The U.S. Securities and Exchange Commission (SEC) may sue the Paxos Trust Company for allegedly violating investor protection laws in its issue of the Binance USD (BUSD) stablecoin, the Wall Street Journal reported on Sunday.

See related article: Stablecoin issuer Paxos probed by New York regulator

Fast facts

  • The SEC alleged that the U.S. dollar-pegged BUSD stablecoin is an unregistered security in a letter, known as a Wells notice, sent to Paxos to alert it to possible enforcement action against the company, the WSJ reported citing unnamed sources familiar with the matter.
  • The Wells notice is not the final indication that the SEC will proceed with the legal enforcement, the WSJ noted, as recipients of the notice are allowed to respond to the SEC explaining why it should not pursue a lawsuit.
  • Crypto trust company Paxos issues and lists BUSD, which is currently the world’s third largest stablecoin with over US$16 billion in market capitalization, according to CoinMarketCap data.
  • New York-based Paxos launched the U.S. dollar-backed BUSD stablecoin in partnership with Binance in 2019 after gaining approval from the New York State Department of Financial Services (NYDFS). However, Binance reportedly acknowledged that flaws in the system had caused the stablecoin to be under-collateralized on several occasions.
  • “Binance licenses its brand to Paxos for use with BUSD, which is entirely owned by Paxos and regulated/supervised by the NY Department of Financial Services,” a Binance spokesperson said in a email statement to Forkast.
  • “Stablecoins are a critical safety net for [cryptocurrency] investors seeking refuge from volatile markets and limiting their access would directly harm millions of people across the globe. We will continue to monitor the situation,” the email said.
  • Paxos also faces a probe by the New York State Department of Financial Services, according to a report by Bloomberg, although the scope of that investigation wasn’t made clear. 
  • The SEC move seems to be part of a broader probe of cryptocurrency operators. Last week the SEC fined the U.S.-based crypto exchange Kraken US$30 million for failing to register the offer and sale of their crypto staking programs. Kraken in response announced the closure of its on-chain staking services for U.S. users on Thursday. 
  • Paxos did not immediately respond to Forkast’s request for comments via email.

See related article: Binance’s BUSD-peg stablecoin has not always been fully collateralized: report