Sources: the SEC told Paxos the agency plans to sue the crypto firm, alleging the Paxos-issued and listed Binance USD stablecoin is an unregistered security

The agency has been intensifying its enforcement of major crypto players — The Securities and Exchange Commission …

Wall Street Journal 2023-02-13

Context & Ripple Effects

The SEC warning landed as New York’s financial regulator had already ordered Paxos to stop issuing additional BUSD, leaving Paxos to continue redemptions and sever its Binance relationship. The episode became an early test of whether a stablecoin could be treated as a security; lawyers soon flagged potential difficulty applying the Howey test to BUSD holders.

The immediate market reaction in related coverage was severe: BUSD outflows after the SEC crackdown exceeded those reported after the CFTC’s later Binance suit. The SEC ultimately dropped its Paxos investigation in 2024, underscoring the unsettled legal basis of the original allegation.

First-order effects

Paxos faces a prospective SEC enforcement case while its BUSD issuance is already halted, concentrating its near-term role on redeeming existing tokens rather than expanding the Binance-linked product.
Binance loses a key issuance partner for BUSD as Paxos cuts ties, while BUSD holders confront a shrinking stablecoin ecosystem and redemption-focused wind-down.

Second-order effects

The combination of enforcement pressure and halted issuance accelerates withdrawals from BUSD, weakening its utility for Binance users and the token’s position in crypto markets.
Other stablecoin issuers and exchanges must assess whether their products and distribution arrangements invite securities scrutiny, even as legal analysis questioned the SEC’s stablecoin theory.

Third-order effects

The case places stablecoin classification at the center of the SEC’s broader crypto enforcement campaign, later visible in its suit against Coinbase over unregistered brokerage and staking.
The SEC’s eventual decision to end the Paxos inquiry suggests that enforcement notices alone may not establish durable classification rules, increasing the importance of clearer legal and regulatory standards for stablecoin issuance.

The trend: US crypto oversight is moving from product-by-product enforcement toward a contested effort to define which tokens and intermediaries fall within securities rules.

Discussion

@wsjmarkets @wsjmarkets on x
The SEC has told crypto firm Paxos Trust Company that it plans to sue the company for violating investor protection laws https://www.wsj.com/...
@milesdeutscher Miles Deutscher on x
The SEC has labelled BUSD as an “unregistered security”, and is suing its issuer, Paxos. But how on earth is a STABLECOIN considered a security, when it clearly doesn't meet the Howey Test criteria. No one has ever had “the expectation of profit” when buying $BUSD. https://twitte…
@ryansadams Ryan Sξan Adams on x
The SEC is making SEC compliance impossible for crypto projects. This is by design. And this is how an institution loses its legitimacy.
@cz_binance @cz_binance on x
5/ On the alleged SEC vs Paxos lawsuit, I have no information about it, other than public news articles. The lawsuit is between the US SEC & Paxos. I am not an expert on US laws. But personally, I agree with Mile's logic here (not that it means much): https://twitter.com/...
@thulynnn @thulynnn on x
1. stables standalone=! security, from legal pov, otherwise $ = security too; 2. my best guess: this related to bn earn products, aka where u deposit/stake & earn some APRs; or the binance chain busd. Those technically not related to pax but pax =easy target since us based https:…
@johnreedstark John Reed Stark on x
Newsflash: SEC issues Wells Notice to Paxos informing Paxos of possible enforcement action. In my 18 years at SEC enforcement division, I can't recall a time when I sent a Wells Notice and an enforcement action did not follow. SEC's crypto-sweep continues! https://www.wsj.com/...
@pt Parker on x
Guys, if it makes you feel better, people have been waiting in jail for decades for them to legalize pot and the drug war has been over a long time. Maybe see if you can get medical crypto through at the state level first? https://twitter.com/...
@jesse_hynes @jesse_hynes on x
For all the shit that the SEC gets, there really is not enough pressure on Congress for absolutely and unequivocally failing to establish regulations. I was screaming about this in 2019 and im still screaming about it today. Congress could easily end this charade
@twobitidiot Ryan Selkis on x
My new goal in life is to end @GaryGensler's political career and make him the reason Biden loses reelection. https://twitter.com/...
@ramahluwalia @ramahluwalia on x
1/ RE: Paxos & BUSD. The SEC issued a No Action Letter to Pocketful of Quarters - a crypto blockchain gaming token in 2019. There was no ‘expectation of profit’ - a prong of the Howey Test - since the token value was fixed (like a stablecoin). How can the SEC can treat a... https…
@lex_node @lex_node on x
don't hate me but custodial stablecoins are probably all securities I have said this consistently US securities laws are just insanely broad... https://archive.ph/nrgeU
@adamscochran Adam Cochran on x
1/5 This is what people don't realize. Howey test = precedent for investment contracts. “Securities” is a much broader category defined by the 1933 Securities Act. Honestly, if the SEC wants to, with how vague the act is, its fairly easy to put anything under it. https://twitter.…
@eleanorterrett Eleanor Terrett on x
Another step in the unilateral effort between the @SECGov, @NYDFS and @USOCC to blitz crypto. More Wells notices going out in the coming 2-3 weeks, I'm told. Keep an eye on @JunoFinanceHQ. https://www.wsj.com/...
@milesdeutscher Miles Deutscher on x
Yes, I'm aware that technically it doesn't need to pass the Howey Test to be considered a security. The SEC basically has free reign to define an investable asset as a security if it wishes to. But it undoubtably sets a scary precedent. https://twitter.com/...
@wublockchain Wu Blockchain on x
One point is that, combined with Kraken's staking product being fined by the SEC, Paxos's own stablecoin USDP is not within the notice, the SEC's crackdown on BUSD may be related to its deposit and interest-earning products. And Circle has a similar product, so that is risky too.
@smtuffy Sean Tuffy on x
The crypto gang forcing me to defend the SEC and Gensler is really getting exhausting.
@carnage4life Dare Obasanjo on x
Stablecoins were crypto's most useful and also its dumbest idea. Digital dollars backed by companies that could go bankrupt at anytime. It's practically regulatory malpractice for the SEC to watch people lose money in the crash then start enforcing now. https://www.wsj.com/...
@it_airmass @it_airmass on x
This is complete bullshit. A stable coin cannot be a security. One of the main tenets of the Howie test is “expectation of profit”. No one expects a stable coin to gain in value. If Paxos doesn't get this thrown out quickly, they are a bunch of pussies. https://www.wsj.com/...
@northrocklp Hal Press on x
This is unfortunate. Has quite broad and complex implications. Could get ugly and will take some time to sort through. Immediate question I am not sure of is does the enforcement stand while they go to court or not. https://www.wsj.com/...
@byzgeneral @byzgeneral on x
SEC sues Paxos over BUSD. The SEC is on a warpath. What a gross institution. Paxos is regulated by the NY state dep of financial services by the way. https://www.wsj.com/...
@adam3us @adam3us on x
ofc i expect paxos is being relatively prudent, not taking elevated term mismatch or high corp borrower default risks. (paxos manages BUSD underlying USD for binance). but like kraken they might nit-pick disclosures. who knows, we'll seen soon enough i guess
@illneil Neil Hartner on x
Justice for all the people who bought Paxos USD stablecoin with an expectation of profit but only broke even. https://twitter.com/...
@mdudas Mike Dudas on x
https://twitter.com/...
@adam3us @adam3us on x
speculative thought for gensler's latest. maybe at a stretch, SEC might argue 0% return on BUSD is a howey test pass for “expectation of return”. there is risk, maybe some term-mismatch ladders underneath, and there's a conflict where the operator profits from the risk.
@twobitidiot @twobitidiot on x
There's generally two types of “serious” people in crypto: 1) ok, playtime is over. what can we build that the government will let us. 2) ok here's what we built that works. playtime is over, fix the law. I'm in the fix the f*cking law. Now. camp.
@bambroughkevin Kevin Bambrough on x
Crypto stable coins represent a peg to a fiat currency while offering no interest income but all the risk of being a creditor to an unregulated firm run by sketchy people will go down in history as one of the absolutely stupidest assets anyone could ever purchase https://twitter.…
@cryptodefilord @cryptodefilord on x
Seems SEC is all out war this year. https://www.wsj.com/...
@starokg @starokg on x
Financial industry has big responsibilities to the society,regulation is definitely necessary. As a crypto company if we build it as a financial institution, can get some short term returns,but the risk and regulatory pressure always is there. Keep our technology gene is critical…
@safetyth1rd @safetyth1rd on x
The SEC doing coordinated hits on crypto like a 1920 mobster tell me how attacking a stablecoin protects investors you can't. because it doesn't.
@twobitidiot @twobitidiot on x
Hey @GaryGensler why don't we do a chat on crypto with a neutral moderator? You play dirty, but I'm not under your thumb so we can give the American investing public a fulsome debate on crypto instead of your shadow games. Time? Place?
@peckshieldalert @peckshieldalert on x
#PeckShieldAlert ~10M $USDP (Pax Dollar) have been burned from Paxos: Treasury https://etherscan.io/... https://twitter.com/...
@jebus911 @jebus911 on x
As someone who's been holding bUSD for years waiting for the pump, I'm glad the SEC is finally taking action

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