Paxos Under NYDSF Investigation?
The New York Department of Financial Services (NYDFS) investigated Paxos Trust, an issuer of stablecoins including Binance’s BUSD. A spokesperson for the regulator said that Paxos “has breached its obligation to perform appropriate, periodic risk assessments and due diligence on BUSD clients issued by Binance and Paxos to prevent bad actors from using them platform” in a “safe and sane” manner.
Paxos manage 3 coins USDP, PAXG (Pax Gold) and BUSD. In essence, BUSD is the stablecoin of Paxos but branded as Binance, this is a partnership of Binance and Paxos. Paxos is a US company and is regulated by NYDFS. Recently, the agency investigated Paxos and concluded that Paxos violated its risk management obligations to prevent bad actors from using the platform of stablecoin BUSD issued by Binance and Paxos.
With the NYDFS allegation, Paxos reached an agreement with NYDFS and agreed to stop providing BUSD services. This means that Paxos will still allow the exchange of BUSD to USD but will not issue more of this stablecoin. So the capitalization of BUSD will only decrease over time.
Binance has confirmed the above information and they announced that they will still support BUSD trading, but will adjust the products if users switch to other stablecoins. Therefore, the future may not be BUSD anymore and it will slowly disappear.
NYDFS reportedly received a complaint from stablecoin issuer Circle regarding Binance’s reserves prior to their crackdown on BUSD.
Government agencies are attacking crypto companies?
In addition, the SEC is also investigating Paxos but has not yet found results. The SEC only has jurisdiction over securities and they will try to pair stablecoins with securities. This makes many people question because of the unreasonableness of the SEC’s allegation. Stablecoins are not suitable for the Howey Test because no one buys a stable coin with the expectation of profit.
It seems that these government agencies target companies that are weaker than them to sue and suppress. Because these companies will often give in because their potential is too thin to resist. These are the first steps these agencies take to set a precedent for lawsuits or steps to regulate this crypto market. They see the crypto market full of potential and profit opportunities, so they want to take control of it.
With the news about BUSD, it is possible that this coin will no longer develop in the future but the market has not reacted much to this news. Because in addition to BUSD, the crypto market still has many major stablecoins such as USDC, USDT, … and the market will not be affected. In addition, users can still exchange BUSD to USD or other cryptocurrencies normally.
What is the Howey Test?
A long time ago, there was a man named William John Howey who owned large orange groves in Florida and grown his own oranges to sell was risky. William Howey thought of a better way to make money. Howey kept half of the land for his own use and sold the other half to interested people who wanted to start an orange business but didn’t know how to farm. The buyer of this land will sign a contract that after buying, this land will be handed over to Howey’s company to cultivate. After harvesting, the profits will be divided among the land owners.
Howey advertised this form of operation through a resort hotel he owned and promised substantial profits. Most of the land buyers are not Florida residents or farmers. They are business people, inexperienced in the agricultural sector, and lacking the skills or equipment to take care of the land on their own.
In 1946, SEC sued the company WJ Howey and this was a decisive case in US securities law. In this case, the United States Supreme Court reviewed the evidence as to whether the investment contract was a security under the Securities Act of 1933.
The defendants in the case, WJ Howey Co. and others in connection with the sale of land in Florida, including the right to use the land for cultivation. Buyers are required to sublease the land to the defendants, who will manage the farming operations.
Howey Test’s 4 conditions
The Court established the “Howey Test” as a definition of an investment contract and a security, which has since become a widely used standard in US securities law. An investment contract is a security when all four of the following are true:
- An investment in money
- Invest in an common enterprise
- Expectation of profit
- Through the effort of the promoter
A clear example, we can look at Apple stock. When investors want to own, they use the money to buy shares of Apple (condition #1). The purchase of this stock is an investment in the company Apple (condition #2). Stock buyers need not do anything that they expect to make a profit (condition #3) when the stock goes up in price. The increase in the price of the stock due to the operating efforts of the Apple company (condition #4). With an investment in a stock like Apple that meets all four of the Howey Test criteria, it is classified as a security.
Currently, securities law regulations are only relevant for traditional financial instruments. With a new market like crypto, this regulation is no longer relevant, but there are no new regulations for it. Therefore, the determination of applying Howey Test to crypto is still very controversial and no final decision has been made. We’ll be watching for further updates to see what the court will decide.
