Crypto brokerage firm Paxos will end its relationship with Binance for the BUSD stablecoin. This spells doom for the world's third largest stablecoin. What are the implications of this development: is this a war on stablecoins? 

After the news, BUSD had a very slight - not at all dramatic - depeg from the value of 1 dollar. Binance CEO 'CZ', tweeted out, with a wink: Funds are 'safu'! He confirmed that Paxos let Binance know they were directed to cease minting new BUSD by their regulatory overlords. Paxos will keep managing redemptions: people exchanging BUSD for real dollars.

The world's largest crypto exchange Binance is under regulatory scrutiny from the American SEC. As Binance isn't registered in the US, the country now attacks its stablecoin, to pry into Binance's affairs.

There are perhaps understandable concerns. The US government would want to know in what way the 16 billion dollars’ worth of circulating BUSD could pose a systemic risk to the traditional banking system. What part of that dollar capital is parked at insured banks, for example? Also, the way Binance automatically converts USDC to BUSD, poses some problems.

Hitting with the security stick

The only stick the SEC has to hit with, is the security stick (it isn't called the Securities and Exchange Commission for nothing: it makes money from companies registering securities and collecting fines). The financial watchdog claims that BUSD is an 'unregistered security'.  

But how can a stablecoin be a security? After all, it is supposed to have a stable value, as opposed to bonds and stocks, which benefit from investment activity. But wait, the companies that issue stablecoins, do invest their dollars in for example US treasuries - that's their profit margin.

Implications for the crypto markets 

The news means that the market cap of BUSD can only shrink. As exchanges can't function without a stablecoin, Binance will have to move to USDT or USDC. Should the SEC target more stablecoins than BUSD for being securities, it could drive stablecoin trading to specialized security token exchanges. Or stablecoin issuers would need to become registered security business themselves. Both would be a radical shift. 

Conclusion

Over the past few months, the SEC has become increasingly aggressive towards the crypto industry. The recent fine for exchange Kraken is an example. Is there indeed an operation chokepoint 2.0 going on? It isn't sure how long and deep the regulatory attacks on stablecoins will be. For the time being, this attack seems more of an attack on a centralized companies that are not transparent. In any case, the dust of this needs to have settled before the next bull market can kick off.