Summary Paxos Trust Company has ceased minting of Binance USD in response to a Wells Notice from the SEC earlier this month. Like BUSD, Paxos is also the issuer of USDP - which did not generate a Wells Notice from the SEC. Regardless of whether the SEC is going after Binance specifically or if this is just the first of many shots from the SEC, this is a problem for crypto. Asset prices didn't reflect much of a change in the crypto market on Monday, but something fairly significant did take place. It started with Paxos Trust Company announcing Monday morning that it will no longer be minting Binance USD ( BUSD-USD ) and would be ending its relationship with Binance. According to the press release, Paxos is taking this step as a result of working with the NYDFS: Effective February 21, Paxos will cease issuance of new BUSD tokens as directed by and working in close coordination with the New York Department of Financial Services (NYDFS). Paxos Trust, a regulated institution overseen by the NYDFS and audited by a top-four accounting firm, will continue to manage BUSD dollar reserves. While minting is done, Paxos will continue redemption of BUSD and maintains that the token is still fully backed 1:1 and in segregated accounts. Paxos mints BUSD when a depositor sends dollars to Paxos. Paxos then custodies those dollars and creates the stablecoin dollar derivative BUSD for dollar-denominated activity on crypto rails. No Peg Issues Yet As of writing, BUSD is the 7th largest crypto coin in the entire market with a $15.6 billion market cap - though that market cap is well off the high of $23.5 billion in November of last year: BUSD Market Cap (CoinMarketCap) Despite that large level of redemption in a very short amount of time, BUSD's peg has never gone below a $0.9996 level at any point in the last 3 months. This could be seen as an indication that there has been nearly no concern about Paxos' ability to provide redemptions. In the instance of BUSD, the primary rails where the token exists are Ethereum ( ETH-USD ) and to a lesser extent Binance Smart Chain ( BNB-USD ), but there are numerous smaller chains with BUSD support as well. BUSD Chain Breakout (Defi Llama) Before Paxos' BUSD minting announcement could even really be digested by the market, the company shared another press release late Monday. The SEC Wells Notice In a rather stunning announcement late Monday afternoon, Paxos disclosed that the Securities and Exchange Commission sent the company a Wells Notice earlier this month and made the claim that BUSD is an unregistered security. This Wells Notice is significant because it means the SEC is investigating or has finished an investigation into BUSD and enforcement action is a highly likely next step. Paxos disagrees with the SEC's position: Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws. This SEC Wells Notice pertains only to BUSD. To be clear, there are unequivocally no other allegations against Paxos. The important thing to note from Paxos' statement is the Wells notice does not impact Pax Dollar ( USDP-USD ). This is very interesting because USDP and BUSD are functionally the same; they are both dollar-collateralized stablecoins that are minted and managed by Paxos. The biggest difference that I can find between the two coins is that one is a Binance-branded product that relies on the Binance Smart Chain for most of its utility, and the other is not. Is This More About Binance? From where I sit, there are a few viable possibilities at play; either there are many more Wells Notices coming, there is something wrong with Binance specifically in the eyes of the SEC, or the SEC is being arbitrary and capricious. The latter of which is something that Grayscale has already accused the SEC of being. But it may realistically be something about Binance specifically that the SEC doesn't like. BUSD is used on Binance Smart Chain to a large degree. Even though Binance only accounts for 30% of the BUSD in circulation, it is by far the largest dollar stablecoin on the network: BSC Stablecoin Share (DeFi Llama) Accounting for over 53% of the $9 billion in US dollar stablecoins on Binance Smart Chain, BSC is reliant on BUSD to a large degree for DeFi activity: Network Stables Mcap Dominant Stablecoin Dominance Ethereum $80.0b USDC 42.5% Tron ( TRON-USD ) $37.9b USDT 94.5% Binance $9.0b BUSD 53.1% Solana ( SOL-USD ) $1.8b USDC 53.1% Polygon ( MATIC-USD ) $1.7b USDC 47.8% Source: DeFi Llama In fact, no other blockchain with a top 10 stablecoin market cap relies on BUSD as its dominant stablecoin. Most of them are using USDC. This does suggest that the SEC may see some sort of problem with Binance specifically. Otherwise, there could be more wrath coming to the broader stablecoin market. If it is About Stablecoins, We Have Problems In many ways, stablecoins are the "killer app" in crypto. The main purpose of stablecoins is for dollar-denominated activity on crypto rails. Those activities can be for anything from DeFi lending, taking profit in crypto native assets trades, merchant services, or yes, even potentially illicit activity. The latter of which is less likely over time since the blockchains are transparent and smart contract deployments can bake-in the ability to freeze assets. This is why we've seen a surge in banned addresses over the last couple of years: Banned addresses (Dune Analytics/KARTOD) The major issuers of these fiat-backed stablecoins like Circle or Paxos generally practice KYC/AML compliance. These financial instruments can serve perfectly legitimate purposes, and stablecoins are something that I explored with BlockChain Reaction subscribers just last week . They enable incredibly cheap, fast payments on the network layer regardless of the software interface the user chooses. If their utility in the United States is regulated away, I would argue the biggest winners would be the centralized peer-to-peer payment apps owned by companies like PayPal ( PYPL ) and Block, Inc. ( SQ ). Summary We don't yet know for certain if this Wells Notice Paxos received is about stablecoins broadly speaking or about Binance specifically. At least for now, it looks like it could be more about Binance. If that's the case, I'd be very careful about exposure to BNB or any highly Binance-exposed applications. I would also caution any crypto advocate who may not think this is a big deal to seriously ponder the implications of what is happening right now. Many have argued the federal government is orchestrating a coordinated crackdown on the entire crypto industry that intensified in December a few weeks after FTX ( FTT-USD ) collapsed. If it is indeed found that BUSD is an unregistered security, it stands to reason that every fiat-collateralized stablecoin is also an unregistered security since their minting mechanisms are all very similar. This would include USDP, Circle's USD Coin ( USDC-USD ), and Tether ( USDT-USD ). If all of those stablecoins are found to also be unregistered securities, we would likely see an enormous outflow from fiat-backed stables and a few things will probably happen: weaker stablecoins could lose dollar pegs decentralized stables could see inflows native assets could see inflows non-USD fiat-collateralized stables could see inflows Crypto value could leave the ecosystem entirely On point number four, there are other jurisdictions that are far more friendly to crypto and the innovations that could ultimately happen in this industry may go offshore. But the larger point is there is well over $100 billion in the USD fiat-collateralized stablecoin market. If the minting of additional USD fiat-backed stables is stopped by the SEC, the redemptions will begin and that value will flow somewhere else. I think native assets would catch a bid. Bitcoin ( BTC-USD ) would likely catch a bid as well. But even decentralized stablecoins or stablecoins of other fiat currencies could see activity. The coins that are truly backed 1:1 shouldn't see massive peg fluctuations. But the stables that aren't fully backed may have peg problems. Right or wrong from a legality standpoint, I personally think Paxos' BUSD Wells Notice is just the beginning.
