By Ambar Warrick
Investing.com -- The U.S. Securities and Exchange Commission intends to sue crypto firm Paxos Trust Co, which issues the Binance USD stablecoin, for allegedly selling unregistered securities, the Wall Street Journal reported on Sunday citing people familiar with the matter.
The SEC’s enforcement staff issued a Wells notice to Paxos, a letter used by the agency to inform entities of potential enforcement action against them.
The regulator alleged that Binance USD (BUSD) is an unregistered security, and that Paxos has breached investor protection laws by issuing the token.
A Wells notice allows firms to respond in writing to the SEC and tell the commission why it should not proceed with a lawsuit. The SEC’s five commissioners must authorize any further action against the firm.
BUSD is a stablecoin that is issued by Paxos by licensing the Binance brand. Binance, the world’s largest crypto exchange, claims that the token is fully backed to have 1:1 parity with the U.S. dollar.
The token is the world’s third-largest stablecoin behind Tether’s USDT and Circle’s USD Coin, with a market capitalization of about $16 billion.
The SEC’s action comes amid growing scrutiny of crypto firms by U.S. regulators after the recent bankruptcy of FTX. The securities regulator recently reached a $30 million settlement with crypto exchange Kraken, which saw the latter scrap its U.S. staking program.
SEC Chair Gary Gensler also recently said that the commission would look into potential risks posed by stablecoins.
Stablecoins play an important role in facilitating crypto trading, by offering users dollar equivalents that can then be used to execute trades on crypto exchanges. But the space has also faced growing accusations of fraud, particularly due to a lack of clarity over the assets backing major players in the space.
For instance, Tether, which runs the world’s largest stablecoin at a market capitalization of $65 billion, has faced mounting criticism over not performing a proper audit. While the firm releases quarterly attestations of its reserves, critics argue that the attestations are not a full audit.
Potential regulatory action comes as another headwind to the crypto market, which is reeling from a sharp decline in prices through 2022. Bitcoin, the world’s largest crypto, lost over 60% of its value last year.