The crypto industry has long awaited regulatory clarity, particularly regarding whether stablecoins—digital assets pegged to and backed by the U.S. dollar—should be classified as securities. In a notable development, the Securities and Exchange Commission (SEC) has quietly concluded its investigation into New York-based stablecoin issuer Paxos. This decision, announced on July 9, suggests that stablecoins may not be treated as securities in most cases, providing a win for the crypto sector.
SEC Drops Probe into Paxos
Jorge Tenreiro, the acting chief of the SEC‘s crypto assets and cyber unit, informed Paxos that he did not intend to recommend enforcement action, according to a letter obtained by Fortune. This notice came more than a year after the SEC had issued a Wells notice to Paxos, signaling a potential enforcement action over its dollar-backed BUSD stablecoin, issued in partnership with Binance.
This decision by the SEC follows a partial defeat in a lawsuit against Binance, one of the top crypto exchanges. With Congress yet to pass legislation to regulate the burgeoning asset class, the SEC‘s move is seen as an unexpected victory for the stablecoin sector, which now includes major players like PayPal and VanEck.
“The termination of this investigation is a significant relief for us,” said Walter Hessert, head of strategy at Paxos, in an interview with Fortune. “It’s what we expected all along, and it should create more certainty in the market, especially among large enterprises.”
An SEC spokesperson declined to comment on the existence or nonexistence of any investigation.
The Search for Stability
Paxos, based in New York, launched BUSD in partnership with Binance in September 2019. Although BUSD never surpassed competitors Tether and USDC, it quickly became a leading stablecoin due to its integration within the Binance ecosystem.
Despite BUSD being pegged to the U.S. dollar, the SEC argued in a lawsuit against Binance that the stablecoin was an investment contract, and therefore a security, because its reserves generated profits for both Binance and Paxos. These profits were partially passed on to Binance users as yields. While the lawsuit was not filed until June 2023, the SEC had informed Paxos of its view in a February 2023 Wells notice. At that time, Paxos disagreed with the SEC’s stance, maintaining that BUSD was backed 1:1 with dollar-denominated reserves, although it did not address the SEC‘s arguments about profits from the reserves.
The SEC‘s action against Paxos caused ripples throughout the crypto industry. Many argue that stablecoins, due to the lack of an expectation of profit—a key factor in determining securities—should not be classified as securities.
The investigation, which lasted over a year, continued until July 3, when the SEC confirmed to Fortune that it was still “active and ongoing.” However, the SEC‘s position appeared to shift after a federal judge ruled in favor of Binance on June 28. The judge held that the sales of BUSD did not constitute a securities offering and ordered the charge to be dropped.
Hessert revealed that Paxos had operated under the “cloud” of a Wells notice for over a year, which hindered its ability to partner with new companies, including PayPal. “It definitely will accelerate some really exciting enterprise conversations,” he said.
A Boost for the Stablecoin Sector
The SEC‘s decision is expected to bolster the stablecoin sector in the U.S. Firms have been looking abroad to launch new offerings amid regulatory uncertainty. The resolution of the investigation into Paxos may encourage more stablecoin projects to remain within the U.S. market, fostering innovation and growth.
As the crypto industry continues to navigate the complex regulatory landscape, the conclusion of the SEC’s probe into Paxos marks a significant step forward. It underscores the need for clear and consistent regulations that can support the growth of digital assets while ensuring investor protection.
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