BUSD Is Under Attack. Are USDC and USDT Next?

Regulators’ latest actions could mark an expanded interpretation of which stablecoins qualify as securities, one lawyer said — but much is still unknown


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Though regulatory actions against stablecoin issuer Paxos come amid a crackdown of the space after a wild 2022, some say the impact on competitors may be limited. 

Other industry participants are waiting for more clarity before parsing the broader effects — as other stablecoin issuers remain “on notice.”

The Wall Street Journal reported Sunday that the SEC sent Paxos a Wells notice — a notification of pending enforcement action — claiming that stablecoin Binance USD (BUSD) is an unregistered security. Paxos has managed the minting and redemption of BUSD under an agreement with the exchange since 2019.

The New York Department of Financial Services (NYDFS) later directed Paxos to cease issuance of new BUSD tokens, effective Feb. 21.

A Paxos spokesperson told Blockworks in a statement that the company “categorically disagrees” with the SEC, adding that BUSD is not a security under the federal securities laws. The SEC Wells notice pertains only to BUSD, according to the representative, considering that there are no other allegations against Paxos.

“Paxos has always prioritized the safety of its customers’ assets. BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts,” the spokesperson said. “We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.”

A Binance spokesperson told Blockworks the BUSD market capitalization, which was about $16 billion as of 5 pm ET Monday, is expected to decrease in the near term. Binance CEO Changpeng Zhao tweeted Monday that he expects users will soon migrate to other stablecoins on Binance.

Potential impact on other stablecoin issuers?

Aaron Kaplan — co-founder of Prometheum and counsel for financial services firm Gusrae Kaplan Nusbaum — said the Wells notice could mark an expanded interpretation of which stablecoins qualify as securities. 

Read more: The Complete Investor’s Guide to Stablecoins

“The entire stablecoin industry is paying close attention to how the Paxos-BUSD situation plays out,” Kaplan told Blockworks. “It is still too early to fully understand the reasoning behind the SEC’s Wells notice or the NYDFS order.”

The market cap of tether (USDT) and Circle’s USD coin (USDC) stand at roughly $68 billion and $41 billion, respectively. 

A spokesperson for Tether said the company does not operate in the US and declined to comment further. 

Dante Disparte, Circle’s chief strategy officer and head of global policy, said USDC is a regulated dollar digital currency issued as stored value under US monetary transmission law.

“Facts and circumstances in any type of regulatory action like this are all different, as are the structural and regulatory considerations with each of the cryptocurrencies that are in circulation around the world,” Disparte said. 

USDC is the safest of all available stablecoins due to its rigorous auditing and licensing requirements, according to Stanislav Havryliuk, chief operating officer at crypto exchange Zonda.

A major difference between BUSD and USDC, according to Havryliuk, is the blockchains on which they are available. BUSD remains limited to Ethereum and BNB Chain, while USDC covers more networks — which Havryliuk said offers additional protections for users. 

“We should not expect the regulators to treat USDC the same way as BUSD,” he said.

Riyad Carey, a researcher at Kaiko, said he, too, doesn’t necessarily see actions against Paxos as a sign that a crackdown on USDC or USDT are likely.

An NYDFS spokesperson told Reuters Monday that Paxos was not administering BUSD in a “safe and sound” manner, adding that it had violated its obligation to conduct risk assessments and due diligence “to prevent bad actors from using the platform.”

The phrasing of the statement to Reuters could signal a potential anti-money laundering (AML) or know your customer (KYC) issue related to Binance, according to Riyad Carey, a researcher at digital assets data provider Kaiko. 

“Obviously there are concerns that the SEC could go after USDC, but, if it’s correct that these actions are mostly related to AML/KYC issues it will be harder for regulators to argue that USDC is unsafe,” Carey told Blockworks in a statement. “Tether is a big question too, as it’s had run-ins with US regulators in the past but isn’t issued by a US entity.”

Tether paid a $41 million fine in October 2021 after the Commodity Futures Trading Commission (CFTC) settled charges with the company for allegedly “making untrue or misleading statements and omissions” about the backing of its stablecoins. 

Slava Demchuck, CEO of crypto compliance company AMLBot, referred to Tether’s settlement with the CFTC, saying there could be more attacks and fines against USDT. 

USDC, though, is sage, Demchuck told Blockworks.

“So far, Circle has the most sophisticated compliance framework built into the USDC token,” he said in a statement. “They work closely with the US Department of the Treasury and constantly update their framework.”

Continued regulation by enforcement

Many expected increased regulatory scrutiny on crypto in the US after the collapse of Terra’s algorithmic stablecoin and a number of high-profile bankruptcies in the fourth quarter of 2022. 

Absent regulatory clarity, agencies have been getting aggressive. 

In the most recent major instance, the SEC slapped Kraken with two charges related to its staking products. The exchange settled on both SEC counts — paying $30 million and ceasing its staking offerings. 

Richard Mico, the US CEO and chief legal officer of crypto payment-and-compliance infrastructure provider Banxa, said last week the action against Kraken sets another “troubling precedent” by the SEC to regulate by enforcement.

“The digital asset industry has been begging the SEC and CFTC for regulatory clarity for some time now, but the response has fallen woefully short,” Mico said. “It’s not healthy to regulate emerging technologies in this way, and I suspect we will see not only more crypto-focused ventures move offshore as a result, but also tech innovators in general.”

Katherine Dowling, general counsel and chief compliance officer at Bitwise Asset Management, told Blockworks last month she expected stablecoin legislation to be a top priority for Congress. 

“BUSD is a unique case,” Carey said at the time. “It is directly tied to the largest, by far, exchange, which regulators have had their eye on, especially post-FTX.”

Macauley Peterson contributed reporting.

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