Updated: NYDFS and SEC Take Action Against Paxos for Issuance of Binance Stablecoin | Practical Law

Updated: NYDFS and SEC Take Action Against Paxos for Issuance of Binance Stablecoin | Practical Law

The New York Department of Financial Services (NYDFS) ordered Paxos Trust Company to cease minting the Paxos-issued stablecoin Binance USD (BUSD). In addition, the SEC issued a Wells notice to Paxos regarding the offer and sale of BUSD as an unregistered security.

Updated: NYDFS and SEC Take Action Against Paxos for Issuance of Binance Stablecoin

Practical Law Legal Update w-038-5091 (Approx. 6 pages)

Updated: NYDFS and SEC Take Action Against Paxos for Issuance of Binance Stablecoin

by Practical Law Finance
Published on 14 Feb 2023USA (National/Federal)
The New York Department of Financial Services (NYDFS) ordered Paxos Trust Company to cease minting the Paxos-issued stablecoin Binance USD (BUSD). In addition, the SEC issued a Wells notice to Paxos regarding the offer and sale of BUSD as an unregistered security.
On February 13, 2023, the New York Department of Financial Services (NYDFS) indicated in a consumer alert that it has ordered Paxos Trust Company (Paxos), a regulated blockchain and tokenization infrastructure platform operating in New York state as a limited purpose trust company under NYDFS supervision, to cease minting its Paxos-issued Binance-branded stablecoin, Binance USD (BUSD). The alert indicated that the NYDFS order resulted from unresolved issues relating to Paxos’ oversight of its relationship with Binance, the world's largest cryptocurrency exchange, regarding the stablecoin.
Paxos issued a press release in response to the NYDFS indicating the cessation of BUSD token issuance would be effective February 21, 2023. The release continued that BUSD will continue to be supported by Paxos and redeemable to onboarded customers through at least February 2024. New and existing Paxos customers will be able to redeem their funds in USD or convert their BUSD tokens to Pax Dollar (USDP), another Paxos regulated USD-backed stablecoin.
Binance CEO Changpeng Zhao issued a series of tweets on February 13, 2023 in which he indicated that:
  • The NYDFS decision means that BUSD market capitalization will decrease over time.
  • Binance will support BUSD for the foreseeable future.
  • Binance's users will migrate to other stablecoins over time.
  • Binance will make product adjustments, such as moving from using BUSD as the "main pair for trading," as the anticipated migration to other stablecoins occurs.
  • Regulatory uncertainty in certain markets is prompting Binance to review its other projects to ensure its users are insulated from any undue harm.
In its alert, NYDFS provided guidance to US residents who own Paxos-issued BUSD and are not Paxos customers that they can apply to be onboarded as a Paxos customer. Once onboarded, Paxos is required to redeem Paxos-issued BUSD for US dollars (USD) at a 1:1 exchange rate pursuant to NYDFS compliance protocols, which require all stablecoins issued by NYDFS-regulated entities to be fully backed 1:1 by cash or cash equivalents (see Legal Update, NYDFS Issues Regulatory Guidance on Issuance of USD-Backed Stablecoins).
In a related action, according to a second press release issued by Paxos on February 13, 2023, the Securities and Exchange Commission (SEC) issued a Wells notice to Paxos on February 3, 2023 stating that its staff may recommend action against Paxos because BUSD is a security under federal securities laws, the offering of which should have been registered with the SEC (see Practice Note, SEC Regulation of Digital Assets). Paxos indicated it disagreed with the categorization of BUSD as a security. The release indicated that BUSD is:
  • Always backed 1:1 with USD-denominated reserves.
  • Fully segregated.
  • Held in bankruptcy-remote accounts.
Paxos indicated it is prepared to vigorously litigate the issue of whether BUSD is a security, if necessary.
Update: On July 11, 2024, Paxos issued a press release indicating that the SEC has dropped its investigation into Paxos for issuance BUSD.