As reported by Fortune, amidst the ongoing discussions around regulatory clarity in the crypto industry, there has been considerable speculation about whether stablecoins, which are usually digital assets pegged to the U.S. dollar, should be classified as securities. The recent decision by the Securities and Exchange Commission (SEC) to quietly conclude an investigation into Paxos, a New York-based stablecoin issuer, suggests that, in most cases, they may not be considered as such.
Acting chief of the crypto assets and cyber unit, Jorge Tenreiro, notified Paxos on July 9th that he did not intend to recommend an enforcement action, as per a letter shared with Fortune. This decision came more than a year after the SEC sent Paxos a Wells notice, indicating a potential enforcement action, over the dollar-backed BUSD stablecoin issued in collaboration with Binance.
The SEC’s withdrawal from the probe comes shortly after facing setbacks in a lawsuit against major crypto exchange Binance. While legislative efforts pertaining to the regulation of the expanding asset class remain stagnant in Congress, the SEC’s move brings an unexpected relief to the stablecoin sector, which now includes prominent companies like PayPal and VanEck.
In an interview with Fortune, Walter Hessert, the head of strategy at Paxos, expressed relief at the termination of the investigation, stating, “It’s what we expected all along, and it really should create, hopefully, more certainty in the market among what we see as a growing number of large enterprises.”
When approached for comment by Fortune, an SEC spokesperson declined to confirm or deny the existence of the investigation, stating, "the SEC does not comment on the existence or nonexistence of a possible investigation."
Paxos initially introduced BUSD in partnership with Binance in September 2019. Despite not surpassing Tether and USDC, BUSD became a significant player in the emerging sector due to its association with the Binance ecosystem.
Although BUSD was pegged to the U.S. dollar, the SEC later contended in a lawsuit against Binance that the stablecoin qualified as an investment contract and thus a security. This was based on the allegation that it generated profits through its reserves for Binance and Paxos, some of which were passed on to Binance users in the form of yields.
While the lawsuit was initiated in June 2023, Paxos was informed of the SEC's position in the February 2023 Wells notice. At the time, Paxos disagreed with the SEC’s assertion, emphasizing that BUSD was fully backed by dollar-denominated reserves.
The SEC’s actions against Paxos reverberated throughout the crypto industry, elevating concerns given the ambiguous regulatory landscape surrounding stablecoins. Many argue that the absence of an expectation of profit distinguishes stablecoins from numerous other crypto assets, a critical factor in the assessment of securities.
Although the investigation persisted for over a year, a Fortune freedom-of-information request revealed that the SEC confirmed its active status as of July 3rd.
However, the agency's position seemed to shift following a federal judge's ruling siding with Binance, where it was determined that the sale of BUSD did not constitute a securities offering, leading to the charge being dismissed.
Hessert emphasized the impact of the year-long scrutiny on Paxos' operations, particularly in forging partnerships with new companies like PayPal, as it operated under the shadow of the Wells notice. He anticipates that the decision will expedite promising enterprise discussions for Paxos.
Furthermore, the decision could potentially bolster the stablecoin sector in the U.S., as firms have looked to launch new offerings overseas amid the regulatory uncertainties.
Comments