Confusion Spirals in Crypto as the US Cracks Down

The US Securities and Exchange Commission is on the warpath—and crypto is in its crosshairs. Over the weekend, The Wall Street Journal reported that the agency intends to sue crypto firm Paxos for issuing BUSD, a stablecoin developed in partnership with the world’s largest crypto exchange, Binance. 

The SEC declined to comment, but Paxos, which is based in New York and Singapore, confirmed today that the agency alleges BUSD should have been registered as a security in the US, which requires compliance with complex rules. In a statement, the firm said it “categorically disagrees” that BUSD is a security but has complied with an order from the New York Department of Financial Services to halt the creation of any new BUSD, effectively strangling the coin.

Paxos did not respond to a request for comment. Binance’s chief strategy officer, Patrick Hillmann, declined to comment on how the SEC’s action would affect the exchange but said the firm will be “reviewing other projects to ensure users are insulated from further undue harm.”

The crypto industry is no stranger to conflict with regulators, but the Paxos case is different—and it has sparked a measure of panic and confusion. The concern is that a ruling against the issuing or use of BUSD will set a precedent that could be applied to all stablecoins, striking down a crucial piece of infrastructure in many crypto markets. “If the supply suddenly dried up, the crypto economy would collapse,” says economist Frances Coppola, who previously worked for HSBC and other banks.

Designed to cling to a specific value, usually $1, stablecoins are a critical pillar of the crypto economy. Most are backed by a combination of cash and bonds, which anchors the tokens in circulation to the desired value.

Unlike cash, which can be difficult to move around, especially across borders, stablecoins are “easy and fast,” says crypto analyst Noelle Acheson, formerly of CoinDesk, helping traders jump on opportunities as they arise. They have “opened up an economy on-chain,” says Ram Ahluwalia, CEO of wealth management firm Lumida, allowing money to “flow into and stay in the ecosystem.”

The SEC defines securities as contracts that amount to “an investment of money, in a common enterprise, with a reasonable expectation of profit, to be derived from the efforts of others.” The classification brings with it a range of regulatory and disclosure requirements. If stablecoins were universally determined to be securities, issuers would be required to register them with the SEC, giving the agency a chance to reject coins. Any stablecoins already on the market could be subject to enforcement action.

Bemused members of the crypto industry, including Binance CEO Changpeng Zhao, are now asking how stablecoins can possibly meet the SEC’s criteria, and in particular how crypto coins designed not to fluctuate in value can be said to be sold with a reasonable expectation of profit.

But action against a major stablecoin issuer should be no surprise, says Acheson, because the SEC has said on multiple occasions that it believes some stablecoins qualify as securities. Acheson imagines the regulator will argue that stablecoins like BUSD, backed by their issuer’s holdings of established securities such as government and corporate bonds, are by extension securities themselves and must be regulated accordingly.