Remember when the SEC made headlines last week when it declared war on the staking service of cryptocurrency exchange Kraken?
Today, I want to cover another piece of news that made headlines that same week. Paxos and its stablecoin Binance USD (BUSD). The SEC apparently believes the sale of BUSD violates securities laws, and the New York State Department of Financial Services (NYDFS) has asked Paxos to stop issuing new BUSD.
Stablecoins as securities
Stablecoin issuer Paxos is at odds with the SEC and NYDFS over BUSD.
Why is it important?
Is this the beginning of a barrage against stablecoins? Or is it the relationship between Paxos and Binance, which does not have a clearly defined headquarters and is often viewed as something of a lawless entity?
In retrospect, CoinDesk first said that the NYDFS was investigating Paxos. On the 12th, The Wall Street Journal reported that the SEC has informed Paxos of its intention to take legal action against BUSD for possible violations of federal securities laws. On the 13th, the NYDFS issued a warning to consumers that Paxos had ordered it to stop issuing BUSD. In response, Paxos announced that it would stop issuing new BUSD.
While some see the move as an attack on stablecoins, so far it seems that Binance and its relationship with BUSD are at stake.
I’ve spoken to a number of people over the past few days about the matter, all of whom requested to remain anonymous due to ongoing regulatory investigations.
What we don’t know at this point is:
1. How does the SEC define BUSD as a security?.
Requirements of the Howey Test (a test of whether an investment product is a security): 1) from the efforts of others, 2) with the prospect of profit, 3) in joint ventures, 4) investments of funds. ─ it seems difficult to match BUSD.
First, BUSD is a stablecoin. It was not built to be profitable per se, nor does Paxos offer a yield-generating product using BUSD.
There is also an interpretation that the stablecoin may be an MMF (money market fund). What is confusing is that the SEC and NYDFS only target BUSD and not Pax Dollar (USDP), another stablecoin issued by Paxos.
2. Paxos next steps
Paxos has spent the last several years striving to appear as compliant as possible, acquiring state and federal licenses. Paxos could consider settling with the SEC, but Paxos said it would not hesitate to sue.
3. Next steps for Binance
This is probably more important. The fact that this crackdown appears to be more focused on BUSD than Paxos strongly suggests that the real target may be Binance.
More interestingly, Binance has announced that it will continue to automatically convert user holdings of stablecoins into BUSD, even though new BUSD is no longer in circulation.
Related article: Binance, USD coin, etc. stop supporting 3 stablecoins ── Convert users’ stablecoins to Binance USD
What we do know, however, is that the SEC is accelerating its crackdown on crypto assets, including notifying Paxos, settling with Kraken, and proposing stricter regulation of crypto custody. The industry is tense.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Original: State of Crypto: Interpreting the Paxos-Binance Tea Leaves
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