Summary of the whole process: What is the reason why the US regulators suddenly strangled BUSD or made it a thing of the past?

In the early morning of February 13th, Beijing time, the Wall Street Journal reported that the U.S. Securities and Exchange Commission (SEC) has informed the stablecoin company Paxos that it plans to sue the company for violating investor protection laws. The notice stated that Binance USD, a digital asset issued and listed by Paxos, is an unregistered security. Companies that receive Wells' notice can respond in writing and tell the SEC why the lawsuit should not proceed. The Wells notice is not the final sign that the SEC will take enforcement action. The agency's five commissioners must vote to authorize any enforcement settlement or lawsuit. The SEC has not previously taken enforcement action against major stablecoin issuers.

https://www.wsj.com/articles/crypto-firm-paxos-faces-sec-lawsuit-over-binance-usd-token-8031e7a7?mod=business_minor_pos4

On the afternoon of February 13th, Beijing time, Bloomberg published a news report, publishing a statement from Binance: The New York State Department of Financial Services (NYDFS) has instructed Paxos to stop minting new BUSD, which is a stablecoin wholly owned and managed by Paxos. The market value of BUSD will only decline over time. Paxos will continue to provide services for the product and manage redemptions. Paxos also guarantees that the funds are safe and fully covered by its bank's reserves.

https://www.bloomberg.com/news/articles/2023-02-13/binance-says-stablecoin-partner-been-told-to-stop-minting-busd?srnd=cryptocurrencies-v2

Paxos said that as of February 21, Paxos will stop issuing new BUSD tokens in accordance with the instructions of NYDFS and in close cooperation with it. BUSD will continue to be fully supported by Paxos and will be redeemable until at least February 2024; new and existing Paxos customers will be able to redeem for US dollars or convert their BUSD tokens into Pax Dollar (USDP).

https://www.prnewswire.com/news-releases/paxos-will-halt-minting-new-busd-tokens-301744964.html

On the afternoon of the 13th, CZ issued a detailed explanation that he had no relevant information about the so-called SEC and Paxos lawsuit except for public news articles. The lawsuit was between the US SEC and Paxos. But personally, he agreed with Mile's logic (but it didn't make much sense): I know that technically, it doesn't need to pass the Howey test to be considered a security. The SEC is basically free to define investable assets as securities if it wants. But this undoubtedly sets a terrible precedent. The SEC labeled BUSD as an "unregistered security" and sued its issuer Paxos. But how exactly can STABLECOIN be considered a security when it clearly does not meet the Howey test standards. No one has ever had an "expectation of profit" when buying BUSD. CZ's old rival Xu Mingxing also said that he believes the SEC may not win the lawsuit because BUSD certainly has no profit expectations and should not be a security; but NYDFS can request to stop BUSD or stop Paxos' license.

https://twitter.com/cz_binance/status/1625067484368740353

CZ said on the line that if BUSD is ruled by the court to be a security, it will have a profound impact on how the crypto industry develops (or does not develop) in jurisdictions ruled as such. Binance will continue to support BUSD for the foreseeable future. We do foresee that users will migrate to other stablecoins over time. We will make product adjustments accordingly. For example, no longer using BUSD as the main currency pair for trading, etc. In view of the continued regulatory uncertainty in certain markets, other projects in these jurisdictions will be reviewed to ensure that our users are protected from any undue harm.

There are many speculations about the reasons. One view is that, combined with the fact that Kraken's staking interest-earning product was fined by the SEC, Paxos' own stablecoin USDP was not within the scope of the SEC's warning, and it is speculated that the US SEC's crackdown on BUSD may be related to its deposit interest-earning product. Circle also has similar products, so it may also be hit similarly.

Another view is that "securities" are a broader category defined by the Securities Act of 1933, including notes, bonds, debt certificates, interest certificates, mortgage trust certificates, deposit certificates, etc., and do not necessarily have to strictly comply with the Howey test. Stablecoin issuers hold underlying Treasury bonds, which makes them much like money market funds, giving holders exposure to securities even if they do not profit from them.

Frank, editor-in-chief of TheBlock, said he would not be surprised if the US SEC was reviewing USDC. A senior exchange executive told him a few days ago that the SEC was working on a "Night of the Nazi Long Knives" against cryptocurrencies. VanEck strategic advisor @gaborgurbacs said that Coinbase offers a "reward" program for USDC users, paying in USDC and using terms such as "APY" and "yield". Given the latest developments of Paxos and Gensler's statements on pledges and returns, it is speculated that the SEC is investigating such issues. Payment of forward returns can be regulated like some kind of fund. And Tether CTO also liked this tweet.

https://twitter.com/gaborgurbacs/status/1625139444326998016

At the end of 2022, Reuters reported that the U.S. Department of Justice's investigation into Binance began in 2018, focusing on whether Binance violated U.S. anti-money laundering laws and sanctions. At least six federal prosecutors are involved, some of whom believe that enough evidence has been collected to take active action against Binance, while other prosecutors believe that it still takes time to review more evidence. Binance has met with Justice Department officials in Washington in recent months. The two sides discussed possible out-of-court settlements, with the option of pleading guilty or paying a fine.

But it is worth noting that CZ emphasized that this incident was a lawsuit between the SEC and Paxos, not a lawsuit with Binance. From the results, the redemption process has begun, and the BUSD with a market value of tens of billions seems to have been completely abandoned, and the possibility of a settlement in the future is not great. In response to "suggesting that Binance make their own decentralized stablecoin similar to DAI next", CZ responded that at this juncture, we would rather others do it to make it more...decentralized. We can't do everything. This statement seems to have some hidden meanings.

Subsequent reports from NYDFS and Bloomberg explained more reasons. The reason why NYDFS requested to stop BUSD seems to have nothing to do with the securities identification and pledge of stablecoins. The real reason seems to be due to Binance-Peg BUSD, Circle complaints and Paxos' poor response.

The NYDFS statement pointed out that it has ordered Paxos to stop minting Paxos-issued BUSD because Paxos has several unresolved issues in supervising its relationship with Binance regarding Paxos-issued BUSD. NYDFS emphasized that it authorized Paxos to issue BUSD on the Ethereum blockchain, but the department has not authorized Binance-Peg BUSD on any blockchain.

https://www.dfs.ny.gov/consumers/alerts/Paxos_and_Binance

According to Bloomberg, Circle complained to the NYDFS last fall that Binance mismanaged the reserves of its own tokens, indicating that Binance did not store sufficient crypto reserves to back its tokens. The NYDFS determined that Paxos was unable to operate BUSD in a safe and sound manner "based on extensive regulatory engagement, recent inspections, and Paxos' failure to promptly remediate significant issues related to Paxos-issued BUSD." "Paxos' failure to address critical deficiencies requires the department to take further action to order Paxos to stop minting Paxos-issued BUSD. The department is closely monitoring Paxos to verify that the company is able to facilitate redemptions in an orderly manner and comply with enhanced, risk-based compliance protocols."

https://news.bloomberglaw.com/securities-law/stablecoin-issuer-circle-warned-ny-watchdog-about-binance-token

Attorney Collins Belton interpreted that it seems that the real motivation of NYDFS is actually Binance Pegged BUSD, believing that it is not backed by full reserves. It was not until the end of last year that the relationship between Peg BUSD and Paxos was most clearly disclosed. The SEC may approach this issue from the same perspective. Therefore, a better result is a reduced impact on other crypto stablecoins (which may not be affected by the cascading effects).