SEC’s Stablecoin Crackdown Could Reshape the Entire Crypto Market

• The SEC has ordered Paxos to stop trading its stablecoin, BUSD, and may issue charges against the blockchain platform
• US regulators have issued a number of high-profile industry fines after FTX crashed the market
• Other coins have been surprisingly resilient following the announcement, with larger stablecoins absorbing more market share

The SEC has turned its attention to stablecoins. It reportedly plans to sue Paxos, a blockchain provider that operates the third-largest stablecoin BUSD, for failing to register the product as a security. It also ordered Paxos to stop trading the coin.

It’s another blow to the crypto industry, which continues to be volatile. Although no formal action has been taken, if the SEC has stablecoins in its crosshairs, we could see a seismic shift in crypto.

But despite everything, stablecoin prices and the broader crypto industry continue their upward trajectory in 2023. Let’s get into the details.

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SEC’s latest crypto target

Paxos, a blockchain infrastructure platform, received a Wells notice from the federal-level regulator, the SEC, in early February – indicating that a potential charge will follow an investigation. The SEC says the company is selling an unregistered security with its BUSD stablecoin.

Paxos was also ordered to stop issuing Binance-backed stablecoin BUSD by the New York regulator. The New York Department of Financial Services (NYDFS) said the order was “a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance”. Binance founder Changpeng Zhao confirmed the news on Twitter.

Paxos said it “categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws” and was prepared to “vigorously litigate if necessary”.

Paxos’ BUSD product, built on the Ethereum blockchain and separate from Binance’s own BUSD stablecoin, had over $16 billion in holdings as of January 31. It has been on the market since 2019 when Binance and Paxos first partnered.

The drama may soon escalate. The SEC is considering legal action against Paxos for violating investor protection laws, which could mark a turning point in the crypto’s battle with regulators.

Stablecoins, securities and regulation

The heart of the issue is whether the BUSD stablecoin is a security. In its statement, Paxos claimed that the BUSD “is always backed 1:1 with US dollar-denominated reserves, completely segregated and held in external bankruptcy accounts”.

US regulators have been wary of crypto companies since the fall of crypto darling FTX – and it’s been a busy month to crack the whip.

The NYDFS accused Coinbase of compliance lapses, saying its AML and know-your-customer standards were subpar and new customers were not thoroughly vetted. Coinbase settled for $100 million in January.

Digital asset firm Genesis Global Trading and New York-registered crypto exchange Gemini have come under fire for allegedly selling unregistered securities in their joint lending scheme. Both companies deny the claims.

Crypto exchange Kraken also agreed to pay $30 million in fines and shut down its crypto-staking-as-a-service program after being charged with failing to register the scheme with the SEC.

How has the market reacted?

Since Paxos issued its statement on February 13, investors have run for the ground. Its BUSD stablecoin has gone from a market cap of $16.1 down to $12.9 billion, which Changpeng Zhao so would continue to decline.

Other stablecoins have benefited from the chaos. Tether, the market leader in stablecoins, has extended its dominance to $70.3 billion with nearly 53% of the market cornered. Competitor Circle’s USD coin is now up to $42 billion and has a market share of 31.3%.

Cryptocurrencies are looking increasingly bullish despite the attacks, with retail investors jumping back in and Bitcoin prices hitting a high of $25,000.

The stablecoin market has grown by $2 billion since the Paxos fallout, and Tether is now a solid leader in the industry. But with the SEC on their backs, how long will stablecoins be able to continue in their current form?

What are the implications for the crypto world?

Stablecoins are supposed to be the “safer” part of the crypto market. Short-term assets such as US Treasuries and Treasury Reverse Repurchase Agreements back them, allowing anyone holding the coin to exchange it 1:1 for the USD at any time.

Their relative protection from volatility means they have quickly become the backbone of the crypto market against a backdrop of scandal, fraud and criminal activity. But if the SEC leaves no stone unturned, we could see a shift in the crypto world.

After FTX, the US financial regulators were accused of being too slow to crack down on bad actors in the industry. Action must also be taken following the Biden administration’s publication on reducing crypto risk in late January, in which stablecoins are mentioned twice.

The Paxos situation has drawn mixed reactions from the crypto industry, with some questioning the SEC’s crackdown. It is worth noting that the SEC has seen its own dissent within its ranks; SEC Commissioner Hester Pierce questioned the Kraken outcome, saying the SEC had shut down a “program that has served people well”.

What about the American digital currency?

Cynics will also note that the SEC crackdown on crypto coincides with the Fed’s digital currency project ramping up.

Project Cedar is the Fed’s prototype for a central bank digital currency (CBDC) to run on blockchain technology. While there are no details on when we can expect the currency to be released, stage one testing has already been completed.

It is not the only country with a digital version of its central currency in the works. The Bank of England, the European Central Bank and the Bank of Japan have all made similar advances in recent months; the latter plans to roll out its pilot as soon as April.

The crypto industry can be a direct competitor to centralized digital currencies. Despite its volatility, the sector is full of bad apples, but its ethos around user privacy has been a resounding attraction for retail investors.

What we could see emerging is a battle between digital currencies: one owned by the banks, and the others beyond their grasp.

The bottom line

The SEC is nowhere near done with its blitz on crypto regulation, so as not to look too complacent in the face of FTX.

While we wait to see what comes of Paxos’ run-in with the regulator, other stablecoins such as Tether and Circle continue to attract investors and increase their market share.

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