Stablecoins Could Shake Up The $137 Billion Market If The SEC Targets One Firm

Paxos, a company that issues stablecoins, could be targeted by the U.S. Securities and Exchange Commission.

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It is expected that this move will have a major impact on the $137 billion market, according to experts in Trade Algo.

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In terms of cryptocurrency, stablecoins are a type of cryptocurrency that is designed to reflect real-world assets like the US dollar.

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Often, stablecoins are backed by real assets, such as bonds or cash in reserves, such as bonds or cash in reserve. In recent years, these have become the backbone of the crypto industry as they allow people to sell and buy different coins quickly without having to convert them into and out of fiat currencies, and so they have become the backbone of the crypto industry.

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A digital currency called Binance USD or BUSD was issued by Paxos in the form of a digital token. 'Stablecoin' is a stablecoin that has been linked to Binance, one of the most popular cryptocurrency exchanges in the world. There is a one-to-one correlation between the BUSD and the U.S. dollar.

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Paxos stopped issuing BUSD last week after being ordered to stop by New York's financial regulator.

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Separately, Paxos announced that it had received a notice from the SEC informing it that the regulator is considering recommending an action alleging that BUSD is considered a security by the regulator. It appears from the notice that Paxos should have registered the offering of BUSD under the federal securities laws if the notice is to be believed. 

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There hasn't been any official action taken by the SEC yet. There is little doubt that the agency's actions are being watched closely, since if it decides to initiate an official procedure, that could have a major impact on all stablecoins, including USDC and Tether, which are the two most valuable stablecoins, worth a combined $110 billion.

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“Any other stablecoin issuer should register or prepare for a court battle with the SEC if the SEC charges Paxos,” said Renato Mariotti, a partner at BCLP.

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Are stablecoins securities?

There have yet to be any specific charges brought by the SEC, but the notice sent to Paxos focuses on the question of whether stablecoins should be viewed as securities at all.

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Paxos, on the other hand, says it “categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws.”

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The Howey test is used by the SEC so that it can determine what it considers to be a security or investment contract, and there are four criteria for determining whether something can be deemed an investment contract as part of the Howey test. For example, if the investor expects to make a profit from the investment.

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“It’s possible that Paxos aggressively litigates against the SEC, but the cost of doing so would be significant.” - Renato Mariotti

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The SEC will have oversight over the stablecoin if it is deemed a security and is deemed a security by the regulator. It would be necessary for any company issuing BUSD to register with the SEC and to accept more stringent regulations in order to do so.

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The same label will also be applied to other stablecoins in the future, which is another implication.

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“This action will certainly be based on a specific set of facts concerning the Paxos BUSD structure, but it will likely have broad implications for other stablecoin issuers selling coins into the US as well,” Townsend Lansing, head of product at CoinShares, told TradeAlgo.

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What are the likely outcomes?

Several different scenarios may be able to play out depending on the situation. Whether the SEC makes a complaint against Paxos and how the two sides proceed depends on what the SEC alleges against Paxos.

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“I believe that there is a good chance that the SEC will reach a settlement with Paxos through which Paxos will acknowledge that BUSD is a security, leading to other stablecoins following suit and registering,” Mariotti stated.

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“Paxos may litigate aggressively against the SEC, but the cost would be steep,” Mariotti said. 

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“Litigation would take years, and the risk of losing to the SEC would be substantial. Having Paxos fight against the SEC would create risk and make BUSD less attractive to investors."

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Mariotti also suggests that the SEC may regulate what assets are used to back stablecoins and what disclosures must be made by those issuing stablecoins.

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CoinShares' Lansing explained that the SEC's definition of a security or investment contract goes beyond the Howey test, and it has “extensive knowledge of how to apply both the law and judicial precedent.”

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It is most likely that BUSD will no longer be sold into the U.S. or available on U.S.-based digital asset exchanges absent a successful fight," Lansing said. "It is very likely that other stablecoins will follow suit."

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What are the chances of Tether and USDC being targeted?

Paxos and BUSD's fate will depend on what the SEC alleges.

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“We do not yet know the exact basis on which the SEC is alleging the violations, so we do not know if those allegations will extend to others in the same industry,” Lansing said.

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Carol Alexander, professor of finance at Sussex University, said the U.S. regulator's action is “more a move against Binance than stablecoins.”

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According to her, Tether and Circle, the company that issues USDC, are "close to the U.S. government." Circle CEO Jeremy Allaire has previously called for greater regulation of stablecoins.

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As Alexander said, "Binance is causing increasing concern among regulators around the world" in areas such as money laundering and securities law violations. There is a possibility that this is one of the reasons why the SEC has targeted BUSD,” according to her.

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Reuters reported last year that the Justice Department was investigating Binance for money laundering and sanctions violations. In 2021, Bloomberg reported that U.S. officials were investigating whether Binance employees traded insider information.

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Trade Algo's request for comment was not immediately answered by Binance.

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Trade Algo reported at the time that Binance has a "zero-tolerance" policy for insider trading and an "ethical code" that prevents misconduct.