The SEC reveals its regulatory "long knife"; who will be next after Paxos?

Author: Runsheng, ChainCatcher

The regulatory fire in the United States has finally reached stablecoins, with BUSD issuer Paxos unfortunately becoming the spark. A few days ago, the New York Department of Financial Services (NYDFS) announced an investigation into Paxos, and today, the U.S. Securities and Exchange Commission (SEC) also announced a lawsuit against Paxos regarding BUSD-related issues.

According to a report by The Wall Street Journal citing informed sources, earlier today, SEC enforcement officials issued a "Wells notice" to Paxos, stating that the BUSD issued and listed by Paxos is an unregistered security, planning to sue Paxos for violating investor protection laws, and may take enforcement action. Shortly thereafter, NYDFS ordered Paxos to stop issuing new BUSD.

This confirms that the U.S. government's regulatory efforts against the crypto industry are intensifying and showing a high degree of coordination. This also echoes an earlier rumor: the Federal Reserve and the Office of the Comptroller of the Currency (OCC) are conducting large-scale de-banking operations for cryptocurrencies, with blockchain companies like Paxos being informed by the OCC to withdraw their bank charter applications, or they would be denied.

Recently, Paxos notified some users via email that they need to re-verify KYC or close their accounts. As usual, Paxos emphasized again in the notification email that "Paxos is a regulated financial institution."

Looking back, Paxos has indeed attracted attention for its high compliance. As early as April 2021, Paxos obtained a temporary federal banking trust charter issued by the OCC, allowing it to provide custody services, stablecoin management, payments, exchanges, and other services, making it the third crypto company to obtain national trust in the U.S. In addition, Paxos also holds a virtual currency license "BitLicense" issued by NYDFS and a digital payment license issued by the Monetary Authority of Singapore (MAS).

With advantages such as compliance, Paxos attracted partners like payment giant PayPal. In 2020, PayPal entered the crypto industry through cooperation with Paxos, opening services for U.S. users to buy and sell crypto assets, and then announced in early 2022 that it was exploring stablecoin business. Like Binance, PayPal also chose Paxos as a development partner for stablecoins. However, as Paxos fell into regulatory turmoil, the PayPal stablecoin, originally scheduled to launch in the coming weeks, has been announced as paused.

In retrospect, this round of regulatory turmoil regarding stablecoins is not without reason. Bloomberg reported on New Year's Day this year that Binance admitted there were reserve management deficiencies in BUSD in 2020 and 2021, sometimes being under-collateralized. After the collapse of the Terra stablecoin system and the FTX crisis, the U.S. government has been exploring new regulations for the crypto industry and stablecoins. As the third-largest stablecoin and a mainstream currency strongly promoted by crypto giant Binance, BUSD naturally became a focal point for stringent regulation. It is no wonder that some believe Paxos's own stablecoin USDP has not faced the same level of scrutiny, suggesting ulterior motives.

As a related party, Binance's response has been quite restrained. At the beginning of the incident, Binance issued a statement saying, "BUSD is issued and owned by Paxos, Binance only authorizes its brand and will continue to monitor the situation," but also quoted Paxos's assurance that "these funds are safe and fully backed by bank reserves."

Subsequently, Binance CEO Changpeng Zhao's response seemed even more helpless: "In the foreseeable future, Binance will continue to support BUSD. We do foresee that users will migrate to other stablecoins over time. We will also make corresponding product adjustments, such as abandoning the use of BUSD as the primary trading currency." Binance has mentally prepared to abandon BUSD.

However, Paxos soon announced it would terminate its partnership with Binance regarding the stablecoin BUSD. But BUSD will continue to receive full support from Paxos and can be redeemed by customers at least until February 2024. New and existing customers of Paxos can fully redeem their funds or convert BUSD tokens into Pax Dollar (USDP) issued by Paxos Trust. This also marks the official end of the BUSD era.

This undoubtedly weakens market expectations for Binance's prospects. According to monitoring by 0xScope Protocol, during a certain hour this afternoon, Binance's withdrawals exceeded $500 million, with USDC withdrawals amounting to approximately $258 million.

The U.S. SEC claims that the reason for regulating Paxos is that BUSD is an unregistered security, violating investor protection laws. However, whether stablecoins can be classified as securities has always been controversial. The current definition of securities in the Securities Act of 1933 is difficult to encompass cryptocurrencies, and since BUSD is pegged to the dollar, investors do not have an expectation of returns when purchasing, making the SEC's claims difficult to convince the public.

Moreover, this regulatory turmoil has further fueled the crypto industry's contradictions regarding the U.S. regulatory authorities' traditionally "brutal" interventions. At the beginning of the incident, Messari founder Ryan Selkis tweeted that his new life goal is to end the political career of SEC Chairman Gary Gensler, making him the reason for President Biden's re-election failure, and he will collaborate with Coinbase CEO Brian Armstrong, Kraken founder Jesse Powell, and dozens of others.

Ryan stated, "I will spend every ounce of energy, financial and political capital I have to fight against the moral decay and corruption that destroy cryptocurrencies. Wise regulation is important. De facto bans will be met with relentless resistance."

Currently, the impact of this regulatory turmoil on the crypto market has not yet manifested. As of the time of writing, BUSD, as a related currency, has not de-pegged, and the price of BNB has slightly dropped by about 6%. Since the SEC has not yet taken formal action against Paxos, and given the legal disputes surrounding this regulation, how the situation will develop remains to be observed.

However, it can be anticipated that the SEC has already revealed its regulatory "long knife." According to speculation from crypto KOL @thulynnn and others, Paxos's current regulatory encounter is related to Binance's earn products, which are deposit/staking products that earn some APR. USDC is also present in multiple interest-bearing products—"If Circle receives these notices, it wouldn't be surprising." Based on this reasoning, the SEC is likely to have its next target in sight.

Additionally, a reporter from The Block previously revealed that an executive from an exchange had disclosed to him that the SEC is actually implementing its own crypto version of the "long knife night"…

The crypto circle has once again entered a tense moment three months after the FTX collapse.

"We are ready to start the fight."