• The SEC issued a Wells Notice to Paxos on Feb 3, alleging that the BUSD stablecoin was an unregistered security.
• The Wells Notice gives Paxos the opportunity to submit a written statement before any potential enforcement action takes place.
• Paxos clarified that this Wells Notice has no impact on USDP-USD, which is managed and minted by Paxos but uses different technology than BUSD.
What is a Wells Notice?
The Securities and Exchange Commission (SEC) can issue a Wells Notice to outline the charges it plans to bring against entities under investigation. Although there is no legal requirement for this document, it does provide the respondent with an opportunity to submit a written statement before any potential enforcement action takes place. The practice of issuing Wells Notices originated from recommendations made by the „Wells Committee“ in 1972, when SEC Chairman William J. Casey established the committee to review and assess the Commission’s enforcement policies and practices.
Paxos Receives SEC Wells Notice
On February 21, 2021, Paxos halted the issuance of new BUSD tokens after receiving a Wells Notice from the SEC alleging that BUSD is an unregistered security. In their disagreement with this decision, PAXOS wrote: “Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws…To be clear, there are unequivocally no other allegations against Paxos.“ They also clarified that this notice does not affect USDP-USD – another dollar-collateralized stablecoin managed and minted by Paxos but using different technology than BUSD.
The Impact of This Action
This development signals that either an investigation into BUSD has already been initiated or completed by the SEC and they may take further enforcement action as a result of their findings. It also serves as an important lesson for crypto companies in regards to compliance – companies should always make sure they adhere to all relevant regulations related to launching digital assets like crypto tokens or stablecoins in order for them to remain legally compliant with applicable laws and regulations set forth by regulators such as the SEC.
The issuance of a Wells Notice by regulators such as the SEC indicates that an investigation has been undertaken or concluded into entities under suspicion of having committed securities violations or other illegal activities related to digital asset investments or transactions. Although there is no legal requirement for this document, it does provide recipients with an opportunity for rebuttal if necessary prior to filing any formal charges or taking additional enforcement actions against them. As such, crypto companies should ensure they are familiar with all applicable regulations prior to launching crypto tokens or other digital assets so as not remain compliant with relevant laws and avoid any potential penalties from regulators in consequence of noncompliance