A formal lawsuit against Paxos by the US Securities and Exchange Commission would have a substantial effect on the $137 billion stablecoin market.
The regulator appears to have targeted Paxos and all other stablecoin issuers, despite the fact that there hasn't been any formal action taken yet.
The New York State Department of Financial Services has ordered Paxos to cease producing new BUSD tokens. On February 13, the SEC sent Paxos a "Wells Notice" informing it that it intends to sue Paxos over BUSD. Soon after, Paxos decided to comply with the New York State Department of Financial Services' directive to stop releasing additional BUSD tokens. Partner at BCLP Renato Mariotti stated:
“If the SEC charges Paxos, any other stablecoin issuer should register or prepare to file a lawsuit with the SEC.”
Mariotti predicts that Paxos and the SEC will come to an agreement, and that BUSD will be accepted as a security by Paxos, which will encourage other stablecoins to do the same.
Paxos can decide to file a lawsuit against the SEC, but doing so will be extremely expensive. Lawsuit will be risky and take years. Another effect is that in order to reduce the amount of money exposed to the market, the SEC may control the assets used to support stablecoins and the specifications for digital currency matters.
“Litigation will take years, and the risk of losing the case before the SEC will be huge. Paxos going against the SEC would create risks and potentially make BUSD less attractive to the market.”
The notification to Paxos focuses on whether stablecoins are securities, even though the SEC has not yet announced precise fees.
For their response, Paxos claimed that "BUSD is not a security under federal securities laws," and that it "totally disagrees with the SEC employee."
Also, Tether and USDC must wait for the SEC's decision on the definitions of Paxos and BUSD. The CEO of Circle, which is the issuer of USDC, Jeremy Allaire, has previously campaigned for increased regulation of stablecoins, and Tether are reportedly "connected to the US government."