Binance USD Token Lawsuit Filed by Paxos

There has been an increase in enforcement by the agency against major crypto players over the past few months.

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Securities and Exchange Commission officials have told crypto firm Paxos Trust Co. that they intend to file a lawsuit against it for violating investor protection laws, according to people familiar with the matter. This is the latest move that has been made by the SEC as it extends its crypto enforcement campaign.

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A letter was issued to Paxos by the SEC's enforcement staff referred to as a Wells Notice, which is used by the SEC as a warning to inform companies and individuals of possible enforcement action, according to the people familiar with the matter.

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It is alleged in the notice that Binance USD is an unregistered security that Paxos issues and lists, according to the people who filed the notice.

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BUSD is a stablecoin brand that is backed by Binance and is pegged to the dollar at a one-to-one ratio. In order to launch their partnership in 2019, Binance and Paxos have announced that they will work together. BUSD is also listed on the Paxos-run digital asset exchange, itBit, which is also run by Paxos. BUSD is also listed on a number of other exchanges as well.

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The SEC notice is unclear as to whether the notice relates specifically to Paxos issuing the coin, or whether it is related to the listing of Paxos' coin, or whether it relates to both.

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“On any individual matter, Paxos cannot comment at this time,” said a spokeswoman for the company on behalf of Paxos.

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The Binance exchange has confirmed that BUSD is issued and owned by Paxos, and it only licenses its brand to Binance. "We will continue to monitor the situation," the company said in a statement.

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In response to requests for comment, the SEC did not respond.

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A firm that receives a Wells Notice is given the opportunity to respond in writing to the SEC and explain why it should not proceed with a lawsuit against it. There is no guarantee that the SEC will take enforcement action against Wells as a consequence of the notices it has sent. It is mandatory for each of the agency's five commissioners to vote in order to authorize any settlement or litigation related to enforcement.

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In recent months, the SEC has intensified its enforcement efforts against major market participants in the crypto market. Payward Inc.'s Kraken platform announced last week that it would stop offering crypto staking services in the U.S. and pay the Securities and Exchange Commission $30 million in penalties for its violations. The concept of staking enables investors to earn a return on their investments by temporarily handing over their crypto tokens to either an intermediary or to a cryptocurrency network in order to earn a return.

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There has never been an enforcement action taken by the SEC against a major stablecoin issuer before. Nevertheless, when the agency was expanding its unit dedicated to crypto enforcement last year, it announced stablecoins would be one of the areas that would be targeted by the unit.

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There is a lucrative business run by stablecoin issuers by investing user deposits in cash and cash-equivalent assets such as short-term U.S. Treasurys. Data provider CoinGecko estimates that BUSD's market cap as of Sunday is over $16 billion, making it the third-largest stablecoin in the world. As per CoinGecko data, Paxos also has its own stablecoin called the Pax Dollar, and according to CoinGecko, the value of this stablecoin is around $897 million.

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The chairman of the Securities and Exchange Commission, Gary Gensler, has stated that stablecoins can resemble bank deposits or money-market mutual funds. Earlier in November 2021, a panel of regulators led by the Department of the Treasury recommended that stablecoins should be regulated specifically and their issuance should be limited to banks only. Congress has not passed such legislation, which gives regulators more discretion to police the market in a way that they see fit.

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During the last six years, the SEC has taken enforcement action against dozens of digital tokens that have been issued. There were allegations raised by the agency that these assets were the type of investments that must be registered with the SEC in order to be sold to the public. As part of the registration process, investors are required to submit financial and risk disclosures so that they can weigh the pros and cons of the investment and make a more informed decision.