According to those with knowledge of the situation, the Securities and Exchange Commission has informed crypto startup Paxos Trust Co. that it intends to sue the company for breaking investor protection rules. This is the latest step in the agency’s expanding crypto enforcement effort.
According to the sources, Paxos received a letter from the SEC’s enforcement division known as a “Wells notice,” which the agency uses to alert businesses and people to potential enforcement actions.
According to the people, the notification claims that Binance USD, a digital currency that Paxos issues and lists, is an unregistered securities.
A stablecoin with the Binance brand name, BUSD, has a one-to-one dollar peg. In order to launch it in 2019, Binance and Paxos announced their alliance. BUSD is also listed on itBit, the Paxos-owned exchange for digital assets. Other exchanges that list BUSD are many.
It was unclear whether the SEC notice is explicitly connected to the coin’s issuance by Paxos, its placement on the exchange, or both.
A Paxos company spokeswoman stated that the business “is not commenting on any specific matter.”
BUSD is issued and held by Paxos, according to Binance, which simply licences its brand. It issued a statement saying, “We will continue to watch the situation.”
Requests for comment from the SEC went unanswered.
Companies that get Wells letters are permitted to reply in writing and explain to the SEC why a lawsuit shouldn’t be filed. The SEC’s wells notices do not guarantee that it will pursue enforcement action. Any enforcement settlement or litigation must have a majority vote from the agency’s five commissioners.
The SEC has been stepping up its enforcement of cryptocurrency laws against significant market participants. The Kraken platform, owned by Payward Inc., agreed last week to halt providing crypto staking services in the United States and to pay the SEC $30 million in fines. Staking enables investors to generate a return by temporarily transferring control of their cryptocurrency tokens to a middleman or a cryptocurrency network.
A significant stablecoin issuer has never previously been the target of enforcement action by the SEC. However, the agency stated that stablecoins will be a focus when it last year enlarged its special enforcement team devoted to the cryptocurrency business.
By investing user payments in assets such as short-term U.S. Treasury bonds and cash and cash equivalents, stablecoin issuers run a successful company. According to data provider CoinGecko, BUSD has developed into the third-largest stablecoin in the world, with a market valuation of more than $16 billion as of Sunday. Additionally, Paxos releases its own stablecoin dubbed Pax Dollar, which, according to statistics from CoinGecko, has a market valuation of about $897 million.
Stablecoins can mimic bank deposits or money-market mutual funds, according to SEC Chairman Gary Gensler. Stablecoins should have an unique regulatory framework and be issued only to banks, according to a team of regulators headed by the Treasury Department in November 2021. Such legislation, which would give regulators more latitude to oversee the market, has not been passed by Congress.
Over the past six years, the SEC has pursued enforcement action against numerous digital tokens. According to the agency, the assets fell within the category of investments that need to be registered with the SEC before being offered for sale to the general public. Typically, registration entails publishing thorough risk and financial disclosures that investors can use to analyze the advantages and disadvantages of an investment.