The Securities and Exchange Commission (SEC) has been increasing its efforts to regulate the cryptocurrency industry, citing concerns about fraud, market manipulation, and investor protection.
In recent months, the SEC has taken several actions against cryptocurrency companies and individuals, including initiating lawsuits, imposing fines, and issuing warnings.
The SEC’s actions have focused on various aspects of the cryptocurrency industry, such as initial coin offerings (ICOs), trading platforms, and digital asset management firms.
The SEC has also been working with other regulators and agencies, such as the Commodity Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority (FINRA), to coordinate its efforts and share information.
While some in the cryptocurrency community have criticized the SEC’s actions as overly aggressive and stifling innovation, others argue that regulation is necessary to protect consumers and establish a stable and trustworthy market.
Paxos in talks with SEC
Paxos Trust Company, a New York-based crypto firm, is reportedly in “constructive talks” with the U.S. Securities and Exchange Commission (SEC) after the regulator issued an enforcement action against stablecoin Binance USD (BUSD). The SEC told Paxos that it should have registered BUSD as a security, to which Paxos received a “Wells Notice” on February 3. The company “categorically disagrees” that BUSD is security and said that it would be prepared to “vigorously litigate” the matter if necessary. Following the announcement, the SEC and Paxos declined to comment on the ongoing talks.
Paxos’ troubles began when the New York Department of Financial Services (NYDFS) ordered the crypto company to freeze production of BUSD, which aims to maintain a peg to the US dollar. The company subsequently announced that it would “end its relationship with Binance for the branded stablecoin BUSD.” The NYDFS order came around the same time as the SEC’s Wells Notice.
This move by the SEC has huge implications for the $137 billion market, as BUSD is a type of cryptocurrency called stablecoin, which is designed to mirror real-world assets such as the U.S. dollar. Stablecoins are often backed by real assets such as bonds or cash in reserve, and they have become the backbone of the crypto market as they allow people to trade in and out of different coins quickly without having to convert in and out of fiat currency.
The SEC’s actions are being closely watched, as if it starts an official procedure, it could have implications for all stablecoins including tether and USDC, the two largest of which combined are worth $110 billion. If the SEC charges Paxos, any other issuer of stablecoins would need to register with the SEC and accept more stringent regulation. This move by the SEC will have significant implications for the crypto market, as stablecoins are a crucial part of the crypto infrastructure, and many people use them for day-to-day trading activities.
There are different scenarios that might play out, depending on what the SEC alleges. The Howey test will determine whether BUSD is a security or not. The SEC uses the Howey test to determine what it deems a security or an “investment contract.” If BUSD is deemed a security, the regulator would have oversight over the stablecoin, and any company issuing BUSD would need to register with the SEC and accept more stringent regulation. Another implication is that other stablecoins will also be given the same label.
Paxos’ categorical disagreement that BUSD is security suggests that it may aggressively litigate against the SEC, but the cost of doing so would be significant. It remains to be seen what the outcome of these talks will be, but it is clear that the crypto market is watching closely. In recent years, the SEC has been stepping up its scrutiny of the cryptocurrency industry, as it seeks to protect investors and ensure compliance with existing securities laws.
The SEC has been out for crypto’s throat
In 2018, the SEC launched a crackdown on initial coin offerings (ICOs), which are a type of crowdfunding mechanism used by blockchain startups to raise funds. The regulator argued that many ICOs were unregistered securities offerings and therefore illegal.
Since then, the SEC has brought numerous enforcement actions against ICO issuers and promoters, including against celebrities such as DJ Khaled and Floyd Mayweather Jr. who were accused of illegally promoting ICOs on social media.
The SEC has also taken action against cryptocurrency exchanges, which are the platforms where people can buy and sell cryptocurrencies. In 2019, the SEC charged the founders of the cryptocurrency exchange BitFunder with fraud, alleging that they had sold unregistered securities in the form of a digital token called BitFunder Tokens.
More recently, the SEC has been focusing on stablecoins, which are a type of cryptocurrency that are designed to maintain a stable value relative to another asset, such as the US dollar. The regulator has expressed concern that some stablecoins may be securities under US law, and therefore subject to SEC oversight.
In December 2020, the SEC filed a lawsuit against Ripple Labs, the company behind the cryptocurrency XRP, alleging that XRP was an unregistered security. The lawsuit sent shockwaves through the cryptocurrency industry, as XRP was one of the largest cryptocurrencies by market capitalization at the time.
Time Will Tell
The SEC’s actions against Paxos are part of a broader trend of increased regulatory scrutiny of the cryptocurrency industry. While some in the industry have called for clearer regulatory guidance to help them comply with existing securities laws, others have argued that the SEC’s actions are stifling innovation and hindering the growth of the industry.
The outcome of the talks between Paxos and the SEC will be closely watched by the cryptocurrency industry, as it could set a precedent for how stablecoins are regulated going forward. It remains to be seen whether Paxos will be able to convince the SEC that BUSD is not a security, or whether the regulator will take enforcement action against the company.