SEC May Sue Against Paxos, Stablecoin Market Suffers Huge Impact

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Key Points:

Although not yet official, the US Securities and Exchange Commission (SEC) is most likely preparing to take action against Paxos.
If the SEC does act, any other stablecoin issuer should either sign up or be prepared to receive a lawsuit from the SEC.
Paxos disagrees with the arguments from the regulator. If Paxos takes action against the SEC, it could incur huge costs.

If the US Securities and Exchange Commission formally files a lawsuit against Paxos, it will have a significant impact on the $137 billion stablecoin market, as reported by CNBC.

Although there has been no formal action yet, there are indications that the regulator has targeted Paxos and all other stablecoin issuers.

On February 13, the SEC issued a “Wells Notice” to Paxos, announcing that it plans to sue Paxos over BUSD; The New York State Department of Financial Services has ordered Paxos to stop issuing new BUSD tokens. Soon after, the New York State Department of Financial Services ordered Paxos to halt issuing new BUSD tokens, and Paxos also agreed to enforce it.

“If the SEC charges Paxos, any other stablecoin issuer should register or prepare to file a lawsuit with the SEC,”
Renato Mariotti, a partner at BCLP said

Mariotti believes that the SEC will likely settle with Paxos and that Paxos recognizes BUSD as security, prompting other stablecoins to follow suit and sign up.

Paxos can take the initiative to sue the SEC, but the cost of doing so will be huge. Litigation will take years and risks. Mariotti says another consequence is that the SEC could regulate what assets are used to support stablecoins and requirements for digital currency matters to save money exposed to the market.

“Litigation will take years, and the risk of losing the case before the SEC will be huge. Paxos going against the SEC would create risks and potentially make BUSD less attractive to the market.”

While the SEC has yet to issue specific fees, the announcement to Paxos focuses on whether stablecoins are securities.

For its part, Paxos said it “completely disagrees with the SEC employee because BUSD is not a security under federal securities laws.”

Tether and USDC also need to wait for the SEC’s ruling on what Paxos and BUSD are. Reportedly, Tether and Circle, the issuer of USDC, are “close to the US government.” Circle CEO Jeremy Allaire has previously called for more regulation of stablecoins.

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