The SEC’s Stablecoin Crackdown Could Reshape The Entire Crypto Market

Key takeaways

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

The SEC has turned its attention to stablecoins. It allegedly has plans to sue Paxos, a blockchain provider that runs the third-largest stablecoin BUSD, for not registering the product as a security. It also ordered Paxos to stop trading the coin.

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

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

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The SEC’s latest crypto target

Paxos, a blockchain infrastructure platform, got a Wells notice from the federal-level regulator, the SEC, at the start of February – indicating a potential charge is coming after 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 $16bn in holdings as of January 31. It’s been on the market since 2019 when Binance and Paxos first partnered.

The drama might soon escalate. The SEC is considering legal action against Paxos for violating investor protection laws, which could mark a turning point in 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 argued BUSD is “always backed 1:1 with U.S. dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts.”

U.S. regulators have been on high alert with crypto companies since the downfall of crypto darling FTX – and it’s been a busy month for cracking the whip.

The NYDFS charged Coinbase with compliance shortcomings, saying its AML and know-your-customer standards were below par and new customers were not thoroughly vetted. Coinbase settled for $100m in January.

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

Crypto exchange Kraken also agreed to pay $30m in penalties 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 hills. Its BUSD stablecoin has gone from a $16.1 market cap down to $12.9bn, which Changpeng Zhao said would continue to decrease.

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

Cryptocurrencies are looking increasingly bullish despite the crackdowns, with retail investors jumping back in and BitcoinBTC
prices hitting highs of $25,000.

The stablecoin market has grown by $2bn since the Paxos fallout, with Tether now firmly leading the charge in the industry. But with the SEC on their backs, how long will stablecoins be able to go on in their current form?

What are the implications for the crypto world?

Stablecoins are meant to be the ‘safer’ part of the crypto market. Short-term assets like U.S. Treasuries and Treasury Reverse Repurchase Agreements back them, so anyone holding the coin can exchange it 1:1 for USD at any point.

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

After FTX, the U.S. financial regulators were accused of being too slow in cracking down on bad players in the industry. It also needs to be seen taking action following the Biden administration’s publication on mitigating crypto risks at the end of January, where stablecoins are mentioned twice.

The Paxos situation has drawn mixed reactions from the crypto industry, with some questioning the SEC’s crackdown. It’s worth noting that the SEC has seen its own dissent in 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 U.S. 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 aren’t any details on when we can expect the currency to be released, stage one testing is already complete.

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

The crypto industry could be a direct competitor against centralized digital currencies. Despite the volatility, the sector is rife with 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 out of their grasp.

The bottom line

The SEC is nowhere near done with its blitz on crypto regulation, lest it looks too complacent in the face of FTX.

While we wait to see what comes of Paxos’ run-in with the regulator, other stablecoins like Tether and Circle are still attracting investors and growing their share in the market.

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