Paxos Strongly Disagrees With SEC on BUSD, Willing to “Vigorously Litigate”

On Monday afternoon, Paxos acknowledged it had been notified by the SEC that the watchdog is preparing an enforcement action over the Binance-branded stablecoin BUSD. Paxos stated it “categorically disagrees” with the regulator’s stance and is “prepared to vigorously litigate” if needed.

Paxos Responds to SEC’s Wells Notice

On Monday afternoon, Paxos confirmed an earlier report indicating that the SEC is looking to sue it over BUSD claiming the stablecoin represents an unregistered securities offering. The company stated it had received a Wells notice—a letter from the watchdog heralding an enforcement action—on February 3rd. In its statement, the stablecoin-issuer expressed its disagreement with the SEC and its intent to fight the complaint:

Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws. This SEC Wells notice pertains only to BUSD. To be clear, there are unequivocally no other allegations against Paxos. Paxos has always prioritized the safety of its customers’ assets. BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts. We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.

Earlier on Monday, Binance’s CZ stated that, while he has no additional information about SEC’s lawsuit against Paxos, he believes the case is likely to have a profound impact on the industry—especially if BUSD is found to be a security. He, however, also stated that his exchange would continue supporting Binance USD stablecoin, but may move away from using it in time.

The SEC’s targeting of BUSD represents the second potentially far-reaching enforcement action undertaken this February. Last week, the Commission revealed a complaint alleging that Kraken’s crypto staking service constitutes an unregistered securities offering. The exchange agreed to settle with the regulator and discontinue the offering causing concerns over the future of staking in the US.

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Regulators Closing in On Paxos

Apart from the SEC probe into BUSD, Paxos also found itself in the crosshairs of the New York state regulator. The NYDFS recently ordered the stablecoin issuer to discontinue minting Binance USD. Allegedly, the company failed to properly conduct periodic risk assessments with regard to the token and is unable to issue it “safely”.

Paxos complied with the request and cease minting new Binance-branded stablecoins by February 21st, but stated that all existing BUSD remains fully backed and redeemable. The company also stated that the regulatory action did not impact its overall operation and commitment—nor discouraged it from its goal of “becoming the global leader in the blockchain tokenization infrastructure”.

Already last week, PayPal announced it would indefinitely pause work on its own stablecoin due to increased regulatory pressure. PayPal’s work alongside Paxos on a new stablecoin was initially reported in January 2022 and the token was allegedly just weeks from launch when the project was frozen.

Do you think Paxos could successfully argue that BUSD is not a security if the case goes to trial? Let us know in the comments below.