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SEC Leans on Paxos Over BUSD Stablecoin: Here’s Everything You Need to Know



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The new crypto week has set off on a red theme, with prices of cryptocurrencies dropping across the board on account of the regulation narrative that has ushered in FUD among holders. Bitcoin (BTC), Ethereum (ETH), and other top altcoins registered sharp losses coming off the weekend, with the majority still on a downtrend trajectory. The market slump was triggered by late Sunday reports that the US Securities and Exchange Commission has pressed on with its heightened scrutiny of the crypto sector, capping off a week of intensified oversight.

On Thursday, the Gensler-led agency laid a $30 million settlement fine on Kraken for violations constituting the offering of unregistered securities through its crypto-staking platform. The SEC's ruling threw the sector into chaos heading into the weekend. Market data shows the crypto market is still downbeat.

BTC/USD chart. Source: TradingView

These recent developments have stirred up a debate within the crypto community, drawing reactions from market participants and other key figures, including SEC Commissioner Hester Peirce. In a statement issued after the settlement news last week, Pierce disapproved of the agency's conduct, equating it to that of a ‘paternalistic and lazy' regulator.

Coinbase is ready to defend its staking service, CEO says

Reports of impending enforcement action emerged ahead of the Kraken fine imposition after Coinbase CEO Brian Armstrong warned in a late Wednesday tweet that the US markets regulator was targeting crypto-staking services offered to US clients by centralized platforms. In a more recent post on Twitter, Armstrong said the exchange is ready to legally defend its crypto staking program, adding that it can't be considered a security as was the case for Kraken.

“Staking is not a security under the US Securities Act, nor under the Howey test.” Coinbase's chief legal officer, Paul Grewal, penned in a statement released in the wake of Kraken's incident.

In addition to trading platforms, banks with crypto dealings have been drawn into the same heat in a move that some opine is meant to curtail the interaction of traditional financial sector with digital assets and, consequently, exposure. On Friday, European Parliament published legislation requiring that EU Banks comply with restrictive crypto rules as the commission prepares clear guidelines. The draft mandates banks operating in the European Union to consider crypto as an extremely risky asset and report exposure – direct and indirect – to the asset. It also outlined as a recommendation that the European Commission prepare more guidelines by June.

SEC threatens ‘enforcement action' Paxos over Binance USD

A Feb 12  report from the Wall Street Journal indicated that the US Securities and Exchange Commission was planning a lawsuit against the Paxos Trust. Persons familiar with the Wells Notice issued by the agency said that the regulator claimed that the Binance USD token, issued by the firm, is an unregistered security. The BUSD stablecoin was conceived in September 2019 following a collaboration between Binance and the stablecoin issuer.

Scrutiny on different fronts

Notably, the New York-headquartered blockchain firm has its stablecoin offering, Paxos Dollar (USDP), launched before the Binance-branded stablecoin. Reports emerging towards the end of last week informed that Paxos was under investigation by the NY Department of Financial Services.

“The Department is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols,” NYDFS said in an issued consumer alert.

The news prompted payments services provider PayPal to halt its stablecoin project, announcing on Friday that it was putting on hold efforts towards introducing its stablecoin to the market.

Paxos halts BUSD issuances and ends collaboration with Binance on the token

Paxos has since acted on NYDFS's directive, telling its users that it will stop minting more BUSD tokens starting Feb 21. The regulated blockchain infrastructure firm also severed its relationship with Binance for the stablecoin offering.

“Paxos has always prioritized the safety of its customers' assets […] BUSD will remain fully supported by Paxos and redeemable to onboarded customers through at least February 2024. New and existing Paxos customers will be able to redeem their funds in US dollars or convert their BUSD tokens to Pax Dollar (USDP),” the blockchain company said in a statement confirming the issuance cease.

Binance appears to have taken a less combative approach as opposed to Coinbase. A spokesperson from the former exchange said it would be assessing other projects under it to prevent inconveniences to users. CEO Changpeng Zhao further communicated that the platform wil continue using the BUSD token, but it is prepared to switch to another stablecoin that could or could not be pegged to the US dollar as its native pair for trading.

“IF BUSD is ruled as a security by the courts, it will have profound impacts on how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such. […] We do foresee users migrating to other stablecoins over time. And we will make product adjustments accordingly. e.g., move away from using BUSD as the main pair for trading, etc.,” CZ wrote on Twitter.

The latest action on centralized exchanges has drawn mixed reactions from the broader crypto community. The majority specifically have an issue with the “regulation by enforcement approach, which has impeded innovation resulting in the US trailing other jurisdictions like Hong Kong and Singapore, which are in advanced stages of establishing clear guidelines around stablecoins.

Market action

Staking service provider Lido whose Ethereum staking platform holds 4.8 million Ether, shared similar views on the agency's ruling, warning that the decision could have dire implications. An official from the decentralized autonomous organization (DAO) behind the DeFi project said US-based stakers stand to lose a lot from the decision.

Ethereum staking stats. Source: Dune Analytics

Coinbase shares dipped towards the end of last week on the back of news of the SEC imposing a fine on Kraken exchange for its crypto staking service to US customers. Though the COIN stock has declined consistently since Feb 2, it is still up 70% this year based on Monday's pre-market figure.

Last month, Bank of America identified the returns in the stock delivered by the generally positive mood in the crypto market as a selling opportunity. Basing his forecast on Q4 crypto transaction volume, Jason Kupferberg, one of the bank's analysts, projected a “murky” revenue forecast for the exchange in 2023.

To learn more about Ethereum or Lido, visit our Investing in Lido and Investing in Ethereum guides.

HTX to shut down its DeFi multi-token wallet

In other news, HTX exchange has said it intends to wind down the services on its HTX Cloud Wallet platform in exactly three months on May 13. The exchange tied the decision to discontinue the multi-token wallet feature introduced on Oct 21 to ‘strategic and product adjustments, ‘ adding that it will neither provide maintenance nor release upgrades starting today. The notice from the exchange asked users to transfer their crypto and NFT assets from the Cloud Wallet to other wallet addresses. Georgia-based digital asset platform Bakkt separately revealed today it is pulling the plug on its consumer-focused business to prioritize business-to-business-to-consumer solutions.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.