by WASHINGTON/LONDON, Feb. 13 (Reuters) – The firm behind Binance’s stablecoin, Paxos Trust Company, said the U.S. Securities and Exchange Commission (SEC) had told the company it should have registered the product as a security and was considering taking action on the platform .
In a statement Monday, Paxos said it contradicts the SEC’s claims that Binance USD is a security and “stands ready to sue vigorously if necessary.”
The move represents one of the SEC’s first actions on stablecoins, though Chairman Gary Gensler has previously said he believes some stablecoins are securities.
The announcement comes hours after the New York Department of Treasury (NYDFS) issued a consumer alert that it ordered Paxos to stop minting Binance USD, citing “unresolved issues” in Paxos’ oversight of its relationship with Binance.
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An NYDFS spokesman later emailed Reuters that Paxos had breached its commitments for “tailored, periodic risk assessments” and due diligence reviews of Binance and Binance USD clients, which are required to identify “bad prevent actors from using the platform”.
Paxos said in a statement that it will stop issuing new Binance USD backed by traditional cash and US Treasury bills starting February 21, but will continue to support and redeem the tokens until at least February 2024.
In a subsequent statement Monday, confirming that the SEC had notified the company, Paxos said “there are clearly no other allegations” against the company.
“Paxos has always prioritized the security of its customers’ assets,” the company said in the statement.
An SEC spokesman said the agency is not commenting on the existence or non-existence of a possible investigation.
Stablecoins, digital tokens typically backed by traditional assets designed to hold constant value, have emerged as one of the most important cogs in the crypto economy. They are used for trading between volatile tokens like bitcoin and in some emerging markets as a way to protect savings from inflation.
NYDFS’ move represents a setback for Binance’s efforts to grab market share from larger stablecoin rivals like Tether and USD Coin, analysts said. The loss of the New York-regulated status offered by Paxos could also hurt Binance’s appeal to larger investors, they said.
“This is a major setback for Binance,” said Ivan Kachkovski, FX and crypto strategist at UBS. “It remains to be seen if (and when) Binance will be able to find a US-based partner for its stablecoin. The latter appears to be crucial with US regulation of stablecoins coming sooner rather than later.”
RACE FOR THE “DOLLAR OF CRYPTO”
Binance USD is the third-largest stablecoin, behind market leaders Tether and USD Coin, with approximately $16 billion in circulation, and the seventh-largest cryptocurrency, according to market tracker CoinGecko.
The token “theoretically had the potential to replace both as crypto’s de jure dollar,” said Joseph Edwards, an investment advisor at crypto firm Enigma Securities.
“What is seen on desks today is a significant flight from BUSD to USDT (Tether),” he said.
Binance Coin, the platform’s native token, was last down 9.7%, according to CoinGecko.
Binance CEO Changpeng Zhao wrote in a series of tweets on Monday that the regulator’s decision means that “BUSD market cap will only decrease over time,” adding that Paxos has assured Binance that the Funds are fully covered by Paxos’ bank reserves.
Binance will “continue to support BUSD for the foreseeable future,” Zhao said, predicting that users would switch to “other stablecoins” over time.
The NYDFS move, first reported by the Wall Street Journal, comes amid a broader crackdown on cryptocurrencies and Binance by US regulators. The Justice Department is investigating Binance for alleged money laundering and sanctions violations, Reuters previously reported. Binance has previously said that it regularly works with regulators to answer any questions that may arise.
Reporting by Hannah Lang in Washington and Tom Wilson and Elizabeth Howcroft in London Editing by Caitlin Webber and Matthew Lewis
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