The SEC vs. Paxos: A deep dive into the implications of the lawsuit and its effects on stablecoins

On Feb. 13, the U.S. Securities and Exchange Commission (SEC) enforcement division issued a Wells notice to Paxos, ordering the company to stop minting the Binance USD (BUSD) stablecoin.

The notice followed an SEC investigation into Paxos and its relationship with Binance, whose stablecoin it issued, which concluded that the company violated securities laws. However, a Wells notice doesn’t necessarily mean that the SEC will take enforcement action against Paxos. For the SEC to pursue this matter further, its five commissioners must vote to authorize any enforcement litigation or settlement.

According to the notice, the Department of Financial Services (DFS) ordered Paxos to stop minting BUSD due to “several unresolved issues related to Paxos’ oversight of its relationship with Binance.” There were no further explanations of these issues — the CEO of Binance, Changpeng Zhao, said he was only aware of the enforcement action through the media.

Paxos is expected to submit a response to the Wells notice and present its case as to why it should not be sued. In the meantime, the company must stop minting new BUSD and enable all customers to redeem their BUSD for U.S. dollars. Paxos has maintained that it has and always will back all BUSD tokens 1:1 with U.S. dollar-denominated reserves.