Paxos said it disagreed with the SEC’s allegations that the Binance USD is a security and is “prepared to vigorously litigate if necessary”. — Reuters
WASHINGTON: The firm behind Binance’s stablecoin, Paxos Trust Company, says the US Securities and Exchange Commission (SEC) has told the company it should have registered the product as a security and is considering taking action against the platform.
In a statement on Monday, Paxos said it disagreed with the SEC’s allegations that the Binance USD is a security and is “prepared to vigorously litigate 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 to be securities.
The announcement comes after the New York Department of Financial Services (NYDFS) said in a consumer alert that it has ordered Paxos to stop minting Binance USD, citing “unresolved issues” in Paxos’ oversight of its relationship with Binance.
An NYDFS spokesperson later told Reuters that Paxos violated its obligations for “tailored, periodic risk assessments” and due diligence checks on Binance and Binance USD customers needed to stop “bad actors from using the platform”.
Paxos said in a statement that it would stop issuing new Binance USD, which is backed by traditional cash and US treasury bills, from Feb 21, but would continue to support and redeem the tokens until at least February 2024.
In a subsequent statement on Monday, confirming that the SEC had put the firm on notice, Paxos said “there are unequivocally no other allegations” against the company.
“Paxos has always prioritised the safety of its customers’ assets,” the company said in the statement.
An SEC spokesperson said the agency does not comment on the existence or nonexistence of a possible investigation.
Stablecoins, digital tokens typically backed by traditional assets that are designed to hold a steady value, have emerged as one of the key cogs in the crypto economy.
They are used for trading between volatile tokens like bitcoin and, in some emerging economies, as a means to protect savings against inflation.
The NYDFS move represents a setback to Binance’s efforts to gain market share from larger stablecoin rivals such as Tether and USD Coin, analysts said.
The loss of the New York-regulated status offered by Paxos may also hurt Binance’s appeal to larger investors, they said.
“It is a big setback for Binance,” said Ivan Kachkovski, forex and crypto strategist at UBS.
“It remains to be seen whether (or when) Binance will be able to find a US-based partner for its stablecoin.
“The latter appears crucial in the wake of US regulations on stablecoins, which are coming sooner rather than later.”
Binance USD is the third-biggest stablecoin behind market leader Tether and USD Coin, with about US$16bil (RM69.7bil) in circulation, and the seventh-biggest cryptocurrency, according to market tracker CoinGecko.
The token “had the potential to replace both as a de jure dollar of crypto,” according to Joseph Edwards, an investment adviser at crypto firm Enigma Securities.
“What’s being seen on the desks today is a significant flight from Binance USD to Tether,” he said.
Binance Coin, the platform’s native token, was last down 9.7%, according to CoinGecko.
Binance chief executive officer Changpeng Zhao wrote in a series of tweets on Monday that the regulator’s decision meant that “Binance USD market cap will only decrease over time”.
He added that Paxos has assured Binance the funds were fully covered by Paxos’ bank reserves.
Binance would “continue to support Binance USD for the foreseeable future,” Zhao said, predicting that users would shift to “other stablecoins over time.”
The NYDFS move, first reported by the Wall Street Journal, comes amid a wider crackdown on cryptocurrencies and Binance by US regulators.
According to Reuters, the Justice Department is looking into Binance for possible money laundering and sanctions violations. — Reuters
