The cryptocurrency world is buzzing as the U.S. Securities and Exchange Commission (SEC) officially sets its sights on BUSD, the world’s third-largest stablecoin by market capitalization.
In a bold move, the SEC issued a Wells Notice to Paxos, the issuer of BUSD, sending shockwaves throughout the industry. Although the SEC hasn’t taken legal action yet, the entire stablecoin industry is holding its breath as the implications of this move could be tremendous.
The following article will delve into the debate on whether BUSD qualifies as a security and gather opinions from leading experts in the space.
Is BUSD a Security?
Determining whether BUSD qualifies as a security is an ongoing debate within the cryptocurrency industry, and unfortunately, there is no easy answer to this complex question. The definition of a security under U.S. law is broad, and stablecoins are a relatively new phenomenon.
One widely used definition of a security is determined by the Howey Test, which states that an investment qualifies if it involves pooling money into a shared enterprise with the expectation of making a profit solely from the efforts of others. However, in terms of BUSD, many argue that BUSD is not a stablecoin as holders of BUSD do not expect to earn a profit but instead seek stability in their cryptocurrency transactions.
Others contend that the way BUSD is sold and marketed to investors could be interpreted as a security under U.S. law, which is known for flexible interpretation. As a result, only time will tell how regulators choose to classify BUSD and the broader stablecoin market.
What Experts Are Saying About BUSD
With regard to BUSD and its classification as a security, it is important to consider a broad range of expert opinions. Here are what several key stakeholders have to say.
1. The U.S. Securities and Exchange Commission (SEC)
In early February, the SEC sent a Wells Notice to Paxos, affirming its position that BUSD is an unregistered security. Following this, the SEC instructed the New York State Department of Financial Services (NYDFS) to discontinue issuing BUSD, resulting in Paxos ceasing all BUSD minting.
The Wells Notice is significant as it indicates that the SEC is investigating BUSD, and it is likely that enforcement action will ensue. However, BUSD will likely not be the first to set a precedent in this vein. Instead, the Ripple vs SEC lawsuit will likely set forth some kind of precedent that will almost certainly affect all crypto security cases ahead.
2. Paxos
Paxos is an industry-leading blockchain company with over $500 million in total funding from notable investors such as PayPal Ventures, Declaration Partners and Mithril Capital. The company is responsible for issuing BUSD and is approved by the NYDFS.
Paxos categorically disagrees with the SEC’s claim that BUSD is a security, asserting that “BUSD is not a security under the federal securities laws.” The company also added that it “will engage with the SEC staff on this issue and is prepared to vigorously litigate if necessary.”
3.Coinbase
In a tweet in February 2023, Coinbase showed support for Paxos and BUSD stating that stablecoins are not securities: “This week the NYDFS ordered U.S.-based Paxos to stop issuing U.S. dollar-denominated stablecoin BUSD and the SEC issued a Wells Notice to Paxos. We don’t know what aspects of BUSD might be of interest to the SEC. What we do know: stablecoins are not securities.”
4. Miles Deutscher
Crypto analyst Miles Deutscher voiced his dissent towards the alleged SEC lawsuit against Paxos on Twitter, stating: “The SEC has labeled BUSD as an ‘unregistered security’ and is suing its issuer, Paxos. But how on earth is a stablecoin considered a security, when it clearly doesn’t meet the Howey Test criteria. No one has ever had ‘the expectation of profit’ when buying BUSD.”
Deutscher, in a follow-up tweet, acknowledged that BUSD “doesn’t need to pass the Howey Test to be considered a security.” However, he emphasized that the SEC has the authority to classify any investment asset as a security, which he believes to be a “scary precedent.”
To quote his words, “the SEC basically has free reign to define an investable asset as a security if it wishes to.”
5. Changpeng Zhao
Changpeng Zhao (CZ), the CEO of Binance, also opposes the alleged SEC lawsuit. Although he acknowledged his lack of expertise on the subject, stating that he is “not an expert on U.S. laws,” he shared his personal concurrence with crypto analyst Miles Deutscher’s assessment.
CZ also confirmed that he has no additional information beyond publicly available information. Moreover, CZ cautioned that “‘if BUSD is ruled as a security by the courts, it will have profound impacts on how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such.”
Risks of Investing in BUSD
In light of recent regulatory allegations, BUSD has lost over half of its market cap, with Dogecoin and Polygon flipping it most recently. As the controversy continues to build, it's worth noting some risks of investing in BUSD.
Regulatory risk: The first and most obvious risk is regulatory uncertainty. Having already issued a Wells Notice to Paxos, it is clear that the SEC is ready and willing to enforce legal action on BUSD. Paxos has already been forced to halt BUSD minting, and it's unclear what other implications could arise over the coming months or years.
Exchange risk: Another key risk of investing in BUSD is the possibility of a security breach or hack of the platform that supports BUSD, which could result in irreversible losses for investors. Although exchange platforms that offer BUSD, such as Binance, have robust security features, there is always the possibility of an unforeseen security issue.
Third-party risk: Unlike traditional currency, stablecoins such as BUSD are not backed by the faith of the U.S. government. Despite Paxos’ frequent audits by third-party auditors to confirm that each BUSD is backed 1:1 with the U.S. dollar, the absence of U.S. government credit means that the stability of BUSD’s value cannot be guaranteed in the long term.
How to Buy BUSD
BUSD is extremely easy to buy because it's the native stablecoin of the largest exchange in the world, Binance. So Binance is likely your best bet to pick up some BUSD. However, if you are a U.S. investor, you will have to use Binance.US. Binance and Binance.US both support a wide range of payment options including cash balance, debit card or an ACH transfer.
BUSD vs Other Stablecoins
While BUSD may be a popular stablecoin, several robust alternatives are available on the market. These competing digital currencies differentiate themselves in a variety of ways, such as the identity of their issuer, their methods of price pegging to fiat currency and the collateral supporting their value. Here are a few of the most promising stablecoins in the market.
USDT: USDT, or Tether, was created in 2014 to solve problems of cryptocurrency volatility and lack of convertibility. USDT is associated with Bitfinex and is fully backed by U.S. dollars held in banks on a 1:1 basis. Despite past controversies surrounding its financial statements, USDT is the largest stablecoin in the world as of March 2023.
USDC: USDC, or USD Coin, is a fiat-collateralized stablecoin that was created by Circle in 2018. It is fully backed by USD dollars held in banks on a 1:1 basis. However, unlike USDT, USDC’s reserves have more weighting towards cash and cash equivalents and can be issued and redeemed by multiple institutions, including Coinbase, through the CENTRE Network. As the second largest stablecoin by market capitalization, USDC is a premier choice.
DAI: DAI is a decentralized stablecoin built on the Ethereum blockchain by MakerDAO. The key difference between DAI and other stablecoins like USDT, USDC and BUSD is that DAI does not require a central authority to maintain a stable 1:1 value against the U.S. dollar. Instead, DAI uses crypto collateral and smart contracts to achieve this peg. Unlike other stablecoins, DAI is not backed 1:1 by the U.S. dollar but rather by a basket of cryptocurrencies, with Ether (ETH) serving as the primary form of collateralization. DAI is over-collateralized, with the value of the Ether used designed to exceed the value of DAI issued.
Frequently Asked Questions
Is BUSD safe?
Yes, BUSD is considered to be safe and is strictly regulated to maintain a 1:1 BUSD and is subject to regular third-party audits.
Can I still redeem BUSD?
Although Paxos no longer mints new BUSD, customers still have the option to redeem their BUSD for USD or convert it into USDP.
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