUSDT, the market leader, has extended its dominance to $70.3 billion and now accounts for around 53% of the market. Furthermore while Circle’s USD coin has increased to $42 billion and holds a 31.3% market share.
Despite the recent crackdowns, cryptocurrencies appear to be gaining momentum, as evidenced by the fact that retail investors are once again entering the scene and Bitcoin price have surged to a record-breaking high of $25,000.
The stablecoin market has also experienced significant growth of $2 billion since the Paxos fallout, with Tether now firmly occupying the number one spot in the industry. However, the Security and Exchange Commission (SEC) is continuing to monitor the situation, raising questions about how long stablecoins can remain in their current form.
SEC Action on Stablecoins Raises Concerns in Crypto Space
Stablecoins have been touted as a more secure form of crypto investment. Backed by short-term assets such as U.S. Treasuries and Treasury Reverse Repurchase Agreements, these coins are easily exchanged for USD at a 1:1 ratio. This stability has made them an integral part of the crypto market, providing a safe haven amidst its many scandals, fraud, and criminal proceedings. However, if the SEC continues its investigations, the crypto landscape could experience a major setback.
Following the FTX collapse, U.S. financial regulators were criticized for their delays in penalizing bad actors in the sector. With the Biden administration’s publication of measures to reduce cryptocurrency risks at the end of January, which mentions stablecoins twice, it is expected that regulators will take more rigorous action.
The response to Paxos’ case has been varied within the crypto space, with some raising concerns about the SEC’s enforcement. It is worth noting that there has been internal opposition within the SEC, as Commissioner Hester Pierce questioned the conclusion of the Kraken matter, declaring that the SEC had terminated a program that had been beneficial to many.
Cryptocurrency Sector Poised to Challenge Centralized Digital Currencies
Skeptics may point to the timing of the US Securities and Exchange Commission’s (SEC) increased scrutiny of cryptocurrencies and the Federal Reserve’s (Fed) Project Cedar, their prototype for a central bank digital currency (CBDC) built on blockchain technology.
Despite the lack of details regarding the timeline for release, the first stage of testing has already been completed. Other countries, such as the Bank of England, European Central Bank, and Bank of Japan are also showing progress in developing their own digital currencies; the Bank of Japan is reportedly planning to launch its pilot as soon as April.
The cryptocurrency sector is poised to be a major challenger to centralized digital currencies. Despite its volatility and the presence of some less than reputable players, its commitment to user privacy has made it an attractive option for individual investors. This could lead to fierce competition between digital currencies, with banks owning one and independent entities controlling the others.
Key takeaways
The U.S. Securities and Exchange Commission (SEC) has been actively pursuing crypto regulation and does not appear to be slowing down, especially on the backdrop of the FTX scandal. As we await the SEC’s ruling on Paxos’ activities, other stablecoins such as Tether and Circle continue to be popular investment options, gaining more and more attraction each day.
Digital assets offer investors a safe and secure way to store their money and are becoming increasingly popular as a reliable alternative to traditional investments. Despite the SEC’s efforts, demand for these types of cryptocurrencies continues to rise, with more investors turning to them for steady returns and potential gains.
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