The War on Stablecoins: Paxos and Circle in the Firing Line of Regulators

The regulatory spotlight is shining brightly on the blockchain industry as several popular stablecoin issuers face enforcement action from the US Securities and Exchange Commission (SEC).

Paxos, a regulated cryptocurrency company that issues both the Pax Dollar and the popular Binance USD stablecoins, has been ordered to stop minting Binance’s BUSD by the New York State Department of Financial Services.

The BUSD stablecoin is a Binance-branded token pegged to the US dollar that Paxos issues for Binance but is also traded on several other crypto exchanges. Paxos has announced that it will stop issuing BUSD on February 21, following the NYDFS instruction.

The regulatory woes for Paxos do not end there. The Securities and Exchange Commission (SEC) has also issued a Wells notice, a notification to companies of possible enforcement action taken against them, to Paxos. The SEC intends to sue the company, alleging that its dollar-pegged BUSD stablecoin is an unregistered security.

PayPal suspends crypto stablecoin development

Paxos is not alone in facing regulatory scrutiny. PayPal has reportedly suspended the development of its stablecoin, which was expected to be launched soon, amid rumors of an SEC crackdown. The move comes just after enforcement action was taken by the SEC against Paxos.

USDC faces SEC enforcement amid stablecoin crackdown

Additionally, Circle, the issuer of the USDC stablecoin, is reportedly set to face an enforcement notice from the SEC. The move comes as part of the SEC’s current crackdown on stablecoins, following its enforcement letter to Paxos demanding the exchange stop minting Binance stablecoin BUSD because it may be a security.

UPDATE: Expect @circle and USDC to be the next SEC stablecoin target to receive a Wells Notice.

**sources: “Circle will get sued, as will every other stablecoin of consequence.”

**source: “Look at @PayPal abandoning their stablecoin project; what else do you need to know?”
— Andrew (@AP_Abacus) February 13, 2023

The regulatory scrutiny of stablecoins is not surprising, given their growing popularity and potential risks. Stablecoins are a type of cryptocurrency that is pegged to a stable asset such as the US dollar, making them less volatile than other cryptocurrencies. However, their increasing popularity has caught the attention of regulators concerned about their potential impact on financial stability and the risk of fraud.

Stablecoin Industry Faces Regulatory Hurdles

The SEC’s focus on stablecoins is part of its broader efforts to regulate the cryptocurrency industry. As stablecoins become increasingly mainstream and integrated into traditional financial systems, it is likely that we will see more regulatory action to address their risks and ensure they are compliant with existing financial regulations.

SEC chair Gensler stated in a release last year that stablecoins may be considered securities because of the broad definition of securities outlined by Congress. According to Gensler, this ambiguity in the legal definition leaves room for stablecoins to potentially fall under the purview of the SEC’s regulatory oversight.

“Stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits, and raise important policy issues. As discussed in the President’s Working Group Report on Stablecoins, it is important to ensure that we have appropriate safety and soundness protections, investor protections, and safeguards against illicit activity.”

In the meantime, issuers such as Paxos and Circle will need to navigate a challenging regulatory environment and ensure their products are compliant with evolving regulations.

As the blockchain industry continues to mature, it is becoming increasingly clear that regulatory compliance will be a critical factor in the success of stablecoins as governments look to issue their own Central Bank Digital Currencies.