Paxos faces SEC charges, ordered to stop minting Binance stablecoin

Chad Cascarilla, CEO of Paxos.

Adam Jeffery | CNBC

Cryptocurrency firm Paxos will stop issuing new Binance USD, or BUSD, stablecoins under the direction of New York’s financial regulator, Binance founder Changpeng Zhao said Monday.

Paxo’s own stablecoin was not affected, but the company confirmed that it had been notified by the Securities and Exchange Commission about potential fees in connection with the BUSD product.

A stablecoin is a cryptocurrency that attempts to maintain a more stable price, usually by tying its value to an underlying asset such as gold, or in this case the US dollar.

The move is the latest in an escalating regulatory effort to rein in the once freewheeling crypto industry. Last week, the Securities and Exchange Commission settled with the crypto exchange Kraken due to allegations of unregistered offers and sales, in connection with Kraken’s crypto betting platform.

The New York State Department of Financial Services issued the order “as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance,” the regulator said Monday in a consumer alert.

“We were informed by Paxos that they have been asked to stop minting new BUSD [Binance’s stablecoin] by the New York Department of Financial Services,” Zhao said on Twitter.

“Effective February 21, Paxos will cease issuing new BUSD tokens as directed by and in close coordination with the New York Department of Financial Services,” Paxos said in a statement, adding that it would “end its relationship with Binance for the brand. stablecoin BUSD.”

The potential SEC charges came through what is known as a Wells notice, which informs firms of the results of an investigation pending charges. The Wall Street Journal reported on Monday that the SEC would argue that Paxos’ BUSD product was a security, an approach it has used with other crypto firms including Gemini, Genesis and Kraken.

“Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws,” a Paxos spokesperson told CNBC. “This SEC Wells filing pertains only to BUSD. To be clear, there are unequivocally no other allegations against Paxos.”

The spokesman also said, “We will engage with SEC staff on this matter and are prepared to take vigorous legal action if necessary.”

Binance did not immediately respond to requests for comment.

Paxos’ BUSD product is built on the Ethereum blockchain and backed one-to-one by US Treasuries and Treasury reverse repurchase agreements, with Paxos reporting about $16 billion in holdings as of January 31. Paxos’ BUSD product is related to, but separate from, Binance’s self-issued Binance-connected BUSD.

Binance’s self-issued BUSD, which is not directly regulated by NYDFS, is independently packaged and issued by the crypto exchange on non-Ethereum blockchains. In other words, Binance can take a single Paxos-issued BUSD, create an analog BUSD on another blockchain (like Binance’s own blockchain, for example), and freeze a corresponding Paxos-issued BUSD.

“The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos,” NYDFS said.

“This action does not affect our ability to continue serving new or existing customers, our continued dedication to growing our staff or funding our business goals,” Paxos’ statement said.

In 2014, New York became the first state to establish licensing for crypto-related companies. Paxos is one of over two dozen companies that have secured a BitLicense. In January, the NYDFS took action against another regulated company, Coinbase.

Two other regulated entities in New York State, Genesis Global Trading and crypto exchange Gemini, have been accused by the Securities and Exchange Commission of participating in the unregistered offering and sale of securities in connection with a joint crypto lending program.