The Securities and Exchange Commission (SEC) has informed crypto firm Paxos Trust Co. of its plans to file a lawsuit against the company for alleged violation of investor protection laws, Wall Street Journal said in a report said.
The SEC’s enforcement division sent a Wells notice to Paxos, which the agency typically uses to notify companies and individuals of a possible enforcement action. The notice reportedly alleges that Binance USD, a digital asset that Paxos issues and lists, is an unregistered security.
Binance USD is a Binance-branded stablecoin pegged to the dollar on a one-to-one basis and is listed on many digital asset exchanges, including the Paxos-run digital asset exchange, itBit. It is unclear if the SEC notice specifically relates to the issuance or listing of Binance USD or both.
Neither Paxos nor Binance have commented on the matter, while the SEC has not responded to requests for comment. The SEC’s five commissioners must vote to authorize any enforcement settlement or litigation and firms that receive Wells notices are allowed to respond in writing to the SEC and explain why it should not proceed with a lawsuit.
The SEC’s enforcement action against crypto companies has been intensifying in recent times. Last week, Payward Inc.’s Kraken platform agreed to stop offering crypto staking services in the US and pay $30 million in penalties to the SEC.
Stablecoin issuers like Paxos run a profitable business by investing user deposits in cash and cash-equivalent assets like short-duration US Treasurys. Binance USD has become the world’s third-largest stablecoin with a market cap of over $16 billion as of Sunday.
Paxos also issues its own stablecoin, Pax Dollar, which has a market cap of around $897 million. SEC Chairman Gary Gensler has stated that stablecoins can resemble bank deposits or money-market mutual funds and in November 2021, a panel of regulators led by the Treasury Department recommended that stablecoins should have a specific regulatory framework and their issuance should be limited to banks.
However, Congress has not yet passed any such legislation, leaving regulators with more discretion to monitor the market. The SEC has taken enforcement action against several digital tokens in the past six years, alleging that they were the type of investments that must be registered with the SEC before being sold to the public.