Breaking: Paxos reportedly ordered to stop issuing Binance USD

A New York regulator ordered Paxos to stop issuing BUSD, the third-largest stablecoin by market cap.

The New York Department of Financial Services (NYDFS) has ordered blockchain company Paxos Trust to stop the issuance of dollar-pegged Binance USD (BUSD) stablecoin. 

The New York regulator’s actions come shortly after the United States Securities and Exchange Commission (SEC) issued a wells notice to Paxos — a letter the regulator uses to tell companies of planned enforcement action. The notice alleged that Binance USD is an unregistered security.

The NYDFS has asked Paxos to stop creating more of its BUSD token. Paxos will continue to manage redemptions of the product, according to a Binance statement.

The Department is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols. In a statement published on the NYDFS website, the regulator confirmed:

"DFS has ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD. In response, on February 13, 2023, Paxos notified customers of its intent to end its relationship with Binance for BUSD."

The most recent regulatory action on the third largest stablecoin comes in the wake of growing scrutiny around the crypto market. The SEC declared that crypto staking services violate securities law only last week, forcing Kraken to close its staking offering altogether. Coinbase is taking up the fight, claiming its staking products are not securities.

The securities debate in the crypto market is long-running and has been in focus ever since SEC filed a lawsuit against Ripple, the issuer behind the XRP (XRP) token. The case has yet to reach a conclusion. Generally, if an investment of money is made in a business with the expectation of a profit to come through the efforts of someone other than the investor, it is considered a security.

However, the security allegations against a stablecoin could present a major challenge to the crypto industry, as stablecoins are a popular on-ramp for users taking their first steps into crypto. Cointelegraph reached out to law experts to understand how stablecoins could qualify as a security. One lawyer said that while stablecoins are supposed to be stable, buyers may possibly profit from a range of arbitrage, hedging and staking opportunities.

Blockchain attorneys told Cointelegraph that while the answer isn’t clear-cut, there is a case to be made if the stablecoin was created with the expectation of making money or if it is a derivative of a security.

Updated at 3:15pm UTC to include a statement from the NYDFS.