Every other week Binance tops the crypto headlines due to FUD, and every time Changpeng Zhao advocates for ignoring it. However, the news about BUSD made him finally address the issue. Do you have to be concerned about the news? We recap the ongoing events so far and give a leveled explanation.
What Is Happening to BUSD?
The Binance USD issuer Paxos received an order from the US Securities and Exchange Commission to cease the issuance of new BUSD tokens. Moreover, the company received a Wells Notice, Wall Street Journal reported. It means the regulator is planning to sue the company on the grounds of the violation of investor protection laws. The violation mentioned in the notice, the Wall Street Journal source claims, is the offer of an unregistered security.
Changpeng Zhao (CZ) initially responded to the news by bringing up the “ignore FUD” point of his list of advice. However, an hour and a half later, he posted an 8-part thread addressing the news. He informed the followers that Paxos was indeed presented with notice and explained what it means for BUSD.
Paxos will not be able to mint new tokens but it will continue service and redemptions. For the time being, there is no existential threat to BUSD, he claims. In the future, with the emphasis on “if”, if BUSD is ruled out to be a security, this will impact the US crypto markets the most. Last but not least, Binance will step back from maintaining BUSD as the main stablecoin of the exchange, although it won’t abandon it.
Most recently, Paxos published a statement regarding the probe, notice, and the fate of their stablecoins. The company will stop working with Binance (since their cooperation was mostly down to minting and burning BUSD) but the company’s own stablecoins — USDP and PAX Gold — remain unaffected.
The last piece of news caused BUSD to briefly depeg from USD on Binance. The BUSD/USDT pair momentarily dipped to $0.995 but at the time of writing, it is on the mend.
🚨~$439M on #Ethereum & ~$102M on #BSC has been out from #Binance for the past hour.
— 0xScope (🪬 . 🪬) (@ScopeProtocol) February 13, 2023
For stablecoins:
$258M $USDC out from #Binance in 1H
(Binance will convert $BUSD to $USDC when the user withdraw happens)
See all #binance data here:https://t.co/qmEqESSkfi pic.twitter.com/axao958nww
Users and analysts have also been reporting an uptick in outflows from Binance. About $500 million left the exchange an hour after the news.
Why You Shouldn’t Panic
To reiterate, the Wells Notice to Paxos alleges BUSD is an unregistered security. However, the argument has been promptly commented on by law experts. To be considered a security, an asset has to pass the Howey test: a four-part filter.
- Does it imply an investment of money?
- In a common enterprise?
- With a reasonable expectation of profit?
- Derived from the efforts of others?
Let’s check if BUSD passes the test. BUSD is hardly an investment in Binance or Paxos because it is a product of the latter that uses the branding of the former. Funds invested in BUSD supposedly go into backing the stablecoin and not funding the companies. It could be argued that BUSD is a common enterprise but only because there is no clear definition of what it is in the first place. Finally, BUSD holders cannot expect a profit from a stablecoin: on its own, it does not yield dividends.
Of course, it does not mean the SEC issued the notice out of nowhere. There are counterarguments that the Howey test is not the only way to define securities. Public attestations of Paxos suggest that at least some of the stablecoin’s backing is derived from securities such as US Treasury Bills. It is now up to Paxos to respond to the regulator and justify why BUSD is not one. The company will have 30 days to do it.
What You Should Note
Binance has been in the crosshairs of regulators for years at this point. As things fare, the scrutiny will only increase. If you keep any assets on Binance, consider self-custody — after all, it is what CZ himself recommends.
The SEC movement did not seem to affect Paxos’ stablecoins, which highlights an abnormality. The USDP backing is also provided by securities in a proportion comparable to BUSD’s. Nevertheless, the press release statement from Paxos makes it clear they do not intend to make any changes to USDP and PAXG yet.
Last week, Paxos reportedly became an object of investigation by the New York Department of Financial Services (NYDFS), a regulator they have always said they work with closely. The news context suggests that the company has already been scrutinized more than usual. So, the statements haven’t come out of the blue. And there is already speculation that the SEC is planning to crack down on other companies. Being in the US legal environment, this whole story is not guaranteed to impact other jurisdictions but it will set a precedent in stablecoin regulation nonetheless.
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