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US Regulators Clear Stablecoin Path For Reluctant Banks

By  |  February 15, 2023

The regulators’ crackdown may chill private firms’ clamor to mint and issue stablecoins.

And pave the way for banks to take the lead in stablecoin creation and advance the case for tokenized deposits, too.

As reported this week, The U.S. Securities and Exchange Commission (SEC) and the New York Department of Financial Services (NYDFS) have fired a shot across the regulatory bow of New York-based blockchain firm Paxos — and enforcement actions loom for alleged violations of laws meant to protect investors.   

New York’s financial regulator, according to reports, alleges that the company did not conduct periodic risk assessments nor perform due diligence on the customers holding the stablecoins. The SEC is reportedly focusing on the stablecoin because it claims the holding is an unregistered security.

Read more: NY Regulator Orders Binance Stablecoin Backer Paxos To Freeze Issuing Tokens

In the meantime, Paxos has been instructed to stop its issuance of BUSD, a stablecoin that, like many others, is pegged to the dollar. Paxos has said it will stop issuing the coin this month.  

As to the big chill, so to speak, PayPal has paused its own stablecoin effort (Paxos is/was the partner here). We note that the projects from the likes of PayPal would go a long way toward encouraging the widespread embrace of stablecoins from individual consumers and corporates alike. 

 It seems long ago and far away, but the Facebook Libra/Diem journey into oblivion also echoes here.   

For private firms, the conundrum is that the regulatory scrutiny is tightening while the actual key existential questions about stablecoins are still being debated: Just what they are (securities or assets); what they’re backed with (straight one-to-one currencies or baskets of liquid holdings); and what they’re used for?

Regulatory clarity may come from enforcement actions, and no firm wants to be at the forefront of being sanctioned, banned from issuing coins or fined so that others may learn by example.