28
Feb
2023

Coinbase Makes Moves To Avoid The Ire Of SEC

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Coinbase makes plans to suspend BUSD

Coinbase, one of the largest cryptocurrency exchanges in the world, has announced that it will suspend trading of Binance USD (BUSD) in less than a month. This move comes two weeks after Paxos Trust disclosed it would stop minting the Binance-branded stablecoin due to regulatory pressure. According to Coinbase, the decision to suspend BUSD trading is based on its internal monitoring and review processes. The exchange stated that BUSD no longer met its listing standards and would be suspended.

The SEC is on a sue-spree

The Securities and Exchange Commission (SEC) plans to sue Paxos for violating investor protection laws, stating that it had issued BUSD in an unregistered securities sale. Timothy Cradle, Director of Regulatory Affairs at Blockchain Intelligence Group, stated that Coinbase’s decision to suspend trading for BUSD was likely an attempt to avoid scrutiny from regulators. Exchanges took similar measures in 2020 after the SEC accused Ripple Labs of raising $1.3 billion in unregistered securities sales through the token XRP. Numerous exchanges, including Coinbase, suspended XRP in the wake of the lawsuit’s announcement. The dispute between Ripple Labs and the SEC remains ongoing today.

Paxos Trust has owned and operated BUSD since its inception in 2019 when the blockchain infrastructure platform entered into a licensing agreement with Binance, the largest cryptocurrency exchange by volume. Coinbase began listing BUSD on its platform in April of last year. Binance’s founder and CEO Changpeng Zhao has stated that Paxos was also ordered to stop issuing BUSD by one of its primary regulators, the New York Department of Financial Services (NYDFS), as well.

BUSD

BUSD is the third-largest stablecoin by market capitalization with a total value of around $10 billion, according to data from CoinGecko, only behind Tether’s USDT and Circle’s USDC stablecoins. Stablecoins are cryptocurrencies designed to maintain a stable value, often pegged to a fiat currency or a commodity. They aim to reduce volatility in the cryptocurrency market and make it easier to use cryptocurrencies as a means of payment. However, the stability of stablecoins is not always guaranteed, and there have been cases of stablecoins failing.

The Stablecoin Dilemma 

The stablecoin market has experienced some failures in recent years, including the collapse of FTX’s USD-pegged stablecoin, FTT, and the Terra platform’s LUNA stablecoin. These incidents have highlighted the risks associated with stablecoins and underscored the need for greater transparency and regulation in the industry.

FTX’s FTT stablecoin was launched in June 2019 with the goal of offering a more stable alternative to the volatile cryptocurrency market. However, the stablecoin’s peg began to fail in March 2020, leading to a sharp drop in its value. FTX responded by buying back FTT tokens at a discounted rate, but the incident damaged the stablecoin’s reputation and led to questions about its underlying collateral.

Similarly, Terra’s LUNA stablecoin was launched in April 2019 and was backed by a basket of cryptocurrencies. However, the stablecoin’s peg began to falter in early 2021, and the value of LUNA dropped by more than 80% in a matter of days. Terra responded by pledging to use its own funds to stabilize the stablecoin’s value, but the incident highlighted the risks associated with stablecoins that are not fully collateralized.

The collapse of FTT and LUNA underscores the need for greater transparency and regulation in the stablecoin market. Stablecoins play a critical role in the cryptocurrency ecosystem by providing a stable alternative to the volatile cryptocurrency market. However, the lack of regulation and transparency in the stablecoin market makes it difficult for investors to assess the risks associated with these assets.

Stablecoins that are not fully collateralized or that rely on a basket of cryptocurrencies as collateral are particularly vulnerable to sudden market shifts, as demonstrated by the collapse of FTT and LUNA. To mitigate these risks, stablecoin issuers should be required to disclose their collateral holdings and undergo regular audits to ensure that they are fully backed by assets of sufficient value.

Coinbase and Binance

The relationship between Coinbase and Binance is complicated. Binance is one of the largest cryptocurrency exchanges in the world, while Coinbase is one of its main competitors. However, both exchanges have been working together to promote the use of stablecoins. Stablecoins are becoming increasingly popular in the cryptocurrency market, and both Coinbase and Binance have been expanding their offerings of stablecoins in recent years.

The decision by Coinbase to suspend trading of BUSD is likely an attempt to avoid regulatory scrutiny. The use of stablecoins in the cryptocurrency market is becoming increasingly popular, but their stability is not always guaranteed. Stablecoins like FTX and Terralabs have failed in recent years, highlighting the risks associated with using stablecoins. The relationship between Coinbase and Binance is complicated, but both exchanges have been working together to promote the use of stablecoins. It remains to be seen how the cryptocurrency market will evolve in the coming years, but stablecoins are likely to play an increasingly important role.

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