By Hannah Lang, Tom Wilson and Elizabeth Howcroft
WASHINGTON/LONDON (Reuters) – The firm behind Binance’s stablecoin, Paxos Trust Company, said the U.S. 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 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 Chair Gary Gensler has previously said he believes some stablecoins to be securities.
The announcement comes hours after the New York Department of Financial Services (NYDFS) said in a consumer alert 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 via email 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 U.S. 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 prioritized 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 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, FX and crypto strategist at UBS. “It remains to be seen whether (and when) Binance will be able to find a U.S.-based partner for its stablecoin. The latter appears crucial in the wake of U.S. regulation on stablecoins that is coming sooner rather than later.”
RACE FOR THE ‘DOLLAR OF CRYPTO’
Binance USD is the third-biggest stablecoin behind market leader Tether and USD Coin, with about $16 billion in circulation, and is the seventh-biggest cryptocurrency, according to market tracker CoinGecko.
The token “in theory had the potential to replace both as a de jure dollar of crypto,” said Joseph Edwards, investment adviser at crypto firm Enigma Securities.
“What’s being seen on the 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 meant that “BUSD market cap will only decrease over time,” adding that Paxos has assured Binance the funds were fully covered by Paxos’ bank reserves.
Binance would “continue to support BUSD 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 U.S. regulators. The Justice Department is investigating Binance for suspected money laundering and sanctions violations, Reuters has previously reported. Binance has previously said it regularly works with regulatory agencies to address questions they may have.
(Reporting by Hannah Lang in Washington and Tom Wilson and Elizabeth Howcroft in London; Editing by Caitlin Webber and Matthew Lewis)