Paxos has been ordered by regulators in New York to stop issuing the Binance USD (BUSD) stablecoin.

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The US Securities and Exchange Commission may be gearing up to take action against Paxos, a company that issues a type of cryptocurrency called a stablecoin.

The move will have major implications for the $137 billion market, experts told CNBC.

Stablecoins are a type of cryptocurrency designed to mirror real-world assets such as the US dollar.

These stablecoins are often backed by real assets such as bonds or cash in reserve. They have become the backbone of the crypto market as they allow people to trade in and out of different coins quickly without having to convert in and out of fiat currency.

Paxos issued a digital currency called Binance USD or BUSD. It is a stablecoin associated with Binance, one of the world’s largest cryptocurrency exchanges. The BUSD is pegged one-to-one with the US dollar.

Last week, the New York state financial regulator ordered Paxos to stop issuing BUSD.

Separately, Paxos said that the SEC had issued a notice that the regulator is considering recommending an action alleging that BUSD is a security. Paxos said the notice suggests Paxos should have registered the offering of BUSD under federal securities laws.

The SEC has not begun official action. But the agency’s actions are closely watched because if it starts official proceedings, it could have huge consequences for all stablecoins, including tether and USDCthe two largest which together are worth 110 billion dollars.

“If the SEC indicts Paxos, all other issuers of stablecoins should register or prepare for a court battle with the SEC,” Renato Mariotti, a partner at law firm BCLP, told CNBC.

Are stablecoins securities?

While the SEC has yet to come out with specific charges, the notice to Paxos focuses on the question of whether or not stablecoins are securities.

For its part, Paxos said it “categorically disagrees with the SEC staff that BUSD is not a security under the federal securities laws.”

The SEC uses Howey test to determine what is considered a security or an “investment contract”. There are four criteria for determining whether something is an investment contract as part of the Howey test, such as whether there is an expectation of profit by the investor.

It is possible that Paxos could aggressively litigate the SEC, but the cost of doing so would be significant.

Renato Mariotti

partner, BCLP

If BUSD is considered a security by the SEC, then the regulator would have oversight over the stablecoin. Regardless of the corporate issues, BUSD would have to register with the SEC and accept stricter rules.

Another implication is that other stablecoins will also be given the same label.

“The basis of that action will necessarily be fact-specific to the Paxos BUSD structure but will likely have far-reaching implications for other stablecoin issuers selling coins to the US,” Townsend Lansing, chief product officer at CoinShares, told CNBC.

What are the likely outcomes?

There are a number of different scenarios that could play out. That will depend on what the SEC alleges against Paxos and how the two sides move forward.

“I think it’s likely that the SEC will reach a settlement with Paxos where Paxos admits BUSD is a security, leading to other stablecoins following suit and signing up,” Mariotti said.

“It is possible that Paxos will aggressively litigate the SEC, but the cost of doing so would be significant,” Mariotti said.

“Litigation would take years and the risk of losing to the SEC would be significant. The mere fact that Paxos was fighting the SEC would create risk and potentially make BUSD less attractive to the market.”

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Another result, according to Mariotti, is that the SEC can regulate which assets are used to back stablecoins and the requirements for issuances of the digital currency to make disclosures to the market.

CoinShares Lansing said that what the SEC considers a securities or investment contract actually extends beyond just the Howey test and the agency has “extensive knowledge of how to apply both the law and judicial precedent.”

“Absent a successful fight, it is most likely that BUSD will no longer be sold into the US or available on US-based digital asset exchanges,” Lansing said. “It is quite possible that other stablecoins will follow suit.”

Are tethers and USDC in the crosshairs?

That will depend on what the SEC’s charges against Paxos and BUSD are.

“We still do not know the exact basis on which the SEC is alleging the violations, so we do not know the extent to which these allegations will extend to other industry participants,” Lansing said.

Carol Alexander, professor of finance at Sussex University, said the US regulator’s action is “more of a move against Binance than stablecoins.”

She said Tether and Circle, the company that issues USDC, is “close to the US government.” Circle CEO Jeremy Allaire previously called for more regulation around stablecoins.

Alexander said “Binance is causing increasing concern to regulators around the world” in areas ranging from money laundering to violations of securities laws. That may be one reason the SEC has targeted BUSD, she said.

The Department of Justice is investigating Binance for suspected money laundering and sanctions violations, It was reported by Reuters last year. Bloomberg reported in 2021 that US officials were investigating whether Binance employees engaged in insider trading.

Binance did not immediately respond to CNBC’s request for comment.

A spokesperson for Binance said at the time that the company has a “zero tolerance” policy for insider trading and a “strict code of ethics” to prevent any wrongdoing, according to Bloomberg.