The US SEC finally let Paxos go, has BUSD become a victim of policy struggles?

Author: jk, Odaily Planet Daily

On July 11, local time in the United States, after a year-long investigation, the U.S. Securities and Exchange Commission (SEC) decided to end its investigation into Paxos Trust Company and the Binance USD (BUSD) stablecoin. Paxos received a formal termination notice from the SEC, stating that it would not recommend enforcement action against the company. This news marks a significant victory for Paxos in its legal dispute related to the Binance USD (BUSD) stablecoin.

Background: SEC's Wells Notice Gradually Pushes BUSD with a Market Cap of $20 Billion into the Background

What is Paxos?

Paxos is a blockchain infrastructure and tokenization platform that collaborates with major global enterprises for asset tokenization, custody, and trading. Partners include PayPal, Interactive Brokers, Mastercard, Free Market, and Nubank, among others. It has issued numerous regulated digital assets, including PayPal USD (PYUSD), Pax Dollar (USDP), and Pax Gold (PAXG). Its affiliated company, Paxos International, issues the yield-bearing regulated stablecoin Lift Dollar (USDL).

Paxos is regulated in the U.S. by the New York Department of Financial Services (NYDFS), the Monetary Authority of Singapore (MAS), and the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market. Paxos is a top-funded fintech company, having raised over $540 million from leading investors including Oak HC/FT, Declaration Partners, Founders Fund, Mithril Capital, and PayPal Ventures.

What has happened?

Binance and Paxos announced their partnership to launch BUSD in 2019, after which BUSD quickly rose to become the third-largest stablecoin, following USDT and USDC. Both Binance and Paxos-operated digital asset exchange itBit listed BUSD, along with many other well-known exchanges.

In February 2023, Paxos received a Wells notice from the SEC, stating that the regulator planned to sue Paxos for violating investor protection laws, claiming that BUSD was an unregistered security. In the same month, the Department of Financial Services (DFS) ordered Paxos to stop minting BUSD due to "several unresolved issues related to Paxos' oversight of its relationship with Binance." At its peak, BUSD had a market cap exceeding $20 billion.

Subsequently, as BUSD could no longer be issued, its position was gradually replaced by FDUSD, issued by Hong Kong company FD 121 Limited, which is affiliated with the Hong Kong-based financial company First Digital Limited. Since its launch in June 2023, FDUSD has stabilized as the fourth-largest stablecoin by market cap, with Coingecko data showing its current market cap at approximately $1.898 billion, second only to USDe. Meanwhile, BUSD's market cap has fallen out of the top 20.

Paxos received the SEC's formal termination notice this Tuesday, which clearly stated that the SEC would not recommend enforcement action against Paxos in the BUSD investigation.

The SEC's formal termination notice. Source: Cointelegraph

Paxos Response: BUSD is Not a Security

Here is the full text of Paxos' response:

Paxos Trust Company has always maintained that its dollar-backed stablecoin is not a security under federal securities law, and that the Wells notice is unreasonable and unfair. We take pride in our ongoing advocacy for stable value digital assets, and we are pleased that SEC staff decided not to take enforcement action against Paxos regarding BUSD. We believe this development will open a new wave of stablecoin adoption for leading global enterprises. Well-designed stablecoins like those issued by Paxos, which have strong consumer protections, will transform the financial system in use cases such as payments, settlements, and remittances. This transformative technology will make the financial system more stable, accessible, and transparent. Paxos consistently prioritizes the safety of customer assets. The stablecoins issued by Paxos are always backed by reserves held in a 1:1 ratio with U.S. dollars, fully segregated and stored in bankruptcy-remote accounts. As the only issuer that ensures regulatory oversight to launch safe solutions, Paxos stands out in driving significant innovation in the global financial system.

Are Stablecoins Securities? Why Did the SEC Stop the Investigation?

In last year's lawsuit against Binance, the SEC argued that BUSD is a security, as it is an asset that appreciates due to the efforts of others, but opinions vary widely. According to The Block, California Congresswoman Maxine Waters and North Carolina Congressman Patrick McHenry have been drafting a bill, but one challenge is who should be the primary regulator of stablecoin issuers. The Senate is also working on drafting stablecoin regulatory legislation.

SEC Chairman Gary Gensler previously compared stablecoins to money market funds and other securities, adding, "Depending on their characteristics, such as whether these instruments pay interest, directly or indirectly, through affiliated companies or otherwise; what the mechanism for maintaining value is; or how these tokens are issued, sold, and used in the crypto ecosystem, they may be shares of a money market fund or another type of security."

An SEC spokesperson stated that the SEC does not comment on potential investigations.

Additionally, it is worth mentioning that the SEC's decision to terminate the investigation came after a series of unfavorable court rulings for the agency. In July 2023, a federal judge ruled in the SEC v. Ripple case that XRP tokens are not securities in the context of programmatic sales on digital asset exchanges. In June 2024, the judge overseeing the SEC v. Binance case cited the Ripple ruling when dismissing charges related to BUSD, ruling that BUSD is not a security.

These court rulings prompted the SEC to reassess its position on Paxos and BUSD. Meanwhile, the U.S. Department of Justice has settled with Binance, which diminished the intent to further pressure Binance through BUSD. However, the SEC is still in litigation with several crypto companies, including Ripple, Binance, Kraken, and Coinbase.