The SEC Drops Paxos Investigation: Are Stablecoins Not Securities?
The crypto industry has long sought clarity on the regulatory status of stablecoins; digital assets typically pegged to a fiat currency like the U.S. dollar. A recent decision by the U.S. Securities and Exchange Commission (SEC) to quietly end its investigation into Paxos, a New York-based stablecoin issuer, marks a significant development in this ongoing debate. This move, influenced by a recent court ruling favouring Binance, suggests that stablecoins may not be classified as securities in most cases, offering a reprieve for the industry and potentially setting a precedent for future regulatory actions.
“Paxos prevails in SEC investigation of BUSD stablecoin” 👏
On Tuesday, we received a formal termination notice from the SEC stating that it will not recommend enforcement action against Paxos Trust Company in the investigation of Binance USD (BUSD).
SEC’s Paxos Probe Ends, Stablecoins Not Securities?
On July 9, Jorge Tenreiro, the Deputy Chief of the Crypto Asset and Cyber Unit in SEC, informed Paxos that he would not recommend enforcement action against the company. This announcement, shared in a letter obtained by Fortune, concluded a year-long investigation that began with issuing a Wells notice in February 2023. The Wells notice had indicated a potential enforcement action over Paxos’ issuance of the Binance USD (BUSD) stablecoin in partnership with Binance.
The SEC’s decision came weeks after a federal judge ruled that BUSD sales were not securities offerings. Judge Amy Berman Jackson’s decision highlighted that the SEC’s allegations against Binance, including those related to BUSD, did not meet the criteria of the Howey test—a standard used to determine whether an asset qualifies as a security. This ruling likely influenced the SEC’s decision to drop the probe into Paxos, as it significantly undermined the SEC’s argument that stablecoins like BUSD should be treated as securities.
Paxos Hails SEC Decision as Market Stability Returns
Walter Hessert, Head of Strategy at Paxos, expressed relief after the investigation. “The termination of this investigation formally is an enormous relief for us,” he told Fortune. “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.” Hessert’s comments underscore the impact of regulatory uncertainty on Paxos, affecting its ability to form new partnerships and expand its business operations.
The SEC’s retreat is seen as a positive development for the stablecoin sector, which includes major players like Tether, Circle, PayPal, and VanEck. The ruling and subsequent decision not to pursue enforcement against Paxos provide a clearer regulatory landscape for these companies, encouraging further adoption and innovation in the stablecoin market. “We believe this development will unlock a new wave of stablecoin adoption by leading global enterprises,” Paxos stated in response to the SEC’s notice.
Regulatory Clarity Boosts Stablecoin Adoption in the U.S.
Despite the SEC’s initial argument that BUSD functioned as a security due to the profits generated through its reserves, Paxos maintained that dollar-denominated reserves fully backed its stablecoins and did not meet the security criteria under federal securities laws. This stance was ultimately supported by the recent court ruling, which dismissed several charges against Binance related to alleged securities law violations from secondary BUSD and BNB Coin trades.
The regulatory landscape for stablecoins remains complex, with Congress yet to pass comprehensive legislation addressing the classification and regulation of digital assets. However, the SEC’s decision to end the Paxos investigation without enforcement action provides a temporary respite and a potential roadmap for future regulatory treatment of stablecoins. This decision is expected to accelerate enterprise adoption and development within the stablecoin sector, as companies now have a clearer understanding of their regulatory obligations and risks.
Conclusion
In conclusion, the SEC’s move to drop its probe into Paxos marks a critical juncture for the stablecoin industry. By signalling that stablecoins may not be treated as securities in most cases, the SEC has provided much-needed clarity and relief to the market. This decision, influenced by recent judicial rulings, will likely foster greater confidence and investment in the stablecoin sector, paving the way for its continued growth and integration into the broader financial ecosystem.
