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Paxos confirmed Monday it received a Wells Notice from the Securities and Exchange Commission, stating it’s prepared to take on the agency and any enforcement actions related to stablecoin Binance USD.
A Wells Notice is an official letter from the SEC that informs recipients the agency is preparing to bring a potential enforcement action against them. Paxos received notice from the SEC that the agency is considering enforcement action against the company for not registering BUSD as a security, the company stated.
Paxos disagreed with the SEC’s belief that its Binance USD token is a security, stating that it is prepared to “vigorously litigate” the disagreement if it's forced to.
“Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws,” the company said in a statement. “To be clear, there are unequivocally no other allegations against Paxos.”
The statement from Paxos comes as the company announced it would stop minting any new BUSD, a stablecoin issued by the company that’s pegged to the value of the dollar and issued under a licensing agreement with Binance, the largest cryptocurrency exchange.
Paxos said that it would “end its relationship with Binance” in a statement released Monday. The company assured customers that while its relationship with Binance is winding down, customers would still be able to redeem the stablecoin for at least a year.
Binance and Paxos established a partnership to launch BUSD in 2019. The coin is currently the seventh largest cryptocurrency by market capitalization with a total value of around $15.8 billion, according to data from CoinGecko.
When it announced that it would no longer issue new BUSD, Paxos said it would be working with the New York Department of Financial Services (NYDFS) as it brought its BUSD offering to a close but made no mention of the SEC until later in the day.
The NYDFS has overseen Paxos’s process for issuing BUSD on Ethereum, ensuring its fully backed by U.S. dollars through regular examination. But BUSD is also offered as a token on Binance Smart Chain, through a process that Binance admits “has not always been flawless.”
In order to issue BUSD on Binance Smart Chain, the exchange holds an equal amount of BUSD issued by Paxos as collateral and releases what’s referred to as Binance-Peg BUSD on its own network.
But the balance between Binance-Peg BUSD and BUSD issued by Paxos and held as collateral has slipped a significant amount on multiple occasions, according to data that was compiled and analyzed by Jonathan Reiter and Patrick Tan of blockchain analytics firm ChainArgos.
The difference exceeded $1 billion on three occasions between 2020 and 2021, the research found, with the amount of BUSD on Binance Smart Chain exceeding the collateral that the exchange held.
A spokesperson for Binance told Bloomberg the discrepancies were “delays” in gathering the appropriate amount of capital, adding that the process behind maintaining collateral for Binance-Peg BUSD had since been corrected.
“Recently, the process has been much improved with enhanced discrepancy checks to ensure it’s always 1-1 pegged,” they said.
Paxos’s positioning to take on the SEC comes amid a regulatory blitz by the agency, which involved a $30 million settlement agreement reached with cryptocurrency exchange Kraken last week over issues with a staking service offered to customers in the U.S. by the company.
Editor's note: this article has been updated to add context relating to BUSD issued on Binance Smart Chain.