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Explaining the main: why the SEC attacked BUSD/USDC and what will happen next

Igor Grigorchenko

News editor

Feb 15, 2023 at 06:05

In this article, we answer last week’s hottest questions: why the SEC attacked BUSD, whether USDC is next in line for an attack (according to some press reports), and how these loud events will affect the stablecoins market.

What happened to BUSD?

Recently, the SEC officially named BUSD a security, violating the law on the circulation of securities. Such an absurd accusation against a stablecoin has caused fear and confusion on the part of the crypto community. The exact motivation behind the accusation has so far not been officially disclosed.

Markus Thielen, head of research for crypto platform Matrixport, described the essence of the claims of U.S. regulators against Paxos (the issuer of BUSD). According to his sources, Paxos Trust wasn’t strict enough in monitoring its stablecoin. Paxos may have violated obligations to periodically assess risks as well as due diligence on Binance’s exchange customers.

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Thielen pointed out that $11 billion worth of BUSD was issued on the Ethereum network, but another $4.8 billion should also be issued on the Binance Smart Chain. This so-called Binance-pegged BUSD, and this part of the issue, is controlled by Binance, which is a non-US company and is not regulated in any way. Therefore, the New York State Department of Financial Services (NYDFS) is concerned that this $4.8 billion may not be properly collateralized. 

A top Matrixport executive further adds that the regulatory accusations against BUSD could be due to the fact that Binance mistakenly stored user funds and assets to guarantee its tokens in the same wallet. This fact became public and was widely discussed in the press. This mixing of funds of completely different origins in the same account is a gross violation of banking controls. Therefore, the SEC had logical questions for Paxos as far as its control over the Binance situation.

This leak from Matrixport perfectly explains why Paxos, which issues BUSD, officially cut off interaction with Binance immediately after the conflict arose. For many, such a strong move was a mystery, since BUSD is a Binance project (Binance USD, BUSD).

Thielen urged the community to stop worrying about the future of BUSD; in his opinion, this stablecoin will survive, and temporary problems are not fatal and will be eliminated.

Is USDC under attack?

Because of the regulators’ actions against Paxos and BUSD, the cryptocurrency community logically fears that the same situation awaits other stablecoins. However, expert Markus Thielen believes that other stablecoin issuers should not fear attacks from regulators. 

Recall that earlier Fox Business reporter Eleanor Terrett wrote that, according to her information, Circle (the company issuing USDC) received a Wells Notice from the U.S. SEC.

The so-called Wells Notice is used by the regulator to notify companies of planned enforcement actions against them. Simply put, it is done just before going directly to court. The crypto community was scared, but recently the issuer of USDC, represented by Circle Pay director Dante Disparte, officially notified everyone that it’s all a fake, no notifications from the SEC were received.

What’s next for stablecoins?

Speaking at the Twitter Spaces event, Changpeng Zhao, Binance CEO, reasoned that most people still make payments and settlements in fiat currencies, so in this regard, stablecoins are very important. By the way, this CZ speech attracted over 500k listeners online, which indirectly shows the significance of the current problems with stablecoins.

According to Changpeng Zhao, the next year will see the following changes in this field:

  • Because of U.S. regulators’ attacks on BUSD, the industry may draw its own conclusions and switch to stablecoins pegged to other fiat currencies. Stablecoins backed by the euro, Japanese yen, or gold will soon become especially popular in the crypto space. Binance is already in talks with a potential issuer of Japanese yen stablecoins, he said.
  • The Binance CEO also noted that algorithmic stablecoins could also play an important role in the development of the cryptocurrency ecosystem. For example, we recently wrote about the release of a new algorithmic stablecoin, Djed, from Cardano. However, Zhao warned that this type of asset is subject to certain risks that fiat-backed stablecoins are not. 
  • Finally, Zhao believes that in any case, stablecoin issuers must learn to disclose detailed information to investors so that they can make an informed decision on which stablecoins to invest in. The ability to be transparent to the public will be the decisive competitive advantage of the stablecoins of the future.

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