SEC drops key stablecoin investigation into Paxos – victory for the crypto industry

On July 9, Jorge Tenreiro, acting head of the crypto-assets and cybersecurity division, informed Paxos that he did not intend to recommend an enforcement action, according to a letter obtained by Paxos. AssetsThe notice comes more than a year after the SEC sent Paxos a Wells notice, or letter, announcing an impending enforcement action over the dollar-backed BUSD stablecoin that Paxos issued in partnership with Binance.

This SEC retreat came just days after the agency suffered a partial defeat in a legal battle against leading crypto exchange Binance. While Congress continues to drag its feet on legislation to regulate this growing asset class, the SEC’s decision represents an unexpected victory for the stablecoin sector, which now includes companies like PayPal and VanEck.

“The formal termination of this investigation is a huge relief for us,” said Walter Hessert, head of strategy at Paxos, in an interview with Assets“We expected this from the beginning and it should hopefully provide more security in the market for what we believe is a growing number of large companies.”

In response to a request for comment from AssetsAn SEC spokesperson said that “the SEC does not comment on the existence or non-existence of a possible investigation.”

The search for stability

New York-based Paxos first launched BUSD in September 2019 in partnership with Binance. Although the dollar-backed stablecoin never overtook its rivals Tether and USDC, it soon became one of the leaders in this emerging sector thanks to its role in the Binance ecosystem.

While BUSD was pegged to the U.S. dollar, the SEC later argued in a lawsuit against Binance that the stablecoin was an investment contract and thus a security because it generated profits for both Binance and Paxos through its reserves, some of which were passed on to Binance users in the form of yield. Although the lawsuit was not filed until June 2023, the SEC informed Paxos of its view in the February 2023 Wells notice. In a statement at the time, Paxos disagreed with the SEC’s stance, arguing that BUSD was backed 1:1 by dollar-denominated reserves, but later did not elaborate on the agency’s arguments about the profits generated by the reserves.

The SEC’s action against Paxos has sent shockwaves through the crypto industry. Stablecoins still fall into a regulatory grey area unless new laws are passed, but many argue that the lack of an expectation of profit – a key consideration when considering whether they are securities – sets them apart from many other crypto assets.

The investigation lasted over a year, with the agency reaching a Assets The agency confirmed that the case was still “active and ongoing” as of July 3, responding to a Freedom of Information request. However, the agency appears to have changed its stance after a federal judge sided with Binance in a June 28 decision, finding that the BUSD sales did not constitute a securities offering and ordering the charges to be dismissed.

Speak with AssetsHessert said Paxos has had to operate under the “cloud” of a Wells announcement for over a year, which has impacted its ability to form partnerships with new companies, including PayPal. “It will definitely accelerate some really exciting corporate conversations,” he said.

The decision could also bolster the stablecoin sector in the U.S., as companies have been looking for new offerings amid regulatory uncertainty abroad.