Whole Process Overview: U.S. Regulation Suddenly Strangled, BUSD or History?

Wu said the author | Colin Wu

In the early morning of February 13, Beijing time, the Wall Street Journal reported that the US Securities and Exchange Commission (SEC) had informed stablecoin company Paxos that it planned to sue the company for violating investor protection laws. The notice states that the digital asset Binance USD, issued and listed by Paxos, is an unregistered security. Companies that receive a notice from Wells can respond in writing and tell the SEC why it should not proceed with the lawsuit. The Wells notice is not the ultimate indication that the SEC will take enforcement action. The agency's five commissioners must vote to authorize any enforcement settlement or litigation. The SEC has not previously taken enforcement action against major stablecoin issuers.

On the afternoon of February 13, Beijing time, Bloomberg released news and published a Binance statement: The New York State Department of Financial Services (NYDFS) has instructed Paxos to stop minting new BUSD, which is a stablecoin wholly owned and managed by Paxos, and the market value of BUSD will only decline over time. Paxos will continue to service the product and manage redemptions. Paxos also guarantees that the funds are safe and fully covered by the reserves of its banks.

Paxos said that as of February 21, Paxos will stop issuing new BUSD tokens in accordance with and in close cooperation with NYDFS. BUSD will continue to be fully supported by Paxos and will be redeemable until at least February 2024; New and existing customers of Paxos will be able to redeem for USD or convert their BUSD tokens to Pax Dollar (USDP).

On the afternoon of the 13th, CZ issued a detailed explanation that he did not have any relevant information about the alleged SEC and Paxos lawsuit other than public news articles. The lawsuit was conducted between the SEC and Paxos. But personally, he agrees with Mile's logic (but doesn't make much sense): I know that technically, it doesn't need to pass the Howey test to be considered a security. The SEC is essentially free to define investable assets as securities if it wishes. But this undoubtedly sets a terrible precedent. The SEC marked BUSD as an "unregistered security" and sued its issuer, Paxos. But how exactly is STABLECOIN considered a security when it clearly does not meet the Howey test criteria. No one has ever had a "profit expectation" when buying a BUSD. Xu Xingxing, CZ's old rival, also said that he believes the SEC may not win the lawsuit because BUSD definitely has no profit expectations and should not be securities; However, NYDFS can require a license to stop BUSD or stop Paxos.

CZ said that if BUSD is ruled as a security by a court, it will have a profound impact on how the crypto industry develops (or does not develop) in jurisdictions where it is ruled to be such. Binance will continue to support BUSD for the foreseeable future. We do foresee users migrating to other stablecoins over time. We will make product adjustments accordingly. For example, BUSD is no longer used as the primary currency pair for trading, etc. In light of the ongoing regulatory uncertainty in certain markets, other projects in these jurisdictions will be reviewed to ensure that our users are protected from any undue harm.

There is a lot of speculation about the reason, one view is that combined with the previous SEC fine for Kraken's staked interest-bearing products, Paxos' own stablecoin USDP is not within the scope of the SEC warning, speculating that the US SEC's crackdown on BUSD may be related to its deposited interest-bearing products. Circle has a similar product, so it could be hit similarly.

Another view is that "securities" are a broader category defined by the Securities Act 1933, including notes, bonds, debt certificates, certificates of interest, certificates of mortgage trust, certificates of deposit, etc., and do not necessarily strictly meet the Howey test. Stablecoin issuers hold underlying treasury bills, which makes them much like money market funds, exposing holders to the security even if they are not profiting from it.

Frank, editor-in-chief of TheBlock, said he wouldn't be surprised if the SEC was reviewing USDC. A few days ago, an exchange executive told him that the SEC was embarking on a "Nazi night of knives" targeting cryptocurrencies. VanEck strategic adviser @gaborgurbacs said that Coinbase offers a "reward" scheme for USDC users, paying in USDC and using terms such as "APY" and "yield", which is speculated that the SEC is investigating such issues given recent developments in Paxos and Gensler's statements on staking and earnings. Paying forward earnings can be regulated like some kind of fund. The Tether CTO also liked the tweet.

At the end of 2022, Reuters reported that the U.S. Department of Justice's investigation into Binance began in 2018 and focused on whether Binance violated U.S. anti-money laundering laws and sanctions. At least 6 federal prosecutors were involved, with some believing that enough evidence had been gathered to take aggressive action against Binance, while others felt that time was still needed to review more evidence. Binance has met with Justice Department officials in Washington in recent months. The parties discussed possible out-of-court settlements, with the option of pleading guilty or paying a fine.

But it's worth noting that CZ emphasized that the incident was a lawsuit between the SEC and Paxos, not Binance. As a result, the redemption process has begun, and the tens of billions of BUSD seem to have been completely abandoned, and the possibility of future settlement is not great. In response to "suggesting that Binance make their own DAI-like decentralized stablecoin next", CZ responded that at this juncture, we would prefer others to do it to make it more ... Decentralization. We can't do everything. There seems to be something difficult to say about this statement.

Subsequent NYDFS and Bloomberg reports explain why. The reason why NYDFS requested the cessation of BUSD does not seem to be related to the securities identification and pledge of stablecoins. The real reason seems to be Binance-Peg BUSD, Circle complaints, and Paxos' poor response.

The NYDFS statement states that Paxos has been ordered to stop minting Paxos-issued BUSDs because Paxos has several unresolved issues regarding Paxos-issued BUSDs overseeing its relationship with Binance. The NYDFS emphasized that it authorized Paxos to issue BUSD on the Ethereum blockchain, but the department has not authorized Binance-Peg BUSD on any blockchain.

According to Bloomberg, Circle complained to NYDFS last fall about Binance's mismanagement of its own token reserves, indicating that Binance did not store enough crypto reserves to back its tokens. The NYDFS determined that Paxos was unable to operate BUSD in a safe and robust manner "based on extensive regulatory engagement, recent inspections, and Paxos' failure to remedy significant issues related to the Paxos-issued BUSD in a timely manner." "Paxos failed to address critical deficiencies and required further action by the Department to order Paxos to stop minting the BUSD issued by Paxos. The department is closely monitoring Paxos to verify that the company is able to facilitate redemptions in an orderly manner and adhere to enhanced, risk-based compliance protocols."

Attorney Collins Belton interpreted that it seems that the real motive of the NYDFS is actually Binance Pegged BUSD, arguing that it is not backed by a comprehensive reserve. It wasn't until late last year that Peg BUSD's relationship with Paxos was most clearly revealed. The SEC will likely approach this from the same angle. Therefore, a better result is a reduced impact on other crypto stablecoins (which may not be affected by cascade effects).

According to the "Notice on Further Preventing and Dealing with the Speculation Risk of Virtual Currency Transactions" issued by the central bank and other departments, the content of this article is only for information sharing, and does not promote and endorse any business and investment behavior, and readers are requested to strictly abide by the laws and regulations of the region and not participate in any illegal financial behavior. We will not provide transaction entrances, guidelines, issuance channel guidance, etc. for the issuance, trading and financing of any virtual currency or digital collections. Wu said that the content is prohibited from being reproduced or copied without permission, and violators will be investigated for legal responsibility.