The issuance of Binance USD (BUSD), the third-largest stablecoin by market size, which is dollar-pegged, has been halted by the New York Department of Financial Services (NYDFS).
The United States Securities and Exchange Commission (SEC), which notifies firms of impending enforcement action, sent Paxos a warning not long before the New York regulator took its own enforcement action. A claim was made in the notice that Binance USD is an unregistered securities.
Paxos has been asked by the NYDFS to stop producing new BUSD tokens. The product’s redemptions will still be managed by Paxos, according to a statement from Binance.
The Department is closely watching Paxos to ensure that it can conduct redemptions in a timely manner while adhering to tighter, risk-based compliance requirements. The agency affirmed in a statement posted on the NYDFS website:
“DFS has ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD. In response, on February 13, 2023, Paxos notified customers of its intent to end its relationship with Binance for BUSD.”
The third-largest stablecoin has become the target of the most recent regulatory action, which follows increased monitoring of the cryptocurrency sector. Only last week did the SEC rule that cryptocurrency staking services are in violation of securities law, causing Kraken to completely discontinue its staking offering. In the fight, Coinbase asserts that its staking products are not securities.
The SEC’s action against Ripple, the company behind the XRP token, has brought the long-running securities argument in the cryptocurrency sector to light. The case has not yet been resolved. In general, a financial investment into a business with the assumption that a profit will be made by someone other than the investor is regarded as a security.
However, given that stablecoins are a well-liked entry point for consumers entering the cryptocurrency space for the first time, the security claims against a stablecoin could pose a significant challenge to the industry.