• Paxos said it categorically disagrees with the US SEC that BUSD is security.
• The stablecoin issuers said it is ready to explore litigation if need be.

A new potential regulatory tussle may be underway between the United States Securities and Exchange Commission (SEC) and Paxos Trust over the security status of Binance USD (BUSD) stablecoin. Following the Wells Notice from the regulator for Paxos to shut down the issuance of the stablecoin, the company has come out to say it “categorically disagrees” that the token is a security.

A Wells Notice is a notification issued by regulators to inform individuals or companies of completed investigations where infractions have been discovered. With the Wells Notice filed, Paxos may be expecting regulatory action from the regulator in the near term.

Notwithstanding the chances it might get sued, Paxos has issued a statement noting it plans to engage with the regulator to find a common ground with respect to the regulatory infraction. Paxos boasts that the BUSD is a dollar-denominated token that it backed up in bankruptcy reserve accounts to ensure it remains solvent.

The company said it is ready to seek legal redress if it comes to that. The Paxis statement reads. 

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. Paxos has always prioritized the safety of its customers’ assets. BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts. We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.

Binance USD (BUSD) is largely attributed as a stablecoin within the Binance Exchange ecosystem, however, it is issued by Paxos. The stablecoin still remains the 7th largest digital currency with a market capitalization of $15.72 billion.

Paxos vs SEC: a Possibly Overreach of Security Definition?

The SEC has been going after digital currency companies for some time now as it bases its associated cryptocurrencies using the Howey Test as its yardstick. The regulator instigated a $1.3 billion lawsuit with blockchain payments firm Ripple labs Inc back in December 2020 over the sales of XRP as an unregistered security.

With the lawsuit still ongoing, the regulator has scored a win with LBRY.com in what seems to be a working strategy for the Gary Gensler lead commission. Much recently, the regulator fined Kraken Exchange $30 million for offering staking as a service. The industry has been very much riled with this and the notice to Paxos appears to be a deal breaker.

One of the Howey test criteria provides that investment must be made into an asset with the hopes of making a return. From the operational modalities of the crypto ecosystem, investing in stablecoins does not guarantee any return. This makes the idea of the SEC pursuing Paxos resemble an overreach of the definition of what security is.