SEC Ends Stablecoin Investigation: A Win for the Crypto Industry
Introduction
The crypto industry has long sought regulatory clarity, especially regarding stablecoins. Stablecoins are digital assets typically backed by the U.S. dollar. The big question has been whether these stablecoins should be treated as securities. Recently, the U.S. Securities and Exchange Commission (SEC) decided to end a probe into Paxos, a New York-based stablecoin issuer. This decision suggests that, in most cases, stablecoins are not considered securities.
SEC’s Decision on Paxos
On July 9, Jorge Tenreiro, the acting chief of the SEC’s crypto assets and cyber unit, informed Paxos that he would not recommend an enforcement action. This notice came over a year after the SEC sent Paxos a Wells Notice regarding the dollar-backed BUSD stablecoin, issued in partnership with Binance. A Wells Notice signals an impending enforcement action. This retreat by the SEC is a significant win for the crypto industry.
Impact on the Crypto Industry
This decision comes shortly after the SEC suffered a partial defeat in a lawsuit against Binance, one of the top crypto exchanges. While Congress has been slow to pass legislation regulating the growing crypto asset class, the SEC’s decision offers an unexpected win to the stablecoin sector, which now includes companies like PayPal and VanEck.
Walter Hessert, the head of strategy at Paxos, expressed relief at the decision, saying it should create more certainty in the market. He believes it will encourage more large enterprises to engage with stablecoins. An SEC spokesperson declined to comment on the investigation.
Background of BUSD
Paxos launched BUSD in partnership with Binance in September 2019. Although BUSD never overtook competitors like Tether and USDC, it became a leader in the stablecoin sector due to its role in the Binance ecosystem. While BUSD was pegged to the U.S. dollar, the SEC argued in a lawsuit that the stablecoin was an investment contract and therefore a security. The SEC claimed that profits were generated through its reserves, benefiting both Binance and Paxos. Paxos disagreed, stating that BUSD was backed 1:1 with dollar-denominated reserves.
The SEC’s move against Paxos sent shockwaves through the crypto industry. Stablecoins still exist in a regulatory gray area, but many argue that the absence of an expectation of profit separates them from other crypto assets.
The Year-Long Investigation
The investigation continued for over a year. In response to a Fortune freedom-of-information request, the SEC confirmed that the investigation was “active and ongoing” as of July 3. However, the agency appeared to shift its stance after a federal judge sided with Binance. The judge ruled that the sales of BUSD did not constitute a securities offering and ordered the charge to be dropped.
Hessert mentioned that Paxos had been operating under the “cloud” of a Wells Notice for over a year. This notice impacted their ability to partner with new companies, including PayPal. He believes the decision will accelerate some exciting enterprise conversations.
Future of Stablecoins in the U.S.
The end of the SEC’s investigation may bolster the stablecoin sector in the U.S. Paxos predicts that this decision will unlock a new wave of stablecoin adoption. They believe well-designed stablecoins with strong consumer protections will transform the financial system, especially in payments, settlement, and remittance.
Stablecoins have proven to be one of the most effective real-world applications of crypto technology, particularly in emerging markets like Nigeria. These assets are usually pegged to the U.S. dollar and provide a stable alternative to volatile cryptocurrencies like Bitcoin.
Paxos’ Response and Future Plans
Following the completion of the SEC’s investigations, Paxos reiterated its stance that their USD-backed stablecoins are not securities under federal securities laws. They maintained that the Wells Notice was unwarranted and unjustified. Paxos has issued several regulated digital assets, including PayPal USD (PYUSD), Pax Dollar (USDP), and Pax Gold (PAXG). The company holds licenses from various financial regulators, including the NYDFS in the U.S., MAS in Singapore, and FSRA in Abu Dhabi.
Paxos predicts that the conclusion of the SEC’s investigation will spur a new wave of stablecoin adoption by major global enterprises. They believe that well-designed stablecoins with strong consumer protections will transform the financial system. This transformation will make the financial system more stable, accessible, and transparent.
Paxos’ Role in the Financial System
Paxos is the leading regulated blockchain infrastructure and tokenization platform. Its products aim to create a new, open financial system that operates faster and more efficiently. Today, trillions of dollars are locked in outdated financial systems that are inaccessible to millions of people. Paxos is working to replatform the financial system, enabling assets to move instantaneously anywhere in the world in a trustworthy way.
Paxos partners with leading global enterprises to tokenize, custody, and trade assets. Their blockchain solutions are used by companies like PayPal, Interactive Brokers, Mastercard, Mercado Libre, and Nubank. Paxos is also the issuer of numerous regulated digital assets, including PayPal USD (PYUSD), Pax Dollar (USDP), and Pax Gold (PAXG). Paxos International, their affiliate company, issues the yield-bearing regulated stablecoin Lift Dollar (USDL). Prudentially regulated by the NYDFS in the U.S., the MAS in Singapore, and FSRA in Abu Dhabi, Paxos is a top-funded fintech company with over $540 million raised from leading investors, including Oak HC/FT, Declaration Partners, Founders Fund, Mithril Capital, and PayPal Ventures.
Conclusion
The SEC’s decision to end its investigation into Paxos marks a significant victory for the crypto industry and stablecoin sector. With regulatory clarity, Paxos and other stablecoin issuers can continue to innovate and expand their offerings. This decision is likely to encourage more large enterprises to adopt stablecoins, further integrating these digital assets into the global financial system. As stablecoins continue to gain acceptance, they have the potential to transform the financial landscape, making it more stable, accessible, and transparent for everyone.
