The Securities and Exchange Commission (SEC) has informed Paxos Trust Co. that it plans to sue the company for violating investor protection laws, according to individuals with knowledge of the matter, says a report from Wall Street Journal.
The SEC’s enforcement staff issued a Wells notice to Paxos, which is used to inform companies and individuals of a possible enforcement action.
Why the SEC is coming for Paxos
The notice alleges that Binance USD (BUSD), a digital asset that Paxos issues and lists, is an unregistered security. BUSD is a Binance-branded stablecoin that is pegged to the dollar on a one-to-one ratio.
Paxos and Binance stated they would work together to create BUSD in 2019. The digital asset exchange itBit, which Paxos own, also offers BUSD, as do a large number of other exchanges.
The specifics of the claims that have been made against BUSD remain unclear at this time. It was not possible to identify whether the SEC notification is explicitly connected to Paxos’s decision to issue the currency, the decision to list the coin, or both.
Binance only licenses its brand, and BUSD is issued and owned by Paxos. BUSD reserves are fully-backed and held in bankruptcy remote accounts. All BUSD tokens issued by the company have and always will be backed 1:1 with US dollar-denominated reserves, the announcement read.
Paxos shuts down BUSD
The announcement prompted the company to end its relationship with Binance for the branded stablecoin. Effective February 21, Paxos will cease the issuance of new BUSD tokens, as directed by and working in close coordination with the New York Department of Financial Services (NYDFS).
However, Paxos Trust, a regulated institution overseen by the NYDFS and audited by a top-four accounting firm, will continue to manage BUSD dollar reserves.
The SEC has been intensifying its crypto enforcement against major market participants, as seen last week with Payward Inc.’s Kraken platform agreeing to stop offering crypto staking services in the U.S. and pay the SEC $30 million in penalties.
Stablecoins are an area of focus for the SEC, which expanded its special enforcement unit devoted to the crypto market last year. The collapse of Terra prompted that.
Paxos Trust Co. is a crypto firm that offers a range of services, including a regulated stablecoin and custody services for digital assets. The company is backed by a range of high-profile investors, including PayPal Ventures, Mithril Capital, and RRE Ventures.
The New York Department of Financial Services has granted the firm regulatory clearance to operate as a trust corporation, which paves the way for the company to provide its services in the cryptocurrency industry.
The SEC’s lawsuit against Paxos is the latest move in the agency’s escalating campaign in crypto enforcement. The agency has been stepping up its scrutiny of the crypto market in recent years, claiming it has a focus on investor protection and market integrity.
The Securities and Exchange Commission (SEC) has issued a warning that it will take action against firms that do not comply with the rules and regulations pertaining to securities.